Impact on the trade deficit

Posted by Scriptaty | 11:25 PM

New Orleans represents a uniquely strategic seaport for both U.S. import and exports transported on the Mississippi River system. This system is responsible for draining the majority of water from the Rocky Mountains in the west to the Appalachian Mountains in the east. Imports and exports traveling to and from the vast American Midwest and high plains eventually feed through the Mississippi River to New Orleans.

As a result, the damage to and evacuation of New Orleans is highly relevant to the U.S. trade balance. Given that America’s largest trade deficits are with Asia, Canada, and Europe, and this trade activity is routed primarily through unaffected non- Gulf Coast ports, Katrina could cause the U.S. trade deficit to initially widen. This could be further exacerbated by higher energy prices and increases in the cost of oil and gas imports.

The good news is that once New Orleans is functioning again, delayed shipments are likely to prompt a positive surge in net exports. The long-term impact of Katrina on the trade deficit will thus be largely dependent upon second round effects and changes in the demand for imported oil and gas.

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