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Good News! The Trade Bubble Continues to Collapse

Posted by: Michael Mandel on April 09

This morning’s trade report 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 blog. 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 didn’t worry about 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 that 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.

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

A further fall in imports and the trade deficit will have several salutory 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 funnelling 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. But 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 anytime soon.

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Reader Comments

Brandon W

April 9, 2009 10:49 AM

... Which means that the entire "Flat World" notion is as much an illusion as the creation of wealth was. The United States has given up productive capacity and steered talent into areas that were allegedly of higher value; but much of it was illusory. We'll need to reclaim and reconstruct much of that productive capacity before we'll have a stabilized, sustainable economy.


April 9, 2009 12:34 PM

I wonder why I'm laughing. I'm not without sympathy for trading partners, but if a different perspective toward balance emerges, that would be refreshing.

The only thing that puzzles me is that these trade numbers don't seem to sync with the consumption numbers.


April 9, 2009 01:54 PM

If the first order effect is that trade is moving towards balance, then what is the second order effect? What will the post-millennial decade look like?

Will production in our trade partners be re-tasked towards local demand? When a bubble bursts, there often tends to be an overshoot... but I'm guessing not in this case. I think the fundamentals and our economic models will continue to drive globalization with a few adjustments. America's status as the market you can't live without will decline, and Americans will begin to live within their means. What else will change? Will America's status as innovator be discredited as the world's brightest increasingly stay home? We had best hope for some of those grand innovations to lift all boats. Hangovers generally last longer than the intoxication.


April 9, 2009 03:51 PM

My disagreements are minor.
It started out as a trade bubble due to massive borrowing by US households to buy imported goods. Gradually, the trade bubble created surpluses to countries-exporters and pressure started building up on these countries (having huge surpluses is a real headache). These surpluses were funneled into the US simply because the US was already a massive borrower thirsty for ever higher debt. At some point, I suspect that the US households' consumption reached a peak (how much can a household consume, after all?) but money kept coming into the US and a buildup of pressure started in the US : what do we do with all this money hungry for yields? This is when subprime mortgages appeared as a rescue to prolong the US households' massive borrowing.
Things will stabilize at a much lower level for a long time. I am more worried about persistent high unemployment in the West. The US will also suffer, there were lots of jobs related to global trade and let's not forget the previously overbloated financial sector. The cohesion of the western societies will be tested. The role of the goverments is now very important regardless of ideologies. China and India will have less problems, they a huge unexploited internal market to partially continue their growth. They may even steal slices of the global pie with their cheap products of tolerable quality (if i were unemployed, price would be my main concern).


April 9, 2009 11:45 PM

Wow, the number of fallacies in this post is surprising. I'm now convinced that Mike's role is to simply fabricate justifications after the fact for whatever the trend of the moment is. He tried to justify the last boom by pointing to uncounted knowledge exports and now does a complete about-face and talks about protectionist concepts that have been outdated for a century or more. The trade deficit is an idiotic concept, do you also sit around calculating the trade deficits of NY and CA between the other US states? I'm starting to believe that Mike's only good for producing stats and charts once in awhile, that his analysis is just fabricated to go along with the herd and whatever they're saying.


April 10, 2009 12:36 AM

The 'Flat World' is permanent. As long as there is an Internet, there will be a flat world.

Also, a fall in global trade is bad. More of the major economies integrating = less chance of warfare between them. The single best thing for America is to rapidly widen trade volume with China as much as possible. Thus, China would never act in a way that hurts the US economy.

So if the process of making China dependent on US stability is delayed, the world becomes more risky.

Lastly, isn't much of the fall in the 'trade bubble' due simply to the crash in the price of oil and other commodities?

The unit volume of electronics made in China and shipped to the West is certainly not dropping.


April 10, 2009 03:24 PM

Yes the flat earth is a permanent thing.

But its useful to ask yourself why outsourcing took off in such a big way.

Here in the SFBA, after the late 90s it was literally impossible to hire engineers..even an entry level guy would ask for 60-80k+. This was because of demand/supply, ALSO due to high RE prices.

With RE becoming more affordable, I HOPE it becomes easier for companies to hire local talent. If young Americans can't get entry level jobs in tech, there is no hope for the tech industry in the US. Us old guys can hold it up for only so long.

Thank you for your interest. This blog is no longer active.



Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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