September 4, 2012    Volume 19, No. 14

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U.S. Trade Deficit Continues To Surge, Costing The Country Hundreds Of Thousands Of Jobs

By Richard A. McCormack

The U.S. trade deficit with China continues to surge, a situation that could lead to "ominous consequence[s]" for the global financial system and for the dollar remaining as the world's reserve currency, according to Ernest Preeg, senior advisor for international trade and finance at the Manufacturers Alliance for Productivity and Innovation (MAPI).

The U.S. trade deficit increased from $326 billion in 2009 to a projected $495 billion in 2012, an increase of 52 percent.

By comparison, China's surplus over the same period increased by 94 percent, from $422 billion to $817 billion, and is on its way to breaking the $1 trillion mark.

During the first half of 2012, China's trade surplus surged by $67 billion, or 24 percent. The country's exports jumped by $80 billion and are expected to reach $1,978 billion in 2012. Imports rose by $13 billion, only 2 percent.

By contrast, U.S. exports will be far less this year: $1,250 billion. "Chinese manufactured exports grew at a much faster rate (74 percent) than U.S. exports (45 percent)" since 2009, notes Preeg. "This continues the dramatic relative rise of China from 2000, when U.S. manufactured exports were almost three times larger than Chinese exports, to 2012, when Chinese exports are projected to be 58 percent larger than U.S. exports, and on track to double U.S. exports by mid-decade."

The United States exports one-dollar worth of goods to China for every six-dollars it imports from China.

Even with such a lopsided trade situation, the Washington, D.C.-based association representing U.S. multinational companies with interests in China continues to argue that the U.S.-China trade relationship is beneficial to the United States. The U.S.-China Business Council sent out a lobbying directive to members of Congress on August 7 stating that "congressional districts all over the country are seeing exports to China outpace exports to the rest of the world." U.S.-China Business Council vice president Erin Ennis said that exports to China "contribute to America's economic recovery and support good jobs for American workers." The group did not mention surging imports from China and whether they cause the loss of American jobs. Preeg has called the U.S.-China Business Council's statements "Chinese propaganda [that] gets an A-plus."

Preeg notes that U.S. imports from China for the first half of 2012 increased by $14 billion, or by 9 percent, but exports to China from the United States increased by less than $1 billion, or only 3 percent. "The resulting bilateral trade deficit with China consequently rose by $13 billion (9 percent) and is almost as large as the $15 billion increase in the U.S. global deficit. Moreover, the entire U.S. deficit [with China] of $162 billion equates to 71 percent of the $228 billion global U.S. deficit, and to almost half of the global Chinese surplus."

Preeg further notes that most press coverage of China describes a slowdown of Chinese exports. But what is not reported is a much sharper decline in Chinese manufactured imports. "The 2 percent import growth together with the 10 percent growth in industrial production means a significant increase is under way in domestic value-added in manufacturing," Preeg notes. "This large increase in the Chinese surplus comes at the expense of growing deficits abroad, which are especially difficult to handle at this time."

The United States is the world's biggest loser in international trade. Of the five largest exporting countries and regions, only the United States has a trade deficit. Since 2000, the U.S. trade deficit has grown from $319 billion to a projected $495 billion in 2012. By contrast, The EU's trade surplus has grown from $51 billion to $255 billion; Japan's surplus is up from $237 billion to $333 billion; South Korea's surplus rose from $57 billion to $172 billion; and China's surplus has grown from $50 billion in 2000 to a projected $817 billion this year.

A $1 trillion a year trade surplus will provide China "with financial resources for increasing its international economic power and influence, but also raises pressures on other competing exporters of manufactures to take actions through exchange rate, trade and other policies, to remain competitive with China," according to Preeg.

The immediate impact of the $169 billion increase in the U.S. deficit over the past three years is the loss of between 700,000 and 1.4 million manufacturing jobs, or 10 percent of total manufacturing employment. The increasing deficit for the first six months of 2012 alone will cost the United States between 130,000 to 260,000 manufacturing jobs.

With a manufacturing sector that is depleted and losing to the world's top economic competitors, the United States will not have the resources to achieve "technology-driven economic growth, defense modernization and export competitiveness," since 70 percent of all U.S. civilian R&D is conducted by manufacturing companies, says Preeg.

The large and growing trade deficits of $500 billion per year combined with the $1.2 trillion federal budget deficit are being financed mostly by foreign central banks buying U.S. Treasuries. "But this could change if an ever-larger U.S. current account deficit is judged to be unsustainable," says Preeg. "Moreover, resulting increases in Treasury bond yields would further raise both the current account and fiscal deficits."

U.S. Treasuries held by foreign banks have increased from $1 trillion in 2000 to more than $5 trillion in 2012. The U.S. national debt is now $16 trillion.

The United States "should have a strategy for responding to the growing trade deficit and consequent foreign debt buildup," says Preeg. "The objective should be to greatly reduce the deficit in manufactures, if not to return to a trade surplus the United States had for decades."

The most important issue the U.S. must address is foreign currency manipulation. The International Monetary Fund defines currency manipulation as protracted large-scale central bank purchases of foreign exchange, which holds down the exchange rate. Over the past 10 years, China has made $3 trillion in purchases, "by far the most protracted and largest-scale purchase in the history of the IMF, while its trade surplus in manufactures has increased tenfold," according to Preeg. "In response, U.S. Secretaries of Treasury from both parties, as required, have reported to the Senate Banking Committee, twice each year and without explanation, that China has not been manipulating its currency! This American policy of head-in-the-sand denial needs to end, and the policy challenge then becomes what to do next."

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