The Commerce Department reported yesterday that the U.S. trade deficit rose over $4 billion dollars to a level of $61 billion in April, the largest single monthly increase in two and a half years. Usually, an increase in the trade deficit means that trade (exports-imports) is a drag on the economy, but not this time.
Over the past year (first quarter 2007 to first quarter 2008), a narrowing the trade deficit (exports-imports) more than offset the decline in residential investment (housing) in the GDP accounts. So, is this sweet spot in the economy turning sour? Thankfully, no.
The rise in the trade deficit in April was driven by the rising price of oil imports, which increased by 8 percent, more than anything else. Ten years ago, petroleum was about a quarter of the overall trade deficit. A year ago, it was roughly a third. As of April 2008, petroleum accounted for a majority (57 percent) of the entire U.S. trade deficit!
Outside of rising oil prices, trade flows continue to improve. Adjusted for inflation, goods exports actually outpaced imports for a fifth consecutive month in April. And over the past year, goods exports are up over 11 percent, while imports are actually down -0.5 percent. As a result, the non-petroleum trade deficit (as of the first quarter of 2008) was at its lowest level (as a share of GDP) since 1999.
Anti-trade politicians and pundants often cite a rising trade deficit as evidence of a failed trade policy. In reality, it has been the lack of a comprehensive energy policy, which has curtailed domestic energy production, that is the real culprit.