Magazine article Insight on the News

Big Trade Deficit Is Bleeding U.S

Magazine article Insight on the News

Big Trade Deficit Is Bleeding U.S

Article excerpt

After 65 years of plains based on the views of ardent, internationalist traders, the sealing trade deficit threatens to undermine the prosperity of United States.

Treasury Secretary Robert Rubin, in a speech about the U.S. trade deficit, bluntly has told the International Monetary Fund, or IMF, "This situation cannot continue indefinitely.... Japan and Europe must boost domestic demand-led growth." The day before, talking to the more private Group of Seven finance ministers, he went into even more pointed detail with a warning that concluded: "The whole world's economy is depending too much on selling to the United States. If the other major nations want to keep protectionist forces here from gathering steam, they need to make sure their own economies get back to growth in order to take some of the pressure off our ballooning trade deficit."

It is serious business when words such as these are exchanged, and it has been mightily provoked. This year's U.S. red ink in trading with the outside world clearly will far exceed 1998's $169 billion, already a deeply worrisome figure. And Fred Bergsten, director of the Institute for International Economics, calls this "the biggest single threat to our economy, which could lead to a plunge in the dollar's value and a big sell-off in stocks and bonds." If Bergsten were a certified protectionist or an enemy of globalization, that might be a routine remark. But coming from a former U.S. Treasury official and well-known supporter of free trade, this is a wakeup call. "We know the dollar will fall at some point," he stresses, "because every time in history there have been big imbalances of this type, the fundamentals have always prevailed."

The mounting excess of U.S. importing over the amounts we are able to export, reaching new records with every report, are putting some $20 billion more into foreign hands each month. IMF projections show it could amount to another third of a trillion dollars in 1999, added to the already shocking figure from 1998. And no matter how sound a currency may be, an excess supply is sure to cheapen it, to cause the foreign holders to dump it at some point.

But although the G-7 officials seemed to respond to Rubin by commenting in a joint statement about the need for "more balanced growth among our countries to reduce external imbalances," the significant point is that they gave no sign of knowing how to achieve that. After long badgering Japan to make itself more of a market for the ailing countries of Asia, Rubin lately also urged Europe to create more jobs so it could help the United States absorb more of the world's overproduction. Japan already has cut interest rates nearly to zero and mounted large public-spending programs, and the new European Central Bank insists it has done its part with a recent interest-rate cut.

The United States, meanwhile, is fearful that troubled areas are headed for even slower business in the months ahead, sending still more products into our market. It is clear that the statements of agreement are papering over a great division among the capitals.

As a result, lots of forces are at work to make the United States retreat from more than a half-century of freer-trade policy. Some are from separate industries that press Congress to protect their interests; others are from experts who look at the overall picture and warn that the decades-long string of huge deficits is building a sharp backlash. The effect of all these forces on the administration are reflected in President Clinton's moves to protect the steel industry against a flood of imports. They are even more broadly significant in Rubin's tougher talk.

But even if it wanted to pull back from the total commitment to more and more free trade, the administration is trapped in a classic catch-22. Robert Shapiro, undersecretary of commerce for economic affairs, says, "This is a time when prosperous American consumers and businesses keep buying while our customers abroad are struggling and buying less." On top of the long string of deficits, in other words, there is now the predictable situation in which one prosperous giant, the United States, is a ready-made market for others who are pressing to sell their way out of trouble.

All of which leads Gordon Richards, economist at the National Association of Manufacturers, or NAM, to say flatly: "I can't predict what our government is going to do, but I can tell what would happen if it should make any substantial protectionist moves at this time when the rest of the world needs to sell more, not less. We would pinch off many of the recoveries in places abroad and seriously aggravate their recessions, which would, of course, impact our prosperity. Even in a weakened condition, those trading partners could and would retaliate by buying even less from us. So we might bring back that sense of global crisis that gripped us last year."

