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Sliding greenback highlights trade
deficit
By John Berthelsen
If
the United States thought Asia would cut it any slack on
its US$500 billion annual trade deficit, it has been
wrong so far. The dollar continues to fall sharply
against Eurozone currencies to make US products more
competitive on world markets. But Asia's mercantilist
economies, now increasingly concerned about the effect
of severe acute respiratory syndrome and other issues on
their financial systems, continue to seek to expand
exports to the West while maintaining their
already-sizable trade surpluses.
They are daring
serious trouble. It is increasingly clear that the day
of reckoning predicted for years for the US trade
balance may finally have arrived. By some estimates, the
United States will be spending as much as $200 billion
to $300 billion a year before the decade is out to
service its foreign trade imbalance unless the deficit
is corrected. All of its trading partners will suffer
collateral damage.
The international trading
system has lived on US deficits for decades as the
United States became the importer of last resort. But
now the dollar has gone into a long - and increasingly
steep - glissade against the euro, falling by nearly 40
percent from its brief lowest point, and against other
currencies such as the Mexican peso and the Australian
and Canadian dollars by about 15 percent. But America's
trade imbalance with Europe and its North American Free
Trade Agreement (NAFTA) partners pales when compared
with those of the Asian nations whose currencies
continue to track the dollar. The US trade deficit with
China rose to a record $103 billion in 2002 and was
$70.1 billion with Japan.
The dollar's slide was
given fresh impetus at the Group of Seven meeting of
finance ministers from industrialized countries on
Sunday when US Treasury Secretary John W Snow described
the currency's current fall as a "modest" realignment.
It is starting to come clear that the strong dollar that
characterized US fiscal policy for the better part of
two decades is well and truly dead. And, as the
devaluation picks up speed, apprehension is growing over
the effect on the global economy. Stock markets showed
their concern on Monday, with the Dow falling 2.14
percent to below 8,500.
The euro on Monday
finally returned to the point where it started on
January 1, 1999, when the currency was introduced - at
117 to the dollar. And while Eurozone exporters are
starting to feel pain from the falling dollar, the
efficient Asian exporters are causing them even more.
The Chinese yuan, for instance, is permanently anchored
near 8.28 to the US dollar, thus depreciating against
the world's other currencies as it tracks the dollar
down. The yen, despite having slid slightly to 115 on
Monday, has remained closely tied to the dollar as the
Japanese, continuing to struggle with their own anemic
economy, apparently still believe they can export their
way out of trouble after 10 years of futile attempts.
The Bank of Japan has spent at least $20.39
billion over several transactions recently and probably
more to buy dollars to keep the yen from appreciating
further. The bank previously spent another reported $32
billion-plus in May and June of 2002 to keep the dollar
from falling below 115 yen. Japanese Finance Minister
Masajuro Shiokawa was quoted last year as saying a
desirable trading range against the dollar would be
150-160 yen. Given the US trade deficit, that is just
flatly unrealistic.
"Asia has preserved its
export competitiveness relative to other emerging
markets (and the developing markets as well) by ensuring
that the currency depreciation during the regional
crisis (of 1997) was not frittered away via inflation,"
according to a study by Credit Suisse First Boston in
Hong Kong. Indeed, The Thai baht, at 42.5 a year ago,
remained Monday at 42.035. The South Korean won, 1,199 a
year ago to the dollar, is at 1,192.9. The Malaysian
ringgit and the Philippine peso also remain tied closely
to the dollar. The Hong Kong dollar has been permanently
pegged at HK$7.80.
But that competitiveness is
growing increasingly dangerous. While a weaker dollar
could help the flailing US economy by driving up the
price of imports from Europe and making US exports more
competitive on world markets, the United States' biggest
trading partners in Asia are eating everybody else's
lunch. The Eurozone is already teetering precariously on
the edge of recession. Relentless Asian export
competitiveness, let alone US competition as a result of
the cheaper dollar, bids fair to drive it over the edge.
Germany has already suffered two quarters of
falling gross domestic product (GDP). And, as the dollar
has fallen 40 percent against the euro, so have most of
the Asian currencies. It likely won't be Chevrolets they
will be buying in Europe. It costs probably 15 percent
more to produce a Mercedes-Benz than it did two years
ago, and while the same currency fluctuations make a
Lexus probably 15 percent less expensive in Bremen or
Brest or Belgium. A wide range of products that the
Eurozone exports across the planet, particularly machine
tools and other precision manufacturing items, can be
expected to face additional difficulty finding markets.
As Asian exports retain their edge in US
markets, the world's economy is increasingly at stake.
Without an Asia-wide revaluation or a fall in the dollar
so steep that the Eurozone probably could not bear the
pain, the United States could well fall back into
recession. And, with Eurozone economies bound by tight
labor regulations and close regulation of corporate
structures, the region faces problems in reacting. In
many European counties, trade retaliation could well
become a possibility.
In addition, for the first
time since the 1930s, the United States is facing the
distinct possibility that it may follow Japan and
Germany into devaluation, thus basically stalling out
the world economy. US retail sales and import prices
both fell at the sharpest rate ever in April and
consumer-confidence data show that some 73 percent of
Americans consider economic conditions in the US to be
negative. US factory-capacity utilization is currently
running at about 75 percent.
The world's biggest
economy, at $9 trillion annually, remains the engine of
world growth despite the fact that by the end of 2002,
US manufacturers had suffered 30 straight months of job
losses as their overseas markets have shrunk. The famed
J-Curve beloved by economists, which posits that the
balance of payments starts to improve progressively
after falling immediately after a currency depreciation
as imports become more expensive, takes months to work.
Barry Bosworth of the Brookings Institution
estimated recently in the Financial Times that given the
slow and uncertain response of trade, much bigger dollar
depreciation - perhaps 20 or 30 percent more - could be
needed to restore the United States to a sustainable
current-account position. "When you get as far out of
line as the US has, you have trouble correcting,"
Bosworth was quoted as saying.
Asian currency
revaluations would both make Asian goods less
competitive overseas and push up Asian consumer demand.
But it appears unlikely that that is going to happen any
time soon. Asian exporters are finding the increased
competitiveness too alluring to give it up.
It
remains to be seen whether the Americans and especially
the Europeans might retaliate. The upcoming Doha Round
of World Trade Organization (WTO) trade talks is already
threatened by European Union agricultural recalcitrance,
a seeming lack of US commitment to freer trade on the
part of the administration of President George W Bush,
and other issues.
International trade is already
under threat from protesters who haunt WTO, World Bank
and International Monetary Fund meetings. It is hard to
say when politicians on either side of the Atlantic
Ocean will find it expedient to sponsor retaliatory
legislation. But in the 1930s, when it came, it
destroyed the world's trading system for more than a
decade and was instrumental in triggering a global
depression.
(©2003 Asia Times Online Co, Ltd.
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