May 2010 International Trade: World Trade Volumes and Prices Trending Higher

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According to data compiled by the Netherlands Bureau for Economic Policy Analysis (known by its Dutch acronym CPB) world trade volume increased by 1.8 percent in May from the previous month, following an upwardly revised decrease of 1.1 percent in April. The rebound in trade volume enabled prices to jump nearly 3.5 percent in May. Although the volume of trade has nearly returned to its April 2008 peak, prices are lagging.

Import volumes went up in the advanced economies as well as emerging Asia and emerging Europe, whereas Latin America, Africa and the Middle East posted sizable declines. Import growth was extraordinarily high in Japan. Export volume increased in all major regions with the exception of emerging Europe. In May, world trade was 3 percent below the peak level reached in April 2008 and 23 percent above the trough reached in May 2009.

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Turning to the United States, the U.S. trade deficit unexpectedly widened by 4.8 percent in May to $42.3 billion. Imports of goods and services ($194.5 billion, up $5.5 billion) rose faster than exports ($152.3 billion, up $3.5 billion) in May. The deficit for the year now totals $197.8 billion, up from $143.8 billion in the same period last year.

The April-to-May increase in exports of goods reflected increases in capital goods; industrial supplies and materials; consumer goods; and automotive vehicles, parts, and engines. A decrease occurred in other goods. Foods, feeds, and beverages were virtually unchanged.

The April-to-May increase in imports of goods reflected increases in consumer goods; automotive vehicles, parts, and engines; capital goods; and foods, feeds, and beverages. A decrease occurred in industrial supplies and materials. Other goods were virtually unchanged.

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U.S. trade in wood pulp, paper and paperboard contributed to the widening trade gap; exports fell by 161,000 metric tons (5.5 percent) while imports rose a marginal eight metric tons (2.1 percent). Both imports and exports were essentially at their year-earlier levels in May; on a year-to-date basis, however, exports are nearly 1.3 million tons “ahead” of the same period in 2009, while imports are virtually unchanged.

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Trade in softwood lumber did not share in the overall increase in imports and exports; both metrics declined in May relative to April. Because the absolute decrease in exports was smaller than that of imports, net exports were less negative in May than in April. Lumber exports were 51 percent higher in May 2010 than a year earlier, while imports are 9 percent higher.

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One of the reasons the jump in the trade deficit was unexpected is because of the dollar’s appreciation between April and May. A weaker dollar makes U.S.-made products relatively more attractive in both the domestic and export markets, but it often worsens the trade deficit because more dollars are required to buy the equivalent volume of imports. Conversely, a stronger dollar stunts demand for domestic products, but can improve the overall trade deficit.
In light of additional dollar appreciation in June, we would not be surprised to see the deficit dip somewhat in the next month or two.

During his State of the Union address, President Obama set a goal of doubling exports in five years; on 7 July, the president said the economy is on track to meet that goal. “Export growth leads to job growth and economic growth,” Pres. Obama said. “At a time when jobs are in short supply, building exports is an imperative.” But the president’s goal of doubling exports by 2015 “is challenging. It’s going to require a very broad set of initiatives,” said Pat Mears, director of international commercial affairs at the National Association of Manufacturers.

So, is the goal realistic? According to international trade statistics from the Census Bureau, U.S. exports of goods and services doubled on a nominal value basis between May 2003 and July 2008; so, there is some precedent for such an achievement. To do so, however, the pace of growth will need to pick up relative to the first four months of this year. A doubling of exports from January 2010 at the average absolute growth rate seen between January and April ($1.46 billion per month) would take until April 2018. Accomplishing the goal would require exports to rise by $2.46 billion every month until January 2015 – a feat that has never been achieved. The fastest average monthly rate of growth over a five-year period was $1.3 billion per month, set between mid-2003 and mid-2008.

The International Monetary Fund recently raised its forecast of global growth for 2010 but downside risks outweigh upside opportunity; also, it is unclear if the level of global growth forecast will be sufficient to fuel the level of U.S. exports necessary to meet the Administration’s goal. Our conclusion, then, is that the goal is possible but not likely, particularly if global growth stagnates and/or the dollar remains as strong as it presently is.