�Bloated Trade Deficit and Weak Dollar Delusions� - theTrumpet.com
�Bloated Trade Deficit and Weak Dollar Delusions� - theTrumpet.com
Bloated Trade Deficit and Weak Dollar Delusions
By Fred Dattolo Thursday, August 25, 2005
U.S. imports are shattering records, including foreign oil. Here's why a weak dollar isn't going to solve the problem.
On August 12, the U.S. Department of Commerce released the June figures for international trade of goods and services. It was not good news for America. Compared to May, June exports were virtually unchanged at $106.8 billion—but imports surged more than $3.4 billion to $165.6 billion, resulting in a trade deficit with the rest of the world of $58.8 billion. Just for the month of June, the U.S. deficit with Europe was $12.8 billion; with Japan, $6.9 billion; with Canada $5.4 billion and with Mexico, a record high of $4.8 billion.
Two other records that were shattered are particularly noteworthy. The trade deficit with China, at $17.6 billion, broke new ground for a single month. Moreover, America’s bill for foreign crude oil and related petroleum products jumped 10 percent in just one month and hit an all-time high of $19.9 billion. Neither trend bodes well for America’s future.
Oil prices have soared since June and will undoubtedly aggravate the trade deficit even more in coming months and years. Meanwhile, in a move encouraged by most American fiscal policy makers, the Chinese unpegged their currency (the yuan) from the dollar and allowed it to appreciate only a little, for now. Theoretically, a stronger yuan will make American goods relatively cheaper on the world market, increase exports and thus improve the trade deficit. However, a weak dollar policy is, at best, short-sighted. While it might boost exports a little, it will fail to substantially improve the trade deficit, and there are several reasons for that.
First, foreign competitors are reluctant to raise prices to offset the declining dollar. They would rather lower profit margins and hang on to market share. The Japanese company Toyota is a case in point—it actually increased its U.S. market share while the Japanese yen appreciated roughly 15 percent against the dollar in the last three years.
Secondly, the U.S. sector with the largest trade deficit is consumer goods—everything from toys to clothing. American manufacturers have largely shut down or moved out of the country. A weaker dollar won’t bring them back. Moreover, 42 percent of all U.S. trade activity last year occurred between divisions of large multinational enterprises, including U.S. companies that have relocated operations outside the U.S. and sell back into the U.S. market. For example, over 60 percent of both German and Mexican imports are from U.S. companies operating in those countries. The fluctuation of exchange rates is not the primary driver in such “related party” trades.
Besides that, Asian cultures have a propensity to save, which makes the demand for U.S. products relatively weak. The Chinese, for example, have a savings rate that is equivalent to about 40 percent of their gdp. On the other hand, the U.S. personal savings rate has now dropped to zero! The trade deficit, many economists teach, is a symptom of this imbalance in savings. In the U.S., a lack of savings inhibits investment directed toward producer plant and equipment. And the federal government compounds the problem by running a budget deficit. A weaker dollar will not appreciably change imbedded cultural tendencies in Asia to save. It could however, slow down Americans’ voracious appetite for foreign goods. But to what degree?
The cost of an imported item includes the import price plus “local value added” costs such as transportation, distribution, marketing, related labor, rent, utilities, etc. For example, Mattel produces Barbie dolls in China for about $1—the import price. After value-added costs and profit margin are tacked on, they sell for about $10. Even if the Chinese yuan appreciated by 50 percent against the dollar, that would raise the import price of a Barbie doll by 50 cents—to $1.50 from $1.00. That in turn would raise the selling price to $10.50 from $10, if the profit margin was not reduced to keep the price down. But that’s not all. A stronger yuan would mean that China would pay less for the doll’s components—plastic resins from Taiwan and nylon hair from Japan. So even with a much weaker dollar, the price increase would be negligible! And studies indicate that “Barbie” is typical of U.S. imports.
Finally, the trade deficit has grown so huge that it is a mathematically daunting challenge to bring it into balance. So far this year (through June), U.S. exports amount to $628 billion but imports total $971 billion—a trade deficit of $343 billion in just six months of trade. The deficit is now equal to 55 percent of our exports! That means that exports would have to grow at a 55 percent faster clip than the percentage increase in imports, to prevent the current trade gap from getting bigger and bigger! As we’ve seen, a weaker dollar is nowhere near the remedy to make that happen (unless it dramatically collapses).
For these reasons and more, Washington’s desire to weaken the dollar against the yuan or any other currency, in hopes of shrinking the trade deficit, is at the very least, a misguided effort. More importantly, a weakened currency could very well hasten the fall of the U.S. dollar as the world’s reserve currency (see Economist, “The Passing of the Buck?” Dec. 2, 2004). Should that happen, the U.S. economy could be devastated.
Nevertheless, it is currently in vogue and politically expedient to blame China and its undervalued currency for America’s lack of strategic vision and fortitude in managing its exports and its reckless spending habits as pertains to imports.
It might sound old-fashioned in our high-tech world overflowing with all kinds of alluring gadgets, garments and gizmos, but God’s Tenth Commandment, “Thou shalt not covet,” is as much a part of His inexorable law as the rest of the commandments. If we break it, it will break us. As a nation, we are breaking it big time.
