A high trade deficit will cut into the value of the dollar, and casue inflation. It is very harmful to this country.
Posted on 02/18/2005 9:55:18 AM PST by Willie Green
For education and discussion only. Not for commercial use.
It is difficult to decide whether the trade figures for 2004 or the Bush Administration's reaction to them indicate the greater danger to the American economy and nation. Last year's trade deficit hit $617.7 billion -- surpassing the record 2003 deficit by 24 percent. The deficit in goods was even higher, at $666.2 billion. The imbalance increased as a share of the economy to 5.3 percent of gross domestic product, up from 4.5 percent in 2003. This is a situation usually associated with underdeveloped countries on the brink of financial collapse.
The Bush Administration is ideologically opposed to doing anything about the deteriorating international situation. It is content to passively accept whatever transnational corporations and foreign governments do to shape the world economy to their advantage. Attempts at positive spin took their most unbelievable form in Treasury Secretary John Snow's testimony to the Senate Budget Committee on February 10. "What those numbers reflect is the fact that the American economy has been doing well relative to other economies," he claimed. "We are importing more from those other economies because we are creating more disposable income."
Yet, according to Commerce Department figures released in January, disposable income by the third quarter of 2004 had increased at an annual rate of 3.5 percent. How does that translate into a 24 percent hike in the trade deficit? Snow apparently assumes that Americans will spend most of any increase in income on imports rather than on American made products. Why would this be true unless American firms are being beaten out by their foreign competitors?
This pattern is not seen elsewhere. Per capita income in Europe and Japan is on a par with America. The European Union actually has a larger combined economy than does the United States, with Japan in third place. Both the EU and Japan run trade surpluses, and in fact use their large gains in the U.S. market to boost their own economic output and income.
China does the same. It is growing three times as fast as the U.S., and its American trade surplus of $162 billion, up by $38 billion from 2003, is a sign of its strength as the rising manufacturing hub of Asia. Beating out the competition in foreign markets is the real sign of successful commerce and government policy, not losing market share to overseas rivals as has been the American case for over a decade.
Here is the fundamental error that has bedeviled political economy for centuries. Is international trade essentially about cooperation or competition? Classical liberals see free trade as creating a world peacefully arraigned by a division of labor and economic integration (a concept of global unity that goes well beyond trade). The Bush administration is in this camp. Those with a more realist or conservative bent see a world based on a more fundamental economic principle, relative scarcity. The first law of economics is that there is never enough to go around; wants are unlimited while the ability to satisfy those wants is limited at any point in time (though it can be increased over time). Thus, there is always competition to gain "the lion's share" of what is available, be it jobs, raw materials, industrial capacity or the means to advance to the next level of prosperity through the accumulation of capital and technology.
Everyone agrees that capitalism is based on competition. Firms are driven to innovate and expand or be left behind by their commercial rivals. What the free traders overlook is that there are societal consequences if the nation's capitalists consistently lose to foreign competitors, or abandon the nation for operations overseas (again in response to competitive pressures).
Americans understood this national aspect of competition during the decades when the United States attained global leadership. By the dawn of the 20th century, America was the largest, most productive economy in the world. In 1902, Brooks Adams published THE NEW EMPIRE proclaiming how American had surpassed Europe as the center of the world economy. While not as well known now as his brother Henry, Brooks was a prominent member of the 4th generation of the illustrious Adams family, counting from Founding Father President John Adams. Brooks and Henry Adams were in the intellectual circle surrounding President Teddy Roosevelt.
"The world seems agreed that the United States is likely to achieve, if indeed she has not already achieved, an economic supremacy. The vortex of the cyclone is New York. No such activity prevails elsewhere; nowhere are undertakings so gigantic, nowhere is administration so perfect; nowhere are such masses of capital centralized in single hands. And as the United States becomes an imperial market, she stretches out along the trade routes which lead from foreign countries to her heart, as every empire has stretched out from the days of Sargon to our own," wrote Adams.
The former global Superpower, Great Britain, according to Adams "is gradually assuming the position of a dependency, which must rely on us as the base from which she draws her food in peace, and without which she could not stand in war," a view borne out in the two world wars of the 20th century. Because London had adopted free trade while Washington still practiced protectionism in Adams' day, American firms were able to profit greatly from their penetration of the British Empire – much as the rising (reborn) empire of China is doing in the American market today.
Indeed, at the end of Adams's interpretative world economic history, he warns that the center of gravity may continue to shift, to Asia. Japan was a rising power in his time, but he thought in the long run China would prove more formidable. "Prudence, therefore, should dictate the adoption of measures to minimize the likelihood of sudden shocks," he advises. "American supremacy has been made possible only by applied science. The labors of successive generations of scientific men have established a control over nature which has enabled the United States to construct a new industrial mechanism, with processes surpassing perfect," he argues, but "America holds its tenure of prosperity only on condition that she can undersell her rivals."
One of my favorite passages also comes near the end of the work: "Life may be destroyed as effectively by peaceful competition as by war. A nation which is undersold may perish by famine as completely as if slaughtered by a conqueror. Therefore, men thrown into acute competition by rivals must have the ingenuity to secure an equality of equipment, else they will suffer; it may be by hunger, it may be by the sword, but in either case the purpose of nature will be attained. Nature abhors the weak."
