The global consequences of weak demand in Europe will likely drive up the U.S. trade deficit for February and in the coming months.
In January, the trade deficit hit $56.2 billion, its widest point since 2008, the year before the recession. So far, modest export growth has helped offset strong imports. Yet economists are forecasting slower growth in exports. This is due in part to Europe’s economic crisis, but also to the drag it’s putting on China’s manufacturing sector.
“The trade deficit is going to continue to get bigger,” says Dr. Robert Brusca of Facts & Opinions Economics. “The U.S. is exporting in world economy that is increasingly challenged. This is making it difficult for U.S. firms to export — and exports are an essential part of recovery.”
As Europe continues to slide deeper into debt and news of a possible bailout in Spain threatens markets, the continent’s woes will hit U.S. exports in more ways than one.
The direct effects are already being seen. Exports to Europe and the European Union have trended downward since October 2011, falling 9% and 10% respectively, while the U.S. trade gap with its European partners has narrowed slightly in the last few months.
The second hit comes by way of China. To meet demand in Europe — its largest trading partner — China imports raw materials, such as waste paper and scrap metal, from the U.S. A slowdown in Europe would dampen China’s manufacturing sector, push down orders for U.S. raw materials and contribute to the contraction of China’s export-driven economy.
If this scenario plays out, exports will be unable to keep pace with U.S. imports, which continue to trend upward. A steady uptick in crude oil prices due to tensions over Iran and the onset of the U.S. driving season will also help drive up the trade deficit.
Partially off-setting weak demand for raw goods from China is the fact that the country’s economy is diversifying. This in turn opens up new markets for U.S. goods.
“Incomes in China have risen, and as a result, diets are diversifying,” says economist Mario Moreno of the Journal of Commerce. “So even though the demand for raw materials has decreased, China is still demanding meat, grains and other food products from the U.S.”
What is more, as the value of the renminbi continues to rise, as it did by 12 percent between June 2010 and February 2012, Chinese consumers will be better positioned to purchase goods and food from the U.S.
These factors won’t completely offset the domino effect of Europe’s economic crisis. But they will provide some respite until Europe can get back in the trade game with its two major partners.