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| Trade: The Ticking Time Bomb that the Press Keeps Ignoring |
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Friday, April 6th, 2001
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In the old days--before the New Economy supposedly changed everything--one of the biggest items of economic news each month was the release of America�s monthly trade figures. Even what by today�s standards were quite minor trade setbacks were often enough to lead the network news programs. Plus �a change. These days, the worse the trade figures get, the less media attention they seem to receive. As American economics correspondents know to their cost, since at least the mid 1990s, there has been a severe bear market in international trade stories.
One thing is certain: the trade figures are now very bad indeed. America�s trade deficit in goods and services for 1999, for instance, came to $271.3 billion--a rise of no less than 65 percent increase on the record deficit incurred the previous year. Yet when it was announced in mid-February, the major American media just yawned. Typical was the New York Times�s decision to relegate the story to just 488 words on page 14. It is interesting to note that just two years earlier the 1997 deficit of $113.7 billion had not only merited nearly twice as much space but had been given front-page treatment.
The trend keeps getting worse. America�s current account deficit totaled 4.4 percent of gross domestic product in 2000. How bad is that? Truly terrible. A search of the record reveals that it is the worse peacetime deficit of any nation in recorded history. By comparison the biggest deficit the United States ran in the 1980s--a supposedly disastrous decade for American trade--was 3.4 percent of national output.
An even more telling comparison is with the then shocking deficits of 1971 and 1972. The deteriorating trade trend in the early 1970s was already considered so serious by September of 1971 that it forced the hand of the Nixon administration in making the historic--and deeply humiliating--decision to abandon the dollar�s gold convertibility. It is therefore interesting to note that in 1971 and 1972 the deficits represented respectively just 0.1 percent and 0.5 percent of gross domestic product.
In the circumstances, the fact that the recent deficits have--so far at least--caused hardly a ripple of public concern seems to confirm the globalists� view that �trade deficits no longer matter.� This idea was once associated solely with the wilder shores of globalism. It has long been a hobbyhorse of the Wall Street Journal�s editorial pages, for instance, where it reached its most memorable articulation in a 1993 commentary by Kenichi Ohmae. �No one worries about trade balances between California and Texas,� he said. �Why should they worry about the balance between the United States and Japan?� It was for comments like this that Liar�s Poker author Michael Lewis once dubbed Ohmae the �galloping globalist.� These days, however, for all the reserve with which most of the rest of the media have traditionally viewed the Journal�s editorial-page positions, almost everyone seems to accept that in a global economy, there is no longer any point in worrying about national trade balances.
But is it really true that America�s mounting trade deficits are nothing to worry about? Hardly. No more than a cursory look is necessary to see that the deficits are symptomatic of a highly troubling deterioration in American competitiveness that presages a drastic diminution of American power in the longer term. But even absent concerns on this score, there is the immediate practical matter that trade deficits have to be financed, and it is an observable fact that the financing in many cases takes the form of selling off American corporate assets to foreigners. In effect America--the so-called lone remaining superpower--is becoming a branch office economy, as more and more Americans work for bosses located in Britain, Germany, the Netherlands, Switzerland, Japan, and even China.
Of course, all this runs directly counter to the conventional view of a triumphant America boldly leading the rest of the world into a new era of unprecedented economic overachievement. But the ironic truth is that it is precisely because the United States has moved so much faster than its major economic competitors to embrace postindustrialism that its trade is worsening so rapidly. The truth is that, in common with most other service businesses, postindustrial businesses are generally remarkably poor export earners.
Even mighty Microsoft Corporation is a disappointing player in world markets--its exports in a typical year account for less than one-quarter of its total sales revenues. By comparison strong American manufacturing companies in, for instance, the American aerospace industry can achieve export ratios of close to 50 percent of total output--and some major Japanese electronics companies export as much as 80 percent of their total output.
Microsoft�s export ratio is particularly disappointing given that the company has for more than a decade enjoyed a famously all-embracing global lock on the global market for personal computer operating systems. In fact it is fair to say that few major companies have ever enjoyed such a large share in an important global business.
But on closer examination, the fact that Microsoft is a relatively poor exporter is hardly surprising. In truth, the Microsoft story is a classic illustration of the weaknesses of postindustrial businesses in foreign markets. For a start, in common with many other postindustrial businesses, Microsoft suffers badly from piracy in many foreign markets. Cultural barriers also importantly limit Microsoft�s contribution to the American balance of payments. Its word processing programs, for instance, must be comprehensively adapted to sell in many key foreign markets. Given that such adaptation is usually done abroad, its cost eats severely into the revenues remitted to the parent company in the United States.
