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About Northwest labor press. (Portland , Ore.) 1987-current | View Entire Issue (Dec. 1, 2006)
The troubling economics and politics of the trade deficit By THOMAS PALLEY (First of two parts) WASHINGTON, D.C. (PAI) — Over the last four years, the U.S. trade deficit persistently set new records, hitting $716.7 billion in 2005, equal to 5.7 percent of Gross Domestic Prod- uct (GDP). That high figure has both real and financial effects. Real effects are impacts on employment, incomes and manufacturing capacity. Financial effects refer to the impact of accumu- lated indebtedness from borrowing money abroad to finance the deficit. One important real effect has been the deficit’s contribution to making the alleged current recovery the weak- est since World War II. The Com- merce Department estimates the trade deficit directly reduced GDP growth by over 25 percent between 2001 and 2003 by channeling spending to for- K eign rather than domestic goods. Its estimate excludes additional in- direct losses stemming from the fact that lower spending on domestic pro- duction meant fewer jobs, in turn causing the U.S. economy to forfeit the spending and growth that those jobs would have generated. This ad- verse impact continued in 2004 and 2005. All economists acknowledge eco- nomic growth is hard to come by, yet U.S. policymakers casually ignore the trade deficit’s negative growth effects. From 2001-2005 the trade deficit di- rectly reduced U.S. growth by an an- nual average of 0.47 percentage points, and that excludes the addi- tional growth that would have come from spending and investment in- duced by faster job and output growth. Robert Scott of the labor-backed ramers/metro mailing service 3201 N.W. YEON PORTLAND, OREGON 97210 (503) 274-1638 FAX (503) 227-1245 THE ONLY UNION MAILER IN OREGON Visit our Web site at www.kramersmailing.com MEMBERS OF TEAMSTERS LOCAL 223 — Eric Brending, Owner — Economic Policy Institute think tank calculates each $1 billion of imported goods embodies approximately 9,500 jobs. Stripping out the OPEC oil deficit of $92.7 billion, the goods trade deficit in 2005 was $695 billion. Using Scott’s estimate, this implies the trade deficit lost us 6.6 million job opportunities. Not only does the trade deficit neg- atively impact employment and out- put, it has lasting adverse impacts on U.S. manufacturing. Behind the trade deficit is a problem of lack of compet- itiveness that is significantly due to undervalued exchange rates in the rest of the world. Such under-valuation makes for- eign goods cheaper relative to U.S.- produced goods. Given this competi- tive disadvantage, many U.S. manu- facturing companies closed plants. That reduced manufacturing capacity. Some companies went out of busi- ness, while others re-located or sub- contracted production, particularly to China. American University economist Robert Blecker examined the impact of the over-valued dollar on U.S. man- ufacturing investment. He estimates the increase in the value of the dollar from 1995-2004 lowered U.S. manu- facturing investment by 61 percent. It also lowered U.S. factory capacity by 17 percent relative to what it would have been in 2004 had the dollar re- mained at its 1995 level. This structurally weakened the U.S. industrial base. It also makes the future task of trade deficit adjustment more difficult as the U.S. may now lack the capacity needed to produce many of the manufactured goods it currently imports. These develop- ments have implications for future U.S. living standards. Manufacturing is key to long-run prosperity. It is a major source of in- novations and productivity growth that drive increased income. A smaller manufacturing base means a smaller base from which to draw such bene- fits. And when factories move off- shore, so do their research and devel- opment activities, diminishing future innovation. The trade deficit also carries signif- icant adverse financial implications. Growing debt abroad that results from borrowing to finance the deficit makes U.S. financial markets vulnerable to a loss of confidence in the dollar. If in- vestors — foreign or domestic — no longer wish to accumulate dollar-de- nominated assets, the dollar stands to fall and interest rates, including car and home loans, will rise as investors exit the economy. Higher interest rates would then have severe adverse effects given the high debt of American households. And dramatic weakening of the dollar would likely accelerate inflation be- cause of heavy reliance on imported goods and limited domestic factory capacity to replace them. And the trade deficit also has na- tional security implications. Heavy re- liance on imports and the erosion of manufacturing capacity could poten- tially expose the U.S. to global eco- nomic disruptions. These economic security concerns are amplified by the special role of China, which now ac- counts for almost 30 percent of the trade deficit. There is considerable uncertainty whether China will evolve into a democracy that shares U.S. values, or 7LUHG RI :RUNLQJ LQ 3$,1" 0RVW,QVXUDQFH 3ODQV$FFHSWHG 3 528'/< 6 (59,1* 3 257/$1' : 25.(56 ) 25 2 9(5 < ($56 PAGE 8 NORTHWEST LABOR PRESS whether it will remain an authoritarian state and become an outright hostile geo-political rival. China is now the world’s second largest holder of U.S. treasury debt, it has the largest trade surplus with the U.S., and many U.S. companies are investing heavily in production plants in China and transferring state-of- the- art manufacturing technology there. These developments give China real and financial leverage over the U.S. economy. Given the uncertainty sur- rounding the U.S.-China relationship, this leverage is a major national secu- rity risk. (Editor’s Note: Thomas Palley is the former chief economist of the AFL-CIO and former chief economist of the U.S.-China Commission, a con- gressionally-created panel that moni- tors U.S.-China trade and economic relations. This and other economic analyses can be found on www. thomaspalley.com. Part II will appear in the Dec. 15 edition of the NW La- bor Press.) Labor’s Yuletide toy drive needs gifts by Dec. 15 Labor’s Community Service Agency and the Northwest Oregon Labor Council will hold their 10th an- nual Presents from Partners Holiday Toy Drive for underprivileged chil- dren. Bring unwrapped gifts for children of all ages to the NOLC office at 1125 SE Madison, Suite 100-D, Portland, no later than Friday, Dec. 15. Gifts will be distributed Saturday, Dec. 16, at 1 p.m. at Genesis Commu- nity Center, 5425 NE 27th off Killingsworth. %HHVRQ &KLURSUDFWLF KHOSVEULQJWKH UHOLHI\RXQHHG 7UHDWPHQWIRUSDLQGXHWR RYHUXVHDQGUHSHWLWLYHPRWLRQ &KLURSUDFWLFDGMXVWPHQWV 7UHDWPHQWIRUDFFLGHQWDQG VSRUWVUHODWHGLQMXULHV 5HKDELOLWDWLRQH[HUFLVHV 7KHUDSHXWLFPDVVDJH ,QWHUQDOGLDJQRVLVDQGWUHDWPHQW /DEWHVWVDQG[UD\V 'U'DQ%HHVRQ&KLURSUDFWRU 6(7KLUWHHQWK$YHLQ6HOOZRRG &$// DECEMBER 1, 2006
