Monday, the Commerce Department
reported the 2007 current account deficit was $738.6 billion, down from $811.5
billion in 2006. The deficit exceeded 5.3 percent of GDP. The fourth
quarter deficit was $172.9 billion.
The current account is the broadest measure of the U.S. trade balance. In addition to
trade in goods and services, it includes income received from U.S. investments abroad less payments to
foreigners on their investments in the United States.
In the 2007, the United
States had a $106.9 surplus on trade in
services and a $106.9 billion surplus on income payments. This was hardly
enough to offset the massive $815.9 billion deficit on trade in goods, and net
unilateral transfers to foreigners equal to $104.4 billion.
The huge deficit on trade in goods is mostly caused by a combination of an
overvalued dollar against the Chinese yuan, a dysfunctional national energy
policy that increases U.S.
dependence on foreign oil, and the competitive woes of the three domestic
automakers. Together, the trade deficit with China and on petroleum and
automotive products total at least 100 percent of the deficit on trade in goods
and services.
To finance the current account deficit, Americans are borrowing and selling
assets at a pace of $600 billion a year. U.S. foreign debt is about $6.5
trillion. At 5 percent interest, the debt service would come to about $2000 a
year for every working American.
The current account deficit imposes a significant tax on GDP growth by moving
workers from export and import-competing industries to other sectors of the
economy. This reduces labor productivity, research and development spending,
and important investments in human capital. In 2007 the trade deficit is
slicing about $250 billion off GDP, and longer term, it reduces potential
annual GDP growth to about 3 percent from about 4 percent.
Financing the Deficit
The current account deficit must be financed by a capital account surplus,
either by foreigners investing in the U.S. economy or loaning Americans
money. Some analysts argue that the deficit reflects U.S. economic strength, because
foreigners find many promising investments here. The details of U.S. financing
belie this argument.
U.S. investments abroad were
$ 1,206.3 billion, while foreigners invested $1,863.7 billion in the United States.
Of that latter total, only $204 billion or 11 percent was direct investment in U.S. productive
assets. The remaining net capital inflows were foreign purchases of Treasury
securities, corporate bonds, bank accounts, currency, and other paper assets.
Essentially, Americans borrowed or sold off real estate and other assets of
about $600 billion to consume about 5.3 percent more than they produced.
Foreign governments loaned Americans $412.7 billion or 3 percent of GDP. The
Chinese and other governments are essentially bankrolling U.S. consumers,
who in turn are mortgaging their children’s income.
The cumulative effects of this borrowing are frightening. The total external
debt now is about $6.5 trillion. The debt service at 5 percent interest,
amounts to $2000 for each working American.
The Chinese government alone holds enough U.S.
and other foreign reserves to purchase about 10 percent of the shares of all
publicly traded U.S.
companies. The U.S.
trade deficit is the primary driver behind this phenomenon.
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 percent higher in industries that export and
compete with imports, and reducing the trade deficit and moving workers into
these industries would increase GDP.
Were the trade deficit cut in half, GDP would increase by about $250 billion or
more than $1700 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
recession and recovery, the manufacturing sector has lost 3.6 million jobs
since 2000. Following the pattern of past economic recoveries, the
manufacturing sector should have regained 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 one percentage
point a year, and the trade deficits of the last two decades have reduced U.S.
growth by one percentage point a year.
Lost growth is cumulative. Thanks to the record trade deficits accumulated over
the last 10 years, the U.S.
economy is about $1.5 trillion smaller. This comes to about $10,000 per
worker.
Had the Administration and the Congress acted responsibly to reduce the
deficit, American workers would be much better off, tax revenues would be much
larger, and the federal deficit could be eliminated without cutting spending.
The damage grows larger each month, as the Bush administration dallies and
ignores the corrosive consequences of the trade deficit.
Peter Morici is a professor at the University
of Maryland School of Business and
former Chief Economist at the U.S.
International Trade Commission.
