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Record US trade deficit highlights global imbalances

But a fall in the US dollar, only throws up other contradictions in the world economy. Even more than a growth in exports resulting from a lower dollar, the US depends on a revival in the world economy to improve its position. However, a fall in the US dollar—increasing the value of the euro and the yen—will adversely affect Europe and Japan, both of which are relying on increased export demand to stave off recession.
Record US trade deficit highlights global imbalances
By Nick Beams
25 February 2003

The announcement of a record balance of trade deficit has once again thrown a spotlight on the deepening financial problems of the US as it prepares to unleash war against Iraq.

Figures released by the Commerce Department last week show that the deficit for 2002 was $435.2 billion, up 21.5 percent from the $358.3 billion trade gap in 2001 and easily surpassing the previous record of $378.7 billion set in 2000. The December deficit of $44.2 billion was also a record monthly high, up by more than 10 percent from the previous record of $40 billion set in November.

According to the department's figures, the trade balance was hit from two sides. The goods deficit, reflecting trade in items such as motor vehicles, food and computers, increased to $484.4 billion from $427.2 billion while the surplus in services, including items such as tourism, royalties from films and financial services, fell from $68.9 billion to $49.1 billion. Overall exports of goods and services for 2002 fell by 2.5 per cent to $973 billion, reflecting the slowdown in the world economy.

The growing US trade deficit and the emergence of rapidly increasing budget deficits were the subject of discussion at the meeting of the finance ministers of the Group of Seven held in Paris at the weekend. Both the head of the European Central Bank and the chairman of eurozone finance ministers warned that the Bush administration's $690 billion tax cut plan could adversely impact on the world economy.

Nikos Christodoulakis, who chairs the group of eurozone finance ministers, said "twin deficits" could "create sustainability risks" which, if they materialised, "would have significant ramifications well beyond the US itself. The Bush tax cut plan "in terms of size, composition and timing" did not dissipate those concerns, he said.

ECB president Wim Duisenberg was somewhat downbeat on the state of the world economy. "The prospect of an economic recovery to potential growth this year is not supported by the latest information," he said.

In a comment published on the eve of the meeting, the Economist said that while the fact it was being held was a sign that global economic co-operation among the world's major powers was still on the agenda, both the economic and political climates were "hostile". In spite of regular G-7 meetings, "international economic co-operation seems to have gone out of fashion."

The problems of the global economy, it pointed out, go beyond uncertainty over the consequences of US action against Iraq. US Federal Reserve Board chairman Alan Greenspan "recently worried aloud that the underlying weakness in the economy might be structural and not simply a response to geopolitical uncertainty."

Germany, it continued, was "teetering on the brink of recession" and may have even entered it, with its predicament being increasingly likened to that of Japan where the economy is facing its fourth recession in a decade.

"Economists," the article pointed out, "are increasingly concerned about the global imbalances which could undermine economic stability and growth." Chief among these is the American current account deficit, now running at about 5 percent of gross domestic product. The textbook solution to this problem is for a fall in the US dollar against other currencies leading to a boost in US exports. In line with this scenario the dollar has fallen about 10 percent on a trade-weighted basis from a year ago, and is down more than 20 percent from its high point against the euro at the end of 2000.

But a fall in the US dollar, only throws up other contradictions in the world economy. Even more than a growth in exports resulting from a lower dollar, the US depends on a revival in the world economy to improve its position. However, a fall in the US dollar—increasing the value of the euro and the yen—will adversely affect Europe and Japan, both of which are relying on increased export demand to stave off recession.

The growth of imbalances within the world economy, resulting from the lack of overall growth, has been the subject of increasing comment. Morgan Stanley chief economist Stephen Roach contrasted the situation today, on the eve of a new war against Iraq, with that which prevailed at the time of the 1990-91 Gulf War. He noted that in the earlier period the world economy was being sustained by three areas: the US was averaging 3.4 percent growth, Japan 4.8 percent and Europe 3 percent, with East Asia averaging more than 8 percent growth. Over the seven-year period 1995-2002, however, the US accounted for some 64 percent of the cumulative increase in world GDP.

"Unfortunately, this one-engine world has spawned massive external imbalances; that's underscored by America's record 5 percent current-account deficit in 2002—and matched by Asia's and, to a lesser extent, Europe's current-account surpluses. In fact, never before has the modern-day world economy been saddled with such extraordinary disparities between outsize current-account deficits and surpluses."

In two articles so far this year, Financial Times global economics columnist Martin Wolf has pointed to the "remarkable" fact that while it has the most powerful military, the biggest economy and the most important currency, the US is also running a "huge and growing current account deficit."

By contrast he pointed out that in the lead-up to World War I, Britain ran current account surpluses of 4 percent of GDP. "Last year, however, its successor as world power ran a deficit close to 5 percent of GDP and had net external liabilities of 25 percent." According to Wolf, economic calculations based on "highly plausible assumptions" show that the overall US current account deficit could rise to 9.5 percent of GDP by the year 2010 when net external liabilities would be close to two-thirds of GDP.

"The superpower," he concluded in a comment published on January 7, "is living on borrowed money and borrowed time. Its rake's progress cannot continue for ever. But how and when it will end remains disturbingly obscure."

