What's going on with the trade deficit?

So the trade deficit is at its lowest level in six months (since the deficit six months ago was another record, that still doesn't mean that we're in particularly great shape, but any progress is better than none). That's pretty good news and will help in a number of areas, including strengthening the dollar, which in turn reduces the price of oil world-wide.

But what I'm interested in is what exactly is going on with this. The trade deficit goes down when the amount we export goes up and/or the amount we import goes down. So part of the change is easily explainable and really pretty overdue: the weakness in the dollar should reduce the price of American-made goods, making these goods more attractive to foreign buyers. This is the "amount we export goes up" leg.

The big question is what's happening in the "amount we import goes down" category. A corollary of the weak dollar is that imports become more expensive to Americans, and the amount we import should therefore go down. That hasn't really happened until now, partly because much of what we import, in the form of oil, is relatively stable and mandatory. But what's extremely curious is this:

A drop in the trade deficit with China - to $12.9 billion in March from $13.9 billion deficit in February - accounted for a good portion of the decline... The decline in imports was most pronounced in volatile areas like drugs from Canada, and clothing and household goods from Asia. Textiles and furniture also experienced notable drops.

What's really interesting about that is that textile import quotas were recently eliminated, leading to fears that textile production in China would swamp world markets. This has, to some extent, proved correct. As noted in The Standard, a Hong Kong-based Chinese business paper, "imports from... mainland [China] leapt by up to 534 percent after a global quota system ended at the beginning of this year. "

But this has not been the case in the U.S.:

Markets had been expecting the bilateral trade deficit with China to reach record levels due to the recent lifting of US textile quotas. In the event, not only did imports from China decline for the second consecutive month, but US exports to China rose for two months in a row.

Now, as noted in the N.Y. Times article, clothing is a fairly volatile segment of the market. But the fact is that clothing is also very sensitive to pricing. The greatly increased Chinese clothing production and export of clothes and other textiles should lead to steep reductions in the cost of clothes. Couple this with the fact that the value of the Chinese renminbi is tied to the price of the dollar, which means that the increased cost of imports due to the weakness of the dollar is not a factor.

One possibility is that there has been a slowdown in textile purchases due to a glut of textiles having already been purchased in the previous months since the removal of the quotas, a not indefensible idea since we have been running record trade deficits the entire time. Another possibility is simply that this is a glitch in the trade numbers and the next couple of months will see us right back to our old habits.