Posted on 04/19/2006 12:56:38 PM PDT by 1rudeboy
One year ago, the chorus of the consensus told America that the dollar’s exchange rate was due to fall in 2005. Under relentless assault from cheap Chinese imports and facing a record trade deficit, the dollar had nowhere to go but down. The influential Economist magazine went so far as to say, “[t]he deficit is unsustainable: sooner or later it will need to shrink, and that will involve a cheaper dollar.” Politicians and pundits predicted economic trauma at the hands of outsourcing. Time has proven them wrong. What the U.S. needed then and needs now is to stick to the reliable keys to growth: low tax rates, deregulation, limited government, and especially free trade.
A Dollar – Deficit Link?
The U.S. economy did set two records last year. First, 2005 saw a new record trade gap. Imports to the U.S. exceeded exports by $724 billion, or 5.8 percent of GDP. Second, more Americans were employed than ever before in history, arguing against those who preached doom and gloom.
The data continue to support our contention of last May that the trade deficit is not the signal to watch: “This is all wrong... Many economists and the weight of history suggest that the trade deficit, a symptom of investment capital inflows, is a sign of national economic strength.”[1] Additionally, two papers published last spring pointed out the lack of a historical relationship between currency values and trade deficits.[2] Indeed, despite the widening trade gap, the dollar gained value against other currencies.
The January 5, 2006, Economist admits that the dollar pessimists “were all wrong.” Yet the conventional wisdom of “trade hawks” is again resurgent, arguing that trade deficits are unsustainable and the dollar cannot hold. Last week, the government reported the third deepest trade gap on record, with imports outweighing exports by $65.7 billion. Current exchange rates, however, appear normal compared with exchange rates over the last few decades.
Unless Congress moves from protectionist rhetoric to protectionist legislation, there is no reason to expect the dollar to slide significantly. Trade flows are the “tail of the dog,” as Fed Chairman Ben Bernanke once explained. From time to time the dollar does fall when the world’s investors lose confidence in the superiority of America’s institutions and markets. Sadly, congressional hostility to the U.A.E. port deal was a bipartisan embarrassment and isn’t likely to reassure the world that America is as free and fair as it proclaims. Equally troubling is the Schumer-Graham proposal in the U.S. Senate to place trade barriers on imports from China.
The Chinese Invasion
According to the last week’s data from the Department of Commerce, the U.S. trade deficit with China was $13.8 billion in February. In 2005, the U.S. trade deficit with China grew by 25 percent to $202 billion. That amounts to nearly twice the $103 billion bilateral deficit in 2002. The ratio of imports to exports with China is now 5 to 1, perfect for the “Chinese invasion” storyline. The U.S.-China deficit’s growth probably won’t continue, but not because it can’t. Consider these points:
We should cheer the triumph of capitalism and its alleviation of poverty within China, as well as its benefits for American consumers and shareholders. The only point of debate is whether American workers’ wages are suffering due to trade with China, but there is no clear evidence of wages “racing to the bottom.” Instead, China is experiencing a severe labor shortage that is driving wages up rapidly in a “race to the top”—the level of free-market workers.
The real dangers to America are not free trade or China’s currency. That’s not to say there aren’t smart policies that should be taken to curb abuses of fair trade, rather that protectionism and currency haggling aren’t part of the smart mix. The real danger is that Congress will try to fix what is not broken and adopt a mercantilist policy of import limitation. Congress would do well to stick to the reliable keys to growth spelled out in The Heritage Foundation’s Index of Economic Freedom: strong property rights, low tax rates, low regulation, limited government, and especially free trade.
Tim Kane, Ph.D., is Director of, Marc Miles, Ph.D., is Senior Fellow in, and Anthony Kim is Research Associate in, the Center for International Trade and Economics at The Heritage Foundation.
[1] Tim Kane, “The Brutal Price of a Dollar,” Heritage Foundation Backgrounder No. 1855, May 31, 2005, at http://www.heritage.org/Research/TradeandForeignAid/bg1855.cfm.
