United States lowers its trade deficit in the first quarter

The United States reduced 21.1% its trade deficit in the first quarter of 2023, to 240,547 million dollars, at an annual rate, considering only products and with figures not adjusted for seasonality, the Commerce Department informed on Thursday.

Which economies contributed the most to this negative balance? China (60,771 million dollars), the European Union (46,341 million), Mexico (34,325 million), Vietnam (23,289 million) and Canada (18,137 million).

Within the European Union, the United States had its largest trade deficit with Germany, at 19.988 billion dollars.

In all of 2022, the U.S. reported a goods trade deficit of $1.191.753 billion, an increase of 9.3% over 2021.

According to the White House, the U.S. dollar strengthened in 2022 against the currencies of its major trading partners, particularly other advanced economies.

The Fed’s broad real exchange rate index rose 10.7% between January 2022 and its peak in October 2022, pulling back in late 2022 to post a year-over-year increase of 5.4% in December 2022.

The dollar’s rise was driven by strong U.S. growth and widening interest rate differentials, as well as the attractiveness of U.S. assets as safe-haven investments as Russia‘s invasion of Ukraine stoked global uncertainty.

The weakening of the dollar at the end of the year reflects the Fed’s signal that the pace of rate hikes would slow and signs of relatively strong economic conditions in other advanced economies.

Trade deficit

Dollar exchange rates have an important influence on trade patterns because they determine the price of U.S. goods and services in the domestic currencies of the country’s trading partners.

When the dollar is strong, more foreign exchange is needed to purchase dollar-denominated goods and services.

At the same time, the dollar cost that U.S. buyers pay for imported goods and services denominated in foreign currency is reduced, effectively making them cheaper.

All other things being equal, these changes in relative prices encourage U.S. buyers to substitute U.S.-produced goods and services for foreign-produced goods and services (i.e., imports), thereby exacerbating the U.S. trade deficit.