U.S. Oil and the Trade Deficit

January 31, 2014
By Jenny Li Fowler, HKS Communications

Falling oil imports resulting from rising domestic oil production could have palpable short-term effects on the U.S. oil trade deficit, but may not be significant enough to offset deterioration in other parts of the trade balance over the longer term. That is the conclusion put forth in a new Council on Foreign Relations energy report titled “Implications of Reduced Oil Imports for the U.S. Trade Deficit,” authored by Harvard Kennedy School Professor (HKS) Robert Lawrence.

In the long run, Lawrence argues, the effect on the U.S. trade deficit would be ambiguous at best.

“At most, each dollar savings on oil imports would yield only a ten cent reduction in the U.S. trade deficit,” Lawrence writes. He also contends that falling oil consumption would also have a similar underwhelming impact on the trade deficit since “reductions in the oil trade balance would be offset by increases in the non-oil trade deficit.”

“The premise that other things will remain constant is invalid,” Lawrence argues. Over time “the changes in oil and non-oil trade balances could well cancel each other, leading to little or no change in the overall U.S. trade deficit. This implies that the economic concerns about growing U.S. international indebtedness, and the geopolitical concerns about the U.S. dependence on borrowing from countries like China will not automatically be alleviated by oil-sufficiency.”

Lawrence suggests the way to achieve a smaller trade deficit is to adopt policy measures that raise the national saving rate, rather than increasing the production or reducing the consumption of oil.

“While such measures may bring other benefits, without other changes in U.S. macroeconomic behavior, they should not be expected to have a major effect on the current account in the long run,” he writes.

Robert Z. Lawrence is Albert L. Williams Professor of International Trade and Investment, a Senior Fellow at the Peterson Institute for International Economics, and a Research Associate at the National Bureau of Economic Research. He currently serves as Faculty Chair of The Practice of Trade Policy executive program at Harvard Kennedy School.

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Robert Z. Lawrence, Albert L. Williams Professor of International Trade and Investment

Robert Z. Lawrence, Albert L. Williams Professor of International Trade and Investment

“At most, each dollar savings on oil imports would yield only a ten cent reduction in the U.S. trade deficit."