Thus, to prevent a panic attack in dozens of countries, the administration has to deny that it has any thought of turning away from free trade. It even enlisted the prestigious Federal Reserve chairman, Alan Greenspan, to speak out against protectionism as "unwise and surely self-defeating." Significantly, however, his statement dwelled on the fact that free trade enhances standards of living, without getting into the looming threat to currency values and stock prices.

The problem is not just momentary, it is deep-rooted. Even before last year, four decades of red-ink trade figures had convinced many believers in openhanded trade policies that the hoped-for reciprocity from our trading partners wasn't even visible on the horizon. Then came 1998 and the collapse of most Asian economies.

As the White House request for fast-track authority to negotiate new trade agreements with less congressional intrusion got into trouble on Capitol Hill, some of the old voices still insisted that "protectionism" was the enemy. But too many separate groups were involved to make that explanation stick. In addition to labor lobbyists and other liberals, there also were GOP legislators whose constituents were complaining about the ballooning increase of imports, and there even were warnings by well-known Washington economists who formerly had been eager for globalization and unfettered trade. No single label fitted them all. The closest thing to a common denominator was that they all realized the system wasn't balancing joy and pain the way it was supposed to.

Last year also brought to light studies revealing that all the business favors the United States handed out to developing nations weren't raising living standards in those places as the experts had expected. Far from improving wages and conditions for workers as the experts had half-promised when trade treaties were made, their local governments and entrepreneurs hadn't passed along benefits to the employees. That tends to kill the longtime hope that those foreign workers would develop enough affluence to buy more U.S. wares, nudging our trade numbers into better balance.

And most of all, 1998 brought the Asian shock -- the almost overnight disappearance of booms that had become part of the effervescent world economy. With Japan in the doldrums and Europe fighting double-digit unemployment, what nation was going to be the "locomotive" that would start to pull these countries out of the quagmire by buying more of their goods? The United States, of course. Selling to the United States became the only game in town.

This already is a major issue in Congress, where there is no neat division into "protectionists" and "free traders." Even within the parties, there is no clear demarcation. The great majority will admit that there is a problem, but they divide on the causes and especially on the remedies. Still, some observers see Congress divided into three distinct groups.

The ardent supporters of free trade insist on ignoring the deficits and pushing ahead with the old policies. They are fighting a rear-guard action. Their view that our current prosperity proves the merits of internationalism is dealt a blow with each new report of another record deficit in our trade balance or sign that American families simply are using their credit cards to the max to buy great quantifies of foreign goods.

On the other side, openly protectionist views, such as those of commentator and presidential candidate Patrick Buchanan, again are attractive to a good many in Congress. And the words of lobbyists such as Robert E. Swift, executive director of the Crafted With Pride in U.S.A. Council, are finding their way into legislators' remarks and newsletters. Swift, a leading defender of the battered garment workers, who have lost 700,000 jobs in the 1990s, says: "Although the U.S. openly practices free trade, what other nation does? Certainly no other nation practices free trade! Why, then, should the United States -- and who is going to take care of us if the United States doesn't? If your house is about to be robbed or your wife is about to be raped, would you protect them? Our manufacturing base is being robbed and our industry is being raped."

Meanwhile a new middle way is gaining ground, for it appears to wave a smaller flee-trade flag while setting up tougher conditions that might impede the import flood. Headed by House Minority Leader Dick Gephardt of Missouri and strongly supported by Democratic Rep. Barney Frank of Massachusetts, House members who have been called "international new dealers" say they are believers in a growing global market, but only if the United States insists that foreign countries give their workers the unrestricted right to unionize for better wages and working conditions. "We must also demand real follow-through on the president's words about attacking `abusive child labor' and we'll insist on far more care of the environment in nations that want access to our markets" says Gephardt.

Clinton has seemed to shift toward this approach. In his State of the Union address -- in which upbeat tones had to be the only sound amid an impeachment trial -- he inserted some spin which, while sounding positive, actually was an early hint that his own position was shifting. He talked about "finding common ground" on trade that "has divided us too long." And he talked about the "rights of workers" and the environment -- points that increasingly had been demanded by critics of our trade policies but always were rebuffed before.

