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Globalization And Trade Deficit

Report of "The U.S. Trade Deficit: Causes, Consequences and Recommendations for Action"

"Trade, including the rush of American capital moving to foreign locations, the spiraling deficits and indebtedness of America to foreign creditors, and the erosion of America's manufacturing base, has implications for our country as an international leader and power. While this may seem axiomatic, there appears to be a growing body of opinion that this process is somehow different from the historical norms establishing the interrelationship of trade and international power and influence, and that political institutions are best advised to stay out of the way of the "free" movement of goods and capital. We regard this thinking as naive and irresponsible. It ignores the long history, for example, of America using trade as a lever of influence with the Soviet Union on human rights." (Commissioners D'Amato, Lewis, Papadimitriou, Thurow, Wessel, and Becker. Chapter 1 Introduction Over the past decade, U.S. trade deficits have grown steadily from $29.5 billion in 1991 to a forecasted $450 billion in 2000. The current figure is the largest trade deficit in U.S. history in absolute terms, and it is also the largest trade deficit measured as a share of U.S. gross domestic product. As each monthly report of the latest trade statistics is released, the print media and the broadcast news carry commentaries and debates over the causes of the deficit and its consequences. Some take the position that trade deficits are the result of U.S. prosperity and that the inflow of foreign capital and goods have kept inflation and interest rates low and boosted productive investments: they are essential components of American prosperity. Others see a more trou-bling side to the deficits. They see the deficits as evidence that globalization and the workings of the world trading system pose threats to continued U.S. prosperity. What are the trade and current account deficits?

A trade deficit means that U.S. businesses and consumers buy more goods and services from producers in foreign nations than foreigners buy from U.S. producers during a given period, such as a year. The current account is a broader measure of international transactions. It reflects not only trade in goods and services, but also net factor payments (that is, interest, rents, dividends, royalties, and profits) and transfers (such as pensions, charitable contributions, and foreign aid). As with the trade deficit, if exports of all goods and services plus all receipts of factor payments and transfers are less than imports of all goods and services plus the payments of all payments and transfers, there is a current account deficit. Just as goods and services flow around the world, capital also moves between countries. Bonds and shares in publicly traded companies are bought and sold, loans are made and repaid, and businesses in one country invest directly in other countries when they build factories and distri-bution facilities. Just as the flows of goods and services go into and out of a country at the same time, the flow of capital is a two-way street. And, just as the flows of goods and services into and out of a country do not often balance, neither do the flows of capital into and out of a country. Trade flows and capital flows, however, are simultaneous. A current account deficit will always have an equal and offsetting surplus on the capital account, and a current account sur-plus will always have an equal and offsetting net outflow of capital. ==An overview of world goods and services trade (http://www.ustdrc.gov/reports/tdrc_ch1.pdf , page 3) Globalization

Overshadowing discussions of trade deficits is the broader trend of globalization. Globalization is an ongoing process that more closely integrates the many national markets for goods, services, capital, and information. It is an ongoing process that has been accelerating in recent years. The recent faster pace has been made possible by the reductions in government barriers to trade and investment and technological innovations in transportation and communication that substantially diminish the relevance of distance for economic transactions. Advances in communication and computing, coupled with dramatic price declines, have made "connectivity" more important than proximity in the sharing of information. Advances in shipping and transportation have made it possible for businesses to deliver a product almost anywhere in the world overnight and for people to travel long distances at much lower cost. While globalization has not made national boundaries irrelevant to commerce, these boundaries are not as important as they were twenty or thirty years ago in determining the location and organization of production. Globalization has broad implications for people, businesses, and governments. People have greater access to a wider array of goods and services, many of them at much lower prices than were available even a decade or two ago. Perhaps even more important, people can have easier access to information; closed societies cannot easily provide access only to information on the Internet that may promote economic growth while walling off information that may promote political reform. However, globalization also means that Americans will face increased challenges and opportunities in the marketplace and in the workplace. Globalization is breaking down the barriers between different markets, and that means that virtually anything that can be traded can be produced in the most efficient locations for sale in any market. Workers have to improve their skills to take advantage of the opportunities presented by global-ization. For businesses, globalization creates opportunities to seek lower costs or higher quality in their production. That can mean "outsourcing" more production to suppliers (who can share information), increasing reliance on production in offshore facilities, and making greater use of technological innovations in production. Globalization also means that companies, as well as workers, are more exposed to competition from foreign as well as from domestic businesses and more affected by flows of information from all sources. Governments are also challenged by globalization. With increased international integration of capital markets and goods markets, the U.S. economy is ever more closely linked with other economies, including some whose political systems, business practices, and values and culture differ substantially from ours. One challenge to the U.S. government is seeking to establish common "rules of engagement," helping to make sure that they are understood by all, and enforcing them. While globalization has changed the role of national governments and the importance of national boundaries in business decisions, "rumors of the demise of national borders as a factor in world trade are greatly exaggerated." Obstacles to international trade and capital flows have been substantially reduced, but not eliminated. Government-imposed trade barriers are the most evident, but not the only, remaining barriers. International transactions involve exchange rate risk, which is not a factor in domestic transactions. Differences among national tax systems can influence business decisions on the location of production facilities. Investors have not diversified their portfolios across countries as widely as prevailing financial models predict they would if national borders were irrelevant. In principle, a majority of Americans supports the growth of international trade, especially when the removal of trade barriers is clearly reciprocal. However, Americans are lukewarm about the actual net benefits of trade to most sectors of society, except for the business community. A majority believes trade widens the gap between rich and poor. A strong majority feels trade has not grown in a way that adequately incorporates concerns for American workers, international labor standards and the environment. Trade and current account deficits: historical perspective

