2006 October 18 Wednesday
US Trade Deficit Hits New Record

The American people should not be so blase about the size of the trade deficit. We are living far beyond our means.

The U.S. trade deficit rose to a record $69.9 billion in August, driven by high oil prices, a growing trade gap with China and rising consumer demand for imported goods from antiques to appliances, the government said yesterday.

The trade deficit was 2.8 percent bigger than in July, despite strong growth in exports, led by sales of agricultural products and aircraft, the Commerce Department reported. American companies sold $122.4 billion worth of goods and services overseas in August, an increase of $2.7 billion over the previous month.

Even if we could somehow magically replace oil with another energy source that would eliminate only $20.8 billion of the $69.9 billion August 2006 deficit.

Our yearly deficit with China will be over twice as much as the cost of the Iraq war - and the Iraq war won't last as long.

The total value of imports rose by 2.4% to $192.3bn in August, while exports rose by 2.3% to $122.4bn.

During August, the politically charged trade deficit with China rose by 12.2% to a monthly high of $22bn. The is on course to top last year's record figure of $202bn.

The $22 billion deficit with China represents over 31% of the total trade deficit. Take it away and the US would still have a trade deficit that is far too large. But part of that is due to other East Asian countries trying to keep their currencies just as weak as the Chinese Renminbi currency so that they are not overwhelmed by Chinese imports. But they also keep their currencies weaker so that they can export to the US.

Exports to China actually dropped.

The politically sensitive deficit with China widened to $22 billion, exceeding the previous record of $20.5 billion reached in October 2005. Thursday's report showed that imports from China increased to an all-time high of $26.7 billion in August. U.S. exports to the Asian nation fell to $4.8 billion.

Remember when all of America's business leaders converged on Congress en masse in May 2000 to argue for granting China status as a Permanent Normal Trade Relations (PNTR) trade partner? This was supposed to open up a massive market for US goods. All it did was allow capitalists (e.g. Wal-Mart's bosses) to automate and speed up the indebting of America to the world.

Why are people living so far beyond their means? Does the influx of foreign money drive down the cost of borrowed money so much that people run up more debt? Or has the development of mechanisms to aggressively market credit cards and other debt instruments worked on human weaknesses to buy now and worry later to lure an increasing percentage of the populace to live beyond their means? Has capitalism become the enemy of prudent living and sound personal economics?

Democrats claim they could do a better job of closing the US trade deficit.

Democrats, hoping to take control of the House and Senate from Republicans, contended the August deficit figure underscored the need for a change in trade policies being pursued by President Bush and the Republican Party.

They said the administration has failed to crack down on unfair trade practices of other nations including China's currency manipulation and its widespread piracy of U.S. goods.

Just a reminder to the Democrats: Democrat Bill Clinton was instrumental in opening the US market to Chinese goods.

The big corporations and their stockholders do not see the trade deficit as a threat to their interests.

The Dow Jones index of major US shares swept above the 12,000 level for the first time on Wednesday but eased back to close short of the landmark level.

The index rose as high as 12,049.51, boosted by falling US inflation, oil and petrol prices and ongoing optimism about corporate earnings.

A slowing of job growth is also not seen as a threat to the profitability of large cap stocks.

The US economy added 51,000 jobs last month, far below analyst expectations, in another signal of slowing growth.

...

Last month's figures contrast with job additions of 188,000 in August and 123,000 in July.

One reason the capitalists can be optimistic about how things are going even as many workers are doing worse is that an increasing portion of all economic output is going to corporate profits.

One way to comprehend what is happening is to look at the split between how much of the economy is won by profits and how much by wages.

The share allotted to corporate profits increased sharply, from 17.7% in 2000 to 20.9% in 2005, while the share going to wages has reached a record low.

If the shift of revenue from wages to profits is due to higher productivity of smart holders of capital then this trend is not so bad. But I wonder if it is due in part to flooding the US labor market with imported labor and I wonder if the higher profits are coming via shifting of external costs onto the rest of us. How much of those profits are paid for by the middle class with taxes that fund for the health care, crime handling, and other costs of the cheap imported labor?

