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| American trade: hurtling towards the tipping point |
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Tuesday, November 18th, 2003
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How serious is America's trade crisis? The best way of framing the answer is that no great power since the last days of the Ottoman Empire has tried to project so much power abroad from such a weak economic base at home. By Eamonn Fingleton.
With the announcement of a worse-than-expected
$41.3 billion U.S. September trade deficit last week,
the scene is being set for a major trade crisis. Certainly
the trend is little short of disastrous and, all wishful
thinking in the Bush administration to the contrary,
there is virtually no hope of a turnaround before the
2004 election.
The new figures mean that in September alone the
United States incurred a larger deficit than in the
entire year of 1992 (which, as President Bush is
well aware, was the last year of his father's
administration). The U.S. goods-and-services trade
deficit is on track to top $515 billion for
2003.
This will represent an increase of nearly 20 percent
on the record 2002 total and will be more than triple
that of 1998 (which was already a disturbingly
large record).
The new figures confirm that the U.S. current account
deficit this year will top the psychologically
important level of 5 percent of GDP. This
will be the worst performance since American economic
statistics were first compiled in the nineteenth
century. By comparison, the notorious U.S. trade
crisis of 1971-72, so well remembered by older
Americans, was a mere blip. The U.S. trade deficit in
1972, at 0.5 percent of GDP, was less than one-tenth
of the current level. Yet it was the prospect of a
"disastrous" trade deficit in 1972 that forced
President Nixon into a humiliating devaluation that
severed the erstwhile "mighty" dollar's historic
link with gold.
By all world standards, America's trade deficits are
stunningly unsustainable. We have to go back to Italy
in 1924 to find a major nation that, in percentage
terms, has run a larger peacetime trade deficit.
The full significance of this is that Italy in 1924
was a true economic basket case -- so much so that in
January 1925, Mussolini seized dictatorial powers.
Of course, in recent years the consensus both on Wall
Street and in the media has been that the trade
deficits "don't matter." The economic thinking
underlying this conclusion is as facile as the
profits-don't-matter ethos that created the disastrous
late 1990s bubble in dot.com stocks.
Why does trade matter? For a start the worsening trend
has obvious and politically explosive implications
for American jobs. True, most displaced workers
eventually find new jobs but these are rarely as well
paid.
Even if policymakers think they can continue to ride
roughshod over the legitimate concerns of American
workers, they will eventually be jolted out of their
insouciance by a force they cannot ignore: money. The
point is that the trade deficits have to be financed
and the question is how long foreign investors will
continue to finance America's recklessly misguided
trade policies.
For every $1 of current account deficit, the United
States has to sell $1 of American assets to
foreigners. In the short run, the question is whether
President Bush can struggle through next year without
suffering a disastrous run on an already weak dollar.
Such a run would raise the price of imports across the
board, discomfiting American consumers and businesses
alike. It would also drastically exacerbate America's
problems in financing the Iraq reconstruction work and
other huge foreign commitments. Perhaps most
politically hurtful would be that it would almost
certainly be accompanied by a shocking increase in
American interest rates.
In the long run the United States faces a rapidly
growing pattern of foreign ownership of key American
assets. More and more U.S. Treasury bonds, for
instance, are being bought by foreign financial
institutions, leaving the U.S. government increasingly
dependent on the whims of financial regulators in
nations like Japan and China. Such erstwhile pillars
of American industry as Amoco and Chrysler have been
bought by foreigners. Japanese corporations have
recently bought two of the crown jewels of
American high technology, IBM's path-breaking
disk-drive division and Lucent's optical fiber
operations. Much of Wall Street is now owned by
foreign capital and German corporations alone own more
than 50 percent of the American book publishing
industry.
In effect America is selling the family silver --
and, as profligate households have discovered down
the ages, you can only sell the family silver once.
Eventually there will be a reckoning as the money runs
out. Within the space of a single generation America
is presiding over the sell-off of much of its
industrial and commercial base. Need it be
added that this base required the sweat and enterprise
of many earlier generations to create.
If this trend continues, the power of foreign bankers,
investors, and financial regulators will soon become a
dominant force in American public life. This has
profound implications for everything from the level
of U.S. interest rates to the way American
corporations are run. Basically the issue
in the long run is who owns the United States. In
truth no great power since the last days of the
Ottoman Empire has tried to project so
much power abroad from such a weak economic
base at home.
Up to a certain level, Americans will hardly notice
the rise in foreign ownership -- but history in other
nations shows that beyond a certain tipping point,
foreign ownership becomes a bitterly hated and
sometimes violently opposed intrusion on national
sovereignty. It is for this reason that both Adam
Smith and David Ricardo, the two founding fathers of
Western economic thought, counselled that it is best
for all concerned if economic assets are owned by
local people. We are not at this tipping point yet
but we are hurtling towards it at a frightening rate.
Eamonn Fingleton's latest book, Unsustainable: How
Economic Dogma is Destroying American Prosperity, is
being published this month by Nation Books. His 1999
book In Praise of Hard Industries: Why Manufacturing,
Not the Information Economy, Is the Key to Future
Prosperity, foreshadowed the dot.com collapse.
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Contact Eamonn Fingleton |
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