Sounding the alarm on U.S. trade deficit

A Miami economist shares his thoughts on what impact the growing gap between U.S. imports and exports will have on the economy.BY JANE BUSSEYjbussey@MiamiHerald.comMiami economist Manuel Lasaga, who burnished his University of Pennsylvania doctorate in economics with a stint at Citibank renegotiating the Latin-American debt in the 1980s, shares few characteristics with Chicken Little, who always warned that the sky was falling.
Still, the 53-year-old economist correctly sounded the alarm over the need to devalue the overvalued Argentina peso back in the 1990s, when such talk was dismissed by the Argentine government, which later faced financial and economic implosion.
More recently, Lasaga has been tracking the growing gap between U.S. imports and exports — the trade deficit that in its broadest measure is known as the current account deficit. At the start of the year, he wrote a cautionary report entitled How U.S. Trade Deficits Will Cause a Storm in Currency Markets.
Lasaga, who advises banks and companies on Latin America, sat down with The Miami Herald to explain why he feels the rising current account deficit — which he estimates will hit a record $813 billion when 2005 figures are totaled up — will trigger turbulence.
Q: You recently wrote a report about problems with the rising U.S. trade deficit. Why do you see this as a problem?
A: The U.S. trade deficit is reaching worrisome proportions. We rely on foreign investment and foreign lending to finance our deficit. I am projecting [the current account deficit] could widen to about $900 billion in 2006. This presents a huge risk for our economy. If we are unable to finance such a huge deficit, it is a question of when we would see a substantial decline in the value of the dollar.
This is not an isolated factor. Currencies are very important. If the dollar were to experience a substantial fall in its value with respect to the yen, euro and to the other major currencies, it would have immediate repercussions on our financial markets, particularly interest rates. The magnitude of the problem at this point is beyond a simple and immediate solution.
Q: Given our huge imports, if the dollar declines, wouldn’t this make our import bill go up?
A: A devaluation of the dollar would be painful. If the value of the dollar falls, our imports become much more expensive. My concern is that it is going to take a substantially bigger fall in the value of the dollar than many analysts think to correct our trade deficit. Since we are for many reasons overly dependent on imports, it’s going to really take a very large increase in the price of those imports [through a fall in the dollar’s value] to reduce our consumption of imports.
The magnitude of the trade deficit is so large, a recession in the United States is not enough to bring it down. The only way we can see a reduction in that trade deficit is going to be a substantial fall in the value of the dollar. The question is when that trigger will take place.
U.S. consumers’ over-dependence on imports reflects several factors. First, imports are cheaper. Second, it has to do with savings; consumers are not saving as much. Also, a large proportion of U.S. industries manufacture a very significant proportion of the total value of their goods in offshore plants.
Q: What about the effect of lower U.S. demand on the rest of the world? Doesn’t the rest of the world depend on export-driven growth to fuel their own economies?
A: The rest of the world is more than happy to give us more credit to buy their goods and services.
When you are the most important economy in the world and you have the largest trade deficit in the global economy and you need to correct that trade deficit because it cannot keep growing — otherwise, we will become the most indebted nation in the world — the day of reckoning for the U.S. economy is going to have a disruptive effect on the rest of the world. As economists say, ``When the U.S. economy sneezes, other economies catch pneumonia.’’
Today the largest deficit the United States has with any other nation is with China. Yet that currency is being managed by the Chinese government, and it has been a source of growing tensions between the United States and China. They need to increase the value of their currency in order to reduce our imports from China.
Q: What about raising U.S. import duties to lower the trade deficit?
A: Some view markets as not being as effective in correcting this huge imbalance. We are going to see more attention on the political front to the possibility of using other types of measures, such as tariffs or in general an increase in protectionist measures as a way to force down the deficit. But that is a very risky path to take as we have seen in the past [because] trade restrictions will undermine both the country that imposes them as well as the country with which it trades.
At this point any resolution is going to be painful because the magnitude of the problem is so large. Where we will see the trigger taking place, if foreign investors at any point begin to become more concerned about the huge financing gap of the United States and are less willing to provide additional financing, is they stop buying as many U.S. Treasuries as they have or reduce the amount of corporate debt. It doesn’t take much. If we are talking about a $900 billion deficit, it could take as little as $25 billion or $50 billion shortfall on financing that gap to trigger a sizable downward spiral [of the dollar].
If we look at the alternative, the introduction of protectionist barriers, that could have the same negative consequences and would probably be more detrimental in the longer run because it would harm global initiatives aimed at freer trade.
Q: How have your predictions been received? So many people say the growing U.S. trade deficit is sustainble.
A: Interestingly, many emerging market countries are very worried about the trade imbalance because they themselves suffered from this type of cyclical trade problems in the past. Unfortunately, in our own policy circles, the government has dismissed the trade deficit, saying that markets will be able to deal with it in a smooth fashion and the problem in a way will go away. That is giving the wrong signals to investors.
Most of the businesses that we deal with in South Florida are veterans of international finance and trade cycles. We have gone through several of those in South Florida, dating back to the Latin American debt crisis, so companies have learned. We always stress the importance of diversification. We stress that China cannot be everything for everybody. You don’t want to put all your eggs in one basket.