Economy drowning in trade-deficit tide

Shift away from manufacturing jobs makes things worse

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March 19, 2006|By PETER MORICI | PETER MORICI,SPECIAL TO THE SUN

Last week, the Commerce Department reported that the 2005 current account deficit was $804.9 billion, up from $668.1 billion in 2004. The current account is the broadest measure of the U.S. trade balance.

In the fourth quarter, the current account deficit was $224.9 billion, up from $185.4 billion in the third quarter. In the fourth quarter, that deficit exceeded 7 percent of gross domestic product.

The current account deficit could easily top $1 trillion a year by the second half of 2006, a prospect with ominous long-term implications for the U.S. economy.

The American appetite for inexpensive imported consumer goods including cars was a huge factor driving the trade deficit higher. In 2005, the deficit on nonpetroleum goods was $537.2 billion, up from $487.6 billion in 2004.

Imports of motor-vehicle parts increased 10 percent to $83 billion, as Ford and General Motors continue to push their procurement offshore and cede market share to Japanese and Korean companies offering better-made and less-expensive-to-own vehicles. Even when they assemble automobiles in the United States, Asian automakers import more parts than Ford and GM.

The Wal-Mart effect was broadly apparent. In 2005, the trade deficit with China was $201.7 billion, a record. This was up from $162 billion in 2004.

This situation is likely to get worse in the months ahead. Crude-oil prices are rising again, and an overvalued dollar continues to keep imported cars and other consumer goods cheap. Announced production cutbacks at GM and Ford will result in more imports of motor vehicles and parts.

The dollar remains at least 40 percent overvalued against the Chinese yuan and other Asian currencies. To sustain their undervalued currencies against the dollar, foreign government have purchased a total of $220.7 billion in U.S. securities. This created an 11 percent subsidy on their exports to the United States.

High and rising trade deficits are taxing economic growth here. 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. 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 $300 billion, or about $2,000 for every working American. Workers' wages would not be lagging behind inflation, and ordinary working Americans would more easily find jobs paying good wages and offering decent benefits.

Manufacturers are particularly hard-hit by this subsidized competition. Since 2000 - through recession and recovery - the manufacturing sector has lost 3 million jobs. Following the pattern of past economic recoveries, the manufacturing sector should have regained about 2 million of these 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 research and development, and encourage more investments in skills and education than other sectors. 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 25 percent a year.

These effects of lost growth are cumulative. Thanks to the record trade deficits in recent years, the U.S. economy is about $1 trillion smaller than it would be without the deficits. This comes to nearly $7,000 per worker.

Had the Bush administration and Congress acted responsibly to reduce the trade deficit, American workers would be much better off, tax revenues would be much larger, and the federal budget deficit would be about half its current size.

Were the trade deficit cut in half, $2,000 per worker would be recouped, but the other $5,000 per worker in lost growth is essentially lost forever.

The damage grows larger each month, as politicians in Washington dally and ignore the corrosive consequences of the trade deficit.

Peter Morici is a professor at the Robert H. Smith School of Business, University of Maryland, College Park. E-mail: pmorici@rhsmith.umd.edu

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