The mostly liberal proponents of this emphasis on workers' rights believe that it would make a genuine humanitarian difference, while also helping U.S. firms by forcing higher costs on their competitors in other countries. There have been attempts for years to make U.S. negotiators put such conditions into our trade treaties. But the attempt never was very intensive on anybody's part, the follow-through almost was nonexistent and the results have been zero.

The new emphasis on these aspects of our foreign trade presumably would involve more follow-up, and perhaps the executive branch would be forced to report to Congress on how well the promises were being kept. While the number of members committed to this approach is not yet clear, the fact that the administration has been backed into working along the same line gives it a good chance of mounting a viable effort.

Even the apparently lost cause of giving the president fast-track authority could become a possibility if it commits him to negotiate for a reduction of our trade deficit rather than more of the old giveaway approach. But this could be a hard sell because the congressional distrust of Clinton colors everything. For example, the administration's current trade negotiations with China are far less ham-fisted than Congress thinks the situation calls for. Many members wonder why we can't virtually dictate terms to a country that is fattening off a trade deficit with us to the tune of some $60 billion annually.

Looking back at how the situation has been handled, objective observers with no single industry's ax to grind tell Insight it is not only our trade policies that have been to blame for the massive deficits. They insist that the policies have been undercut by poor policing of deals after they are made. Greg Mastel of the nonpartisan Economic Strategy Institute says, "We have been very bad at enforcing agreements. There are probably hundreds of cases of countries not complying, but unless an industry has the time and money to document and pursue a complaint, it doesn't get done"

Enforcing the quota limitations on some imported products, for example, depends on the Market Access and Compliance unit in the Commerce Department. Because of budget cutting, its staff has been chopped by a third during the 1990s. As an example of how well this has paid off for foreign competitors, the policing of imports from Japan formerly was believed to require a minimum of 21 employees. That was trimmed to just eight. As a result, it is admitted openly that quotas set by treaty have been repeatedly and grossly exceeded. No one even dares to estimate how many millions of dollars worth of Japanese products have been admitted to the U.S. market over the limits. The government has saved millions of dollars in salaries but permitted hundreds of millions worth of illicit imports to come in, costing an uncounted number of American workers their jobs and the U.S. Treasury a great deal of tax income from U.S. companies that might have supplied those products instead of the Japanese.

That is only the Japanese example. The Chinese case will appear to be a misprint, but this is a fact: Only three employees are specializing in the review of imports from a country that will account for some $60 billion of the U.S. trade deficit this year.

Few of the observers that Insight has talked with see the "third way" that Gephardt and Frank are pushing as a cure for a problem as big as the United States now faces. If it had been started years ago, it might have made some difference by now. But they doubt that even the toughest pressure on other countries could change their labor costs and product prices enough to cure them of relying on dangerously high sales into our market. Moreover, its effects would take years to show up -- nothing that would pinch off the present danger from this huge dollar glut overseas.

Regrettably, one other positive note also has a long-term ring to it. NAM economist Richards points out that the present bulge in our trade deficit should shrink when our prosperity settles back to a more normal economic performance. "Nobody seems to look back and see how our deficit declined in two fairly recent periods when our economic cycle was in transition -- around 1980 and 1991" he says. "Even if we don't undergo a serious setback but manage a soft landing at sustainable growth and stock-market levels, it should bring the deficit way down, ,provided that our main trading partners have good growth at that time."

Meanwhile, there will be heated debate in Congress and aggressive tightrope-walking by the administration to appear responsive to special-interest groups while avoiding any protectionist signals that might shake foreign stock markets. None of this will subdue the high fever of a global economy with a very serious international ailment. No matter what great levels the stock markets here and abroad may enjoy, the world is in day-to-day danger when so many countries can't afford to buy enough of what they produce -- and so depend on the United States as their "market of last resort."

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