A Dollar Drop Won't Fix Trade Deficit

The dollar exchange rate affects the trade deficit, but it can't wipe it out. That's the lesson of recent history at least.

Despite the ups and downs in the dollar's value, the United States has had a deficit in its merchandise trade with the world since 1976. The US has run a deficit in its current-account (which includes services and investment income as well as trade in goods) since 1982.

The trade gap persists, despite a 40 percent drop in the dollar since 1985.

A weaker dollar would help make US exports cheaper, but there are lots of factors pushing the gap, from the price of oil to foreign trade barriers.

Now, a favorite explanation for the deficit is the strong US economy, which is sucking in imports.

Charles McMillion of MBG Information Services, a Washington consulting firm, offers another reason for the persistent trade deficit.

"It really is globalization," he says. "The best companies in the world are competing with one another to produce in the lowest-cost countries they can find."

American companies send their factory work to Mexico, China, and other Asian nations and then sell the products back to American consumers. Such "emerging" nations account for half of US trade losses.