The worst trade deficit ever ~~ At the level of ordinary Americans, the pattern of worsening U.S. trade balances correlates closely with declining manufacturing employment.~~The Sphinx in Winter
America’s burgeoning trade deficits threaten Greenspan’s legacy.
By Eamonn Fingleton
For those who watch the American economy, the Internet boasts few more useful resources than the Web site of the Federal Reserve. In a few clicks you can mine data on everything from the level of interest rates on Black Monday to the growth of steel production under Eisenhower. Whether the topic is the trend in semiconductor prices, the impact of weather on retailing, or the most efficacious way for corporations to break bad financial news, someone at the Fed has studied it and has posted his findings.
Strangely, though, one crucial economic concern gets short shrift: international trade. Not only are there no trade statistics, but America’s perennially rising trade deficits have received virtually no attention from the Fed’s monograph writers in recent years.
This blindspot faithfully reflects the mindset at the top. Fed chairman Alan Greenspan consistently tiptoes around the subject of trade. Indeed, the worse America’s trade figures have become, the less willing he has been to look the trade trend in the eye.
Yet when future historians look back on America’s economic performance in recent decades, no problem will loom larger in retrospect than that of the deteriorating trade position—and, as a result, no reputation is destined to come in for more extensive revision than that of the Sphinx of Constitution Avenue.
Although the Fed chairman has no direct control over trade policy, he is in a uniquely powerful position to moderate the climate of opinion in which that policy is set. It is fair to say that where economic matters are concerned, he enjoys far greater trust than any president. In any case, he has been in office far longer than any president: already he has served under no less than four. Whereas each succeeding president could plausibly spin the trade trend as a temporary aberration and bequeath the painful task of rethinking trade policy to his successor, Greenspan can offer no such alibi. One of his most important responsibilities is to safeguard the value of the dollar. Trade ranks with inflation as one of the two key determinants of the dollar’s long-run external purchasing power. Trade, moreover, is of pivotal importance for America’s continued leadership of the world community.
Although the press airbrushed the problem out of the picture during the economic euphoria of the late 1990s, the trade deficits never went away. In fact, as the American public is belatedly beginning to discover, they got far worse —so much so that the monthly deficits under George W. Bush are sometimes higher than the total annual deficit in his father’s last year in office.
In the past year we have seen a dramatic rise in the number of talking heads who openly question American trade policy. In the academic world, MIT economist Lester Thurow has suggested that America’s trade deficits could trigger a 50 percent-plus collapse in the dollar’s external value, and this in turn would lead to a global depression. Meanwhile on CNN, Lou Dobbs fulminates nightly about the impact of imports on American manufacturing jobs. In the world of business, critics of U.S. trade policy include that ultimate financial heavyweight, Warren Buffett. Even investment banker Robert Rubin, who as Clinton’s treasury secretary did much to create the trade problem, has now added his voice to the hue and cry. Then there is Henry Kissinger. Obliquely criticizing American trade policy at a conference last summer, he suggested that a nation that had lost its manufacturing base could not long remain a world power.
Figures to be published in March will show that expressed as a percentage of GDP the current-account trade gap has now topped the psychologically important 5 percent level. This is the worst performance since American economic records were first published in the 19th century. By comparison, the notorious U.S. trade crisis of 1971-72 was a mere blip. The trade deficit in 1972, at 0.5 percent of GDP, was less than one-tenth the current level. Yet the 1972 trade deficit seemed so troubling in prospect that President Nixon was forced to devalue the dollar and cut its erstwhile “sacred” link with gold.
The recent trade performance stands in particularly stark contrast to America’s days of greatest relative economic strength in the first seven decades of the 20th century. This was a period when, thanks mainly to the extraordinary exporting prowess of America’s huge manufacturing industries, the U.S. showed a trade surplus in all but 11 years—and did so despite wages that were then five to ten times higher than in Japan and Germany.
Not only is a 5 percent current account deficit unprecedented in American economic history, but it is shocking by all previous world standards. Other major nations have incurred percentage deficits approaching this scale only at times of extreme economic distress, most notably during the two World Wars and in their immediate aftermath. The only time any of the six most economically important nations ever ran a trade deficit of more than 5 percent of GDP was Italy in 1924—hardly an auspicious precedent given that economic problems helped pave the way for Mussolini’s seizure of dictatorial powers.
To the extent that the trade trend has penetrated Greenspan’s consciousness, he has stubbornly insisted on viewing it through rose-tinted spectacles. Greenspan’s message on trade is the simplistic one of a thousand undergraduate economics textbooks: trade benefits the consumer. And of course this is true—to a point. For a small closed economy such as that of, say, 1950s-era Ireland (with a population of three million and a per capita income about one-tenth of America’s), the benefits of a more open trade policy are undisputable. What the textbooks rarely mention is that the larger an economy is, the less it stands to gain from international trade. The fundamental benefit of trade is to enable producers to achieve greater scale economies. But in most industries, scale economies are subject to diminishing returns. Certainly for an economy the size of America’s, it is not at all obvious that, even were all its trade partners to play by the rules of perfect free trade, American producers in most industries would gain much on balance from competing on a global rather merely a national scale. And in reality, many nations are far from perfect in their observance of the rules.
This has greatly exacerbated the negative impact of foreign trade on American joblessness and industrial decline. Over the years, American industries most exposed to international trade have generally turned in a far poorer performance than more sheltered ones. Consider some facts:
America’s share of world manufacturing has fallen from 60 percent in 1950 to less than 25 percent today.
Corporate America’s share of the world’s total foreign direct investment fell recently to just 21 percent—down from 47 percent in 1960.
According to economist Richard Du Boff, non-U.S. companies account for nine of the ten largest electronics and electrical equipment manufacturers, eight of the ten largest auto makers, seven of the ten largest oil refiners, five of ten pharmaceutical firms, and four of six chemical producers.
Even in aerospace, one of the last remaining areas of American industrial strength, the writing is on the wall. Last year, Europe’s Airbus for the first time bested Boeing in deliveries of completed planes. And the new Boeing 7E7, which is expected to be launched in 2016, will be largely a foreign plane in terms of its manufactured inputs and, by Boeing’s own admission, Japanese partners will account for much of the most advanced work.
In supercomputers—so vital for U.S. national security and once one of America’s most avidly defended industrial strongholds—American leadership is a thing of the past. Although it was widely reported in the early 1990s that American supercomputer makers had staged a comeback after losing the lead in the late 1980s, this has proved to have been a mirage. As of 2002, a Japanese laboratory had built a supercomputer whose processing power matched that of the 20 fastest American supercomputers combined.
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At the level of ordinary Americans, the pattern of worsening U.S. trade balances correlates closely with declining manufacturing employment. As economist Pat Choate has pointed out, the United States has lost more than four million labor-intensive manufacturing jobs in the last decade. Of these, more than half disappeared in just the last three years. The result is that manufacturing’s share of total employment had fallen to 10.7 percent by last year—versus 18.2 percent in 1989 and 33.1 percent in 1950.
continued: amconmag.com |
