European View of the Growing U.S. Trade Gap

America’s trade gap is growing again. Worse, it may be extremely hard to close it without causing much economic pain—and not just for Americans.

Last year, when the dollar resumed its steady decline after a brief spring rally, many observers felt vindicated and a little relieved. The world had grown too dependent on selling its goods to America. For its part, America was too dependent on flogging its assets to the rest of the world to finance its addiction to imported goods. To be sure, America’s willingness to spend more than it could strictly afford on other countries’ manufactures was welcome at a time when most of these countries’ economies were sluggish. But deficits of over 5% of GDP in America’s current account could not be sustained. Having carried the world economy through the first, crucial leg of recovery from the slowdown of 2001, some economists felt it was time for America to “hand over the baton” to the rest of the world and pause for breath.

Some say that America is refusing to let go of the baton. It continues to import much more than it exports while investing more than it saves. According to figures released last Friday, its current-account deficit, having narrowed to 4.6% of GDP at the end of last year, has widened again in the first quarter of this year (see chart), to 5.1% of GDP.

Were we expecting too much from a fall in the dollar? In other countries, a swift depreciation of the exchange rate has worked wonders. A fall of 20%-plus, in real terms, in the Swedish krone after 1992, for example, turned a deficit of more than 3% of GDP into a surplus of about 4%. But Sweden is a relatively small economy. Providing it remains outside the euro, it can depreciate, gaining competitiveness against its neighbours, without beggaring them. The United States, on other hand, is such a crucial destination for the imports of so many countries that they may struggle to find alternative sources of demand.

More here.