Trade deficit rises faster than expected: How worrying is that?

The US imported $49.9 billion more in goods and services than its exported in June, up from $42 billion in May. Such a large trade deficit is unsustainable and a drag on the economy, experts say.

By , Staff writer

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    A customer looks at Sony, Panasonic, and other televisions at Costco in Mountain View, Calif., on July 7. The US trade deficit surged in June to the highest level since October 2008. ()
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Sagging exports and a rise in imports pushed the US trade deficit up sharply in June – an unwelcome development during an already-weak economic recovery.

In all, imports exceeded exports of goods and services by $49.9 billion in June, up from $42.0 billion in May, the Commerce Department reported. That was a significantly wider trade deficit than economists had predicted for the month and the widest trade gap the economy has seen since the financial crisis deepened near the end of 2008.

Last year, imports and exports were rebounding in tandem from recession low points. This year, the revival of imports has continued – led by consumer goods from Asia. But export growth has ground virtually to a halt.

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That's occurring even though President Obama has set an ambitious goal of doubling US exports within five years, a target designed to bolster US job creation. The new trade numbers confirm that the goal won't be easy to reach.

June's export dip encompassed products ranging from soybeans to aircraft parts, computer chips, and steel products.

"The [trade] deficit has trended higher as the economy has recovered, and a return to the narrower deficits of a year ago does not look likely, at least not in the foreseeable future," economists at Wells Fargo Securities wrote in an analysis of the new numbers.

This also means that US gross domestic product probably grew even more slowly in the second quarter than the recently reported pace of 2.4 percent annualized growth. (Exports add to GDP, while money spent by Americans on imports is counted as a subtraction from economic activity in the US.)

How big a deal?

Economists differ on how big a headwind the trade deficit represents for the economy and job growth. Many agree that such large trade deficits are unsustainable. The June figure equals about 4 percent of GDP, and Americans are borrowing money from abroad to finance their appetite for imported goods.

Some suggest that while the mammoth trade deficit isn’t a good thing, it’s not the crux of America’s job problem. Trade deficits coexisted with decent domestic job growth for many years prior to the recession.

The more important issue, these economists argue, is reviving domestic consumer demand and business investment. And they see a risk that bold efforts to fix the trade deficit could be counterproductive if they lead to a retreat from the trend of expanding global commerce.

To other experts, however, the trade deficit represents a pivotal problem that must be addressed.

"Oil and consumer goods from China account for nearly the entire trade deficit, and without a dramatic change in energy and trade policies, the U.S. economy faces unemployment around 10 percent indefinitely," University of Maryland economist Peter Morici says in a written analysis.

The China problem

Mr. Morici says a core issue is China's efforts to keep its yuan currency artificially weak in value, which makes Chinese goods more attractive to foreign buyers. Beijing announced greater flexibility in its exchange rate earlier this year, but he calls that a token move.

To prod China on its currency policy, Morici urges the US to tax Beijing's conversions of yuan into dollars at a rate as high as 35 percent -- an amount designed to "offset Chinese subsidies that harm U.S. businesses and workers."

That idea is controversial, given that America's traditional role has been of encouraging more open trade and shunning practices that might be viewed by others as a trade war. Recent presidents including Obama have been reluctant to take the step of alleging officially that China manipulates its currency value.

Wherever the debate heads on US policy toward China, economists generally say it would be helpful for the world economy to become more balanced -- with the US running smaller trade deficits and Asian nations shifting their emphasis from exports toward domestic consumer-led growth.

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