VIEWPOINTS : Sooner or Later, the U.S. Trade Deficit <i> Will </i> End
In 1986, the United States had the largest merchandise trade deficit ever recorded by any country--$166 billion. By dint of its sheer size, the trade imbalance will affect the U.S. economy profoundly, putting Americans into the unaccustomed position of having their standard of living linked closely to the world economy.
There is, however, some good news: It takes 4 million full-time, year-round workers to produce $166 billion in goods. Thus, when the United States balances its international accounts, up to 4 million new jobs could be created in manufacturing.
Total employment will not grow by 4 million, because many of the people filling these new manufacturing jobs will come from the services industries. But wages will rise in the services industries as they seek to retain some of their best workers.
On the other hand, the nation’s real spending power is apt to fall. A $166-billion trade deficit means that America’s consumption in 1986 was 4% more than its production.
Consequently, if America’s trade deficit were to disappear in 1987 without increased production, Americans could be forced to accept a 4% reduction in their standard of living. And further reductions in the nation’s living standard might be necessary to cover interest payments on international debt.
But will the trade deficit disappear? The answer is unambiguously yes. No country can forever run a trade deficit. To do so, it must forever run ever deeper into debt at ever more rapid rates, an impossible feat.
The compound interest that must be paid on those ever-increasing debts would eventually overwhelm the rest of the world’s willingness and ability to lend. When the lending stopped, the dollar would fall however far it must fall to bring American exports and imports back into balance.
The United States, moreover, is going to become a nation with a trade surplus. In the long run, any country that has become a net debtor must run a trade surplus. That is the only way that it can earn the money necessary to pay interest on its debts.
As a result, we know with 100% certainty that eventually the current trade relationships between the United States and Japan will be reversed.
Today, the United States has a large trade deficit and Japan has a large trade surplus. Tomorrow, as the world’s largest net debtor, the United States will need to have a substantial trade surplus, and Japan, as the world’s largest net creditor, will need to have a substantial trade deficit.
What we don’t know is the timing. How much money can the United States borrow before the rest of the world regards further U.S. loans as too risky?
Never before has the world’s richest country been a net debtor, much less one with record trade deficits.
The world’s reserve currency--that is, the currency used for world trade--has never been held by a net debtor nation. To put it another way, the financial world is on new ice and no one can tell whether it is one foot or one-quarter of an inch thick.
If the world were willing to lend the United States as much, relative to its gross national product, as it has to Mexico, the United States could borrow at least $650 billion. At current borrowing rates, that won’t occur until the spring of 1989.
Chile, however, was allowed to borrow much more than Mexico--130% of its GNP to be precise. If the United States were allowed to borrow 130% of its GNP, it could borrow $6 trillion before the rest of the world stopped lending. Even at current borrowing rates, that wouldn’t occur until well into the 21st Century.
As the world’s reserve currency, however, hundreds of billions of dollars are held in America by foreigners principally for safety rather than investment purposes. Dollars are the equivalent of money in the mattress. But what safety is to be found in a country that is the world’s largest net debtor? Those interested in safety might bail out of dollars tomorrow morning.
Which of these scenarios will occur? All we know is that the United States eventually will become a nation with a trade surplus. That is not a prediction but a statement of simple economic arithmetic.
