Fed chief says U.S. trade gap may start to lessen

Greenspan reassures G-7 on falling dollar, predicts imbalance will shrink

February 05, 2005|By NEW YORK TIMES NEWS SERVICE

LONDON - Federal Reserve Chairman Alan Greenspan said yesterday that America's record trade gap might be poised to stabilize and even fall because of market pressures and belt-tightening by the Bush administration.

Greenspan was speaking at a gathering here coinciding with a scheduled meeting of the Group of 7 finance ministers and central bank governors who represent the world's leading industrialized nations. His remarks inspired a strengthening of the dollar.

The G-7 talks, which end today, are likely to devote much attention to the U.S. trade deficits, the weakness of the dollar and the linkage of China's currency to the dollar, which has propelled the trade deficit by fueling a rapid expansion in Chinese exports.

Much of the focus of yesterday's discussions was on a speech by Greenspan that analysts examined for clues as to the most likely way that the U.S. trade and budget deficits could be reduced.

Reflecting the concern of the global financial community, Mervyn King, the governor of the Bank of England, said yesterday that the international monetary system could be threatened by persistent deficits in the United States and the accumulation of vast dollar assets by Asian central banks.

The U.S. trade gap could narrow by a reduction in imports into the country or by a rise in American exports. Greenspan said foreign exporters selling goods to the United States might no longer be prepared to reduce their profits in the interests of preserving a share of American markets.

"We may be approaching a point, if we are not already there, at which exporters to the United States, should the dollar decline further, would no longer choose to absorb a further reduction in profit margins," Greenspan said. That could mean a reduction in the volume of imports but "leave the resulting value of imports uncertain."

Greenspan said American exporters' profit margins, boosted by the weak dollar that makes U.S. goods more attractive to foreign buyers, "appear to be increasing, which bodes well for future U.S. exports and the adjustment process."

"Besides market pressures, which appear poised to stabilize and over the long run possibly to decrease the U.S. current account deficit and its attendant financing requirements, some forces in the domestic U.S. economy seem about to head in the same direction," Greenspan said.

"The voice of fiscal restraint, barely audible a year ago, has at least partially regained volume," he said, referring to promises by the Bush administration to restrain the spending that has led to the large budget deficit.

Greenspan and others have said that the trade gap, estimated at nearly 6 percent of the nation's wealth, cannot be sustained at that level.

"I have argued elsewhere that the U.S. current account deficit cannot widen forever but that, fortunately, the increased flexibility of the American economy will likely facilitate any adjustment without significant consequences to aggregate economic activity," Greenspan said.

"That argument will be tested, I suspect, by possibly new twists and turns that will emerge in a seemingly ever-more complex international economic and financial structure," he said.

Greenspan also noted that Chinese exporters had not labored under the same difficulties as European exporters, whose business has become progressively more expensive or less profitable in the United States because of the weak dollar.

"Chinese exporters, of course, have not had to address this issue because China continues to hold its renminbi at a fixed rate against the dollar," he said, referring to the Chinese currency.

Greenspan also referred to the "effect of Asian official purchases of dollars in support of their currencies. Such intervention may be supporting the dollar and U.S. Treasury bond prices somewhat, but the effect is difficult to pin down."

John B. Taylor, a U.S. Treasury undersecretary, met yesterday with Zhou Xiaochuan, the governor of the Chinese central bank, and Jin Renqing, the finance minister. "We know they are taking steps toward a more flexible exchange rate," Taylor said later. Taylor is representing the United States. Treasury Secretary John W. Snow, who was ill, did not attend the meeting.

G-7 members are the United States, Britain, Canada, France, Germany, Italy and Japan.

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