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April Trade Deficit: Nothing To Celebrate

Last Friday the Commerce Department reported that the U.S. deficit in international trade of goods and services (the trade gap) declined from $62.4 billion in March to $58.5 billion in April. The narrowing of the U.S. trade deficit by $3.9 billion prompted some economists to celebrate and raise their forecasts for economic growth going forward.

Source: U.S. Census Bureau

Miller time, anyone? Hardly. Glancing at the chart it becomes readily apparent that no progress has been made on reducing the trade gap over time. And the significance of April’s adjustment? Like Peter Schiff explains in his book Crash Proof, “Given the state of our economy, that’s like celebrating the fact that your kid brought home a report card with an F instead of an F minus.”

Americans continue to import much more than we export. But why should we care, since there have been no apparent repercussions of such actions? Because a sustained trade gap increases the danger of a financial crisis. The longer the U.S. trade deficit remains at high levels, the more Americans must effectively borrow from foreigners to pay for all of the goods we buy overseas. As our indebtedness to foreigners rises so does the danger that overseas investors might dump their dollars and unload their holdings of U.S. securities in a panic once they realize that the United States cannot repay all that debt. Last year, legendary investor Warren Buffett told business students and faculty at the University of Nevada-Reno that, “The U.S. trade deficit is a bigger threat to the domestic economy than either the federal budget deficit or consumer debt and could lead to political turmoil… Right now, the rest of the world owns $3 trillion U.S. more of us than we own of them… In my view, it will create political turmoil at some point. Pretty soon, I think there will be a big adjustment.”