Wednesday, March 8, 2017

Disentangling a Worsening Trade Deficit: Sector-Specific Industrial and Macro Economic Policy

he U.S. trade deficit rose 9.6% in January, 2017, to the highest level since 2012. The gap of $48.5 billion of exports exceeding imports looks daunting, yet the story is more complex at the sector level.[1] According to Neil Irwin of The New York Times, “What really matters is not whether the trade deficit is rising or falling. What matters is why?”[2] Distinguishing macro factors such as a strengthening dollar from sectoral strengths and weaknesses is thus necessary.

 The Port of Oakland. (source: Jim Wilson/NYT)

In the automotive sector, a $1.3 billion increase in exports corresponds to a $900 million increase in imports—essentially a draw. The $2.1 billion more in exports of industrial supplies is favorable, suggesting that that sector is doing well, but exports of civilian aircraft fell by $611 million, and other high-tech capital goods were also down, while imports of consumer goods—notably cell phones—increased by $2.4 billion. Boeing may simply have had a bad month, though it is also possible that Airbus had been out-competing its American competitor. The numbers on electronics add to the general perception that the U.S. is not competitive in such manufacturing. Industrial policy could address the possibility that automation and tax incentives (and penalties on American companies producing abroad only to import the finished goods back to the domestic market) could rectify this weakness in the American economy. 
Meanwhile, the balance of trade in services worsened by $5.3 billion. The fact that the money that foreign travelers spend in the U.S. on hotels and restaurants counts as exports suggests that a strengthening dollar could have been in play.[3] The Federal Reserve’s monetary policy was thus in play, for rising interest rates mean a strengthening of the dollar. Industrial policy may thus be less relevant here.
“A big piece in the rise in imports was crude oil and other petroleum products. They were up by a combined $2.2 billion.”[4] Exports also increased, by $1.2 billion, so this sector obviously contributed significantly to the overall trade deficit. To be sure, an increase in the price of oil favored producers, but this matter is dwarfed by the strategic national-security goal of self-sufficiency on fossil fuels. In terms of industrial policy, an expansion of domestic sources of oil and refining capacity may have been advisable at the time—not so carbon emissions would increase, but, rather, so imports of oil could drop.
In short, analyzing changes in a trade deficit requires distinguishing sectors, and, moreover, discerning where industrial policy recommendations are in order from cases in which macro political economic policy is at issue. Ideally, sector-specific industrial policies and macro policies are “on the same page.”

[1] Neil Irwin, “The Huge January Trade Deficit Shows Trump’s Hard Job Ahead,” The New York Times, March 7, 2017.
[2] Ibid.
[3] Ibid.
[4] Ibid.