The 2008 deficit on international trade in goods and services was $677.1 billion, down from $700.3 billion in 2007, but still 4.7% of GDP. The trade deficit was smaller in 2008 because economic growth and consumer spending began to decline during the second half of 2008.
Trade deficits and shoddy banking practices pushed the economy into recession, and until both trade and the banks are fixed, sustained economic growth cannot be accomplished. The trade deficit will rise again as the effects of the stimulus package are felt, but if its underlying causes are not addressed, the trade deficit will drag the economy back down into a double dip recession.
Pushed up by the surge in oil prices and the ballooning trade gap with China, the trade deficit is reducing U.S. GDP by $400 billion, annually, and significantly adding to the pain imposed by the unfolding recession. The negative effects of the trade deficit on GDP and employment overwhelm the potential positive effects of President Obama's proposed stimulus spending.
Anatomy of the Hemorrhaging Current Account
In 2008, the United States had a $144.1-billion surplus on trade in services. This was hardly enough to offset the massive $821.2-billion deficit on trade in goods.
The deficit on petroleum products was $386.3 billion, up from $293.2 billion in 2007. The average price for imported crude oil rose to $95.23 in 2008 from $64.28 in 2007, while the volume of petroleum imports fell 4.0%.
Also, the American appetite for inexpensive imported consumer goods and cars is a huge factor driving up the trade deficit. The trade deficit with China was $266.3 billion, a new record, and up from $256.2 billion in 2007.
The deficit on motor vehicle products was $107.1 billion. Ford (F) and GM continue to push their procurement offshore and cede market share to Japanese and Korean companies. However, the automotive trade deficit was down from $120.9 billion as Asian automakers continued to expand production in North America and demand for autos fell with the recession.
The trade deficit should ease in 2009 with lower oil prices and as the recession bears down on consumer spending. However, China is not permitting its currency to rise in value, despite its trade surplus, and has beefed up subsidies on its exports in an effort to export its unemployment to the United States and other industrialized countries. China's beggar-thy-neighbor protectionism threatens to ignite a global trade war of devastating proportions.
In 2010, as stimulus spending in the United States and elsewhere lifts economic activity, oil prices will surge and China's exports will rise above 2008 levels, thanks to an undervalued currency and larger export subsidies. That will push the trade deficit beyond its peak of 5.1% of GDP, and this may well pull the U.S. economy back into recession.
Dollars spent on imported oil and cars and consumer goods from China cannot be spent on U.S. goods and services, and every dollar that U.S. imports exceed exports negates at least one dollar of federal stimulus spending. Overall, the trade deficit overwhelms the positive effects of the Obama stimulus package on demand for U.S. goods and services, GDP and employment. Along with the banking crisis, the trade deficit is a primary cause of the U.S. recession.
The dollar remains at least 40% to 50% overvalued against the Chinese yuan and other Asian currencies. Although China adjusted the yuan from 8.28 per dollar to 8.11 in July 2005 and permitted it to rise gradually to 6.84 by July 2008, the value of the yuan has not changed since.
To sustain an undervalued currency in 2008, China purchased approximately $600 billion in U.S. and other foreign securities, creating a 40% subsidy on its exports of goods and services. Other Asian governments align their currency policies with China to avoid losing competitiveness to Chinese products in lucrative U.S. and EU markets.
Consequences for Economic Growth
High and rising trade deficits tax economic growth. Specifically, each dollar spent on imports that is not matched by a dollar of exports reduces domestic demand and employment and shifts workers into activities where productivity is lower.
Productivity is at least 50% higher in industries that export and compete with imports, and reducing the trade deficit and moving workers into trade-competing industries would increase GDP.
Were the trade deficit cut in half, GDP would increase by at least $400 billion, or about $2750 for every working American. Workers' wages would not be lagging inflation, and ordinary working Americans would more easily find jobs paying higher wages and offering decent benefits.
Manufacturers are particularly hard hit by this subsidized competition. Through the recent economic expansion and recession, the manufacturing sector has lost 4.6 million jobs since 2000. Following the patterns of past economic expansions, the manufacturing sector should have kept at least 2 million of those jobs, especially given the very strong productivity growth accomplished in durable goods and throughout manufacturing.
Longer term, persistent U.S. trade deficits are a substantial drag on growth. U.S. import-competing and export industries spend three times the national average on industrial R&D, and encourage more investments in skills and education than other sectors of the economy. By shifting employment away from trade-competing industries, the trade deficit reduces U.S. investments in new methods and products, and skilled labor.
Cutting the trade deficit in half would boost U.S. GDP growth by 1 percentage point a year, and the trade deficits of the past two decades have reduced U.S. growth by 1 percentage point a year. Lost growth is cumulative. Thanks to the record trade deficits accumulated over the past 20 years, the U.S. economy is about $3 trillion smaller. This comes to about $20,000 per worker.
Had Washington acted responsibly to reduce the deficit, American workers would be much better off, tax revenues would be much larger, and the federal deficit would be much smaller. The recession would be much less severe.
If the Obama administration relies on stimulus and bank reform alone, the economy will fall back into recession once the spending has run its course. A pattern of false recoveries, much as occurred during the Great Depression, will likely emerge. Conditions will not be as bad, but unemployment will stay at unacceptable levels.
