FacebookTwitterGoogle+RedditEmail

Anatomy of a Hemorrhage

The Commerce Department reported the 2008 deficit on international trade in goods and services was $677.1 billion. This is down from $700.3 billion in 2007 but still 4.7 percent of GDP. The trade deficit was smaller in 2008, becasue economic growth and consumer spending began to decline during the second half 2008.

Trade deficits and shoddy banking practices pushed the economy into recession, and until both trade and the banks are fixed, sustained economic growth cannot be accomplished. The trade deficit will rise again as the effects of the stimulus package are felt, but if its underling causes are not addressed, the trade deficit will drag the economy back down into a double dip recession.

Pushed up by the surge in oil prices and the ballooning trade gap with China, the trade deficit is reducing U.S. GDP by $400 billion, annually, and significantly adding to the pain imposed by the unfolding recession. The negative effects of the trade deficit on GDP and employment overwhelm the potential positive effects of President Obama’s proposed stimulus spending.

To finance the deficit of recent years, Americans have borrowed more than $6.5 trillion from foreign sources, including foreign governments, and the debt service comes to more than $1500 for each working American. In addition, foreign investors have at least $3.6 billion acquiring equities in U.S. businesses.

The flood of dollars into foreign government hands has bloated sovereign wealth funds that are now buying significant shares of U.S. businesses and other property, and threaten to compromise the loyalties of U.S. businesses.

The Chinese government alone holds about $2 trillion in U.S. and other securities, and these could be used to purchase about 20 percent of the value of publicly-traded U.S. companies. Add to that the holding of Middle East sovereigns and royal families, the potential purchases of U.S. businesses by foreign governments with interests unfriendly to the United States is alarming.

This should give Americans real pause for concern about Chinese and other foreign government intentions to diversify their foreign exchange holdings into U.S. stocks and other real assets.

Anatomy of the Hemorrhaging Current Account

In 2008, the United States had a $144.1 billion surplus on trade in services. This was hardly enough to offset the massive $821.2 billion deficit on trade in goods.

The deficit on petroleum products was $386.3 billion, up from $293.2 billion in 2007. The average price for imported crude oil rose to $95.23 from $64.28 percent from 2007, while the volume of petroleum imports fell 4.0 percent.

Also, the American appetite for inexpensive imported consumer goods and cars is a huge factor driving up the trade deficit. The trade deficit with China was $266.3 billion, a new record and up from $256.2 billion in 2007.

The deficit on motor vehicle products was $107.1 billion. Ford and GM continue to push their procurement offshore and cede market share to Japanese and Korean companies. However, the automotive trade deficit was down from $120.9, as Asian automakers continued to expand production in North America and demand for autos fell with the recession.

The trade deficit should ease in 2009 with lower oil prices and as the recession bears down on consumer spending. However, China is not permitting its currency to rise in value, despite its trade surplus and has beefed up subsidies on its exports in an effort to export its unemployment to the United States and other industrialized countries. China’s beggar-thy-neighbor protectionism threatens to ignite a global trade war of devastating proportions.

In 2010, as stimulus spending in the United States and elsewhere lifts economic activity the trade deficit will increase again, oil prices will surge and China’s exports will rise above 2008 levels, thanks to an undervalued currency and larger export subsidies. The U.S. trade deficit will rise beyond its peak of 5.1 percent of GDP, and this may well pull the U.S. economy back into recession.

Dollars spent on imported oil and cars and consumer goods from China cannot be spent on U.S. goods and services, and every dollar that U.S. imports exceed exports negates at least one dollar of federal stimulus spending. Overall the trade deficit overwhelms the positive effects of the Obama stimulus package on demand for U.S. goods and services, GDP and employment. Along with the banking crisis, the trade deficit is a primary cause of the U.S. recession.

The dollar remains at least 40 to 50 percent overvalued against the Chinese yuan and other Asian currencies. Although China adjusted the yuan from 8.28 per dollar to 8.11 in July 2005 and permitted it to rise gradually to 6.84 by July 2008, the value of the yuan has not changed since.

To sustain an undervalued currency in 2008, China purchased approximately $600 billion in U.S. and other foreign securities, creating a 40 percent subsidy on its exports of goods and services. Other Asian governments align their currency policies with China to avoid losing competitiveness to Chinese products in lucrative U.S. and EU markets.

Consequences for Economic Growth

High and rising trade deficits tax economic growth. Specifically, each dollar spent on imports that is not matched by a dollar of exports reduces domestic demand and employment, and shifts workers into activities where productivity is lower.

Productivity is at least 50 percent higher in industries that export and compete with imports, and reducing the trade deficit and moving workers into trade-competing industries would increase GDP.

Were the trade deficit cut in half, GDP would increase by at least $400 billion, or about $2750 for every working American. Workers’ wages would not be lagging inflation, and ordinary working Americans would more easily find jobs paying higher wages and offering decent benefits.

