U.S. Trade Bubble Continues to Collapse


Goods imports are down 33% over the past year, but the U.S. trade deficit, a key part of the global financial crisis, needs to narrow further

The trade report released Apr. 9 shows that the trade bubble continues to collapse—and that's good news.

The trade deficit shrunk to $26 billion in February, or an annual rate of $313 billion, down from $743 billion a year ago. Goods imports alone are down 33% over the past year. Leaving out oil, the imports of nonpetroleum goods are down by 26% over the past year.

This shouldn't be a surprise to readers of my BusinessWeek blog, Economics Unbound. Global trade is following the same steep downward path as home prices and borrowing, after having followed the same upward path.

And why not? All three are manifestations of the global credit bubble. Cheap credit and the ignorance of risk helped fuel excessive trade. It made perfect sense to locate factories overseas if it cost nothing to build them, if you didn't worry about the cost of financing the goods in shipment, and if you ignored the risks of having a 10,000 mile-long supply chain running through six countries.

What's more, the huge trade deficit was itself an essential part of the global financial crisis. For one, it reflected massive borrowing by U.S. households to buy imported goods, with money they did not have. Second, it reflected massive lending by foreigners in the U.S., which eventually morphed into subprime mortgages and other risky assets.

Further Fall Can Help in Financial System Fix

But as long as the U.S. is running a big trade deficit, the wound is still bleeding. The non-oil merchandise trade deficit is still at $22 billion a month, or $267 billion a year. It needs to fall further.

A deeper fall in imports and the trade deficit will have several salutary effects. First, it will mean that the U.S. has to borrow less from overseas. Second, it will make it easier to fix the financial system, since banks and other financial institutions will not be funneling so much foreign money into the U.S. economy. Third, and perhaps most important, it will become easier to see just what remains of our manufacturing base. I'm reporting a new story right now about how excess globalization, fueled by the credit bubble, distorted growth statistics in the U.S. and around the world.

The downside of the fall in global trade is that it is going to be very harmful to many countries which grew too dependent on exports, including Japan and Germany. If I'm right, and the global trade boom was another manifestation of the global credit boom, a big chunk of these exports are not going to come back any time soon.

Mandel is chief economist for BusinessWeek.

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