|
|
| The Trade Disaster: A Primer |
|
Tuesday, October 28th, 2003
|
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 for a long time.
Having been worn down by decades of fighting unfair
trade, American manufacturers have been
under-investing for decades. Without constant high
levels of investment, manufacturers simply cannot stay
at the leading edge for long.
That said, it is true, of course, that Americans are
being constantly assured that the United States
remains the world's most competitive economy. The
evidence of the trade figures, however, flatly denies
this. 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 that
an economist wants to prove. 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 style of economic
activity is closer to the their laissez-faire ideal
than those 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.
Eamonn Fingleton is the author most recently of
Unsustainable: How Economic Dogma Is Destroying
American Prosperity (Nation Books, 2003).
|
|
Contact Eamonn Fingleton |
|
|
|
