Trade trouble

Our view: A mounting trade deficit makes economic recovery more difficult

December 28, 2008

Trade has everything to do with America's economic dilemma, but officials from President-elect Barack Obama on down have had very little to say about the potentially devastating impact of a continuing trade deficit. Americans are borrowing and selling assets at a pace of about $400 billion a year to buy foreign oil and goods. U.S. foreign debt exceeds $6.5 trillion, and the debt service comes to about $2,000 a year for every working American.

The deficit is caused by a combination of an overvalued dollar against the Chinese yuan, a dysfunctional national energy policy that increases U.S. dependence on foreign oil, and the competitive woes of the three domestic automakers. Together, the trade deficit with China and on petroleum and automotive products accounts for almost the entire deficit on trade in goods and services.

Weakening of American purchasing power does not necessarily mean others will gain, as it could hurt many economies reliant on exports to the U.S. There's real danger that wariness about the dollar could lead to an inclination to hold fewer dollars, eroding the dollar's value and setting off a protracted downward spiral.

The U.S. must either get its economic house in order, by reducing debt-financed consumption and rebuilding savings, or learn to live with a decline in American buying power and its influence.

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