Giant trade gap: no end in sight
January's deficit is the largest monthly imbalance yet for the US. One reason for it: a surging China.
Christian Science Monitor | March 10, 2006
By Mark Trumbull
America's trade deficit has been setting records with such frequency that it seems almost tiresome to hear it again: Another month, another $68.5 billion.
But the gap between what America imports and what it exports is growing so rapidly and relentlessly that it is provoking new concern about how long the world's largest economy can play borrower and consumer to the world.
The issue may take on new urgency in a congressional election year, stoked by news Thursday that the trade deficit hit a new high in January. The monthly record is attributed to a surge in goods from fast-rising China, a tide of imports affecting the beleaguered US auto industry, and an exodus of dollars going to pay for OPEC oil. The huge trade imbalance was top of mind with US lawmakers recently, when they quizzed incoming Federal Reserve Chairman Ben Bernanke about their economic concerns.
Though America's trade deficit has been growing by about $100 billion annually - hitting $726 billion last year - that doesn't necessarily mean a sober day of reckoning is drawing near.
"It's clear that the US trade deficit cannot go on galloping ahead $100 billion a year indefinitely," says Daniel Griswold, a trade expert at the libertarian Cato Institute in Washington. But "it's more likely the adjustments will be incremental rather than jarring."
Even if a soft landing were to eventually occur, the trade deficit would be likely to remain an important issue.
The change, when it comes, could bring a weaker dollar and higher interest rates for US borrowers as foreign willingness to lend dollars to the US ebbs. Moreover, the longer it takes for "global imbalances" to begin a correction, the tougher the adjustment could be.
Each year of gargantuan deficits with trade partners represents another year of erosion for America's economy, because it means US consumers are buying cheaper goods from abroad at the expense of jobs at home, say those who worry about the size of America's trade deficit.
"We're hollowing the economy out," says Charles McMillion, an economist who follows trade patterns at MBG Information Services in Washington. "It's having enormous negative consequences for families and individuals." When IBM sold its personal-computer manufacturing business to China's Lenovo, he notes, that $1.7 billion deal covered only about one day's worth of the deficit.
For now, the economic worries are focused on China - though they hardly end there.
At $201 billion last year, China's trade surplus in goods with the US was by far the largest of any nation. That figure represents a 24 percent rise in just 12 months, fueled by surging exports of everything from textiles to electronics.
Yet virtually across the board, from Europe to Latin America to Africa, the US trade imbalance rose at double-digit rates between 2004 and the end of 2005. It's difficult to find nations - Australia and Belgium are two - that buy more goods from America than they sell.
Still, China is significant for both its scale and the warp speed of its economic rise - and because many analysts see its currency as artificially low.
The dreams of US manufacturers and labor unions for a higher yuan, however, are difficult for China to fulfill. While some currency analysts expect Beijing will allow the yuan to strengthen, a shift that is too sudden or too dramatic - producing a surge of imports into China - could spark social unrest among Chinese farmers and workers whose livelihoods would be negatively affected.
In many ways, China and the US are reverse images of an imbalanced global economy. The US is the great consumer and borrower, and other nations, economists say, should devote more of their national income to consumer spending.
The US trade deficit "does reflect continuing weakness abroad, especially in Europe and Japan, where consumers are not as confident," says Mr. Griswold.
Of course, concerns about the size of US trade deficits have been around for two decades. Some economists say the imbalance could persist for some time, given America's wealth and the world's penchant to see the US as a haven for their dollars.
"We are so rich as a country," says Robert Lawrence, a Harvard University economist. "We're borrowing, we're running down our assets, but we're very wealthy." He wouldn't be surprised, though, to see the gap shrink eventually.
Other nations may at some point decide they don't want to invest so heavily in US dollar-denominated assets, from Treasury bonds to businesses. That could weaken the exchange rate of the dollar, which in turn would help US exporters. And America may have to pay higher rates of interest to lure foreign financing, such as borrowing to cover growing federal budget deficits.
Last modified March 10, 2006