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Smith Faculty
Opinion Article
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April 10,
2008
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By Dr. Peter Morici, Professor of
International Business
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U.S. Trade Rises in February
Drags Growth, Lowers GDP by $250 Billion
Today, the Commerce Department
reported the February deficit on trade
in goods and services was $62.3 billion.
This was up from $59.0 billion in
January and about 5.3 percent of GDP.
The deficit was pushed higher by rising
prices from many industrial supplies and
materials and increased imports of
consumer goods.
The deficit on trade in goods was
$72.9 billion in February, up from $69.4
billion in January, while the surplus on
services increased to $10.6 billion in
February from $10.5 billion the previous
month.
The weaker dollar against the euro,
yen and other currencies of other market
economies has boosted exports. U.S.
manufacturers and exportable services
compete head to head with many European
Union industries, and the weaker dollar
improves price competitiveness of U.S.
products.
However, the dollar remains
stubbornly strong against the yen and
the currencies of other Asian
mercantilists, because their governments
intervene aggressively in currency
markets to frustrate market forces,
subsidize exports and maintain
artificial cost advantages. For example,
the blooming Chinese and Indian
automobile industries would struggle
with much more import competition if
their currencies were fairly valued,
tariffs were as low as those in North
America and Europe and bureaucratic
barriers to foreign auto sales were
removed. Coffee exports from Nova Scotia
would make sense with a trade regime
like that on java beans.
The average price for imported
petroleum rose to $84.76 per barrel in
February from $84.09 in January. The
trade deficit on petroleum decreased to
$31.4 billion in February from $35.8
billion in January, because the volume
of imports receded from 420 million
barrels in January to 367 million in
February. In March, import volumes
should rebound, prices should continue
to rise, and the petroleum deficit will
rise again.
The stubbornly large trade deficit
heightens the risk of recession. The
deficit subtracts about $250 billion
from GDP, and that amount could double
if the economy slips into a prolonged
recession. In addition, it has saddled
the economy with a $6.5 trillion debt to
foreign governments and investors.
China
China accounted for $18.4
billion of the February trade deficit,
down from $20.3 billion in January.
February is usually a slack month for
bilateral trade with China, and this
deficit should rise again in March. U.S.
imports from China exceed exports by a
ratio of four to one, because China
undervalues the yuan, and this makes
Chinese exports artificially inexpensive
and U.S. products too expensive in
China. In addition, China maintains much
higher import tariffs and restrictive
barriers on imports than the United
States on most products.
China revalued the yuan from 8.28 to
8.11 in July 2005 and has permitted the
yuan to rise about 6 percent every
twelve months. Modernization and
productivity advances raise the implicit
value of the yuan more than 6 percent
every 12 months, and the yuan remains
undervalued against the dollar by 40 to
50 percent.
China’s huge trade surplus creates an
excess demand for yuan on global
currency markets; however, to limit
appreciation of the yuan against the
dollar and drive its value down against
the euro, the Peoples Bank of China
sells yuan and buys dollars, euros and
other currencies on foreign exchange
markets.
In 2007, the Chinese government
purchased $462 billion in U.S. and other
foreign currency and securities. This
comes to about 14 percent of China’s GDP
and about 44 percent of its exports.
These purchases provide foreign
consumers with 3.5 trillion yuan to
purchase Chinese exports, and create a
44 percent “off budget” subsidy on
foreign sales of Chinese products, and
an even larger implicit tariff on
Chinese imports.
In addition, China provides numerous
tax incentives and rebates, and low
interest loans, to encourage exports and
replace imports with domestic products.
These practices clearly violate China’s
obligations in the WTO, and it agreed to
remove those when it joined the trade
body.
Driving Up Debt and Dragging Down
Growth
Trade deficits must be financed by
foreigners investing in the U.S. economy
or Americans borrowing money abroad.
Direct investments in the United States
provide only about a tenth of the needed
funds, and Americans borrow about $50
billion each month. The total debt is
about $6.5 trillion, and at five percent
interest, the debt service comes to
about $2000 per U.S. worker each year.
High and rising trade deficits tax
economic growth. Each dollar spent on
imports, not matched by a dollar of
exports, shifts workers into activities
in non-trade competing industries like
department stores and restaurants.
Manufacturers are particularly hard
hit by this subsidized competition.
Through recession and recovery, the
manufacturing sector has lost 3.7
million jobs since 2000. Following the
pattern of past economic recoveries, the
manufacturing sector should have
regained more than 2 million of those
jobs, especially given the very strong
productivity growth accomplished in
technology-intensive durable goods
industries.
Productivity is at least 50 percent
higher in industries that export and
compete with imports. By reducing the
demand for high-skill and
technology-intensive products, and U.S.
made goods and services, the deficit
reduces GDP by about $250 billion a year
or about $1750 for each worker.
Longer-term, persistent U.S. trade
deficits are a substantial drag on
growth. U.S. import-competing and export
industries spend at least three-times
the national average on industrial R&D,
and encourage more investments in skills
and education than other sectors of the
economy. 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 one
percentage point a year, and the trade
deficits of the last two decades have
reduced U.S. growth by one percentage
point a year.
Lost growth is cumulative. Thanks to
the record trade deficits accumulated
over the last 10 years, the U.S. economy
is about $1.5 trillion smaller. This
comes to about $10,000 per worker.
The damage grows larger each month,
as the Bush administration dallies and
ignores the corrosive consequences of
the trade deficit.
Peter Morici is a professor at the
Robert H. Smith School of Business and former Chief Economist at
the U.S. International Trade Commission. ►More Faculty
Opinion Articles |
