Thursday, June 19, 2003

Truly amazing. The 2003:I current account deficit rose to an all-time high of $136.1bn, a 5.8% jump over 2002:IV. Goods imports rose over $6bn while goods exports rose just $2.5bn, and the services surplus actually fell as US services exports dropped $0.7bn and services imports rose $1bn. And this in the midst of a falling dollar. US exports (including goods and services) are up from the pits of late 2001, but still have not recovered to early 2001 levels.

A completely foolish exchange in the New York Times today sums up the level of thinking in "free trade" circles:
The Bush administration believes the way to deal with swelling trade deficits is for other countries to remove trade barriers, rather than raising barriers to imports coming into the United States. That would allow U.S. companies to more freely do business in overseas markets, thus boosting America's global competitiveness, the administration says.

But critics say growing deficits are proof that the administration's free-trade policies aren't working. U.S. companies have moved operations overseas, while imports flood into the United States, a combination that has cost millions of lost American manufacturing jobs.
This ridiculousness of this 'debate' is tempered only by the frightening seriousness of the consequences of failing to have a meaningful discussion on the position of the US in the global economy. The United States cannot improve its external position through free trade agreements because trade barriers are not the cause of this trouble. The US has since the early 1980s been a structural importer and no amount of tweaking trade agreements or twisting arms in the WTO is going to change that. Both Republicans and Democrats have since the 1980s actively sought to destroy the US manufacturing base, and these current account deficits are proof of their success.

The flip side is that "fair trade" a la Dick Gephardt is not going to change things either, because again the diagnosis of the cause of these imbalances is completely wrong. While Gephardt and some few others actually care about manufacturing jobs, the vast majority of the power elite whether in the Republican or the Democratic camp simply do not.

The result is that in 2003:I, the US current account deficit as a percentage of GDP hit 5.7%! Back in 2000, the IMF boldly stated:
the United States cannot live beyond its long-term means forever, nor will U.S. assets always be so favored by global investors. At current exchange rates and assuming a resumption of sustained growth in the world economy, by 2005 the current account deficit will be about $600 billion�more than 5 percent of GDP. This is both a large volume of assets, in dollar terms, that the United States is offering to international investors, as well as an unprecedented (for the United States) share of GDP. To avoid a sustainability episode in the future, it is critical that structural reforms start now.
Truly stunning how sanguine that outlook appears now in hindsight. The US didn't take 5 years but only three to push the $600bn threshhold, and less than that to jump the 5% GDP hurdle. How long until the day of reckoning? How long?


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