The Deficit and Why it Won't Go Away

The headline in the Los Angeles TIMES recently screamed: TRADE GAP WIDENS TO MORE THAN $55 BILLION. "The larger than expected gap, fueled by surging oil prices and r3ecent imports from China, also suggested that U.S. economic growth may not be as strong as believed" (Sing C 1). There is no doubt that the maj0r cause of the trade deficit, since the 1980s has been the increased use of oil, for everything from more cars on the road to the use of plastics in so many more items. Also, one has to use the disheartening fact that, with child labor and sweatshop practices making textiles and other goods more attractive to American shoppers, more and more products are being imported from Asia. Most TV sets are now made in China or Taiwan. Most transistor radios and DVD players come from Asia. And, now, IBM will no longer make PCs, having sold its PC division to a Chinese company:

The problem with the enormous deficit is really two=-fold, as we move into 2005: First, the Iraq War is costing untold billions of dollars over what the US takes in in taxes. The unpopularity of the war, and the US government's action, has caused mistrust among many nations toward the U.S., which has caused severe weakening of the dollar. At week's end, the dollar was pegged at about 77C for the European currency, the euro. The fact is that the U.S. dollar "the world's most trusted currency, has been melting away for three years" (Kadlec 42). The weaker dollar ought top be a boon to American exporters who find their goods now much cheaper overseas than when the dollar was strong. But, even with an increase in exports, imports are still rising- especially oil, and so the overall effect does not help ease the trade deficit.

The deficit of more than $400 billion has also caused concern among nations, especially Japan and China, which hold enormous amounts of U.S. treasury bonds, whose value has been slipping to the point where these nations literally have to hold on to them. According to Kadlec (44) foreign-held investments in U.S. bonds are over $1.90 trillion. And, as the dollar falls, so do the values of these investments. "Shifting out of dollars could be dangerous for the global economy....triggering sharply higher interest rates in the U.S." (Kadlec 44). The fEd has now raised interest rates five times in the last six months, incidentally, to 2.25%.

How does the deficit and trade imbalance affect the business cycle? For American manufacturers, they are able to sell more to Europe and even to parts of Asia, because of the weakness of the dollar. But, as was stated earlier, there is still so much oil and other goods being imported, that, overall, the U.S. is not seeing a benefit, or a lowering of the trade imbalance. "Although experts in October grew to a record- thanks partly to the weak greenback, which made U.S. goods cheaper overseas- imports jumped even more" (Sing C 1).

It would seem naïve to suggest that the U.S. put an embargo on the goods that are flowing into the U.S. from either oil=producing nations or low-wage countries. "With imports 50% larger than exports, it will take a long time to correct this imbalance" (Sing C-10).

Of course, publicity campaigns, some sponsored by labor unions, have emphasized "Buy American", but the p[rice differential is just too great. Even Wal-Mart, the nation's leading retailer, has stopped advertising that it only sells American-made goods. It's just so much cheaper to buy goods made in Asia (in particular). The next poor statist5ic should come by this week's end, when the government releases third-quarter figures of current account deficits, which "was a record $6 billion in the second quarter" (Sing C 10).. What makes this account deficit and total trade imbalance so troublesome, combined with a record budget debt and the weak dollar, is the fact that American investors are now selling their American stocks and bonds and buying foreign "paper". There seems to be no reasonable short cut to reducing the deficits or somehow changing and improving the business cycles which both affect and are affected by enormous trade Imbalances and the weakening dollar.

WORKS CITED:

Kadklec, Daniel: "Wither the Dollar" TIME Magazine, December 20, 2004

Sing, Bill: "Trade Gap Widens to More than $55 Billion" Los Angeles TIMES, Wednesday, Dec. 15, 2004