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Thursday, October 9th, 2003
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What are the trade deficits?
When a nation imports more than it exports, it runs a trade deficit. As measured on a so-called �current account� basis, America�s trade has been in deficit every year since 1981. The current account is the widest measure of a nation�s trade. As such it is the measure used by economists and government officials in all serious policy discussions. A less comprehensive measure, the goods-and-service balance, is reported on a monthly basis in the newspapers, and, because it is published sooner, it gets much more attention in the press. America's goods-and-service deficits generally mirror the trend of the current account deficits and both have been rising rapidly in recent years. More on the distinctions between these two measures later.
How bad are these deficits?
Disastrous. In 2002 the United States ran a current account deficit totalling $503 billion. That was more than nine times the deficit in 1992. Even more disturbingly, it equalled more than 5 percent of America�s total national output. On a percentage basis, that was the worst trade performance in U.S. history.
To put that 5 percent figure in perspective, remember that before 1983 the United States had never incurred a deficit of more than 1 percent. The latest deficit stands in particularly stark contrast to America�s record of consistently strong trade surpluses in the time of America�s greatest economic success in the first seven decades of the twentieth century. In those years, the United States recorded an annual trade deficit on only eleven occasions � and in most cases the deficits were miniscule. Even the notorious trade crisis of the early 1970s was no more than a storm in a teacup by today�s standards � the trade deficit was just 0.1 percent in 1971 and 0.5 percent in 1972. Yet it was the prospect of the latter deficit � considered seriously damaging to America�s economic health at the time � that forced President Nixon to make the deeply humiliating decision to break the dollar�s quasi-sacred link with gold.
Why does trade matter?
Economic history tells us that chronic trade deficits first enfeeble a nation and eventually, if they remain unchecked, ruin it. The decline of the once-great Ottoman empire, for instance, stemmed in substantial measure from its failure in its last decades to control its spiralling trade deficits. Chronic trade troubles also precipitated the decline of Argentina, a nation that began the twentieth century at the top of the First World and ended it at the bottom of the Second.
It is also revealing to look at the history of the so-called Group of Seven nations (these nations comprise Japan, Germany, France, Italy, the United Kingdom, and Canada, as well as, of course, the United States). Although some of them have on occasion run deficits even larger than America�s recent 5 percent figure, they have invariably done so only at times of extreme distress. Specifically in most cases such deficits were incurred either in the desperate circumstances of the two World Wars or in the immediate aftermath of those massively destructive wars. The one other occasion when a G7 nation exceeded America�s 2002 figure was a deficit of 7.7 percent incurred by Italy in 1924. But that precedent is cold comfort for anyone trying to downplay America�s current trade crisis: a glance at the history books reveals that Italy in the mid 1920s was a true basket case � so much so that its problems paved the way for the rise of Fascism (Mussolini seized dictatorial powers in 1925).
All that is past history but what exactly do Americans have to worry about now?
For the United States as a nation, the problems will include rapidly increasing foreign intervention in the American economy and ultimately the collapse of American economic power. Meanwhile ordinary Americans will face a diminished future in which jobs will become ever less secure, wages will be stunted, and society will become more and more polarized.
The collapse of American economic power? Explain.
The best starting point in trying to understand all this is to remember that, where trade is concerned, a nation is like a household. A household that spends more than it earns may have a ball for a while. But, to pay the bills, it must either run up credit or sell the family silver. Neither option is attractive. Loans have to be repaid some time and in the meantime the interest charges mount up. As for selling the family silver, you can do that only once. Beyond a certain point therefore living beyond your means becomes unsustainable. And the reckoning, when it comes, can be devastating.
Exactly the same logic applies to nations. In its efforts to finance the trade deficits, America is borrowing ever more heavily from abroad. Much of this borrowing is being done by American banks but American corporations are also becoming increasingly dependent on foreign capital. So is the U.S. government. And the interest bills are mounting exponentially.
As for selling the family silver, the United States is now within the space of a single generation 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.
Such erstwhile pillars of American industry as Amoco and Chrysler have been bought by foreigners. Recently Lucent, which owns the fabled Bell Labs, came within an ace of being bought by the French.
Large parts of Wall Street have come under foreign control. Names like Bankers Trust, First Boston, Scudder, Alliance Capital, Republic Bank, Kemper Corporation, and Dillon Read may still sound American but these former titans of American financial power are now controlled from places like Zurich, Winterthur, Frankfurt, Paris, London, and Hong Kong.
Even the American mind is coming under foreign ownership. On one estimate, German media conglomerates have bought more than half the American book publishing industry. Other foreign companies control much of the rest.
Despite its image as a quintessentially American phenomenon, the New Economy has not been immune. Tokyo-based Softbank Corporation, for instance, is the dominant shareholder in hundreds of cyberspace businesses, most notably Yahoo! and E*TRADE. Meanwhile, Paris-based LVMH is a major investor in the Datek online brokerage firm as well as in Cisco Systems and MP3.com.
Already the great American sell-off has gone so far that America's economic standing on the world stage has been dramatically diminished. While that may not be obvious to American voters or even to opinion leaders, it is apparent in national asset/liabilities figures published by the International Monetary Fund. These show that in the eleven years to December 2000, America's net foreign liabilities ballooned from $47 billion to $2187.4 billion. And that�s only the beginning. Because financing costs (in the form of interest and dividends paid to foreigners) are now adding rapidly to the problem, America�s net foreign liabilities are set to soar in coming years even if Washington somehow succeeds in reining in the growth in America�s imports.