Share |      By Randall Parker at 2006 October 18 05:43 PM  Economics Trade


Comments
John S Bolton said at October 18, 2006 10:43 PM:

Our business leaders don't dare to consider the future, any more than is necessary to grab what's available now, and be ready to run.
In terms of capitalism, what's going on here is socialism so huge that it washes out of the picture any economic features like those of 19th century capitalism.
The growth comes from dollar support operations by foreign central banks such as that of China.
China is supporting the dollar with a trillion dollar hoard which has to stay parked in reserves, or unleash a giant inflation in their country.
They're adding to it at the rate of hundreds of billions a year.
These are not investment decisions, but public interventions to keep export growth going on regardless.
The money for this is taken by aggression on participants in the Chinese economy, so that we're receiving stolen goods on a scale completely unprecedented in the history of the world.
There's no way good can come from that on net balance.
The WSJ of Tuesday Oct. 17th '06, has a front page story on the magnitude of this operation.

Kurt said at October 18, 2006 10:48 PM:

I was at Thunderbird in 1990 when I heard all of this same psychotic yammering with regards to Japan. This was also when everyone was ranting and raving about how the Japanese were buying up all of our "cultural icon" (Columbia studios, Rockafeller Center, etc) and how terrible it was. Now we hear all of the same yammering about China.

What the trade deficit figures do not take into account is the amount of direct foreign investment INTO China from the U.S. If you take both into account, the figures pretty much even out. Anyone who knows finance and trade understands this is a non-issue.

Gus Kuehne said at October 19, 2006 7:55 AM:

I do not consider our growing trade deficit with China a "non- issue", Kurt. China has more power to affect the US economy than any country since we were a colony. Our esclating trade deficit has given them the means, and our federal budget the opportunity, to buy 3/4 trillion dollars of US treasuies.

Anytime China should choose to change their policy to purchase our bonds, they could send this country into an economic tailspin. High long term rates could assure a real estate collapse, resulting in record personal bankrupcy, a hault to deficit consumer spending, and budget crushing interest on our federal debt. Not that China would necessarily want all this to happen to their best customer.

China would only have to threaten to change their policy on our bonds enough to see that our position on N.Korea, Iran, or Taiwan was consistant with their wishes. In other words until we say uncle.If you feel I am overstating China's current power how long do you think it will be until they do, 2yrs.,5yrs., or 10 yrs. when thy own over 2 trillion of our debt.

Gem Hudson said at October 19, 2006 8:44 AM:

But we that just stretch the dollar over one to many of a deficit problem do more than to inflate a bubble economics. We that just stretch the dollar over one to many of a deficit problem print more money that makes the money more paper than of store value. We that just stretch the dollar spend more than what we could be sold and therefore we that just stretch the dollar as far as it could go earn none of the money either. So the solution to the problem is to fight more poverty by exporting more of U.S. right out of business.

America is the land that one goes from their rags to their riches. America the land of opportunity needs not any of those politicians around. America knows how it all works for them.

nz conservative said at October 19, 2006 8:02 PM:

Another factor to consider is rising resource prices.

At present China likes a weak currency to make its exports more competitive.

However, since oil is set to peak next decade, they will soon have to let the value of the Yuan increase.
This will mean western countries will have to pay more for chinese imports- and this will hurt.

Also, in another decade, not only will the Chinese home market be a lot larger, but alternative markets in countries like India, Russia and Argentina will also be a lot bigger. Hence, China will be able to pull out alot of their investment in the US without fatally damaging their own economy.

Look at the way China is investing in South America - it wants to marginalise the US by builing alternative markets for its products.

Bob Badour said at October 19, 2006 8:33 PM:

Kurt,

All that investing in China is building economic infrastructure there that is not getting built here. It is raising productivity there while the US imports millions of low-wage low-productivity workers. How is that good for the US?

John S Bolton said at October 19, 2006 10:28 PM:

The value of US investments in China is almost entirely the result of their dollar support; they would not otherwise have much if any value.
An investment which consists of a corporate shell which exists merely to capitalize on dollar support from a government that today wants to promote export growth, is not that which can be capitalized as an asset longterm.
Our business leaders do not dare to look beyond the iridescence on the bubbleskin.
Their investment decisions are based on nothing but the whimsy of some bureaucrats in the central bank of a communist dictatorship, or that of Japan.
Now it can be seen why they spend $40 million on a beach house with nothing but sand under it, and $100 million or more on a modern anti-art canvas, they are the bubbleskin themselves.


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