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
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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.
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DECEMBER 1, 2006
