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| Key Facts on the Trade Disaster |
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Sunday, June 17th, 2001
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This is my new primer on America�s trade disaster. In advance of posting it as a permanent feature of the site, I am running it as this week�s Trading Blows column. EF
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 has been running trade deficits every year since 1981. The current account is the widest measure of a nation�s international trade, tracking as it does not only trade in goods and services but cross-border payments of interest and dividends. (For more on the various ways that trade is measured see later. For now, let�s note that on all measures, America�s trade trend has been deteriorating alarmingly in recent years. Because it is the most comprehensive measure, the current account is the measure invariably used by economists and government officials in all serious discussions of trade policy.)
How bad are these deficits?
Disastrous. In 2000 the United States ran a current account deficit totalling $435 billion. That was nearly nine times the deficit in 1992. Even more disturbingly, it equalled fully 4.5 percent of America�s total national output. On a percentage basis, that was by far the worst trade performance in U.S. history.
To put that 4.5 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 continue unchecked, ruin it. The decline of the once-great Ottoman empire, for instance, stemmed substantially 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 4.5 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 2000 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 include rapidly increasing foreign intervention in the American economy and ultimately the collapse of American economic power. Meanwhile ordinary Americans 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 the consequences for American economic power is to remember that, where trade is concerned, a nation is like a household. A household that spends more than it earns is living in a fool�s paradise. To pay the bills, it must either run up credit or sell the family silver. Neither option is attractive. Loans have to be repaid 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 in the name of American banks and American corporations. But the U.S. government is also becoming increasingly dependent on foreign capital. 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 succumbing to 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 pillars of the American financial establishment are now controlled from places like Zurich, 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 escaped the trend. 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 the American public, it is apparent 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 $49 billion to $1,537 billion. And that�s only the beginning. Because financing costs (in the form of interest and dividends paid to foreigners) are now compounding rapidly to the problem, America�s net foreign liabilities are set to soar in coming years irrespective of whether Washington 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 have been 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 America.
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.
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 In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the Key to Future Prosperity (Houghton Mifflin, 1999).
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