Of course no one can say exactly how the deepening financial crisis of the US economy will develop. But one thing can be said with certainty: the US will increasingly seek to resolve its growing economic problems by military means at the expense of its rivals. This is the significance of the war drive against Iraq and the bitter conflict it has provoked with some of the European powers.

homepage: homepage: http://www.wsws.org/articles/2003/feb2003/usec-f25.shtml
address: address: World Socialist Web Site

US economy is due to collapse in the next 6 months 31.Oct.2004 09:00

comments by IMF economist

Is the U.S. Current Account Deficit Sustainable?
by Catherine L. Mann

The U.S. current account deficit, driven by the United States' widening trade deficit, is the largest it has ever been, both as a share of the U.S. economy and in dollar terms. How much longer can the United States continue to spend more than it earns and support the resumption of global growth?


The United States is enjoying an economic boom that is fueling the growth of its trade deficit. At current exchange rates, the strength of the U.S. economy, combined with slow growth in demand in many other parts of the world, will lead to further widening of the U.S. trade deficit. How long can the trade deficit continue on that trajectory without disrupting the U.S. economy or the world economy?

Absent structural reforms in the United States and abroad, a large devaluation of the dollar, or significant changes in the business cycle, both the trade and the current account deficits will continue to widen until they become unsustainable, perhaps two or three years out. Changing the trajectory will be difficult. The U.S. trade deficit is now so large that even if world economic growth were to pick up and boost U.S. exports, U.S. imports would have to slow dramatically for the gap to narrow. To shrink the trade deficit significantly, say, over a two-year period, exports would have to grow twice as fast as they did in the 1990s, when growth averaged 7.5 percent a year, and the growth rate of imports would have to be halved, from 11 percent to 51/2 percent a year. Moreover, following twenty years as a net recipient of capital inflows, the United States will soon be confronted with much larger service payments.

At some point, either the United States' negative net international investment position and the associated servicing costs will become too great a burden on the U.S. economy or, more likely, global investors will decide that U.S. assets account for a big enough share of their portfolios and so will stop acquiring more of them. At that point, asset prices, including interest rates and the exchange value of the dollar, will adjust, reflecting the change of sentiment in the markets. A change in the value of the dollar alone would narrow the trade gap for a while, but the deficit would soon begin to widen again. To put the U.S. current account and trade deficits back on a sustainable path will require structural reforms in the United States and its trading partners that encourage faster global growth, boost U.S. household saving rates, better prepare U.S. workers for technological changes in the global economy, and open up markets for U.S. exports, particularly of services.

.....Moreover, if structural reforms accompanied rising domestic demand in countries whose economies were growing, these countries would be able to offer higher returns to domestic and foreign investors. Investors would increase the share of non-U.S. assets in their portfolios, and the dollar would drift lower. Faster growth abroad and a modest drop in the dollar would stimulate the growth of U.S. exports and slow the growth of imports, and the U.S. current account gap would shrink. If such a shift occurred smoothly, the U.S. economy could continue to expand for quite some time, amid robust and sustainable global growth.

If other economies continue to stagnate and needed structural reforms are postponed, however, U.S. investments will continue to yield higher returns than those in other countries; foreign investors will continue to acquire U.S. and dollar-denominated assets; and the current account deficit will grow wider. When a change in investor sentiment comes, it could be dramatic. What would happen if the dollar depreciated by a significant amount, say 25 percent?

Although such a depreciation would quickly close the current account deficit, U.S. consumers would shift from buying imported goods and services to buying those made domestically, and U.S. labor markets would tighten further. The combination of rising wages and a falling dollar likely would drive up prices. The U.S. Federal Reserve would probably raise interest rates, putting the brakes on the U.S. economy. A rapid change in the dollar's value and a raising of interest rates would likely disrupt financial markets, with knock-on effects on consumption and business investment in the United States and throughout the world.

Even though a sudden depreciation would be costly, it still would not put the current account on a sustainable trajectory. Absent structural changes in the U.S. and other economies, a sudden, significant depreciation would set off a dangerous cycle: the trade and current account deficits initially would narrow but they would soon widen again, as structural instabilities returned to the fore. Moreover, because a depreciation would affect only the trade component of the current account, its impact would wear off more quickly than did the impact of the depreciation of the dollar in the 1980s.

The United States' external deficits have widened dramatically during a period in which the U.S. economy has been robust, while stagnation and financial crisis have swept through much of the rest of the world. But, because globalization has enhanced productivity growth and because the United States is a central participant in international markets, the external situation is not yet unsustainable. Strong domestic demand in the United States can continue to support the transition to demand-led growth abroad for two or three more years. However, structural asymmetries in the components of the U.S. internal and external balances, as well as political and market sensitivities toward growing trade deficits, will unleash economic forces that ultimately could undermine the sustainability of the U.S. deficit. A failure to address policy and structural needs, in the United States and abroad, increases the likelihood that the resolution of the U.S. trade imbalance will be unpleasant and disruptive for the world economy.

This article is based on the author's book, Is the U.S. Trade Deficit Sustainable? (Washington: Institute for International Economics, 1999).

Catherine L. Mann, Senior Fellow at the Institute for International Economics and Adjunct Professor at the Owen School of Management at Vanderbilt University, has held several posts at the U.S. Federal Reserve System and served as Senior Economist on the U.S. President's Council of Economic Advisers.

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