Cracks Appearing in Globalization?

http://www.time.com/time/magazine/article/0,9171,1725094,00.html

It’s a significant development in the fight for a sensible trade policy when a major pubication like TIME Magazine acknowledges that our enormous trade deficit is a problem.  There is definitely a building groundswell of dissatisfaction with what our trade policies have done to our economy.  For example, when articles about trade appear in USAToday, the comments come fast and furious from those upset with our trade deficit.  Virtually no one is defending it.  If only our political leaders would recognize this wave of discontent, things may actually begin to change.

There are some inaccuracies in this article, but first I want to high-light some important statements that TIME has exactly right:

That problem is America’s vast, unsustainable trade deficit with the rest of the world. The deficit has created stuffed storehouses of dollars and dollar-based securities at many of America’s most important trading partners. The dollar reserves are especially large in Asia, where export-oriented countries like China and Japan have run large trade surpluses with the U.S. The Bush Administration has attempted to pin the blame for the trade deficit on “unfair” practices by foreign countries. Special abuse was reserved for China. Bush has maintained that Beijing’s manipulation of its currency, the yuan, made Chinese-produced goods exceptionally cheap and as a result they have flooded the U.S. market.

This argument is nonsense and always has been. Since China ended its currency peg in mid-2005, the yuan has risen 17% against the dollar and hit an all-time high last week. But the trade deficit with China hasn’t budged.

The trade deficit hasn’t budged because currency values have nothing to do with the root cause of the deficit – the disparity in population density and per capita consumption between the U.S. and China and so many other of our trading “partners.” 

And if you don’t believe TIME, then how about Warren Buffett?

America, Buffett warned, was facing the same fate. “Our trade deficit has greatly worsened, to the point that our country’s ‘net worth,’ so to speak, is now being transferred abroad at an alarming rate,” Buffett wrote.

But, like I said there are some bad misstatements in this article.  Let’s begin with the sentences that followed that first quote above:

The real cause of the trade deficit is that Americans spend too much and save too little. That’s true for both the government, with its mammoth budget deficits, and the average consumer. American household debt reached $13.8 trillion at the end of 2007, or more than double the amount in 1999. This debt-financed consumption has led to a level of imports well beyond the nation’s ability to pay for them. Americans have no one to blame but themselves.

Nothing could be further from the truth.  Americans have simply been trying to sustain their standard of living.  It wasn’t their choice to out-source the manufacture of virtually everything.  What choice do they have?  In almost every case, there simply aren’t any American-made alternatives. 

Here’s another one:

That’s why today’s turmoil in U.S. financial markets will end in a massive transfer of wealth from America to the rest of the globe.

Today’s turmoil began with the massive transfer of wealth to finance the trade deficit, now totaling a cumulative $9 trillion since 1976.  The transfer of wealth has already happened and continues at a rate of $700+ billion per year.

The housing bust, the subprime catastrophe, the Bear Stearns evaporation, and the tanking markets have already dented household wealth. But this is just the beginning. These events are only the trigger to a larger problem that affects America’s standing in the global economy.

Again, TIME has the cause and effect reversed.  The housing bust and subprime catastrophe are due to wages not keeping pace with inflation, forcing average Americans to resort to subprime mortgage terms just to be able to “afford” (or so they thought) a home. 

But the worse error is the first sentence of the last paragraph:

There is, simply put, no way out of this situation for America.

Nothing could be further from the truth.  America is still a sovereign nation.  We can withdraw from trade treaties and revise our trade policy.  We can implement the tariff structure on manufactured goods called for in Five Short Blasts.  We could completely reverse this situation in a matter of a few short years.

Pete

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