As can be seen in figures 1.2 and 1.3, the United States has run persistent trade and current account deficits for the past twenty years, although this has not always been the case. Further, as figure 1.3 demonstrates, the share of the trade and current account deficits in our GDP has increased since the middle of the 1990s and is forecasted to set a new record in 2000. The data for 1991 appear to show a current account balance; however, the data for that year require a clarification. The international accounts for 1991 include the receipt of payments from allies to reimburse the United States for the cost of the Gulf War. Those payments totaled $42.5 billion. If these unique payments were removed from the current account data, other things being equal, the deficit in 1991 would have been $38.2 billion, or 0.65 percent of GDP. 1. Over the past two hundred plus years of U.S. history, there have been large internal migrations as Americans have moved to states with better economic prospects. The ability and willingness to move around the country freely in response to changing economic opportunities is one reason for our economic strength over the past century and why the internal trade surpluses or deficits of the various states of the United States are not important. 2. When there are international trade imbalances, businesses and labor do not move freely in response to the opportunities that arise in other countries. While exports create sales and job opportunities in the United States, workers and businesses may see imports as "taking jobs away" from the United States. If imports are significantly larger than exports, there is an under-standable focus on the jobs lost in the import competing sectors – even if national employment is rising substantially. 3. Workers, similarly, enjoy substantial legal protections. Actions against illegal or "unfair" trade practices across national borders are inherently more complex. Worker protections vary from nation to nation. More importantly, actions against a country that violates international trade rules still involve a large diplomatic component. While the World Trade Organization is developing a stronger dispute resolution procedure to deal with trade disputes between nations, it is not authorized to adjudicate com-mercial disputes between private parties. 4. A fourth reason for the attention paid to the current account deficit stems from persistent current account deficits requiring constant "borrowing" from other countries. A decade ago, the value of all foreign assets owned by Americans exceeded the value of all U.S. assets held by foreigners by $500 billion because we had earlier accumulated assets. As of the end of 1998, the value of all U.S. assets held by foreigners exceeded the value of all foreign assets held by Americans by more than $1.5 trillion.9 By the end of 2000, this number could approach $2 trillion. This $2 tril-lion is referred to as the "negative net international investment" position of the United States. Every year that the United States has a current account deficit, the negative net international investment position will grow. And every year, the United States will have to pay profits, interest, rents, and dividends on a growing scale to foreign owners of these assets. Some are concerned that these growing payments may limit the future U.S. standard of living. Furthermore, some are concerned that foreigners may not be willing to continue to provide capital to the United States to finance future trade deficits or, in the extreme, that they may not be willing to keep their current investments in the United States. 5. A fifth reason attention is focused on the trade and current account deficits is that they coincide with significant economic changes in the United States. New technology; the end of government regulation of broad swaths of the U.S. economy; and increased exports, imports, and foreign direct investment have produced a more competitive and more efficient U.S. economy. On the plus side, the United States has been experiencing the longest economic expansion in its histo-ry, inflation is low and stable, and unemployment is at a thirty-year low. On the down side, there is a rising sense of insecurity among many U.S. workers, despite the very low rate of unemploy-ment. For example, despite the 4 percent unemployment rate, the percentage of workers who fear they will lose their jobs is three times higher today than at the height of the 1981 recession, when the unemployment rate was above 10 percent. Globalization and trade deficits have been blamed for the wage stagnation (along with other factors, including technological change). 6. A sixth reason for the attention paid to the trade deficit is the persistence of large, bilateral deficits in U.S. trade with certain countries. Bilateral trade deficits are both contentious and potentially misleading. Particular contention surrounds trade with Japan and China because their persistent overall surpluses on trade with the world 11 appear, to some, to be tied to the many obstacles to exporting to these countries and doing business in them. 7. In particular, new efforts to push forward with comprehensive negotiations for further trade liberalization could be put at risk by concerns over the trade deficits. Chapter 2 Causes of the U.S. trade and current account deficits In the view of the Democratic Commissioners (page 41), the U.S.' large and growing trade and current account deficits are caused by a number of long- and short-term factors. Key long-term factors include:  Unequal relationships with America’s major trading partners. The U.S. market is more open to imports than any other country in the world. High nontariff barriers to trade in foreign markets are an important cause of this problem. These include quotas, private trading arrangements (such as the Japanese keiretsu groups) and other restrictions that reduce U.S. exports (i.e., restricted access to foreign exchange) to China and many other countries.  Predatory practices, such as dumping, that have increased U.S. imports.  Foreign government subsidies to foreign companies for research, development, and production that have not been effectively challenged or countered by the U.S. government.  Multinational corporations driving globalization. U.S. firms have been world leaders in eliminating jobs at home and moving production technology and production offshore.  The loss of competitiveness of U.S. firms on the one hand, with developing countries that depress workers’ rights, environmental standards, and workers’ wages so as to lower costs and unfairly compete for larger shares of the U.S. market, and, on the other hand, with those from Europe and Japan because they often have higher levels of productivity growth than the United States.  The failure of other nations, especially in developing countries, to enforce their labor and environmental laws and observe internationally recognized labor standards.  Low rates of saving in the United States, which have also contributed to trade and current account problems. Short-term factors have also contributed to the recent growth of the trade deficit. These include: (1) higher oil prices, (2) the 23 percent increase in the value of the dollar since 1995 that has made imports cheaper and the price of our exports more expensive to foreign buyers, and (3) slow economic growth in other countries. We also found that the U.S. manufacturing sector accounts for most of our trade deficit. Manufacturing industries will have to expand significantly if the United States is going to respond effectively to trade deficits and globalization. To do this, the United States will need new trade and development policies that will help rebuild manufacturing and reduce unfair barriers to trade around the world. We also need new tools to encourage U.S. multinationals to maintain jobs, technology, and production here in the United States.