If Microsoft�s export performance seems disappointing, that of most of America�s other vaunted postindustrial businesses is abysmal. Whether we are talking about America Online, Yahoo!, or even eBay, the story is the same: these companies contribute virtually nothing to America�s balance of payments.
Perhaps no area of the postindustrial economy turns in such a disappointing performance as financial services. Although many of America�s great financial services firms have been serving foreign markets for more than a century, their long experience abroad does not translate into superior export performance. Take, for instance, Merrill Lynch. Although the firm generates about a quarter of its revenues outside the United States, only a small fraction of such foreign revenues count as exports for the United States. This is because the firm is a classic service business in that it generally serves its foreign customers from offices in the markets concerned. Essentially virtually all the salaries and other expenses involved in serving foreign customers count as deductions from its foreign revenues. When these are netted out, it is apparent that even in a good year less than 5 percent of the firm�s revenues contribute to the American balance of payments.
The other side of postindustrialism is the continuing decline of many of America�s erstwhile world-beating manufacturing industries. Here the noise-to-signal ratio is notably high as various vested interests--from the McKinsey Global Institute to the American electronics and aerospace industries--have sought to disguise the extent to which American manufacturing has lost competitiveness in recent years. While many disingenuous arguments have been advanced to suggest that American manufacturing has rarely been stronger, a glance at America�s international trade position tells a different story. The point is that a rapidly increasing percentage of American imports is now coming from nations where wages are actually higher than in the United States. The clear message is that manufacturers in such nations are now more productive than their American counterparts. Among nations whose wage levels at last count were higher than America�s were Switzerland, Germany, Denmark, Sweden, and Austria, all of whom enjoy booming exports to the United States.
These nations� achievements, however, pale in comparison to that of Japan, the global economy�s supposed sick man. Amid all the triumphalist talk in recent years about America�s supposed besting of the Japanese economic challenge, Americans have lost sight of a couple of sobering facts:
1. Japan accounts for a larger share of America�s current account deficits than any other nation.
2. Since the Japanese stock market started its famous collapse in January 1990, the Japanese yen has generally risen against the dollar (which at end-1989 was worth fully �143.40).
3. Translated at market exchange rates, wages in Japan now run 15 to 20 percent higher than in the United States.
Why does the United States buy so much from a nation where labor is so expensive? It is hard to resist the conclusion that most of the goods America imports from Japan these days are products so advanced that America cannot make them for itself--or at least cannot make at all efficiently. An examination of the fundamental facts underlying U.S.-Japan trade fully vindicates this conclusion. The truth is that while Americans associate Japan with assembling consumer goods like television sets and cars, an estimated 70 percent of what the United States imports from Japan these days consists of highly sophisticated producers� goods such as high-tech components, advanced materials, and complex capital equipment. The manufacture of such products is not only highly capital-intensive but highly knowhow intensive--so much so that it is generally much more difficult to enter than most areas of the vaunted postindustrial economy on which the United States is betting its future.
Japan�s dominance in capital equipment is particularly noteworthy. Unseen by the American consumer, Japan is the world�s main--and sometimes only--source of many categories of highly advanced machine tools without which American manufacturers would literally grind to a halt. Many of the most advanced presses used to stamp out car bodies in Detroit, for instance, are made in Japan. So too are the sophisticated robots used to paint cars. Meanwhile, behind the scenes in American television studios, most of the cameras and other highly advanced broadcasting equipment are Japanese-made. Ditto for the huge printing machines used by publishers like the Washington Post.
The United States is also heavily dependent on Japan for key components in all sorts of consumer products. Often Japan�s contribution consists in supplying enabling components without which whole classes of products would simply not exist. A notable illustration of America�s unsuspected dependence on such components is laser diodes. Although almost no one in the United States other than engineering specialists have ever heard of these tiny devices, they are the key technology in CD players, CD-ROMs, and DVD machines, and are essential also in everything from fiber-optic communications and to laser printers. Tokyo-based Sony alone produces about 50 percent of the world�s laser diodes and all the rest comes from other Japanese manufacturers.
