EYE ON AMERICA Oil, autos and China
By Peter Morici
On Thursday, the US Commerce Department reported the September deficit on trade
in goods and services was US$64.3 billion. This was down from a record $69
billion deficit in August. The improvement was attributable to a decline in the
price and volume of imported oil, 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 US
bilateral trade deficit with China will continue to rise.
Since December 2001, the US monthly trade deficit has increased $37.7 billion.
This has saddled the economy with a huge foreign debt and taxed growth. The
policies of President George W Bush's administration have exacerbated these
problems.
Oil, autos and China
Petroleum, automotive products and goods from China account for 86% of the US
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, by from 352 million to 414 million
barrels.
A 2004 Rocky Mountain Institute study, endorsed by former secretary of state
George Schultz, demonstrates how most US dependence on foreign oil could be
eliminated, without making Americans give up their sport-utility vehicles, by
deploying new technologies, such as hybrid engines, lightweight materials and
alternative fuels.
Implementing those solutions requires presidential leadership, which has been
sorely lacking. Instead, former president Bill Clinton sought an
across-the-board energy tax that would handicap the international
competitiveness of basic industries such as 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 $400 million
or 5.3%, while the parts deficit has increased $1.5 billion or 116%.
Japanese and South Korean manufacturers have snatched market share from General
Motors and Ford by offering more attractive and reliable vehicles, and are
expanding their US production. Korean auto maker Kia has announced plans to
export from the US state of 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 US remains a competitive place to make cars and many components, but GM and
Ford work 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 Justice
Department has not investigated GM or Ford for abuse of monopoly power.
The US trade deficit with China was $23.0 billion in October, and has increased
$17.5 billion since December 2001.
The bilateral deficit keeps rising because China undervalues the yuan, and this
makes Chinese exports artificially inexpensive and US products too expensive in
China.
China's 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 US and
other foreign currencies and securities. Those purchases come to about 9% of
China's gross domestic product (GDP) and create a 25% 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
China's exports to offset the resulting subsidies or to keep selling China US
bonds.
Many US multinationals, such as General Electric, Caterpillar and GM, have
earned huge profits investing in protected Chinese markets, and have lobbied
the US Congress and the 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 US regularly does when subsidized imports from the European Union
or Japan harm domestic industries.
Trade deficits and growth
Trade deficits must be financed by foreigners investing in the US 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 5% interest, the debt service comes to about $2,000 per worker each
year.
The trade deficit reduces growth, near-term, by reducing the demand for US-made
goods and services and, longer-term, by shifting labor and capital away from
export and import-competing industries that invest more in research and
development and highly skilled labor.
In the third quarter, the US trade deficit subtracted about 6 percentage points
from GDP growth. Over the past two decades, large deficits have reduced growth
by about 1 percentage point a year, and were it not for these deficits, GDP
would be at least 20% 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.
The new Democratic majority in Congress needs to 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 US International Trade Commission.
