Diane Swonk, Chief Economist
August 11, 2010 – 7:45 a.m. CT
Rush to Buy Chinese Goods Balloons Trade Deficit
The U.S. trade deficit widened to $49.9 billion in June from $42.0 billion in May. Much of the increase in the deficit could be attributed to a sharp rise in imports from China, as producers scrambled to stockpile cheap steel and other goods ahead of a repeal in the tax credit that China provides on many of its export products. The move, which went into effect on July 15, was intended to reduce excess capacity in key sectors in China by forcing inefficient plants to close. The Chinese are also hoping that efforts to remove export subsidies will alleviate calls for increased protectionism from the U.S. China has also begun to appreciate its currency relative to the dollar, but the process has been glacial to say the very least.
The stockpiling of Chinese goods should slow now that the subsidies have been removed. Preliminary data out of China on the month of July, however, suggests we will have to wait until August for any noticeable change.
Separately, exports held up fairly well in June, supported by strong exports to the developing economies, largely China. (Are you seeing a theme here?) There is some concern that exports will slow, particularly to China, which has also been a large buyer of our goods, now that it has made moves to cool its domestic economy. Indeed, the same preliminary trade data on July that showed Chinese imports likely remained strong during the month also showed some cooling in exports.
The Bottom Line: Real GDP for the second quarter will be revised down significantly, probably closer to 1.5% than the 2.4% initially reported. That is assuming that at least part of the surge in imports that we have seen will show up in an off-setting increase in inventories. Otherwise, revisions to the second quarter could be even worse. Some of that weakness will carry into the fourth quarter. The trade situation, however, could easily reverse course and improve again by year end as Chinese goods rise in price.
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