Trading Down: It's Not Whether Record Trade Deficits Will Become a Full-Blown Currency Crisis. It's When

Article excerpt

WHILE IT IS STILL UNCLEAR HOW LARGE THE TRADE problem will loom in the presidential election, there is surely plenty to be worried about. On several occasions under George W. Bush, the monthly trade deficit has exceeded the total annual deficit--$41 billion--in the entire last year of his father's administration. Of course, Bush Junior cannot be blamed entirely for the deterioration. In reality, most of it occurred under Bill Clinton. But even compared with the record trade deficit in Clinton's last year in office, last year's ran about 20 percent higher.

In fact, figures soon to be released are expected to show that in 2003 the U.S. account for the first time topped the psychologically important 5-percent level. This was the worst performance since American economic statistics were first compiled in the 19th century. By comparison, the notorious U.S. trade crisis of 1971-72 was a mere blip: The trade deficit in 1972, approximately o.5 percent of the gross domestic product, was less than one-tenth of the current level. In truth, America's current trade position is a time bomb that sooner or later will explode--with devastating political consequences for whichever luckless soul happens to occupy the Oval Office at the time.

Media interest in the trade story took a dive during the euphoria of the dot-tom bubble. Although the media interest has yet to fully recover, several key economic observers are sounding the alarm. MIT economist Lester Thurow, for instance, has suggested that the trade deficits are setting the scene for an eventually devastating currency crisis. In a new book, Fortune Favors the Bold, he argues that without careful handling, the dollar could plunge by half, propelling the global economy into a 1930s--style depression. Also publicly fretting is billionaire investor Warren Buffett. In an article in Fortune last fall, he proposed a complicated import-control system in which importers would bid in at public auctions for special permits to buy from abroad. For all this system's free-market fancy dress, its impact on U.S. trade would be virtually indistinguishable from that of an across-the-board tariff.

Thurow and Buffett are, of course, liberals whose views the Bush White House can readily discount. But prominent conservatives are also joining the clamor. A standout in this regard has been CNN's Lou Dobbs. Once seemingly prepared to accept mass layoffs as a necessary price for the benefits of globalism, Dobbs has in recent months emerged as perhaps the most trenchant critic of what free trade has done to the American manufacturing sector. Even Henry Kissinger has obliquely criticized the worsening trade trend. In a comment last summer, he suggested that a nation that has lost its manufacturing base cannot long remain a world power.

"The question really is whether America can remain a great power or a dominant power if it becomes primarily a service economy, and I doubt that," Kissinger said in an India Financial Express article that appeared in July 2003. "l think that a country has to have a major industrial base in order to play a significant role in the world."

Sensing President Bush's vulnerability, the Democratic presidential contenders have also hardened their rhetoric on trade recently. In the words of veteran trade hawk Pat Buchanan, they are all "beginning to sound like Pat Buchanan now."

BY ALL WORLD STANDARDS, AMERICA'S TRADE DEFICITS are stunningly out of line. An analysis of six major economies--the United States, Japan, Germany, France, Britain, and Italy--shows that it is generally only during or immediately after a war that rich nations have incurred trade deficits even remotely comparable to America's recent performance, Indeed, history records only one previous case of a major nation running a trade deficit of more than 5 percent of the GDP. This was Italy in 1924--hardly an auspicious precedent. In recent years, the consensus both on Wall Street and in the media has been that the trade deficits "don't matter. …