It is hard to exaggerate the significance of America�s mounting foreign liabilities. The figures are there in black and white in the IMF�s statistics books. Yet they are almost completely ignored by the American press.
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 value of the U.S. dollar and the level of U.S. interest rates to the way American corporations are run. Basically the issue is who owns the United States.
What about the impact on ordinary Americans?
The most obvious problem is the threat to American jobs. Rising imports almost inevitably throw Americans out of work. Some such job losses are inevitable, of course. But to the extent that foreigners use unfair trade tactics to sell in the American market, the resulting losses of American jobs are highly damaging to America�s long-term economic health. Unfair trade tactics come in countless forms and have proved almost impossible to police. Virtually every country is guilty to some extent and even the United States is not completely blameless. But on balance, the United States has been by far the biggest victim of such tactics. As American jobs have been snuffed out through unfair trade, factories have closed and the United States has lost the capacity to make many types of goods in which it was once the world�s leading supplier. In other words there is a ratchet effect here.
What about the impact on ordinary Americans?
The most obvious problem is the threat to American jobs. Rising imports throw Americans out of work. Some such job losses stem inevitably from advances in technology and changing tastes. But to the extent that foreigners use unfair trade tactics to drive American producers out of business, lost American jobs are highly damaging to America�s long-term economic health.
Unfair trade tactics come in countless forms. Virtually every country is guilty to some extent and even the United States is not completely blameless. But on balance, the United States has been by far the biggest victim of such tactics. As unfair trade has snuffed out American jobs, the United States has lost the capacity to make many types of goods in which it was once the world�s leading supplier. This, of course, means that America is becoming ever more dependent on foreign suppliers. In other words there is a ratchet effect here.
What about American wages?
Unfair trade has clearly been a factor restricting income growth in the United States, particularly in the case of middle class families. The most obvious indication of how badly the American middle class has done in recent years is that these days most families need two incomes � that of a mother as well as a father � to maintain the sort of lifestyle that fathers alone could deliver a generation ago.
Surely the main reason America imports so much is because output is rising in low-wage nations like China?
Buying from low-wage nations explains only part of the problem. Certainly America's imports from China have been growing very rapidly in recent years and Chinese wages, of course, are only a fraction of American levels. But not every country the United States imports from has low wages. Wages in Japan, for instance, have been running about 10 to 20 percent higher than American levels for years yet the United States consistently incurs huge deficits with Japan. In fact taking the last ten years as a whole, it has been Japan not China that has been the nation with which the United States has been running the biggest deficits. The United States is also running huge deficits with Germany, another nation that boasts very high wages.
Why does the United States buy so much from a nation like Japan, where labor is so expensive?
Because America literally cannot make the products concerned. Either the American manufacturers who used to make these products have gone out of business -- or, more likely, the products are very advanced ones that Americans never manufactured in the first place. 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 also highly know-how intensive--so much so that it is generally much more difficult to enter such activities than most areas of the vaunted postindustrial economy (on which the United States is betting its future).
Unseen by the American consumer, Japan is the main -- and in many cases, only -- source of the key machines without which the American economy 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 of supplying enabling components without which whole classes of products would simply not exist. Consider laser diodes. Unless you're an engineer, you've probably never heard of these tiny devices, but they are the key technology in CD players, CD-ROMs, and DVD machines, and are essential also in everything from fiber-optic communications to laser printers. The Sony Corporation, based in Tokyo, alone produces about 50 percent of the world's laser diodes--all the rest come from other Japanese manufacturers.
Even the American aerospace industry is becoming increasingly dependent on Japan. The Japanese are vital sources of such crucial aerospace requirements as carbon fiber and refined titanium. They also dominate the manufacture of a host of key components such as liquid crystal displays and charge-coupled devices. (Although charge-coupled devices are not familiar to the non-engineer, they perform a variety of vital tasks, including such national security-sensitive functions as guiding American cruise missiles down enemy ventilation shafts.) Boeing acknowledges that 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 subcomponents 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.
But surely American manufacturers are the world's most efficient�
Not true! In fact it has not been true for a long time. Worn down by fighting unfair trade, American manufacturers have been under-investing for decades. And, of course, without constant high levels of investment, no nation's manufacturers can hope to stay at the leading edge for long.
That said, it is true, of course, that many economists claim that the United States remains the world�s most competitive economy. The evidence of the trade figures, however, flatly contradicts them. The trade figures are a fact -- whereas all those surveys that "prove" America is the world's most productive nation are merely opinions. Depending on the assumptions on which they are based, such surveys can be manipulated to "prove" almost any result an economist wants. American economists love to "prove" that America is the world's most productive nation. To show anything else would immediately throw into question their entire belief system, particularly their conviction that the American system of relatively pure laissez-faire is more effective than the digiriste approaches of competing nations (several economies which in reality are more productive than the United States are run on principles far removed from American-style laissez faire).
What are the main differences between the various methods of measuring the deficits?
There are three major measures. The first is the visible balance. This counts merely trade in physical goods. It was the standard way America�s trade position was reported up to the early 1990s but has been jettisoned because it was too incomplete to be meaningful.
The second is the goods-and-services balance. As the name implies, this counts services as well as goods. It is now the standard way trade is reported in the press. But it is not fully comprehensive because it does not count cross-border interest and dividend payments and receipts. The third is the current account balance. This not only counts trade in goods and services but also interest payments and other financial payments. America used to have a large surplus in financial flows but these days, thanks to the fact that it has incurred up huge foreign debts in the last two decades, it is running huge deficits on these flows. On a yearly basis, the current account deficit now runs about $80 billion higher than the goods-and-services deficit.
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Contact Eamonn Fingleton |
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