[2] See Ibid. and Tim Kane and Marc Miles, “Trade Deficits, Dollars, and China: Wrong Lessons Make Dangerous Policy,” Heritage Foundation WebMemo No. 743, May 12, 2005, at http://www.heritage.org/Research/Economy/wm743.cfm.
[3] A.B. Bernard, J.B. Jensen, and P.K. Schott, "Importers, Exporters and Multinationals: A Portrait of the Firms in the U.S. that Trade Goods," NBER Working Paper No. 11404, June 2005.
BTW: I would note that the chart's creators are apparently trying to give a skewed impression that production increased only nominally over time...which is not true.
Examine the positive side for IP, Industrial Production note how it is slanted by squishing the dimensions thereto... Whereas the negative side is stretched out dimensionally. Your'e Comparing Oranges and Apples.
Keep in mind, it was our surplus in Manufactures which allowed the U.S. to almost eradicate its trade deficit...despite a serious energy import appetite which only grew larger during the Reagan recovery (even though we were again pumping new oil finds). The economy's thriving only increased the overall thirst for energy, and hence imports for foreign oil and Liquiefied natural gas.
Security standards for ports are governed by the International Shipping and Port Security (ISPS) Code, which is based on U.S. maritime laws adopted after 9/11. The same law applies to any company operating in the U.S., regardless of its origin.Source: HeritageThe U.S. Coast Guard is responsible for overseeing the implementation of ISPS. Every U.S. port has a Coast Guard officer who is the Captain of the Port and is responsible for coordinating all port security. The Customs and Border Protection agency and the Coast Guard, not the owner of the port, conduct security screening on individuals and cargo that enter the port.
Paul, if there really is some kind of correlation between the dollar, trade, and the balance of payments, then I sure as hell want to know about it So far, we've had a pretty terrific run of huge capital flows into the US with Americans getting rich enough to pay for increased imports of coffee, chocolate, oil, etc., --all this with ever increasing personal wealth.
Please, tell me your take on what's in store for us. Do you think the dollar is going back up, the same, or lower than ever before --and what that means for our the current/capital account flows. If you don't see this run of prosperity continuing into the future, tell us what you think we need to do to make sure it does.
Why did you do that?
I thought I'd prepare you for the shocking revelation that the U.S. Coast Guard enforces the Maritime Transportation Security Act of 2002 (MTSA), which meets and in some cases exceeds the requirements of the ISPS Code.
He made a pretty good point whether he intended to or not.
In total sincerity you posted "The UN is in charge of OUR port security. We only comply." Rudy posted a link to someone, equally sincere, who recommended taping black plastic over the abdomen to help ward off psychic attack. The point is that sincerity is not enough, and neither is having friends that agree with you.
OK, if you're happy with what rings true for the moment then more power to you --but if you aren't, then some people follow the scientific method to get what they want. There're lots of ways of going at it--
I heard that it has a tendency to drop-out at times, and you definitely need to have an alternate plan in place should you ever have the misfortune of needing to dial 911.
Yes, depending on your cable provider, it can drop out occasionally. Also, if the power goes out, VOIP goes out too, unlike conventional phones. Voice quality is at least as good as conventional. 911 goes to a local emergency number, but is supposed to be treated like regular 911 soon.
Fancy talk for a guy who can't read a simple chart.
Don't you think you should find out before you go off on one of your raving moonbat UNESCO World Heritage Site the-black-helicopters-are-coming-for-my-vitamin-supplements tangents?
You don't even know how much input the U.S. had in establishing the ISPS guidelines.
Moreover, even if the guidelines came from the planet Zod, you haven't even started to establish that the legislative process in the U.S. was somehow influenced or compromised. All you've done is state how you feel about the process. I'm sure there are dollar-lot used-car salespeople out there who actually believe they are selling a fine product, but the rest of us know they are crap, much like the argument you are making.
Some last words: it is not unusual for countries to standardize functions that they have in common. Take international distress frequencies, for example. Another example of those eeeevillll globalists taking away your freedom to die in a flaming plane crash, or merely an example of making it easier?
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