U.S. Is More Customer Than Big Global Debtor
Last week, Li Ruogu, deputy director of China’s central bank, scolded the United States for its trade deficit and added that we “spend too much and save too little.”
What’s more, Li said in an interview with the Financial Times, high labor costs in the United States have made it so uncompetitive globally that it should “give up textiles, shoemaking and even agriculture probably.”
Li even offered his own prescription for the U.S. economy: “They should concentrate on sectors like aerospace and then sell those things to us and we would spend billions on this. We could easily balance the trade.”
Does all this sound familiar? Li’s comments were like an echo of the 1980s, when an ascendant Japan used to lecture the United States about its budget and trade deficits.
Of course, that was just before one of the greatest economic booms in America’s history and Japan’s descent into a 15-year economic slump.
This is not to suggest that China is headed for a similar collapse, but Li is as wrong about global trade realities now as Japan was two decades ago.
In truth, the last thing China wants is a reduction in the U.S. trade deficit. China relies on exports to the United States to keep its potentially huge economy developing and its people employed. China’s trade surplus with the United States this year is likely to be well more than $150 billion, up at least 20% from 2003.
If China were serious about changing that, it would increase the value of its currency, the yuan. That would make its exports more expensive and theoretically reduce the U.S. trade gap. But Li said last week that China had no immediate plans to do so -- although China has hinted that in April it could boost the value of the yuan 10% or so.
China keeps its strictly controlled, nonconvertible currency pegged to the dollar so that no matter what happens with the buck, China’s exports are unaffected.
And clearly a lot has been happening with the buck lately. World markets are in a tizzy, with the dollar declining almost daily against the euro and the yen. The dollar has slid 20% against the euro in the last two years, and experts look for it to drop an additional 10% or so -- to about $1.50 to the euro.
Why the plunge? Experts point to the trade deficit -- now more than $500 billion, which means that the United States pays out that much more for imports each year than it takes in from selling goods and services to other countries. That floods the global economy with dollars, making them relatively cheap compared with other currencies.
In turn, the central banks of China, Japan and other countries plow the dollars they receive in trade back into investments in U.S. Treasury bonds and other securities. Such investments allow the U.S. economy to keep bubbling along, with American consumers able to go on buying imported goods. The investments also help finance the government’s budget deficit, which keeps U.S. interest rates low.
By living off the investments of foreigners, the United States appears to be borrowing its way into unsustainable debts and gigantic future interest obligations. As the amounts “borrowed” have grown larger, experts have grown more nervous over the downward spiral of the dollar.
But the experts are confused. The world economy doesn’t work the way it used to.
Although central bank governors like Li fret about deficits, it is more useful to focus on the concept of “interdependence,” or as economist Catherine Mann of Washington’s International Institute of Economics calls it: “codependence.” Either term can be used to describe a global economy that for more than a decade has been reliant on selling goods to one big customer: the United States.
“To an inordinate degree,” Mann says, “all countries and regions in the rest of the world have depended on net exports to the United States for economic growth.”
In the last 10 years, U.S. imports of goods and services have risen 67%, reaching $1.5 trillion last year. But exports have gone up only 29% to a little more than $1 trillion.
Was this because U.S. producers were uncompetitive? Not at all. It was because potential customers of American goods have not expanded their economies. Japan’s has sputtered for more than a decade. The European Union, now 25 countries with a combined market comparable to that of the United States, has had scarcely any growth. And it is likely to remain stalled as long as the higher euro makes its products less competitive.
Without a doubt, playing the role of big customer to the world has changed the U.S. economy. Manufacturing jobs have disappeared, but the nation has adapted and created other jobs, many geared to foreign trade. The economy is strong today, with forecasts of 4% growth in the year ahead -- which would add $500 billion in goods and services to U.S. living standards.
Some U.S. companies that struggled to compete in the 1980s are now doing well all over the world. Manufacturers such as Cummins Inc., a maker of truck engines and power generators, and Caterpillar Inc. and Deere & Co., makers of construction equipment and farm gear, are having buoyant success practically everywhere. Caterpillar, for example, saw sales rise 48% in Asia in the last year, compared with 40% in North America.
“Changes in currency no longer affect us as much,” says Cummins spokesman Mark Land, because the company has factories in many countries where it sells its products and, consequently, uses local currencies.
The world economy has changed since the 1980s, yet fluctuations in currencies and concerns about trade and budget deficits go on.
Just the other week, Federal Reserve Chairman Alan Greenspan added his significant voice to the world’s worriers. If U.S. trade and government budget deficits continued for years ahead, Greenspan said at a conference in Berlin, investors would “seek higher dollar returns” -- meaning higher interest rates on U.S. bonds, thereby hurting the U.S. economy.
So what is really likely to happen after the present squall of anxiety eases?
Currencies, for one thing, will settle down. When traders who are moving money into euros “see so little economic growth in Europe,” funds will move back into dollars, economist Mann predicts. Indeed, last week the president of the Organization of the Petroleum Exporting Countries gave the greenback a vote of confidence by saying the cartel would not adopt the euro to replace the dollar as the currency for oil sales.
China-U.S. trade will continue to grow. Even a 10% revaluation of China’s yuan next year wouldn’t have much effect on the trade deficit. Producers in China who want to sell in the U.S. market will absorb small currency increases instead of raising prices.
In any case, many of the products coming from China are not “exports” in the classic sense of the word. Some are the result of collaborations -- toys or clothes, for example, designed in Southern California, produced in China and then “imported” here.
The real problems facing the world are long term. Europe and Japan must open their economies to take in more of the goods of China, India and other emerging countries. And the United States must correct its budget deficits.
If those challenges are met, global trade will be more balanced and the U.S. dollar and economy will be seen again as towers of strength rather than sources of anxiety and confusion.
James Flanigan can be reached at jim.flanigan @latimes.com.