Even the American aerospace industry is becoming increasingly dependent on Japan. By virtue of their dominance in advanced materials, the Japanese are vital sources of such crucial aerospace requirements as carbon fiber and refined titanium. They also dominate in a whole host of key components such as liquid crystal displays and charge-coupled devices (although charge-coupled devices are little known outside engineering circles, they perform a variety of vital functions, not least as the seeing eyes that guide American cruise missiles down enemy ventilation shafts). Boeing acknowledges that fully 20 percent of the components in its most advanced passenger jet, the 777, are sourced from Japanese suppliers. When account is taken of Japanese-made sub-components used by Boeing�s American and European suppliers, ultra-high-wage Japan probably accounts for more than 30 percent of the manufactured content in the 777.
Perhaps the most surprising manifestation of how dependent the United States has become on higher wage nations is in the fundamental technologies driving the Internet. While Americans laughed when Al Gore claimed to have invented the Internet, they are guilty of advancing a similarly self-serving myth when they claim that the rise of the Internet is an American achievement.
The point is that the widespread use of the Internet would not have been possible without major breakthroughs in fundamental manufacturing technologies. Remember that computer chips are now nearly one-hundred times more powerful than the already almost magically powerful chips of a decade ago. To make more powerful chips, the world�s semiconductor companies have had to print ever finer lines on ever more refined silicon. Japan dominates the world market in both refined silicon and in the lithographic machines that print lines on silicon chips�and thus by dint of these technologies as well as several lesser ones, it is in reality the true prime mover of the entire electronic revolution.
Perhaps the ultimate illustration of America�s dependence on imported technology is in mobile phones. Although these devices--undoubtedly the most impressive exercises in miniaturization the electronics industry has so far produced--are sold under American as well as European and Japanese brandnames, they are almost entirely Japanese in their fundamental manufacturing technologies. According to an analysis by Deutsche Securities, a subsidiary of Germany�s Deutsche Bank, of the thirty-six leading manufacturers that make the nine highly miniaturized enabling components in mobile phones, all but seven are entirely Japanese. Perhaps even more surprisingly, of the seven non-Japanese manufacturers all but one are in some way heavily dependent on Japan for their success. A notable example is Intel Corporation, which supplies so-called flash memories, which are essential in mobile phones. In reality, however, Intel does not make these devices but rather outsources them from Japan. Like so many other American-brandname components in advanced electronic devices these days, Intel flash-memories are entirely Japanese in their manufacturing
technology.
In view of facts like this, it is hardly surprising that exports from Japan recently accounted for fully l3 percent of all America�s imports. Germany accounted for a further 5 percent and other ultra-high wage nations another 5 percent. All in all, therefore, close to one-quarter of American imports are now coming directly from nations where wages are higher than American levels. But the situation is even worse than these figures would imply because much of what America imports from lower wage nations represents value added ultimately attributable to ultra-high wage nations. Probably close to one-third of the value added in the exports of China and other low-wage East Asian nations, for instance, is accounted for by Japanese-made components, materials and capital equipment. Similarly exports from the lower wage nations of Europe are in large measure made up of added value created in ultra-high wage nations, most notably Japan and Germany. Add it all up and it seems likely that more than 35 percent of the added value in America�s imports comes from nations that have passed America in wage levels.
But even absent this sobering fact, the scale of America�s current account deficits is in itself a clear warning that the American economy�s supposed success in boosting its competitiveness in recent years is a lot more sizzle than steak. Trade deficits are ultimately unsustainable. Sooner or later something will give--and that something is the exchange rate. If the past is prologue, the dollar will fall suddenly and precipitously, in much the way it did in the mid-1980s and early 1990s (on each of these occasions it lost fully half its value against the yen). That we are close to a similar adjustment seems obvious given that--entirely overlooked by the American media--America�s current account deficit last year hit an all-time record of 3.8 percent of gross domestic product. This compares with a previous record of 3.6 percent set in 1987. And preliminary indications are that the deficit in 2000 probably reached 4.4 percent.
Irrespective of when the foreign exchange shoe drops, there is this to consider: every dollar of current account deficit the United States incurs represents another dollar of assets transferred from American to foreign hands. The most obvious manifestation of this trend is the recent huge increase in foreign takeovers of American businesses. While the scale on which America is selling its assets to pay for its imports may not be immediately apparent to voters or even to opinion leaders, it is obvious in national asset/liabilities figures published by the International Monetary Fund. These show that in the first nine years of the 1990s alone, America�s net foreign liabilities ballooned from from $49 billion to $1,537 billion. Faced with figures like these, many American opinion leaders may be tempted to bury their heads in the sand. They should be reminded of the fate of earlier empires that paid too little attention to trade. It is time they checked out what happened to the Ottoman empire.
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Contact Eamonn Fingleton |
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