U.S. Is the Beast of Burden for World Trade Deficits
According to economic texts and the law of the Invisible Hand, some nations will run trade surpluses, others trade deficits. These imbalances will rise and fall because no nation can permanently maintain a deficit or surplus. Over the long run, each of the participants in the international trading system will be in balance.
Cut from textbooks to the real world. For the last quarter of a century, the United States has run a trade deficit and Japan has run a surplus. At current rates, America’s annual global merchandise trade imbalance will approach $220 billion this year, the highest deficit for any country in history.
Nearly every nation in the world--large oil exporters in the Middle East are the major exception--suffers a trade deficit with Japan. Other countries offset their shortfalls by running a surplus against the United States. Making matters worse, China’s trade habits are quickly mimicking Japan’s. In effect, America is singlehandedly carrying the burden of the world’s trade problems with Japan and growing problems with China.
Economic fundamentals will not allow the U.S. to sustain and finance such deficits indefinitely. As economist Lester Thurow has argued: “The question is not whether an economic earthquake will occur. It will. The only question is when and whether it occurs as one big shock or as a series of smaller shocks that do less damage.”
Either way, this correction is likely to hasten America’s relative economic decline. As we make the switch from being a massive net importer to a net exporter, American firms and families that have grown used to consuming foreign products will see the prices of these imports rise. The dollar’s value will slide lower, making American exports extremely competitive, but also compelling American workers to work harder and run faster to maintain their economic position.
This structural adjustment in our trade imbalance is inevitable, but wise actions now can help make it a positive, constructive process. In 1995, during Senate debate of the GATT Uruguay Round legislation, I asked U.S. Trade Representative Mickey Kantor to establish a commission to explore why U.S. trade deficits with Asia continue to rise. The administration established the Presidential Commission on U.S.-Pacific Trade and Investment Policy.
The 17-member commission, which will release both a majority report and a dissenting response today, reflects a great diversity of views on whether trade deficits matter. I agree with the dissenters, who believe that trade deficits make a difference, particularly on our ability to create high-wage jobs.
The majority report does make some important contributions. I support the recommendation that the U.S. encourage China’s integration into the World Trade Organization only on commercially viable grounds. I also support the concept of a comprehensive market agreement negotiation with Japan that would include procedures to deal with anticompetitive business practices, investment restrictions and other trade barriers. And I support the recommendations that the U.S. encourage the Asia-Pacific Economic Cooperation forum to produce concrete initiatives that further trade and investment liberalization. One of the important tangibles in the majority report is the establishment of a permanent high-level trade and commercial office in the Asia-Pacific region.
I do not, however, share the majority’s enthusiasm for providing the administration with a quick extension of fast-track authority to negotiate new trade agreements. America needs to step back and assess the impact, positive and negative, that the recently negotiated and approved agreements have had on our economy.
I also take great exception to the majority’s dismissal of the significance of trade deficits. While the recommendations focused on trade and investment liberalization, there is little discussion of the growing structural imbalances in trade, their consequences and possible remediation. The commission focused on one side of the equation, the side of making the world safe for investment and promoting exports, but chose to ignore the side related to maintaining some balance in trade relations.
In the final analysis, the commission did not develop the credible, long-term action plan our country needs to maintain a high and growing standard of living as we integrate further into the global economy.
What’s needed now is a credible plan to reverse our growing trade deficit. That would be the best chance we have of ensuring that America’s working families have the opportunity to hold high wage jobs and improve their quality of life.
