Third Quarter Current
Account Deficit Hits $196 Billion
and Is Destroying Millions of Jobs
By Dr. Peter Morici,
Professor of International Business
Today, the Commerce Department reported the U.S. current account deficit in the third quarter was $195.8 billion.
The current account is dominated
by the trade deficit for goods and
services, which was $182.8 billion
in the third quarter.
The trade deficit reduces the
demand for U.S.-made goods and
services, much like a tax increase
or government spending cut of
comparable size. Reducing the annual
trade deficit by half would create
as many as five million new jobs
over three years.
Manufacturing is particularly
hard hit. Lowering the trade deficit
would create nearly two million more
manufacturing jobs over three years.
An effective policy to lower the
trade deficit would particularly
benefit highly competitive U.S.
durable goods manufacturers such as
machine tools, industrial and
construction machinery, auto parts,
and electronic equipment.
Since 2000, three million
manufacturing jobs have been lost.
But for the growing trade deficit,
the economy should have regained
about two million manufacturing
jobs, mostly in R&D-intensive
durable goods industries.
Advocates of the Administration
trade policy argue that the current
account deficit is caused by foreign
investors finding U.S. business
opportunities so attractive.
However, 32 percent of the second
and third quarter current account
deficits were financed by foreign
governments, not private investors.
Foreign governments make these
purchases to keep the value of their
currencies low and subsidize their
U.S. Trade Representative Rob
Portman argues that a Doha Round
Deal will reduce the current account
deficit but any gains in service
exports will be overwhelmed by
additional agricultural imports.
Whatever gains are made on
manufacturing tariffs will have
little positive effect on the trade
deficit, as the U.S. admits more
labor intensive products like
textiles and furniture to gain more
exports of high-tech products like
turbines and sophisticated
communications equipment. Moreover,
as the experience with China
demonstrates, lower tariffs on
manufacturers do not always improve
the trade deficit, as governments
substitute performance requirements
on foreign investors, cheap bank
credit and undervalued currency to
limit manufactured imports and boost
Foreign government currency
manipulation is the largest cause of
the U.S. trade deficit. These
actions contribute to large U.S.
government deficits by lowering GDP,
wages and tax collections, and make
U.S. budget woes worse.
The Commerce Department reported
today that foreign government
purchases of U.S. dollars,
government securities and other
assets were $38.4 billion in the
third quarter. These purchases
artificially raise the value of the
dollar against foreign currencies,
and make U.S. exports needlessly
expensive in foreign markets and
imports artificially inexpensive at
Wal-Mart and other U.S. retailers.
Chinese government purchases of
dollars and other securities create
a 35 percent subsidy on China's
exports and are having a devastating
effect on U.S. workers with only a
high school education or only some
college or technical training.
Although the dollar has fallen
against the euro and other major
currencies, it continues strong
currencies--such as the Chinese yuan.
Since January 2002, the dollar is
down an average of 13 percent
against all currencies. The dollar
has fallen an average of 22 percent
against the euro and other
industrialized country currencies,
but it is up an average of about 0.2
percent against the Chinese yuan and
other developing country currencies.
Chinese monetary authorities
purchase dollars in foreign exchange
markets to keep the yuan pegged at
8.08 per dollar. Other Asian
developing country- governments
pursue similar, soft pegs by also
purchasing dollars. China's currency
policy compels them to do so lest
they lose sales in U.S. markets to
Were foreign governments to stop
manipulating their currencies, the
U.S. trade deficit would be cut by
Without more forceful efforts
from the Bush Administration to
persuade China and other Asian
exporters to stop manipulating
currency markets and subsidizing
their exports to the United States,
U.S. workers will continue to face a
tough job market and wages adjusted
for inflation will continue to
stagnate and fall.
import-competing and export
industries spend at least 50 percent
more on R&D and encourage more
investments in skills and education
than other sectors of the economy.
By shifting employment away from
these trade-competing industries,
the trade deficit is reducing U.S.
investments in knowledge-based
industries and skills, and slashing
more than one percentage point off
economic growth each year.
Cutting the trade in half would
increase GDP growth to about five
percent a year.
The trade deficit remains the
single most important tax on U.S.
growth and burden on American