Trade Deficit Blame Game

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    Trade Deficit Blame Game


    Irwin M. Stelzer

    Washington (The Daily Standard) - THE DATA RELEASED last week showing that America's trade deficit hit still another record in November startled those who have been expecting the shrunken dollar to shrink the deficit, and soon. The $60.3 billion recorded in November, a jump of 7.7 percent from the October level, appalled those economists who have been forecasting a drop in the deficit. And it upset those in Europe who are hoping that the dollar will strengthen, making export goods from the eurozone more competitive.

    But there may be less to the deficit figure than at first meets the eye. A good part of the increase was due to a rise in oil imports, which hit a monthly record of almost $20 billion. Exclude oil, and imports showed a slight drop. The other significant contributor to the rising deficit was a drop in exports of aircraft. Both oil imports and aircraft exports are highly volatile, month-to-month.

    Still, there is no way to wring really good news out of these figures if you are betting on a dollar bounce-back. The United States is headed towards a 2004 trade deficit of $600 billion, which will be about 13 percent higher than the previous record, set in 2003, and comes to about 6 percent of GDP (news - web sites), a figure that many economists say is unsustainable.

    The rise in the deficit has set off a new round in the international blame game. Treasury Secretary John Snow blames Europe and Japan for not growing fast enough to absorb more American products, especially capital goods. Secretary of Commerce Don Evans blames the Chinese, whose $16.6 billion trade surplus was the largest by any American trading partner, for refusing to allow their currency to appreciate against the dollar, which would make their goods more expensive for American consumers. The Chinese and the Europeans blame the Americans for not reining in the government's budget deficit, which Rodrigo Rato, director general of the International Monetary Fund (news - web sites), told a meeting of central bankers in Basel is "truly excessive." This atmosphere of mutual recrimination is likely to blight next month's G-7 meeting in London.

    To make matters worse, good news turned to bad in the fraught negotiations between the United States and the European Union (news - web sites) over aircraft subsidies. The background is this: Last year European maker Airbus delivered more passenger jets than America's Boeing (320 vs. 285), and will do so again this year (350-360 vs. 320). As if that were not bad enough, from the U.S. point of view, Airbus has announced that it will add to its line of giant, long-distance aircraft, smaller planes designed to compete directly with Boeing's main product line.

    Both manufacturers have long accused each other of receiving subsidies that are illegal under the rules set by the World Trade Organization (news - web sites) (WTO), but agreed not to file suits at the WTO when U.S. Trade representative Bob Zoellick and E.U. Trade commissioner Peter Mandelson struck a deal to negotiate rather than litigate their differences. Or so it seemed.

    The ink was hardly dry on the deal document, and Mandelson had hardly finished taking bows and accepting kudos, when the Wall Street Journal reported Mandelson's "surprising admission" that he settled only because he knew he would lose if he went to the WTO, and Airbus announced that it was seeking a €1 billion subsidy from four governments, including the United Kingdom, to help it meet the €4 billion cost of launching its A350 long-range airliner. Zoellick, who will be leaving the Trade job to take over the number-two post under Condoleezza Rice (news - web sites) when she is confirmed as secretary of State in a few weeks, must have been at least somewhat chagrined at the now-you-have-it, now-you-don't chain of events. His successor will have to be wondering just what it means to agree to a deal with Mandelson, only to see it come unstuck within days after the favorable press notices have been printed.

    Whatever the outcome, American exports remain in trouble. Trade in agricultural products, once an area in which America ran a substantial trade balance, is now in deficit. Foreign auto companies, which have eaten into the market share of American carmakers, are stepping up the pressure, especially in the light-truck sector, by using their lower costs to turn a profit at prices that General Motors and Ford, burdened by staggering health care and other labor costs, cannot profitably meet. Chinese manufacturers are moving from the export of low-end consumer products into high-end electronic goods.

    All of which means that the dollar is in for more trouble, which is why government officials in the export-led economies of Germany and Japan are demanding that America shore up its currency. Better that, they reason, than to face domestic opposition to the labor-market and other reforms necessary to free their economies to grow at reasonable rates.

    Barring some cataclysmic development that affects currency markets, the end-game is likely to look something like this: In America, the monetary authorities, which have only now put interest rates up to levels above those in the European Union, will continue to raise rates, slowly if Fed chairman Greenspan has his way, more rapidly if the Bank's inflation hawks prevail. That will slow consumer demand by making credit more expensive, cutting into imports. The falling dollar will have a similar effect by making imports more expensive, and stimulating exports. The trade gap will fall, but persist at some lower level that can be financed by foreign investment in the United States.

    We could be more precise if we knew just what plans, if any, the Chinese authorities have for revaluing their currency; whether the Saudis are telling the truth when they claim that they can keep oil prices down by increasing capacity by some 5 million barrels per day; whether the European Union can reform its economies and expand demand for U.S. products; and whether President Bush (news - web sites) and Congress are serious about reducing the budget deficit. Among other things, all equally unknowable.

    Irwin M. Stelzer is director of economic policy studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.



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