Trade Gap for ’99 Will Set a Record
America’s record-setting economy is poised to smash one more record today when the government announces that the nation’s colossal addiction to foreign goods drove the trade deficit to about $270 billion last year.
It’s not an occasion for celebration, although whatever the precise number, “It’s going to be big,” promised Nariman Behravesh, chief international economist at Standard & Poor’s DRI in Lexington, Mass.
Yet, remarkably, hardly anyone is complaining. Few economists see the huge imbalance as an imminent threat to prosperity. Financial markets are blissfully unbothered. Trade woes have not become a rallying cry in the presidential campaign.
In fact, many experts note, the trade deficit perversely reflects good economic news--the affluence of American consumers, who have been spared the hard times that much of the rest of the world has suffered in the last few years.
Such an enormous trade gap is not without risks. But they lurk somewhere in the future, a consequence of the massive amount of dollars that Americans send overseas when they buy foreign goods.
If foreign investors lose confidence in America’s economy--and their appetite for holding all those dollars--the U.S. currency would slide in value, interest rates could soar and the cost of many imports would shoot upward, imperiling the record economic expansion. Signs of inflation or a crash on Wall Street are two of the most commonly mentioned trigger points for such a loss of confidence.
“The good news is that foreigners have been happy to pour investments into the U.S. economy,” Behravesh said. “The big question is, what happens if their perception of the United States changes? At that point, the trade deficit becomes a vulnerability.”
The trade gap also remains a smoldering political concern, providing black-and-white evidence of import waves that can crush American jobs, even at a time of exceptionally high employment.
Just last Friday, President Clinton imposed punitive tariffs on certain steel imports in a bid to save 5,000 American jobs. The move was perceived overseas as election-year protectionism, and foreign countries threatened to challenge its legality in the World Trade Organization.
At home, the tariffs underscored the trade deficit’s potential to combust in controversy when the jobless rate starts to move upward and more voters end up on the unemployment line.
“Even in the healthy economy, we see the steel industry complaining about dumping [of cheap imports],” said Lawrence Chimerine, chief economist at the Economic Strategy Institute in Washington. “Can you imagine what would happen if the economy isn’t so strong?”
For the first 11 months of last year, the trade deficit approached $245 billion and will reach $270 billion for the year if the December figures, to be released today, follow the trend. Yet those numbers tell only part of the story. The nation continues to run a surplus in services, a broad category that includes such items as health care, tourism, banking and education. For the year, the services surplus appears likely to exceed $70 billion.
In merchandise alone, the U.S. trade gap had skyrocketed to $314 billion by November and seems headed toward $350 billion or even more for the year. At that level, the merchandise deficit would represent not only the highest level ever as measured in dollars, but also its largest share of the U.S. economy--3.6% of total U.S. economic output.
According to the mainstream view, a chief villain in the trade deficit has been timing. Just when the U.S. economy was racing forward over the last couple of years and pulling in more foreign products, Asian and other nations were plunging into recession and cutting back their purchases from America. Many of those same countries intentionally aimed their exports at the rich U.S. market.
By all accounts, the U.S. capacity to absorb those products became a critical safety valve for the global economy in the rough years of 1997 and 1998. Now, with conditions improving in much of Asia, Europe and Latin America, many forecasters expect the deficit to narrow.
“The worst is over,” declared Joseph P. Quinlan, senior international economist at Morgan Stanley Dean Witter. “It’s just a question of how quickly does this improve going forward?”
This view is not unanimous, however. Critics of U.S. trade policy say that foreign trade restrictions aimed at U.S. goods, along with other nations’ own aggressive export strategies, have become a driving force behind the trade gap and will not vanish as their economies bounce back.
The U.S. trade deficit with China--$63 billion through November--is especially sensitive, coming at a time when the White House is pushing hard for Congress to permanently grant China normal trade relations. In his news conference this week, Clinton argued that China’s membership in the global trading system would encourage political reforms there, and he noted that China made important concessions in last year’s trade deal between the two countries. His administration has predicted the result would be a boom in U.S. exports of agricultural products and other goods.
But skeptics say that the trade deficit with China is evidence of that country’s very reluctance to open up to U.S. products.
“The Chinese [trade] numbers are very interesting, because of the promises by the American business lobby that the WTO agreement is going to enable American producers to export to China like gangbusters,” said Alan Tonelson, a research fellow with the United States Business & Industry Council in Washington.
Critics face a formidable hurdle, however: Beyond the pockets of distress in such import-sensitive industries as steel, textiles and machine tools, the vast majority of Americans have suffered little from the trade deficit.
But what of the future, and the warnings of financial turmoil in a world flooded with greenbacks?
Until now, foreigners have been delighted to receive dollars and invest them in U.S. stocks, bonds and factories, seeing in America’s developing high-tech economy the lucrative growth prospects usually associated with much riskier, emerging nations. This phenomenon has helped keep the dollar strong against many other currencies and prevented the financial consequences that could come from such massive trade deficits.
“People tend to think trade deficit--bad, bad, bad,” said Kurt E. Karl, international economist at the WEFA Group of consultants near Philadelphia. “Another way to think of it is this is a new economy, a developing economy.”
Still, even the biggest optimists concede that the happy circumstances may not last forever.
The financial world continues to watch closely for signs that the Federal Reserve has lost any of its control over inflation, a development that could spark dangerous instability on Wall Street. The lofty U.S. stock market continues to prompt uncertainty and fears of a destabilizing correction or worse. Perhaps some highly visible foreign investor will conclude that the time has come to dump dollars, loosing a mob-like stampede. In that event, U.S. interest rates could rocket upward to stem the tide.
“Something will trigger a problem, and everyone will try to run for the exits and figure the dollar’s going to go down and I better get out before everyone else,” suggested Chimerine. “That’s the kind of thing that could happen.”
* GREENSPAN MESSAGE
Fed Chairman Alan Greenspan sends an unmistakable signal of more interest rate hikes. C1
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Trade and the Dollar
In the mid-1980s, the last time the U.S. trade deficit soared into record territory, the dollar soon plunged in value. Will it happen again?
Dollar
Dollar’s value against a basket of major foreign currencies on an index in which 1973 equals 100
Sources: Federal Reserve; Department of Commerce (Bureau of the Census and Bureau of Economic Analysis)
