Democrat From Kentucky

Democrat from Kentucky
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Trade Deficit Costs America $1 Trillion Friday, February 10, 2006

I get an email newsletter from an economist at the University of Maryland. He's a very good at his job and has done all kind of things. He gets picked up by newsmedia fairly regularly in one form or another. Here's what he had to say about he current trade deficit problems:

2005 Trade Hits another Record
Bush Administration Trade Deficits Now Costing the U.S. $1 Trillion Each Year

Today, the Commerce Department reported the 2005 trade deficit was $725.8 billion, up from $617.6 billion in 2004. In December, the trade deficit was $65.7 billion, up from $64.7 billion in November. My forecast for the December deficit, published by Reuters, was $66.2 billion.

In the fourth quarter, the trade deficit exceeded 6 percent of GDP, and with consumer spending slowing, a growing trade deficit will weigh down economic growth in 2006.

In 2005, the deficit on petroleum products was $229.2 billion, up from $163.4 billion in 2004; prices for imported petroleum rose about 37 percent from 2004. In December, the petroleum deficit was $21.8 billion, down from $23.0 billion in November.

The American appetite for inexpensive imported consumer goods and cars was a huge factor driving the trade deficit higher. In 2005, the deficit on nonpetroleum goods was $537.6 billion, up from $487.6 billion in 2004.

The Wal-Mart effect was broadly apparent. In 2005, the trade deficit with China hit $201.6 billion, a new record. In November and December, the deficit with China declined for seasonal reasons—stores stock up for the holidays in October. The deficit with China will begin rising again in the New Year.

This situation is likely to become worse in the months ahead. Crude oil prices are rising again, and an overvalued dollar continues to keep imported cars and consumer goods cheap.

The dollar remains at least 40 percent overvalued against the Chinese yuan and other Asia currencies.

China continues to peg against the dollar. Although China revalued the yuan from 8.28 to 8.11 in July, and announced it would adjust the currency to a basket of currencies, the yuan continues to track the dollar very closely. Currently it is trading at 8.06.

China is permitting the yuan to rise at a pace of 1.2 percent per year. Since implicit value of the yuan rises about 5 percent each year, the yuan will remain at least 40 percent overvalued for the foreseeable future. The overvalued dollar will contribute mightily to the U.S. trade deficit until the Bush Administration takes decisive action.

Together, higher oil prices and a strong dollar will push the trade deficit to new record highs. The trade deficit will likely exceed $800 billion in 2006.

High and rising trade deficits tax economic growth. Specifically, 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, and 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 $2000 for every working American. Workers’ wages would not be lagging 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. 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 R 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 25 percent a year.

These effects of lost growth are cumulative. Thanks to the record trade deficits under President Bush, the U.S. economy is about $1 trillion smaller. This comes to nearly $7000 per worker.

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

Were the trade deficit cut in half, $2000 would be recouped but $5000 per worker in lost growth is essentially lost forever.

The damage grows larger each month, as the Bush administration dallies and ignores the corrosive consequences of the trade deficit.

Peter Morici
Robert H. Smith School of Business
University of Maryland
College Park, MD 20742-1815

I think he puts it pretty succinctly. The administration is more worried about listening in on its own citizens than it its about economic policy and massive trade deficits with China and the rest of the world. How can we ever expect to improve the economy if we don't get a grip on dealing with China?

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Location: Harrodsburg, Kentucky, United States

I'm currently working in the telecomm industry but one of my passions is still politics.

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