Latest / International Business with Fexingo: Global Trade, Cross-Border Deals, and Multinational Operations / The Twin Shocks Widening America's Trade Gap
Transcript
- Lucas: Let's start with a number that jumped out in this morning's data: the US trade deficit for goods and services hit $77.6 billion in May. That's down from $54.6 billion in April — a 42 percent increase in just one month. Luna: That is a massive swing. Usually these monthly changes are a few billion, not twenty-three billion. What happened? Lucas: Two big shocks hit simultaneously. First, oil prices spiked after the renewed us iran strikes. Iran's attack on US forces yesterday sent crude up sharply, and the US is a net oil importer — so our import bill jumped. Second, the Asian tech rout hammered semiconductor exports. South Korea's KOSPI fell 8 percent overnight, and a lot of that was tied to chip stocks like SK Hynix and Samsung. If demand for chips softens, US exports of semiconductor equipment and design IP take a hit. Luna: So one shock pushed imports up, the other pushed exports down. Perfect storm for the trade deficit. And the dollar is still strong, right? Lucas: The trade-weighted dollar index is at 120.7 — down a hair from 120.91 last week, but still historically high. That makes US exports more expensive for foreign buyers and imports cheaper for US consumers. So even with a slight weakening, the dollar is still a headwind for trade balance. Luna: Yeah, and this isn't a one-off. The deficit has been trending wider all year. Let's put the May number in context — what's driving the structural part versus these shocks? Lucas: Right. Pre-shock, the trend was already deteriorating. Exports grew at 4.7 percent year-over-year through January, but imports grew at 5.8 percent. So the gap was widening even before the oil spike and chip rout. The structural factors include the strong dollar, but also the US consumer's appetite for foreign goods — that hasn't abated. Luna: True. And on the export side, services — things like software, consulting, royalties — have been a bright spot. But goods exports are under pressure. Let's talk about the oil piece specifically. How much did it add to the deficit in May? Lucas: Hard to isolate May perfectly, but crude oil imports by value were up roughly 12 percent month over month in the first two weeks after the strikes resumed. If we annualize that, it's about $8 to $10 billion extra on the import bill per month. And that's if prices stay at these levels. If they go higher, the deficit widens further. Luna: And the chip rout: South Korea is a bellwether for global semiconductor demand. When their stocks drop that hard, it signals that the ai driven boom might be hitting a speed bump. That directly impacts US exports of chip-making equipment and design tools. Lucas: Exactly. Companies like Applied Materials, Lam Research, and KLA — they sell a lot to Korean and Taiwanese fabs. If those customers start pulling back orders, US export numbers suffer. In May, semiconductor exports were already down 3 percent from April. The rout could accelerate that. Luna: So we have energy geopolitics and tech geopolitics converging. It's a rare moment where two unrelated shockwaves hit trade at the same time. Lucas: And that's what makes this episode interesting — it's not just one story. If these conversations have helped you make sense of the crosscurrents in global trade, well, that's exactly what we aim for. Listener support keeps this show ad-free and lets us dive into these angles without worrying about commercial breaks. You can help at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small gesture that goes a long way. And it keeps the conversation independent. Lucas: So back to the trade deficit. The May number is likely to be revised, but the direction is clear. The question is whether the dollar weakening we've seen — the index dropped from 121 to 120.7 — is enough to start rebalancing trade. Most economists say no. The dollar would need to fall another 10 percent to make a meaningful dent. Luna: And even then, the oil and chip shocks are transitory, but they could linger. If iran us tensions stay hot, oil stays high. If the AI hype cycle cools, chip demand stays weak. That could keep the deficit elevated for months. Lucas: Right. The IMF just warned that trade fragmentation — the split into us led and China-led blocs — could reduce global GDP by 7 percent over the long term. That's not a shock, it's a slow bleed. But the trade deficit is the symptom of deeper structural shifts. Luna: Let's zoom in on one more specific: the services surplus. That's been a reliable buffer for the US trade balance. Are services exports holding up? Lucas: Yes, services exports were $85 billion in May, up from $82 billion in April. That includes travel, education, and business services. But goods imports are so large — $280 billion in May — that the services surplus can't offset the goods deficit. The total deficit is $77.6 billion, and services surplus is about $20 billion. So goods deficit is nearly $100 billion. Luna: That math makes the structural problem clear. The US manufactures less than it consumes. And with the dollar strong and geopolitical risks rising, there's no quick fix. Lucas: One more data point: the current account balance, which includes income payments and transfers, also deteriorated in Q1 2026 to a negative $226.8 billion. That's the widest since 2006. So the trade deficit is part of a broader imbalance. Luna: What does this mean for the average listener? If you're in a business that exports, you're facing headwinds. If you import, you're paying more for oil and maybe less for tech components. It's a mixed bag. Lucas: Exactly. And for investors, the trade deficit can weigh on GDP growth. Net exports subtract from GDP when imports exceed exports. In Q2, if the deficit stays this wide, it could shave half a percentage point off growth. Luna: So we're watching a live experiment in how geopolitics and technology cycles interact with currency and trade policy. No simple answers. Lucas: No simple answers, but a clear picture: the US trade deficit is not just a number — it's a signal of how the economy is positioned in a multipolar, shock-prone world. And that's worth paying attention to. Luna: Agreed. Next week we'll look at how emerging markets are coping with these same shocks.