U.S. trade deficit widening into obstacle

OUTLOOK

April 30, 2000|By Amanda J. Crawford

Consumers' appetite increases risk as other nations regain strength

The U.S. trade deficit swelled to a record $29.2 billion in February as oil import prices hit their highest level since the 1991 Persian Gulf war, the government reported this month.

And while exports fell for a second straight month, imports hit a record $113.4 billion as U.S. consumer demand continued unabated. Even before the numbers were released, Treasury Secretary Lawrence Summers urged trade partners to do more to balance lopsided world growth by spurring their economies as engines of growth rather than relying on a booming United States.

What are the long-term effects of a continually widening deficit? What could rein it in? How might it affect the U.S. economy?

Michael Gregory

Vice president and senior economist, Lehman Brothers Inc., New York

The widening trade deficit is part of general widening in the current account deficit, which measures not only the trade in goods and services but also investment. The reason why the deficit is getting bigger is because consumption is exceeding the U.S. economy's capacity to produce and the slack is being reflected in imports. We are paying for those imports by selling foreigners assets. Foreigners buy stocks, Treasury bonds, real estate, factories, whatever. The U.S. economy has been the strongest and most dynamic economy in the world, so foreign investors have had no problem buying those assets. It's been easy to continue widening this deficit.

But eventually, when the rest of the world's economic prospects continue to improve and after foreign investors have already bought U.S. assets, the negative impact may come home to roost because we still have to convince foreign investors to buy U.S. assets. One way you convince them is by giving them cheaper prices at which to buy. If you lower the price of bonds, it causes interest rates to go up. Or the U.S. dollar could depreciate.

There are economic consequences of higher interest rates. There are also inflationary consequences of a cheaper U.S. dollar: The cost of imports begins to rise.

Alex Beuzelin

Senior market analyst, Ruesch International Inc., Washington

The main danger of having the United States running a large current account deficit is that the economy remains dependent to a large extent on foreign sources of capital. This trade imbalance can have a detrimental effect on market sentiment for U.S. equities markets and for the U.S. dollar. One of the greatest potential sources of weakness for the dollar remains the long imbalance in the United States' current account.

The United States alone cannot rein in this large deficit. The U.S. administration has pushed Japan and the euro zone to increase domestic demand to help boost U.S. exports. Such development would help to narrow the imbalances in the U.S. trade account. Another option would be to lower U.S. import demand. But this would signal a slowdown in U.S. economic growth and could adversely impact the global economy.

Jay Bryson

Global economist, First Union Corp., Charlotte, N.C.

The counterpart to the widening trade deficit is the fact that we are a net capital importer from the rest of the world. Essentially what a trade deficit represents or what the current account deficit represents is the amount a country spends above what it produces. When you or I want to spend more money than we make, we can use a credit card or take out a loan.

The United States is essentially borrowing from the rest of the world. Just like I have to eventually pay off my Visa or bank, the United States has to pay off the rest of the world, its creditors. At some point we need to generate current account surpluses so that we can earn enough money to pay off our creditors.

There are two ways we can rein in the current account deficit: One way would be spending less in general, and part of that would spill into imports. The other way is if the dollar would weaken against other currencies; that would make imports more expensive and exports cheaper in foreign countries.

If the dollar were to weaken gradually, then there is probably not that big of an implication for the economy. But if the dollar weakens suddenly and dramatically against other currencies, that would push up import prices and we could see much higher inflation.

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