June 2010 International Trade: Higher Global Volumes Translate Into Wider U.S. Trade Gap

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According to data compiled by the Netherlands Bureau for Economic Policy Analysis, world trade volume increased by 0.7 percent in June from the previous month, following an upwardly revised increase of 2.3 percent in May. Trade growth during 2Q2010 accelerated in advanced economies, but fell back considerably in most emerging regions. As a result 2Q2010 world trade growth slowed to 3.6 percent (compared to 5.7 percent in 1Q and 6.1 percent in 4Q2009).

Although the volume of trade has increased since year-end 2009, price changes have not followed suit; in fact, prices have been trending lower since early 2010, and in June were 4.3 percent below their November-to-January plateau.

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Turning to the United States, the U.S. trade deficit widened sharply in June to the highest level in 20 months on rising imports from China, and waning exports. The trade gap grew at its fastest monthly pace on record (18.8 percent), reaching $49.9 billion and threatening to erode already slow economic growth. Imports increased 3.0 percent to $200.3 billion while exports declined 1.3 percent to $150.5 billion.

The trade gap is "bad news for real GDP growth in the United States, which will be further reduced by the effects of rising imports," said Moody's Economy.com's economist Christopher Cornell. Nigel Gault, an economist at IHS Global Insight, said the June deficit figure means that the government will trim its estimate of overall economic growth from an already sub-par 2.4 percent to 1.2 percent when it releases a revised estimate on August 27.

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U.S. trade in wood pulp, paper and paperboard was essentially flat in June (relative to May), with imports outpacing exports by about 6,000 metric tons. Exports were off year-earlier levels by 2.9 percent while imports were 18.2 percent higher.

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Trade in softwood lumber was one of the factors contributing to the widening trade gap. Exports fell back by two million board feet (MMBF), or 1.8 percent, between May and June while imports jumped by 135 MMBF (16.4 percent). Exports are 30 MMBF (37.5 percent) ahead of year-earlier levels, but imports have risen by 176 MMBF (22.5 percent).

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With the U.S. dollar weakening in July against a basket of other currencies, we would not be surprised to see the July trade gap widen even more. 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 improves the overall trade deficit.