Record US Trade Deficits Spell Impending Economic Defeat

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.

being able to ONLY afford imported chinese products is not a sign of wealth. my wealth is not measured by how many many $9 toasters I can buy.

Lets assume I have an annual income of $300,000 and little debt. Why should I spend $50 on a "high end" toaster when I can spend $9 on a regular, no frills toaster and get the same toast out of it?

My buying the $9 toaster is not a reflection of my economic situation, but a reflection of my mental ability. I am smart enough to not waste the extra $40.

"I included reference links to support my assertions."

You avoided the question. Anybody who has taken an introductory economics course knows that what I said about GDP is true. How do you reconcile your implication with that fact? The trade balance is accounted for in other parts of the GDP equation, yet you implied that GDP is reduced by the amount equal to the trade deficit. That is factually false. If you want to see my reference, pick up any Introductory Economics text.

Such policies contributed to a drastic decline in international trade. For example, U.S. imports from Europe declined from a 1929 high of $1,334 million to just $390 million in 1932, while U.S. exports to Europe fell from $2,341 million in 1929 to $784 million in 1932.

The Smoot-Hawley boogeyman theory has been debunked many times.
The decline in international trade was a result of the collapse of the speculative financial bubble in 1929. Those who blame Smoot-Hawley are guilty of reversing cause and effect.

if you present americans with the cost of something priced in real dollars, unaffected by global effects - the cost of a college education, the cost of paying for private sector healthcare or health insurance - what happens? they run screaming to the government for subsidies. why? because most of them can't afford to pay for those things.

being able to ONLY afford imported chinese products is not a sign of wealth. my wealth is not measured by how many many $9 toasters I can buy.

Funny how the free trade, "what me worry" types ignore the fact that from the household to the government debt levels have skyrocketed. People and nations who live on plastic are one misfortune away from disaster.

You know, I used to teach economics at the university level. What I found is that guys like this Willie Green would start out with a preconceived position then round up the facts to support it.

Perhaps not too surprisingly the consensus was always that we were on the verge of economic collapse. I can probably point to 50+ books with that conclusion. The interesting thing is that they always used different subsets of facts, usually competeing facts, to "prove" their position. The logic is the same as that used by the scientists proving global warming.

The current economic disaster fetish is the trade deficit coupled with budget deficits. Seven years ago the favored theory was that the overextended debt plight of the third world nations was going to cause the collapse of the American banking system.

What they miss is that these constant prognostications of disasterous collapse have gone far to marginalize the Democrats and their minions doom and gloom campaigning tactics.

As far as everything I (we) buy being made in China, that's B.S. as well. I buy cheap stuff that's made in china, consumable goods, like coffee makers etc that have a short lifespan. I buy Good stuff that I expect to last from either the USA, Canada, Europe. which may or may not contain parts from various other places in the world.

Apparently you haven't checked where components are made these days.

Yes, the point about of the skyrocketing import of goods is well taken: it's up 28% in just two years.

We are piling on debt at unsustainable rate:

The good news from the trade situation is that our overall exports of goods also set a record last year in dollar value.

Our exports of capital goods, while not quite at record levels, are also picking up.

Employment, while it is not at 2000 levels, at least is also on an upward trend and we may be able to break those record levels even this year; however, there's not much chance that we will actually have caught up in terms of the participation rate of employed persons to the whole population.

But the amount of debt we are creating is a lead weight on our system. Our international investment position was at -$2.6 trillion dollars as of last year's report, and I suspect that it will be far worse this year.

Good thing you aren't married to a wife like mine who MUST have everything match her decor. cheap wal-mart toasters just won't do around here, because their main funtion isn't making toast, they must make a statement instead

I'm right there with ya. I am married to a Long Island JAP! But I was able to teach her to be cheap in many aspects so as to allow extravegence in other areas (such as vacations, art work, some electronics, etc...)

The trade balance is accounted for in other parts of the GDP equation, yet you implied that GDP is reduced by the amount equal to the trade deficit.

Yes, anybody familiar with the fundamental bookkeeping techniques invented by Luca Pacioli can make that assertion. But to use that to imply that the Trade Defict doesn't diminish GDP is silly. It's right there in the basic calculation of GDP. Trade Deficits are SUBTRACTED. What don't you understand about that?

japan is not china. they did not use a currency peg to guarantee a permanent benefit to themselves regarding trade. their currency floats, japan is not a third world nation regarding living standards. japan did not have an essentially infinite supply of workers willing to accept wages at the subsistence level, kept in check by a communist government holding them at the point of a gun and a prison term.

japan is not china, stop comparing the two.

I kinda remember that in 1975 a blue collar worker on one paycheck could buy a house, have health insurance, go away on vacation, send a kid to college, and retire on a pension. I kinda remember that while adjusted for inflation the prices of cars have remained pretty constant, auto loans were three years then but are six years now.

There are a lot more variables at work in your example than the trade deficit. Tax levels are much higher now. Cars are built much better now and have more -- albeit federally mandated -- safety features than in the 70's. College costs are a topic unto themselves. With 80-90% radical/liberal administration and faculty at most colleges, one can surmise that there isn't sound economic policy going on.

Incomes, adjusted for inflation, have gradually increased since the 70's.

When you compare the "United States Wage per Job" line above...

...to the graph of our trade deficit, you can plainly see that the two are not correlated at all.

In my state, blue-collar workers are still quite capable of buying a home, car and college.

The Chinese economy has nowhere else to go but up. They were nothing since the end of WWII and it should have been expected that it evenually develops. I'd say the same applies to India and Brazil. Our biggest problem is that our politics keep us from really taking advantage of the action. The Eu could care less about the moral aspects getting in the way of trade.

Sooner or latter I'd say the chinese economy will get a taste of some of the same problems we are facing.

Import volume is a indication of consumer DEMAND. Consumers consume, importers supply. It means the consumer has money to spend. If the economy was bad, consumers wouldn't have surplus money to spend, imports would drop, then exports would exceed imports. EXACTLY LIKE GERMANY.

I can't buy a ford in China, nor a house, or the lumber to build it. Nor most of the domestic materials for the main goods I need to live a comfortable life.
I didn't import the concrete for my pool from China, nor the cement truck that delivered it, not the water, the construction workers, the steel re-rod, forms etc.Even the jacuzzi pumps, the water heaters, etc. are all American made, big ticket items you can't buy at wal-mart.

Take a good look around your house and see what really is imported besides some electronics and cheap toasters, and fake art.

almost all your clothes and textile goods are imported, as well as electronics and home appliances. china is taking the furniture industry, its almost been completely gutted from north carolina. auto subasemblies increasingly come from china, so your car is part chinese. don't believe me, go to the chevy dealer and look at the sticker on an Equinox. and then let's start talking about FOOD. where does it increasingly come from? the US will be a net importer of food for the first time this year. need I continue?

most of the "american" stuff you buy these days are in the form of services, not goods.

and those same consumers who are so flush with money as you claim - why can't they afford healthcare or college costs?

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