Smith Faculty Opinion Article	November 13, 2006
By Dr. Peter Morici, Professor of International Business E-MAIL WEB SITE

U.S. Records $64.3 Billion Trade Deficit in September

Today, the Commerce Department reported the September deficit on trade in goods and services was $64.3 billion. This was down from a record $69.0 billion deficit in August.

The improvement was attributable to a decline in the price and volume of oil imported, while the trade deficit with China widened again. In the months ahead, oil imports will increase, and new record trade deficits will be set.

China posted a record trade surplus in October, indicating the bilateral trade deficit with China will continue to rise.

Since December 2001, the U.S. monthly trade deficit has increased $37.7 billion. This has saddled the economy with a huge foreign debt and taxed growth, and Bush Administration policies have exacerbated these problems.

Oil, Autos and China
Petroleum, automotive products, and goods from China account for 86 percent of the trade deficit, and no solution is possible without addressing issues particular to these segments.

Crude oil and refined products account for $22.7 billion of the monthly trade gap. Since December 2001, net petroleum imports have increased $17.1 billion, as the average price of a barrel of imported oil has risen from
$15.46 to $62.52, and monthly imports have increased 352 to 414 million barrels.

A 2004 Rocky Mountain Institute study, endorsed by former Secretary of State George Schultz, demonstrates how most U.S. dependence on foreign oil could be eliminated, without sacrificing SUVs, by deploying new technologies, such as hybrid engines, light weight materials and alternative fuels.

Implementing those solutions requires presidential leadership, which has been sorely lacking. Instead, President Clinton sought an across the board energy tax that would handicap the international competitiveness of basic industries like petrochemicals and aluminum. President Bush pushed through energy legislation that made Exxon and other oil giants happy but accomplished little to change the fundamental energy equation.

Automobiles and parts account for $10.7 billion of the monthly trade deficit; however, since December 2001, the deficit on vehicles has fallen
$0.4 billion or 5.3 percent, while the parts deficit has increased $1.5 billion or 116 percent.

Japanese and Korean manufacturers have snatched market share from GM and Ford by offering more attractive and reliable vehicles, and are expanding their U.S. production. Kia has announced plans to export from Georgia to Latin America. However, foreign manufacturers tend to use more imported components than domestic companies, and GM and Ford are pushing their parts suppliers to move to China.

The U.S. remains a competitive place to make cars and many components, but GM and Ford labor under a $2,500 cost disadvantage thanks to clumsy management and unrealistic labor contracts.

Rather than effectively addressing these core problems, GM and Ford have used their purchasing power to hammer down component and material prices to levels that have bankrupted many suppliers. It remains a puzzle why the Bush Administration Justice Department has not investigated GM or Ford for abuse of monopoly power.

The U.S. trade deficit with China was $23.0 billion in October, and has increased $17.5 billion since December 2001.

The bilateral deficit remains keeps rising, because China undervalues the yuan, and this makes Chinese exports artificially inexpensive and U.S. products too expensive in China.

Chinas huge global trade surplus creates an excess demand for yuan in foreign exchange markets, and this should drive the value of the yuan up against the dollar and other western currencies. However, each year to keep its value from rising, China purchases with yuan more than $200 billion in U.S. and other foreign currencies and securities. Those purchases come to about 9 percent of Chinas GDP and create a 25 percent export subsidy.

Diplomatic efforts to persuade China to stop manipulating currency markets have failed. This leaves the United States to choose between imposing tariffs on Chinas exports to offset the resulting subsidies or to keep selling China U.S. bonds.

Many U.S. multinationals, like GE, Caterpillar and GM, have earned huge profits investing in protected Chinese markets, and have lobbied the Congress and Administration not to take action against Chinese mercantilism.

Rather than recognizing Chinese currency manipulation as protectionism, President Bush and his Treasury Secretaries have sided with the large multinationals profiting from Chinese mercantilism, and labeled as protectionist Americans advocating measures to offset Chinese subsidies something the U.S. regularly does when subsidized imports from the EU or Japan harm U.S. industries.

Trade Deficits and Growth
Trade deficits must be financed by foreigners investing in the U.S. economy or Americans borrowing money abroad. Direct investment in the United States provides only a small fraction of the needed funds, and Americans borrow nearly $60 billion each month. The total debt will exceed $6 trillion by early 2007, and at five percent interest, the debt service comes to about $2000 per U.S. worker each year.

The trade deficit reduces growth, near term, by reducing the demand for U.S.-made goods and services, and longer term, by shifting U.S. labor and capital away from export and import-competing industries that invest more in R&D and highly-skilled labor.

In the third quarter, the trade deficit subtracted about 0.6 percentage points from GDP growth. Over the last two decades, large deficits have reduced U.S. growth by about one percentage point a year, and were it not for these deficits, U.S. GDP would be at least 20 percent larger in 2006.

Persistently large trade deficits saddle Americans with a huge foreign debt to service and reduce the means available to service that debt.

Despite this disturbing calculus, the Bush Administration has repeatedly sided with the interests of large multinational corporations that profit from foreign government policies and business practices that drive up the trade deficit.

Hopefully, the new Democratic majority in Congress will call the president to account for these choices.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.