Page 1 of
2 EYE ON
AMERICA Of deficits, debt and
growth By Peter Morici
On Wednesday, the US Commerce Department
reported that the November deficit on trade in
goods and services was US$58.2 billion. This was
down from the $58.8 billion in October but remains
about 5.3% of gross domestic product (GDP).
The improvement was largely attributable
to slower Christmas-holiday sales, which tapped
down imports from China a bit. The trade gap with
China should rise again in the months ahead.
Since December 2001, the US monthly trade
deficit has
increased $31.6 billion. This
has saddled the economy with a huge foreign debt
and slowed growth. Dysfunctional energy policies,
the overvalued dollar and the competitive
difficulties of domestic auto makers are largely
responsible for these problems.
To finance
trade deficits, Americans have borrowed $6
trillion, over and above foreign direct investment
in the United States, and the debt service comes
to about $300 billion a year.
With
declining demand for high-value, US-made goods and
services, the deficit reduces GDP by about $250
billion, and by cutting investments in research
and development (R&D) and labor skills, the
trade deficit cuts potential economic growth from
about 4% a year to about 3%.
Breaking
down the deficit Petroleum, automotive
products and goods from China account for about
90% of the trade deficit, and no solution is
possible without addressing issues particular to
these segments.
Petroleum products account
for $18.7 billion of the monthly trade gap. Since
December 2001, net petroleum imports have
increased $13.2 billion, as the average price of a
barrel of imported oil has risen from $15.46 to
$52.25, and monthly imports have increased from
352 million to 381 million barrels.
Technologies such as simply retuning
conventional gasoline engines and transmissions,
hybrid systems, lighter-weight steel and other
materials, and alternative energy sources could
substantially reduce US dependence on foreign oil.
Accelerating these solutions requires
national leadership, but both Republican and
Democratic party leaders have failed to champion a
policy framework that would accomplish what is now
clearly possible - a great reduction in the
dependence on Middle East oil and the threats to
national security it engenders.
Automotive
products account for about $12.6 billion of the
monthly trade deficit; however, since December
2001, the deficit on vehicles has increased $1.9
billion or 12.6%, while the parts deficit has
increased $1.2 billion or 135%.
Japanese
and South Korean manufacturers have captured
larger market shares by offering more attractive
and reliable vehicles than US competitors and are
expanding their US production. However, Asian
manufacturers tend to use more imported components
than domestic companies, and General Motors 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, Ford and
Chrysler carry a $2,500 cost disadvantage thanks
to clumsy management, costly health benefits,
excessive fringe benefits and unrealistic work
rules imposed by contracts with the United Auto
Workers trade union. This disadvantage far exceeds
those imposed by legacy costs, such as providing
health benefits for retired blue-collar workers,
and it would persist even with the implementation
of national health insurance.
In addition
to better management, the industry sorely needs
new labor contracts that align costs with Toyota
and other Asia transplants. Essential elements
would include pay for performance, health benefits
in line with those offered by most US employers,
and adopting defined contributions pensions
systems. Without these essential reforms, even the
reincarnation of Henry Ford (1864-1947) and Alfred
Sloan (1875-1966, longtime president and chairman
of GM) could not save the domestic auto makers
from their inevitable ride through Chapter 11 (the
section of the US Bankruptcy Code governing
reorganization).
China accounts for $22.9
billion of the monthly trade deficit, up from $5.5
billion in December 2001. The bilateral deficit
remains stubbornly high because China undervalues
its currency, the yuan, and this makes Chinese
exports artificially inexpensive and US products
too expensive in China.
Although China
revalued the yuan from 8.28 to 8.11 to the US
dollar in July 2005 and announced that it would
adjust it to a basket of currencies, the yuan
continues to track the dollar
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
