U. S. trade deficit reaches all-time high

I’d meant to comment on this a day or so ago but somehow it slipped past me. The trade deficit (the difference between what we buy from overseas and what we sell overseas) has reached an all-time high:

WASHINGTON – A surge in oil imports and a flood of Chinese televisions, toys and computers helped to drive the U.S. trade deficit to an all-time high in October.

The
Commerce Department reported Wednesday that the gap between what America sells overseas and what it imports rose by 4.4 percent to $68.9 billion, surpassing the record of $66 billion set in September.

The United States incurred record deficits in October with most of its major trading partners including China, the 25-nation
European Union, Canada and Mexico. This development is certain to increase protectionist pressures in Congress, with many lawmakers already unhappy with the Bush administration’s trade policies.

The worse-than-expected October performance was blamed in part on the Gulf Coast hurricanes. They curtailed domestic production of oil, chemicals and plastics, forcing companies to turn to overseas suppliers.

Thanks to Calculated Risk for the eye-catching graphic (click to view an enlarged version).

Explanations for the record trade deficit vary from the aftermath of Hurricane Katrina to high oil import levels but most have failed to recognize the underlying cause: our economy is growing. As our economy has made a transition from making things to selling services our domestic companies must purchase more from overseas in order to grow themselves. And, of course, more economic activity here means we consume more oil to move things around with and to make more energy with.

What can we do about it? As long as we’re willing to subsidize the services sectors of our economy and remove the protections (a form of subsidy) from the goods-producing sectors while some of our largest trading partners (notably Japan, China, and India) protect both, I suspect the answer is “Not much”. The prevailing wisdom seems to be that we need to produce more stuff that more people want and can afford to buy. As usual, the prevailing wisdom is wrong.

We produce lots of things (especially agricultural products) that people in China and India, in particular, want. And with all the dollars that are flying to both those countries for all the goods on the shelves at Wal-Mart (in the case of China) and all the backoffice support functions (in the case of India), they have the money to buy them. But until very recently both China and India had official policies of autarky (self-sufficiency—essentially no foreign trade) and they now have a sort of one-way free trade: we can buy anything we want from them but they still control their imports of both goods and services pretty tightly. Can Ricardian comparative advantage function as Ricardo envisioned in an environment of near-perfect information in which one of the parties is willing to erect barriers to trade and the other party isn’t?

Should we do anything about it? I’m inclined to say “No”. Based on our experience with Japan, we’ll see a period of worry during which our domestic growth is slower than it would have been otherwise and Chinese and Indian companies are buying up lots of U. S. assets at inflated prices. Ultimately, the internal conflicts within the Chinese and Indian economies and societies will probably cause the same sort of collapse as we saw in Japan (only faster because the internal conflicts in China and India are so much more grave than the Japanese).

So, fasten your seatbelts. We’re in for a bumpy ride.