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Yay for trade! At least the current trade model. Sign
agreements, don't enforce them, and claim we need more to expand
trade. Talk about only exports, but not imports - like GE talking
about gross profit with nary a word about expenses in quarterly reports.
Peter
Morici, awarded top economic forecaster by public radio's Marketplace,
says the trade defiicit has knocked $250 billion off the U.S.
GDP.
Kudos to the twisted globalizers... globalizationists... globalationers... or whatever they are. Fewer U.S. farmers, fewer good jobs, a more polluted atmosphere, less growth, stagnant wages, and less GDP.
Morici's report is below the fold (read more).
U.S. Records $57.8 Billion Trade Deficit in October
Heightens Risk of Recessions, Lowers GDP by $250 Billion
By Peter Morici
Today, the Commerce Department reported the October deficit on trade in
goods and services was $57.8 billion. This was up from $57.1 billion in
September and was about 5.0 percent of GDP. My published forecast was
$57.4 billion.
The deficit on trade in goods was $66.8 billion in October, up from
$65.8 billion in September, while the surplus on services increased to
$8.9 billion in October from $8.7 billion the previous month.
The dollar has weakened against the euro, pound and Canadian dollar,
and this boosts exports. However, the trade deficit remains stubbornly
large, because imports of petroleum and from Asia are not much affected
by exchange rate movements.
Petroleum is priced in dollars. Consumer goods from China and
automotive products from Japan and Korea remain strong, because these
countries’ central banks sell billions of yuan, yen and won in foreign
exchange markets to keep their currencies undervalued against the
dollar.
The stubbornly large trade deficit heightens the risk of recession. The
deficit subtracts about $250 billion from GDP, and that amount could
double if the economy slips into recession.
Breaking down the Deficit
Petroleum, China and automotive products total about 110 percent of the
trade deficit, and no solution to the overall trade imbalance is
possible without addressing these segments.
Petroleum products accounted for $26.3 billion of the monthly trade
gap. Since December 2001, net petroleum imports have increased $20.8
billion, as the average price of a barrel of imported oil has risen
from $15.46 to $72.49, and monthly imports have increased from 353
million to 406 million barrels.
Retuning conventional gasoline engines and transmissions, hybrid
systems, lighter weight vehicles, nuclear power, and other alternative
energy sources could substantially reduce U.S. dependence on foreign
oil. These solutions require national leadership, but both Republican
and Democratic Party leaders have failed to champion policies that
would reduce dependence on Middle East oil.
China accounted for $25.9 billion of the October trade deficit, up from
$23.8 billion in September and $5.5 billion in December 2001. The
bilateral deficit keeps rising, because China undervalues the yuan, and
this makes Chinese exports artificially inexpensive and U.S. products
too expensive in China.
China revalued the yuan from 8.28 to 8.11 in July 2005 and has since
permitted the yuan to rise 3.8 percent every twelve months.
Modernization and productivity advances raise the implicit value of the
yuan about 7 percent every 12 months, and the yuan remains undervalued
against the dollar by 40 to 50 percent.
China’s huge trade surplus creates an excess demand for yuan on global
currency markets; however, to limit appreciation of the yuan against
the dollar and drive its value down against the euro, the Peoples Bank
of China sells yuan and buys dollars, euros and other currencies on
foreign exchange markets.
In 2007, the Chinese central bank is on track to purchase about $450
billion in U.S. and other foreign currency and securities. This comes
to about 15 percent of China’s GDP and about 45 percent of its exports.
These purchases provide foreign consumers with 3.6 trillion yuan to
purchase Chinese exports, and create a 45 percent “off budget” subsidy
on foreign sales of Chinese products, and an even larger implicit
tariff on Chinese imports.
In addition, China provides numerous tax incentives and rebates, and
low interest loans, to encourage exports and replace imports with
domestic products. These practices clearly violate China’s obligations
in the WTO, and it agreed to remove those when it joined the trade
body.
Automotive products account for about $11.2 billion of the monthly
trade deficit. Japanese and Korean manufacturers have captured a larger
market and are expanding their U.S. production. However, Asian
manufacturers tend to use more imported components than domestic
companies, and GM and Ford are pushing their parts suppliers to move to
China.
GM, Ford and Chrysler carry a significant cost disadvantage against
Toyota plants located in the United States, thanks to clumsy management
and unrealistic wages, excessive fringe benefits and arcane work rules
imposed by United Autoworker contracts. Recent negotiations have
improved the Detroit Three’s cost position but did not wholly close the
labor cost gap with Toyota and other Asian transplants.
Recently negotiated labor agreements should reduce, but not eliminate,
these cost disadvantages. Even with retiree health care benefits moved
off the books and a two tier wage structure, the cost disadvantage will
remain well above $1000 per vehicle.
Also, the central banks of Japan and Korea have aggressively stepped up
sales of yen and won for U.S. dollars and other securities to keep
their currencies cheap against the dollar. This discourages Toyota,
Hyundai and others from moving more auto assembly and sourcing more
parts in the United States.
Deficits, Debt and Growth
Trade deficits must be financed by foreigners investing in the U.S.
economy or Americans borrowing money abroad. Direct investments in the
United States provide only about a tenth of the needed funds, and
Americans borrow about $50 billion each month. The total debt is about
$6 trillion, and at five percent interest, the debt service comes to
about $2000 per U.S. worker each year.
High and rising trade deficits tax economic growth. Each dollar spent
on imports, not matched by a dollar of exports, shifts workers into
activities in non-trade competing industries like department stores and
restaurants.
Manufacturers are particularly hard hit by this subsidized competition.
Through recession and recovery, the manufacturing sector has lost 3.3
million jobs since 2000. Following the pattern of past economic
recoveries, the manufacturing sector should have regained about 2
million of those jobs, especially given the very strong productivity
growth accomplished in technology-intensive durable goods industries.
Productivity is at least 50 percent higher in industries that export
and compete with imports. By reducing the demand for high-skill and
technology-intensive products, and U.S. made goods and services, the
deficit reduces GDP by about $250 billion a year or about $1750 for
each worker.
Longer-term, persistent U.S. trade deficits are a substantial drag on
growth. U.S. import-competing and export industries spend at least
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 10 years, the U.S. economy is about $1.5
trillion smaller. This comes to about $10000 per worker.
The damage grows larger each month, as the Bush administration dallies
and ignores the corrosive consequences of the trade deficit.
Peter Morici is a professor at the University of Maryland School of
Business and former Chief Economist at the U.S. International Trade
Commission.
Peter Morici
Professor
Robert H. Smith School of Business
University of Maryland
College Park, MD 20742-1815
703 549 4338
cell 703 618 4338
This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
http://www.smith.umd.edu/lbpp/faculty/morici.html
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