Manufacturers are particularly hard hit by this subsidized competition. Through the recent economic expansion and recession, the manufacturing sector has lost 4.6 million jobs since 2000. Following the patterns of past economic expansions, the manufacturing sector should have kept at least 2 million of those jobs, especially given the very strong productivity growth accomplished in durable goods and throughout manufacturing.

Longer-term, persistent U.S. trade deficits are a substantial drag on growth. U.S. import-competing and export industries spend three-times the national average on industrial R&D, and encourage more investments in skills and education than other sectors of the economy. By shifting employment away from trade-competing industries, the trade deficit reduces U.S. investments in new methods and products, and skilled labor.

Cutting the trade deficit in half would boost U.S. GDP growth by one percentage point a year, and the trade deficits of the last two decades have reduced U.S. growth by one percentage point a year.

Lost growth is cumulative. Thanks to the record trade deficits accumulated over the last 20 years, the U.S. economy is about $3 trillion smaller. This comes to about $20,000 per worker.

Had the Administration and the Congress acted responsibly to reduce the deficit, American workers would be much better off, tax revenues would be much larger, and the federal deficit would be much smaller. The recession would be much less severe

If the Obama Administration relies on stimulus and bank reform alone, the economy will fall back into recession once the spending has run its course. A pattern of false recoveries, much as occurred during the Great Depression, will likely emerge. Conditions will not be as bad, unemployment will stay at unacceptable levels.

PETER MORICI is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.

More articles by:

PETER MORICI is a professor at the Smith School of Business, University of Maryland School, and the former Chief Economist at the U.S. International Trade Commission.

Weekend Edition
April 20, 2018
Friday - Sunday
Paul Street
Ruling Class Operatives Say the Darndest Things: On Devils Known and Not
Conn Hallinan
The Great Game Comes to Syria
Jeffrey St. Clair
Roaming Charges: Mother of War
Andrew Levine
“How Come?” Questions
Doug Noble
A Tale of Two Atrocities: Douma and Gaza
Kenneth Surin
The Blight of Ukania
Howard Lisnoff
How James Comey Became the Strange New Hero of the Liberals
William Blum
Anti-Empire Report: Unseen Persons
Lawrence Davidson
Missiles Over Damascus
Patrick Cockburn
The Plight of the Yazidi of Afrin
Pete Dolack
Fooled again? Trump Trade Policy Elevates Corporate Power
Stan Cox
For Climate Mobilization, Look to 1960s Vietnam Before Turning to 1940s America
William Hawes
Global Weirding
Dan Glazebrook
World War is Still in the Cards
Nick Pemberton
In Defense of Cardi B: Beyond Bourgeois PC Culture
Ishmael Reed
Hollywood’s Last Days?
Peter Certo
There Was Nothing Humanitarian About Our Strikes on Syria
Dean Baker
China’s “Currency Devaluation Game”
Ann Garrison
Why Don’t We All Vote to Commit International Crimes?
LEJ Rachell
The Baddest Black Power Artist You Never Heard Of
Lawrence Ware
All Hell Broke Out in Oklahoma
Donny Swanson
Janus v. AFSCME: What’s It All About?
Will Podmore
Brexit and the Windrush Britons
Brian Saady
Boehner’s Marijuana Lobbying is Symptomatic of Special-Interest Problem
Julian Vigo
Google’s Delisting and Censorship of Information
Patrick Walker
Political Dynamite: Poor People’s Campaign and the Movement for a People’s Party
Fred Gardner
Medical Board to MDs: Emphasize Dangers of Marijuana
Rob Seimetz
We Must Stand In Solidarity With Eric Reid
Missy Comley Beattie
Remembering Barbara Bush
Wim Laven
Teaching Peace in a Time of Hate
Thomas Knapp
Freedom is Winning in the Encryption Arms Race
Mir Alikhan
There Won’t be Peace in Afghanistan Until There’s Peace in Kashmir
Robert Koehler
Playing War in Syria
Tamara Pearson
US Shootings: Gun Industry Killing More People Overseas
John Feffer
Trump’s Trade War is About Trump Not China
Morris Pearl
Why the Census Shouldn’t Ask About Citizenship
Ralph Nader
Bill Curry on the Move against Public Corruption
Josh Hoxie
Five Tax Myths Debunked
Leslie Mullin
Democratic Space in Adverse Times: Milestone at Haiti’s University of the Aristide Foundation
Louis Proyect
Syria and Neo-McCarthyism
Dean Baker
Finance 202 Meets Economics 101
Abel Cohen
Forget Gun Control, Try Bullet Control
Robert Fantina
“Damascus Time:” An Iranian Movie
David Yearsley
Bach and Taxes
April 19, 2018
Ramzy Baroud
Media Cover-up: Shielding Israel is a Matter of Policy
FacebookTwitterGoogle+RedditEmail