How a Weaker Dollar Can Mean a Bigger Trade Deficit

Tim Worstall, after leaving a semi-cryptic comment on my blog yesterday, explains himself in a bit more detail today. I was confused about how US net exports could deteriorate even as the currency was weakening, but it turns out that an initial deterioration is exactly what you’d expect in such an event. Says Tim:

It’s not “despite” the dollar only getting weaker over the course of the quarter, it’s “because” ditto ditto that export growth in cash terms is slowing even as imports in cash terms are rising again.

The point is that if the dollar is weaker, any given volume of imported widgets will be worth that more in dollar terms, and it’s only after the effects of that weaker dollar kick in (more widgets exported, fewer widgets imported) that you see the trade balance improve. This happens every time there’s a new deterioration in the currency, like there was in the first quarter, although ultimately the more your currency weakens, the stronger your trade balance will eventually be.

Eventually of course the longer term effects overcome even a succession of J Curves and the trade balance comes roaring back.

As I fully expect the US one to, indeed, I’d be really rather surprised if in 5 years time the US wasn’t running a trade surplus.

Yikes, a US trade surplus? Assuming that China too continues to have a big trade surplus, I guess that means that Germany would be swinging to a deficit.

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