|
The money quote from Morici:
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 could be eliminated without
cutting spending.
The full piece is below the fold (read more).
2007 Trade Deficit Exceeds $700
Slows Growth and Multiplies Recession Woes
Today, the Commerce Department reported the 2007 deficit on
international trade in goods and services was $711.6 billion. This is
down from $758.5 billion in 2006 but still 5.1 percent of GDP.
Pushed up by rising prices for imported petroleum and a ballooning
trade gap with China, the trade deficit is reducing U.S. GDP by $250
billion and significantly adding to the pain imposed by the unfolding
recession.
To finance the deficit of recent years, Americans have borrowed about
$6.5 trillion from foreign sources, including foreign governments, and
the debt service comes to about $2000 for each working American.
The flood of dollars into foreign government hands is bloating
sovereign wealth funds that are now buying significant shares of U.S.
banks and other property, and threaten to compromise the loyalties of
U.S. businesses.
The Chinese government alone holds more than $1.6 trillion in U.S. and
other securities, and these could be used to purchase 10 percent of the
value of publicly-owned U.S. companies. Add to that the holdings of
Middle East sovereigns and royal families, the potential purchases of
U.S. business by foreign governments with interests unfriendly to the
United States exceeds 20 percent of all publically-owned U.S. companies.
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 2007, the United States had a $104.0 billion surplus on trade in
services. This was hardly enough to offset the massive $815.6 billion
deficit on trade in goods.
The deficit on petroleum products was $293.5 billion, up from $270.9
billion in 2006; prices for imported petroleum rose 10.8 percent from
2006, while the volume of imports fell 1.5 percent.
The American appetite for inexpensive imported consumer goods and cars
is huge factor driving the trade deficit higher. The deficit on
nonpetroleum goods was $496.8 billion. The trade deficit with China was
$256.3 billion, a new record, and up from $232.6 billion in 2006.
The deficit on motor vehicle products was $121.5 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 17 percent as Asian automakers continued to expand production
in North America and demand for autos flagged.
This situation is likely to become worse in the months ahead. Crude oil
prices will be higher in 2008 than last year, and an overvalued dollar
against the yuan and yen continues to keep imported automobiles and
consumer goods cheap. Announced production cutbacks at GM, Ford and
Chrysler will result in more imported motor vehicles and parts. Rising
gas prices are driving car buyers away from Detroit’s gas guzzlers and
into the arms of Asian brands.
The dollar remains at least 40 to 50 percent overvalued against the
Chinese yuan and other Asian currencies. Although China revalued the
yuan from 8.28 to 8.11 in July 2005, and announced it would adjust the
currency to a basket of currencies, the yuan continues to track the
dollar very closely. Currently, the yuan is trading at 7.19.
To sustain an undervalued currency in 2007, China purchased
approximately $465 U.S. and other foreign securities, creating a 34
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.
Financing the Deficit
The trade deficit must be financed by capital inflows, either by
foreigners investing in the U.S. economy or loaning Americans money.
Some analysts argue that the trade deficit reflects U.S. economic
strength, because foreigners find many promising investments here. The
details of U.S. financing belie this argument.
Foreign direct investment in U.S. only comes to about 10 percent of
U.S. capital inflows and the remainder of the $712 billion trade
deficit must be largely financed by sales of bonds and other
securities. The cumulative value of this debt now exceeds $6 trillion
and will likely pierce $7 trillion in 2008. The interest payments come
to about $2000 for each working American.
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 these industries would increase GDP.
Were the trade deficit cut in half, GDP would increase by nearly $250
billion, or about $1750 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 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 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 could be eliminated without
cutting spending.
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
http://www.smith.umd.edu/faculty/pmorici/cv_pmorici.htm
Trackback(0)
 |
TrackBack URI for this entry
Subscribe to this comment's feed