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Case against reducing US deficits
By Wu Jiayin |
January 9, 2010, Saturday
|
Print Edition
Print Edition
BIG trade deficits are widely believed to be destroying American industry and causing high unemployment in the country.
Worried about the impact of big trade deficits on its declining domestic economy, the United States has been taking some desperate measures to reduce its trade deficit.
To relieve the situation, the US is not only abusing the antidumping mechanism against major exporters such as China but also forcing the appreciation of currencies of those countries against the dollar to increase competitiveness of US products in the global market.
However, both the perception about the negative impacts of trade deficits and the countermeasures the US is taking are wrong, Marc Chandler says in his book "Making Sense of the Dollar."
Chandler, an expert on currency markets and foreign exchange, summarizes several "dangerous myths" about the trade deficit, the dollar and the economic strengths of nations using clear logic and non-technical explanations. He makes his argument convincing and easily understandable, for even lay readers.
Contrary to the popular belief that the US' trade deficit is a problem that needs to be corrected, Chandler argues instead that what needs correction is the way trade is measured.
"The system of trade accounting, no longer offers an accurate picture of how the global political economy works. It is based on a world that no longer exists," Chandler writes.
He illustrates with an example. If a US company sends parts abroad for assembly and then brings the finished product back, the transaction is recorded in trade transactions. As the finished product has a higher value than the parts exported, the US trade deficit grows.
However, such trade records make no sense as the transaction takes place within a single company.
This is not a rare case.
"Amazingly, the movement of goods and services within the same company accounts for half the US trade deficit," Chandler observes.
In other words, at least half of the US trade deficit is non-existent if activities of multinational corporations are not recorded as international trade.
True, as it is more likely for overseas plants to hire local people rather than Americans, the job opportunities for Americans do seem to have been reduced accordingly.
Yet this is more of a natural result of rapid technology development in the US than the side effect of globalization, Chandler stresses.
Indeed, given the mainstream economics' theory that people act rationally, the trend of moving low-skilled work to places where low-skilled labor is cheap is unstoppable.Moreover, advanced technology has improved productivity in the US to the extent that fewer people can do more.
Therefore, rather than practicing restrictive trade policies, it is more realistic for the US government to train more US workers and equip them with skills that can meet the needs of more demanding and rewarding jobs, Chandler insightfully suggests.
Now that the argument for reducing trade deficits is refuted, the US' efforts to make the dollar less expensive are also shown to be wrong.
As Chandler notes, "the belief that the dollar has to decline because the trade deficit has to close eventually is counterproductive and may have unintended consequences."'
The most direct consequence is the weakened purchasing power of average Americans, especially when they buy foreign products.
Joseph Stiglitz, the 2001 Nobel Prize winner, once told Shanghai Daily, "the US has benefited (from its trade relationship with China) because our consumers have had access to low-priced goods. And that enabled them to have higher standards of living, especially with wages not doing very well." Americans might no longer enjoy such benefits were the dollar to continue to depreciate against the Chinese yuan.
Worse, dollar weakness may also discourage investment in the US because all investors prefer to put assets where currencies are gaining value, Chandler points out.
So far, the US dollar still preserves its status as the most important reserve asset in the world. But in the long run, a continuously depreciating currency is sure to shake the confidence of its holders.
Worried about the impact of big trade deficits on its declining domestic economy, the United States has been taking some desperate measures to reduce its trade deficit.
To relieve the situation, the US is not only abusing the antidumping mechanism against major exporters such as China but also forcing the appreciation of currencies of those countries against the dollar to increase competitiveness of US products in the global market.
However, both the perception about the negative impacts of trade deficits and the countermeasures the US is taking are wrong, Marc Chandler says in his book "Making Sense of the Dollar."
Chandler, an expert on currency markets and foreign exchange, summarizes several "dangerous myths" about the trade deficit, the dollar and the economic strengths of nations using clear logic and non-technical explanations. He makes his argument convincing and easily understandable, for even lay readers.
Contrary to the popular belief that the US' trade deficit is a problem that needs to be corrected, Chandler argues instead that what needs correction is the way trade is measured.
"The system of trade accounting, no longer offers an accurate picture of how the global political economy works. It is based on a world that no longer exists," Chandler writes.
He illustrates with an example. If a US company sends parts abroad for assembly and then brings the finished product back, the transaction is recorded in trade transactions. As the finished product has a higher value than the parts exported, the US trade deficit grows.
However, such trade records make no sense as the transaction takes place within a single company.
This is not a rare case.
"Amazingly, the movement of goods and services within the same company accounts for half the US trade deficit," Chandler observes.
In other words, at least half of the US trade deficit is non-existent if activities of multinational corporations are not recorded as international trade.
True, as it is more likely for overseas plants to hire local people rather than Americans, the job opportunities for Americans do seem to have been reduced accordingly.
Yet this is more of a natural result of rapid technology development in the US than the side effect of globalization, Chandler stresses.
Indeed, given the mainstream economics' theory that people act rationally, the trend of moving low-skilled work to places where low-skilled labor is cheap is unstoppable.Moreover, advanced technology has improved productivity in the US to the extent that fewer people can do more.
Therefore, rather than practicing restrictive trade policies, it is more realistic for the US government to train more US workers and equip them with skills that can meet the needs of more demanding and rewarding jobs, Chandler insightfully suggests.
Now that the argument for reducing trade deficits is refuted, the US' efforts to make the dollar less expensive are also shown to be wrong.
As Chandler notes, "the belief that the dollar has to decline because the trade deficit has to close eventually is counterproductive and may have unintended consequences."'
The most direct consequence is the weakened purchasing power of average Americans, especially when they buy foreign products.
Joseph Stiglitz, the 2001 Nobel Prize winner, once told Shanghai Daily, "the US has benefited (from its trade relationship with China) because our consumers have had access to low-priced goods. And that enabled them to have higher standards of living, especially with wages not doing very well." Americans might no longer enjoy such benefits were the dollar to continue to depreciate against the Chinese yuan.
Worse, dollar weakness may also discourage investment in the US because all investors prefer to put assets where currencies are gaining value, Chandler points out.
So far, the US dollar still preserves its status as the most important reserve asset in the world. But in the long run, a continuously depreciating currency is sure to shake the confidence of its holders.
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