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| The Unnoticed American Trade Crisis |
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Thursday, March 8th, 2001
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Almost no one has noticed, but the United States is heading for a major foreign trade crisis � one that could provide the new Bush administration with an unwelcome early test of its economic diplomacy skills. All the indications are that the current account deficit for 2000 came to 4.5 percent of gross domestic product. Although the current account deficit is less publicized than the goods and services deficit released today, it is the one that policy-makers and financiers are likely to focus on. When the numbers come in next month, they will be shockingly large, by far the highest percentage of GDP since the United States first started publishing the data in 1889. This is a huge jump over the record 3.6 percent deficit recorded in 1999.
We have almost forgotten that up to 1983 the U.S. trade deficit had never exceeded even 1 percent of GDP. The big trade crisis of the early 1970s � which forced President Nixon into breaking the dollar�s link with gold � was puny by today�s standards. In 1972 the deficit came to a mere 0.5 percent of GDP. Yet this was considered shocking at the time.
The conventional wisdom today is that soaring trade deficits prove how strong the American economy is compared to those of Europe and Asia. Because American has been in a boom � at least up until last fall � it has been sucking in imports at a time when consumer demand has remained weak elsewhere.
The conventional wisdom, however, does not stand up to even cursory analysis. Past boom times in America did not cause trade problems. On the contrary, in America�s greatest days of economic leadership in the 1950s and 1960s, the American economy not only achieved booming growth but generated large trade surpluses which were hailed as proof of American commercial superiority.
Another version of the optimistic view has it that in a globalized world economy, trade deficits simply don�t matter any more. Yet, economic history shows that a nation that persistently runs trade deficits eventually faces a reckoning in the form of a drastic devaluation of its currency. Globalized financial markets have made this a more, not less, acute problem.
Trade deficits also matter because they have to be financed � by transferring assets from American to foreign hands. According to the International Monetary Fund, America�s net overseas liabilities ballooned from $49 billion to $1,537 billion in the first nine years of the 1990s. They are now increasing at a rate of $1 billion a day � seven days a week.
It is precisely because the United States has moved so much faster than its major economic competitors to embrace post-industrialism that its trade is worsening so rapidly. Unfortunately, post-industrial 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 lock on the global market for personal computer operating systems. But Microsoft suffers badly from piracy in many foreign markets. Cultural barriers also limit Microsoft�s contribution to the American balance of payments. Its word processing programs must be adapted to sell overseas. This adaptation is usually done in the local market, where costs eat severely into the revenues sent back to the United States.
The other side of post-industrialism is the continuing decline of many of America�s erstwhile world-leading manufacturing industries. It�s not just the cheap labor of foreign competitors that beating them. 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 are higher than America�s are Switzerland, Japan, Germany, Denmark, Sweden, and Austria, all of whom enjoy booming exports to the United States.
All this suggests that it is past time that American policy-makers took a closer look at what has really been happening to American manufacturing in recent years. Certainly they would be well advised to focus on the problem before it blows up into a full-scale international economic crisis.
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Contact Eamonn Fingleton |
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