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Deficit Hits $196 Billion

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Well-known member
Feb 13, 2005
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Third Quarter Current Account Deficit Hits $196 Billion and Is Destroying Millions of Jobs

Today, the Commerce Department reported the U.S. current account deficit in the third quarter was $195.8 billion.

The current account is dominated by the trade deficit for goods and services, which was $182.8 billion in the third quarter.

The trade deficit reduces the demand for U.S.-made goods and services, much like a tax increase or government spending cut of comparable size. Reducing the annual trade deficit by half would create as many as five million new jobs over three years.

Manufacturing is particularly hard hit. Lowering the trade deficit would create nearly two million more manufacturing jobs over three years. An effective policy to lower the trade deficit would particularly benefit highly competitive U.S. durable goods manufacturers such as machine tools, industrial and construction machinery, auto parts, and electronic equipment.

Since 2000, three million manufacturing jobs have been lost. But for the growing trade deficit, the economy should have regained about two million manufacturing jobs, mostly in R&D-intensive durable goods industries.

Advocates of the Administration trade policy argue that the current account deficit is caused by foreign investors finding U.S. business opportunities so attractive. However, 32 percent of the second and third quarter current account deficits were financed by foreign governments, not private investors. Foreign governments make these purchases to keep the value of their currencies low and subsidize their exports.

U.S. Trade Representative Rob Portman argues that a Doha Round Deal will reduce the current account deficit but any gains in service exports will be overwhelmed by additional agricultural imports. Whatever gains are made on manufacturing tariffs will have little positive effect on the trade deficit, as the U.S. admits more labor intensive products like textiles and furniture to gain more exports of high-tech products like turbines and sophisticated communications equipment. Moreover, as the experience with China demonstrates, lower tariffs on manufacturers do not always improve the trade deficit, as governments substitute performance requirements on foreign investors, cheap bank credit and undervalued currency to limit manufactured imports and boost exports,

Foreign government currency manipulation is the largest cause of the U.S. trade deficit. These actions contribute to large U.S. government deficits by lowering GDP, wages and tax collections, and make U.S. budget woes worse.

The Commerce Department reported today that foreign government purchases of U.S. dollars, government securities and other assets were $38.4 billion in the third quarter. These purchases artificially raise the value of the dollar against foreign currencies, and make U.S. exports needlessly expensive in foreign markets and imports artificially inexpensive at Wal-Mart and other U.S. retailers.

Chinese government purchases of dollars and other securities create a 35 percent subsidy on China's exports and are having a devastating effect on U.S. workers with only a high school education or only some college or technical training.

Although the dollar has fallen against the euro and other major industrialized countries' currencies, it continues strong against developing-country currencies--such as the Chinese yuan.

Since January 2002, the dollar is down an average of 13 percent against all currencies. The dollar has fallen an average of 22 percent against the euro and other industrialized country currencies, but it is up an average of about 0.2 percent against the Chinese yuan and other developing country currencies.

Chinese monetary authorities purchase dollars in foreign exchange markets to keep the yuan pegged at 8.08 per dollar. Other Asian developing country- governments pursue similar, soft pegs by also purchasing dollars. China's currency policy compels them to do so lest they lose sales in U.S. markets to China.

Were foreign governments to stop manipulating their currencies, the U.S. trade deficit would be cut by half.

Without more forceful efforts from the Bush Administration to persuade China and other Asian exporters to stop manipulating currency markets and subsidizing their exports to the United States, U.S. workers will continue to face a tough job market and wages adjusted for inflation will continue to stagnate and fall.

Longer-term, U.S. import-competing and export industries spend at least 50 percent more on R&D and encourage more investments in skills and education than other sectors of the economy. By shifting employment away from these trade-competing industries, the trade deficit is reducing U.S. investments in knowledge-based industries and skills, and slashing more than one percentage point off economic growth each year.

Cutting the trade in half would increase GDP growth to about five percent a year.

The trade deficit remains the single most important tax on U.S. growth and burden on American workers.

Peter Morici
Robert H. Smith School of Business
University of Maryland
College Park, MD 20742-1815
703 549 4338
cell 703 618 4338
[email protected]

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