Bloated Trade Deficit and Weak Dollar Delusions
By Fred Dattolo Thursday, August 25, 2005
U.S. imports are shattering records, including foreign oil. Here's why a weak dollar isn't going to solve the problem.
On August 12, the U.S. Department of Commerce released the June figures for international trade of goods and services. It was not good news for America. Compared to May, June exports were virtually unchanged at $106.8 billion—but imports surged more than $3.4 billion to $165.6 billion, resulting in a trade deficit with the rest of the world of $58.8 billion. Just for the month of June, the U.S. deficit with Europe was $12.8 billion; with Japan, $6.9 billion; with Canada $5.4 billion and with Mexico, a record high of $4.8 billion.
Two other records that were shattered are particularly noteworthy. The trade deficit with China, at $17.6 billion, broke new ground for a single month. Moreover, America’s bill for foreign crude oil and related petroleum products jumped 10 percent in just one month and hit an all-time high of $19.9 billion. Neither trend bodes well for America’s future.
Oil prices have soared since June and will undoubtedly aggravate the trade deficit even more in coming months and years. Meanwhile, in a move encouraged by most American fiscal policy makers, the Chinese unpegged their currency (the yuan) from the dollar and allowed it to appreciate only a little, for now. Theoretically, a stronger yuan will make American goods relatively cheaper on the world market, increase exports and thus improve the trade deficit. However, a weak dollar policy is, at best, short-sighted. While it might boost exports a little, it will fail to substantially improve the trade deficit, and there are several reasons for that.
First, foreign competitors are reluctant to raise prices to offset the declining dollar. They would rather lower profit margins and hang on to market share. The Japanese company Toyota is a case in point—it actually increased its U.S. market share while the Japanese yen appreciated roughly 15 percent against the dollar in the last three years.
Secondly, the U.S. sector with the largest trade deficit is consumer goods—everything from toys to clothing. American manufacturers have largely shut down or moved out of the country. A weaker dollar won’t bring them back. Moreover, 42 percent of all U.S. trade activity last year occurred between divisions of large multinational enterprises, including U.S. companies that have relocated operations outside the U.S. and sell back into the U.S. market. For example, over 60 percent of both German and Mexican imports are from U.S. companies operating in those countries. The fluctuation of exchange rates is not the primary driver in such “related party” trades.
Besides that, Asian cultures have a propensity to save, which makes the demand for U.S. products relatively weak. The Chinese, for example, have a savings rate that is equivalent to about 40 percent of their gdp. On the other hand, the U.S. personal savings rate has now dropped to zero! The trade deficit, many economists teach, is a symptom of this imbalance in savings. In the U.S., a lack of savings inhibits investment directed toward producer plant and equipment. And the federal government compounds the problem by running a budget deficit. A weaker dollar will not appreciably change imbedded cultural tendencies in Asia to save. It could however, slow down Americans’ voracious appetite for foreign goods. But to what degree?
The cost of an imported item includes the import price plus “local value added” costs such as transportation, distribution, marketing, related labor, rent, utilities, etc. For example, Mattel produces Barbie dolls in China for about $1—the import price. After value-added costs and profit margin are tacked on, they sell for about $10. Even if the Chinese yuan appreciated by 50 percent against the dollar, that would raise the import price of a Barbie doll by 50 cents—to $1.50 from $1.00. That in turn would raise the selling price to $10.50 from $10, if the profit margin was not reduced to keep the price down. But that’s not all. A stronger yuan would mean that China would pay less for the doll’s components—plastic resins from Taiwan and nylon hair from Japan. So even with a much weaker dollar, the price increase would be negligible! And studies indicate that “Barbie” is typical of U.S. imports.
Finally, the trade deficit has grown so huge that it is a mathematically daunting challenge to bring it into balance. So far this year (through June), U.S. exports amount to $628 billion but imports total $971 billion—a trade deficit of $343 billion in just six months of trade. The deficit is now equal to 55 percent of our exports! That means that exports would have to grow at a 55 percent faster clip than the percentage increase in imports, to prevent the current trade gap from getting bigger and bigger! As we’ve seen, a weaker dollar is nowhere near the remedy to make that happen (unless it dramatically collapses).
For these reasons and more, Washington’s desire to weaken the dollar against the yuan or any other currency, in hopes of shrinking the trade deficit, is at the very least, a misguided effort. More importantly, a weakened currency could very well hasten the fall of the U.S. dollar as the world’s reserve currency (see Economist, “The Passing of the Buck?” Dec. 2, 2004). Should that happen, the U.S. economy could be devastated.
Nevertheless, it is currently in vogue and politically expedient to blame China and its undervalued currency for America’s lack of strategic vision and fortitude in managing its exports and its reckless spending habits as pertains to imports.
It might sound old-fashioned in our high-tech world overflowing with all kinds of alluring gadgets, garments and gizmos, but God’s Tenth Commandment, “Thou shalt not covet,” is as much a part of His inexorable law as the rest of the commandments. If we break it, it will break us. As a nation, we are breaking it big time.
posted by Marcel at 3:31 AM
0 Comments:
Post a Comment
<< Home