Sliding greenback highlights trade deficit
By John Berthelsen
If the United States thought Asia would cut it any slack on its US$500 billion annual trade deficit, it has been wrong so far. The dollar continues to fall sharply against Eurozone currencies to make US products more competitive on world markets. But Asia's mercantilist economies, now increasingly concerned about the effect of severe acute respiratory syndrome and other issues on their financial systems, continue to seek to expand exports to the West while maintaining their already-sizable trade surpluses.
They are daring serious trouble. It is increasingly clear that the day of reckoning predicted for years for the US trade balance may finally have arrived. By some estimates, the United States will be spending as much as $200 billion to $300 billion a year before the decade is out to service its foreign trade imbalance unless the deficit is corrected. All of its trading partners will suffer collateral damage.
The international trading system has lived on US deficits for decades as the United States became the importer of last resort. But now the dollar has gone into a long - and increasingly steep - glissade against the euro, falling by nearly 40 percent from its brief lowest point, and against other currencies such as the Mexican peso and the Australian and Canadian dollars by about 15 percent. But America's trade imbalance with Europe and its North American Free Trade Agreement (NAFTA) partners pales when compared with those of the Asian nations whose currencies continue to track the dollar. The US trade deficit with China rose to a record $103 billion in 2002 and was $70.1 billion with Japan.
The dollar's slide was given fresh impetus at the Group of Seven meeting of finance ministers from industrialized countries on Sunday when US Treasury Secretary John W Snow described the currency's current fall as a "modest" realignment. It is starting to come clear that the strong dollar that characterized US fiscal policy for the better part of two decades is well and truly dead. And, as the devaluation picks up speed, apprehension is growing over the effect on the global economy. Stock markets showed their concern on Monday, with the Dow falling 2.14 percent to below 8,500.
The euro on Monday finally returned to the point where it started on January 1, 1999, when the currency was introduced - at 117 to the dollar. And while Eurozone exporters are starting to feel pain from the falling dollar, the efficient Asian exporters are causing them even more. The Chinese yuan, for instance, is permanently anchored near 8.28 to the US dollar, thus depreciating against the world's other currencies as it tracks the dollar down. The yen, despite having slid slightly to 115 on Monday, has remained closely tied to the dollar as the Japanese, continuing to struggle with their own anemic economy, apparently still believe they can export their way out of trouble after 10 years of futile attempts.
The Bank of Japan has spent at least $20.39 billion over several transactions recently and probably more to buy dollars to keep the yen from appreciating further. The bank previously spent another reported $32 billion-plus in May and June of 2002 to keep the dollar from falling below 115 yen. Japanese Finance Minister Masajuro Shiokawa was quoted last year as saying a desirable trading range against the dollar would be 150-160 yen. Given the US trade deficit, that is just flatly unrealistic.
"Asia has preserved its export competitiveness relative to other emerging markets (and the developing markets as well) by ensuring that the currency depreciation during the regional crisis (of 1997) was not frittered away via inflation," according to a study by Credit Suisse First Boston in Hong Kong. Indeed, The Thai baht, at 42.5 a year ago, remained Monday at 42.035. The South Korean won, 1,199 a year ago to the dollar, is at 1,192.9. The Malaysian ringgit and the Philippine peso also remain tied closely to the dollar. The Hong Kong dollar has been permanently pegged at HK$7.80.
But that competitiveness is growing increasingly dangerous. While a weaker dollar could help the flailing US economy by driving up the price of imports from Europe and making US exports more competitive on world markets, the United States' biggest trading partners in Asia are eating everybody else's lunch. The Eurozone is already teetering precariously on the edge of recession. Relentless Asian export competitiveness, let alone US competition as a result of the cheaper dollar, bids fair to drive it over the edge.
Germany has already suffered two quarters of falling gross domestic product (GDP). And, as the dollar has fallen 40 percent against the euro, so have most of the Asian currencies. It likely won't be Chevrolets they will be buying in Europe. It costs probably 15 percent more to produce a Mercedes-Benz than it did two years ago, and while the same currency fluctuations make a Lexus probably 15 percent less expensive in Bremen or Brest or Belgium. A wide range of products that the Eurozone exports across the planet, particularly machine tools and other precision manufacturing items, can be expected to face additional difficulty finding markets.
As Asian exports retain their edge in US markets, the world's economy is increasingly at stake. Without an Asia-wide revaluation or a fall in the dollar so steep that the Eurozone probably could not bear the pain, the United States could well fall back into recession. And, with Eurozone economies bound by tight labor regulations and close regulation of corporate structures, the region faces problems in reacting. In many European counties, trade retaliation could well become a possibility.
In addition, for the first time since the 1930s, the United States is facing the distinct possibility that it may follow Japan and Germany into devaluation, thus basically stalling out the world economy. US retail sales and import prices both fell at the sharpest rate ever in April and consumer-confidence data show that some 73 percent of Americans consider economic conditions in the US to be negative. US factory-capacity utilization is currently running at about 75 percent.
The world's biggest economy, at $9 trillion annually, remains the engine of world growth despite the fact that by the end of 2002, US manufacturers had suffered 30 straight months of job losses as their overseas markets have shrunk. The famed J-Curve beloved by economists, which posits that the balance of payments starts to improve progressively after falling immediately after a currency depreciation as imports become more expensive, takes months to work.
Barry Bosworth of the Brookings Institution estimated recently in the Financial Times that given the slow and uncertain response of trade, much bigger dollar depreciation - perhaps 20 or 30 percent more - could be needed to restore the United States to a sustainable current-account position. "When you get as far out of line as the US has, you have trouble correcting," Bosworth was quoted as saying.
Asian currency revaluations would both make Asian goods less competitive overseas and push up Asian consumer demand. But it appears unlikely that that is going to happen any time soon. Asian exporters are finding the increased competitiveness too alluring to give it up.
It remains to be seen whether the Americans and especially the Europeans might retaliate. The upcoming Doha Round of World Trade Organization (WTO) trade talks is already threatened by European Union agricultural recalcitrance, a seeming lack of US commitment to freer trade on the part of the administration of President George W Bush, and other issues.
International trade is already under threat from protesters who haunt WTO, World Bank and International Monetary Fund meetings. It is hard to say when politicians on either side of the Atlantic Ocean will find it expedient to sponsor retaliatory legislation. But in the 1930s, when it came, it destroyed the world's trading system for more than a decade and was instrumental in triggering a global depression.
(©2003 Asia Times Online Co, Ltd. All rights reserved. Please contact content@atimes.com for information on our sales and syndication policies.)
May 23, 2003
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