A Dangerous Imbalance

April 28, 2005

Mark Weisbrot
International Herald Tribune, April 28, 2005

In 2004, the U.S. trade deficit came in at a record 5.3 percent of GDP. Over the last three months, it is running at about 6 percent of GDP. The data from February broke another record.

Clearly this cannot go on indefinitely. If the U.S. trade deficit were to simply stay where it is, within 19 years America’s net foreign debt would exceed the entire value of its stock market. That will not happen. Instead, the dollar will inevitably fall further, until U.S. foreign borrowing stabilizes at a sustainable level.

U.S. officials seem to be in denial about all of this.

“We view these figures as an affirmation that we’re growing faster than our trading partners by as much as 2 percent, and we need them to take steps so they can grow and buy our products,” Rob Nichols, the spokesman for Treasury Secretary John W. Snow, said recently.

But increased economic growth on the part of America’s slower-growing trading partners – mainly Europe and Japan – cannot come close to solving the problem. If these countries had grown 2 percentage points faster annually over the past five years, the U.S. trade deficit today would only be $45 billion to $60 billion less. It would still be over $600 billion.

So the dollar will have to fall, and if U.S. officials wanted to help solve this problem, they would be talking it down, instead of trying to wear the U.S. trade deficit as a badge of honor. Or they could try to arrange, with other countries, an orderly decline of the dollar.

Of course this adjustment will cause disruption for developing countries dependent on exports to the United States, since every dollar of earnings will cover less of their costs at home.

Global textile quotas also ended in January, meaning that China will displace many developing countries that previously had some space reserved for them in the United States and other rich country markets. Chinese exports of textiles and apparel to the United States surged in January.

This is a one-two punch for many developing countries, from Central America to Southern Africa to Bangladesh. Millions of their jobs are at risk just from the end of the quotas.

These kinds of miscalculations and strategic missteps are often wrongly attributed to “free trade” or “free market” excesses on the part of policy makers and international institutions. But these labels misrepresent the problem.

The Group of 7 countries, and the institutions that they control – for example the IMF, World Bank and WTO – have not, on balance, succumbed to the play of market forces. Rather they have promoted a whole set of specific economic policies – including fiscal, monetary and exchange rate policies, export-led growth, liberalization of international trade and capital flows – and sometimes even specific industries and agricultural crops.

They have also rewritten the rules of global commerce in ways that significantly restrict international trade and competition, at enormous cost to developing countries – for example, in the case of patent and copyright protection.

The lack of preparation for the expiration of textile quotas is evidence that these economists and institutions did not plan very well. The over-dependence on an unsustainable expansion of the U.S. import market is another indication of bad economic development planning.

Unfortunately, this latter mistake is ongoing. Washington continues to encourage its Latin American trading partners, and others, to make more costly concessions in return for access to a U.S. market that will actually shrink – measured in non-dollar currencies – over the next decade.

Of course the most obvious mark of economic failure is the sharp decline in economic growth in the vast majority of low- and middle-income countries outside of Asia over the last 25 years. Income per person in Latin America, for example, has grown by only about 12 percent in the last 25 years. In just 20 before that (1960-1979), it grew by 80 percent.

It seems that most developing countries grew faster when their own governments had more say in development planning, and international institutions had less. Governments were often corrupt or inefficient, and they made mistakes. But their mistakes appear to have been less costly than today’s conventional wisdom, from the point of view of economic growth and development.

Mark Weisbrot is co-director of the Center for Economic and Policy Research.

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