|
U.S. Trade Deficit Surges in April and Recession Risks Mount
Bernanke Aggravates Risks and Ignores Fundamental Problems
By Peter Morici
Today, the Commerce Department reported the April deficit on trade in
goods and services was $60.9 billion. This was up from $56.5 billion in
March, substantially larger than the 59.5 billion consensus forecast.
The trade deficit was driven up by higher prices for imported oil and a
dramatic surge in imports from China. At 5.1 percent of GDP, these pose
a significant drag on the economy.
The trade deficit heightens the risk of recession and surging
unemployment. Ben Bernanke’s recent comments about oil driven
inflation only serve to distract attention from these issues and
aggravate risks.
Simply, money spent on Middle East oil and Middle Kingdom consumer
goods can’t be spent on U.S. made goods and services. The drag on
aggregate demand is every bit as important as the credit crisis and
housing adjustment in driving up unemployment. The combined effect of
oil imports, the trade deficit and housing adjustment are pushing the
economy into recession, and breaking inflation on non-energy products.
That is why core inflation, prices less food and energy, stays in
check.
Federal Reserve Chairman Ben Bernanke in recent comments has emphasized
that western central banks stand ready to resist oil induced recession,
when in fact oil price increases are far beyond the control of the
Federal Reserve and other central banks to affect. This is causing
markets to factor in Federal Reserve increases in the federal funds
rate by the end of the year, just as the economy is sliding into
recession.
China is subsidizing oil imports, without regard to spot prices in
international markets, and controlling domestic gasoline prices with
the dollars it purchases with yuan. It undertakes the latter purchases
to keep the yuan undervalued against the dollar and boost exports.
Hence, consumers in country contributing most to growing demand for
oil, China, are wholly insulated from rising oil prices. As oil prices
rises, the Chinese drive prices even higher with their subsidies.
Bernanke should talk about that if he wants to do something about oil
driven inflation.
Instead, Bernanke’s words cause markets to believe the Fed will raise
interest rates as we travel into a recession and this drives equity
prices down, compounding the panic created by rising oil prices.
Raising interest rates now would be the kind of policy the Federal
Reserve pursued in 1929. Is that the kind of signal a central banker
and student of the Great Depression wants to send to fragile markets?
If Bernanke wants to do something about both the recession and
inflation, he should focus on Chinese purchases of dollars with yuan,
which boost exports to the United States, and Chinese subsidies on oil
imports with those dollars, which drive up global oil
prices. Together, these are driving up the trade deficit,
exacerbating the recession and driving up U.S. gas prices.
Were the Chinese yuan problem solved, the trade deficit could be cut by
a third, and that would boost U.S. GDP by about $250 to $500 billion
GDP.
Breaking down the Deficit
Together, petroleum, China and automotive products account for nearly
the entire U.S. trade deficit, and no solution to the overall trade
imbalance is possible without addressing these segments.
Petroleum products accounted for $34.5 billion of the monthly trade
gap, on a seasonally adjusted basis, up from 30.2 in March. Since
December 2001, net petroleum imports have increased $30.0 billion, as
the average price of a barrel of imported oil has risen from $15.46 to
$96.81, and monthly imports have increased from 353 million to 388
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.
In 2007, the Congress managed to push through the first increase in
automobile mileage standards in 32 years but don’t cheer loudly.
The 35 mile-per-gallon standard to be achieved by 2020 is far less than
what is possible.
The bill also requires the production of about 2.4 million barrels a
day of ethanol. Along with other conservation measures, the 2007 Energy
Act could reduce U.S. petroleum consumption by 4 million barrels a day
by 2030. Over the last 23 years, petroleum consumption has increased by
about 5.5 million barrels a day, despite improvements in mileage
standards, automobile and appliance technology, and
conservation.
Being optimistic, in 2030 the United States will be just as dependent
on imported oil as before without stronger conservation and alternative
fuel policies. Factor in falling production from U.S. oil fields,
the situation gets worse.
China accounted for $20.2 billion of the April trade deficit, up from
$16.1 billion in March and $5.5 billion in December 2001. The bilateral
deficit is rising, because China undervalues the yuan, and this makes
Chinese exports artificially inexpensive and U.S. products too
expensive in China. U.S. imports from China exceed exports to China by
a ratio of 4.5 to 1.
China revalued the yuan from 8.28 to 8.11 in July 2005 and has
permitted the yuan to rise less than 5 percent every twelve months.
Modernization and productivity advances raise the implicit value of the
yuan much more than 5 percent every 12 months, and the yuan remains
undervalued against the dollar by at least 40 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 government purchased $462 billion in U.S. and
other foreign currency and securities. This comes to about 14 percent
of China’s GDP and about 35 percent of its exports of goods and
services. These purchases provide foreign consumers with 3.5 trillion
yuan to purchase Chinese exports, and create a 35 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 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 still carry a significant cost disadvantages
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 at least $1000 per vehicle.
Also, the Bank of Japan has 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 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
$6.5 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 3.7
million jobs since 2000. Following the pattern of past economic
recoveries, the manufacturing sector should have regained more than 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 at least $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
 |