While it is fashionable to dismiss works of that period as "social Darwinism," labels do not change how the world works, which is in ways just as intense now as ever. Brooks warned against the classical economists dogma of free trade. "Now men are apt to lecture on political economy as if it were a dogma, much as the nominalists and realists lectured in medieval schools. But a priori theories can avail little in matters which are determined by experiment....No one can say a priori what will succeed; the criterion is success." By this standard, U.S. trade policy is a failure, no matter how many academic economists claim it should be working in theory.
The dangerous situation in America today is no longer just one of particular industries being battered by foreign competition. The declining dollar indicates an impending financial meltdown, which would be a clear indicator of the nation's economic defeat in the global arena, and the coming end of its world leadership. America may no longer be a "new empire" but it would be tragic if its leaders allowed foreign rivals to push the country into a retirement home prematurely.
The value of the dollar has declined signficantly since then.
And what has happened to the American standard of living in those thirty years? Has it suffered? No.
Next?
A whole bunch of hucksters are making a load of money off of our "free trade" policies with mercantilist China, and you do not need to come here and upset their apple cart.
its why we barely can hold GDP growth in the low 3% range, while China is running 8-9%.
we must somehow force china to float its currency.
We're doomed!!!
Like I've said before, there is a serious lack of economics education in this country, even among conservatives. Go take a Econ 101 class at your local friendly neighborhood community college.
A high trade deficit will cut into the value of the dollar, and casue inflation. It is very harmful to this country.
Exactly.. The funny thing is the Trade deficit was going up in the 90's but we have not seen on peep about the trade deficist at all. I wonder why...
"Per capita income in Europe and Japan is on a par with America. The European Union actually has a larger combined economy than does the United States, with Japan in third place. Both the EU and Japan run trade surpluses, and in fact use their large gains in the U.S. market to boost their own economic output and income."
And these trade surpluses get them what? 10% plus unemployment and no growth in Europe, deflation and stagnation in Japan. Not to mention massive demographic issues regarding pension funding in both. These doom and gloomers should go to Europe every now and then.
Europe's infrastructure is crumbling. My 15 year-old daughter just returned from a semester in Italy. She was amazed that a supposed 1st world nation could not guarantee that running water would be available on a daily basis in major metro area. The availability of goods and services was maddeningly inconsistent and not on par with the US. Even the pizza was lousy.
Per capita income in Europe is inflated by government salaries and welfare payments. As a result, the tax rates across the EU are double ours, sometimes more. The result is NO GROWTH and NO JOBS.
The misinformation in this article is legion. Hoopleheads!
Where did this concept that a nation has to pay for the things it imports come from ? Hey we can just run up the plastic forever with no end in sight.
afford what imported goods? chinese ones? in fact, most americans cannot afford imported goods from first world countries - europe and japan. the fact that many americans can ONLY afford goods from china is not a sign of our wealth.
"Per capita income in Europe... is on a par with America"
That is absolutely not true. It is a blatant lie, look at any reference on the subject. European per capita income is significantly below US.
/sarcasm too?
Not at all. In fact when there isn't one is when things are going to be bad. When people stop consuming it means there's trouble at home.
Take a look at Germany for a good example. they have a trade surplus, but a failing economy. No economic growth at all 5 years running for the most part. It's partly because they are spending too much at home feeding their high social costs.
The last 5 was a time when they should have had good growth. Now as we move into a slump cycle, It will interesting to watch
Yeah, but China's a developing economy, I expect their GDP numbers to grow astronomically as they convert to a quasi-capitalist system.
Their gains are coming from infrastructural growth; ours come from population and productivity gains, and the marginal march oh technology.
"the fact that many americans can ONLY afford goods from china is not a sign of our wealth."
You are purely insane. People and businesses will get their goods and services at the lowest prices available, that is NOT a sign of poverty. You are making no sense and apparently have never taken an introductory economics course(or didn't pay very close attention).
Umm... Where is all this rampant inflation when we have record trade deficits now? Are they just arriving fashionably late?
I'm not listening to him. I don't care what he thinks. And I'm well aware that tariffs increase prices and business costs. All taxes do that. We could lower (or elimiate completely) the corporate income tax at the same time. Don't tell me that consumers would bat an eye at paying one or two percent more. And if they do, so be it. Supply and demand will apply and we'll get less of that product. Why is it ok to have income taxes but not tariffs? It's a revenue source that has been ignored since this absolute free trade nonsense started.
You still have not addressed your misstatement on GDP. Do you understand the parts of the GDP equation? The trade balance is accounted for in the rest of the equation, do you understand this? If so, why did you imply otherwise?
If you knew anything at all about history you would recognize the point at which major powers begin to die. And the 'what, me worry ?' blind complacency you exhibit.
I'll call your philosophy Mendozaism. There was a Spanish grandee named Mendoza who proudly proclaimed in 1659 that Spain was great because all the world exported to Spain while Spain exported nothing. Trade deficit ? Who cares ? People who think that Spain needs to export finished goods are just being hysterical.
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