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Trade Deficit Sets Record for 5th Year

Old 03-14-07, 09:48 AM
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Trade Deficit Sets Record for 5th Year


The deficit in the broadest measure of trade set a record for the fifth consecutive year even though the imbalance in the final three months of 2006 shrank, reflecting a lower foreign oil bill.

The Commerce Department reported that the imbalance in the current account jumped by 8.2 percent to $856.7 billion, representing a record 6.5 percent of the total economy. For the fourth quarter, the deficit shrank by 14.6 percent to $195.8 billion, the smallest quarterly imbalance since the summer of 2005.

Even with the fourth quarter improvement, administration critics say the soaring deficit for the whole year shows the failure of President Bush's trade policies to protect American workers. They contend that America is going into hock to foreigners at an alarming rate even though they have been more than willing so far to hold American assets in return for sales of televisions, cars and other goods to U.S. consumers.

The current account is the broadest measure of trade because it covers not only trade in goods and services but also investment flows between countries. It also represents the amount of U.S. assets that have been transferred into foreign hands to cover the gap between American exports and imports.

A deficit of $856.7 billion in 2006 meant that the United States was borrowing more than $2 billion daily to finance its trade gap. So far foreigners have been quite happy to sell to the United States and hold dollars in return, money that has been invested in U.S. Treasury securities, the stocks of American companies and other assets.

However, the concern is that if foreigners lose their appetite for U.S. investments, it could cause a big plunge in the value of the dollar, send stock prices crashing and interest rates soaring. If the adjustment were large enough, it could push the country into a recession.

While believing that the current account will have to come down in coming years, many economists also think the adjustment can be made at a more gradual pace that will not seriously disrupt the U.S. economy.

The $195.8 billion deficit in the fourth quarter was down from a third quarter deficit of $229.4 billion. The drop reflected a big decline in oil prices during the period compared to record oil prices hit last summer.

Many economists believe that America's trade deficit will start to show gradual improvement this year as long as oil prices do not surge again. Part of the optimism reflects growth in U.S. exports, which are being spurred by stronger economic growth in many of America's major markets and also a weaker dollar against such currencies as the euro.

A lower value for the dollar makes foreign trips for American tourists more expensive but it lowers the price of U.S. products on overseas markets, boosting exports.

The Bush administration has warned against a protectionist backlash in this country from the huge trade deficits. But Democrats, who gained control of both the House and Senate for the first time in 12 years, contend that the administration needs to do more to protect American workers from unfair competition from low-wage countries with lax labor and environmental regulations.

Some people believe the trade deficit is considerably more important than the budget deficit.

Others believe the trade deficit has no meaning.

Neal (Neil) Cavuto, Fox News Business Correspondent, seems to play both sides of the street. When people complain about the trade deficit, he says it doesn't matter, and that the deficit was actually good for the U.S.. Yet, just a couple of days ago when it was announced the trade deficit had dropped during the last quarter, he said it was good news for the U.S. economy.

Where do you stand on the issue?

BTW: Who was the member a couple of days ago who complained about George W. Bush being a protectionist?

Last edited by classicman2; 03-14-07 at 09:53 AM.
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Old 03-14-07, 09:55 AM
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so how do you calculate the trade deficit on a product designed in the US, made in one country, assembled in another, and then sold back in the US or somewhere else with the control being a US company?

i know someone that works for a major clothing company. 15000 employees in the US, plans to hire hundreds more and they don't make a single thing here
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Old 03-14-07, 10:39 AM
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I think if the global economy is going to become a reality, trade deficits aren't going to matter much. In a global economy we as a nation do need to innovate, and I am concerned whether we'll be able to do that or not.
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Old 03-14-07, 11:23 AM
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I have never worried about our ability to innovate, personally. At least for most sectors.
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Old 03-14-07, 11:40 AM
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Originally Posted by kvrdave
I have never worried about our ability to innovate, personally. At least for most sectors.
Me neither. That's the least of our worries. To be efficient at production, that concerns me.
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Old 03-14-07, 12:15 PM
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Statement at Hearings before the U.S. Trade Deficit Commission
by Milton Friedman
November 15,1999
. .
I am pleased to have an opportunity to testify on the causes and consequences of trade deficits.

The world is currently experiencing the effects of two major revolutions of the past few decades: a technological revolution that is transforming the way the world does business, and a political revolution sparked by the fall of the Berlin Wall in 1989 and the Deng reforms in China starting in 1977.

The technological revolution in computers, telecommunications, and related
industries has made it possible for an enterprise to be located almost anywhere in the world, produce goods and services almost anywhere in the world, and distribute its products almost anywhere in the world. As that possibility unfolds it will greatly strengthen and widen the existing global economy. The political revolution reinforces the effect of the technological revolution, by greatly expanding the supply of low-cost yet not low-quality labor available to the global economy, discrediting central planning, and raising the appeal of market mechanisms.

Taken together, these two revolutions offer the opportunity of a major economic revolution comparable to the industrial revolution that started 200 years ago. The industrial revolution produced a greater increase in world output in the past 200 years than in the preceding two thousand. The information revolution under way has the potential of repeating that remarkable achievement.

We are now seeing the first stages of the major restructuring of worldwide production and trade that will be produced by the information revolution. . Capitalintensive activities--human capital as well as physical capital-- are moving to the center of the technological revolution, so far largely in the United States but soon to include Europe and Japan -- and labor-intensive activities are moving to underdeveloped countries, including the former Soviet satellites in East Europe, as well as China, and India. Free trade in goods, services, and capital is by far the most effective way to expedite a worldwide transformation that promises a major improvement in human well-being around the world.

In the process, deficits and surpluses in balances of payments are unavoidable. The countries to which capital is moving will have balance of
payments deficits - the opposite face of a capital surplus - financed by countries whose internal savings are larger than can be absorbed in domestic activities that yield a competitive rate of return. Such deficits, far from being a burden, are an essential ingredient in the adjustment process. The remarkable performance of the U. S. economy in the past few years would have been impossible without the inflow of foreign capital -- the mirror image of large balance of payments deficits.

California is a splendid example. If balance of payments figures were available for California alone, they would show that California has experienced a steady stream of deficits for decades on end just as the U.S. on a whole did in the last half of the nineteenth century. California has grown far more rapidly than most of the rest of the country. If California enterprises had been forced to rely on the savings of California citizens alone, it could never have financed its rapid growth. That was possible because capital was moving from the East to the West to benefit from the higher rates of return that were attainable in California. It was possible because California was experiencing large and continuous balance of payments deficits.

Ignorance is sometimes bliss. Imagine the public reaction if the Los Angeles Times and the San Francisco Chronic/e were to come out with headlines reading ‘California Faces a Multibillion Deficit in Payments to Rest of Country.” Could Sacramento have refused to respond in some way?

As an empirical economist, I very much welcome detailed government statistics on almost anything including international trade, yet as a political
economist and citizen, I often sympathize with my old teacher at the University of Chicago, Lloyd Mints. who contended that U.S. trade policy would be far better if, like California, the U.S. had no such data.

Given that we do have such data and are likely to have more rather than less,
the only alternative is to try to educate the public on the merits of free trade in goods, in services, and in capital. Your commission will, I am sure, make an
important contribution to that objective.
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Old 03-14-07, 12:24 PM
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Is our debt being bought up internally or externally?

Or do you believe that doesn't make any difference?
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