Skip to comments.U.S. 2002 Trade Deficit Reaches $435.2B
Posted on 02/20/2003 9:31:20 AM PST by Enemy Of The State
U.S. 2002 Trade Deficit Reaches $435.2B
By MARTIN CRUTSINGER
WASHINGTON (AP) - The United States recorded a $435.2 billion trade deficit for 2002, the largest imbalance in history, as the weak global economy set back American exports while imports of autos and other consumer goods were hitting all-time highs.
In other economic news, the Labor Department reported Thursday that inflation at the wholesale level shot up by 1.6 percent in January, the biggest increase in 13 years, led by a sharp 4.8 percent rise in energy costs.
Even though the surge was concentrated in energy, prices of other items such as new cars showed big advances as well and the overall increase was certain to raise concerns about whether inflation, which has been well-behaved for years, was threatening to get out of control. The government will report on January consumer prices on Friday.
In a third report, the government said that the number of newly laid off workers filing unemployment claims jumped to a seven-week high of 402,000 last week, up by 21,000 from the previous week, showing that the labor market is still struggling with an uneven economic recovery.
The trade report showed that even in agricultural products, normally a U.S. bulwark, Americans bought more imported wine, cheese and other foods than American farmers were able to sell abroad - resulting in only the second U.S. trade deficit in farm goods on record.
The Commerce Department reported Thursday that the deficit for all of last year was up 21.5 percent from the $358.3 billion trade gap recorded in 2001 and surpassed the old record deficit of $378.7 billion set in 2000.
By country, the United States ran up the largest trade gap with China, a deficit of $103.1 billion, marking the third straight year that the United States has recorded its largest trade deficit with that nation. It pushed the former front-runner in this category, Japan, into second place.
In addition to the record for all of 2002, the United States set a new monthly high of $44.2 billion in December, up 10.5 percent from the previous record set in November of $40.0 billion.
Opponents of President Bush's trade policies contend that the huge trade deficits represent the loss of millions of manufacturing jobs as U.S. companies have been battered by what the critics say is unfair competition from low-wage countries that stifle labor rights and have lax environmental protections.
American manufacturing companies have been lobbying for the Bush administration to drop its support for a strong dollar policy, arguing that an overpriced dollar has made their goods noncompetitive in foreign markets while opening them to a flood of competition from cheaper priced imports.
Treasury Secretary John Snow, who was meeting with British finance officials on Thursday on his way to a weekend meeting in Paris of America's major economic allies, insisted during his Senate confirmation hearing that the administration intends to make no change in its strong dollar policy. A strong U.S. dollar makes investments in U.S. stocks and bonds more attractive to foreigners.
For 2002, exports of goods and services fell 2.5 percent to $973 billion, marking the second consecutive annual decline, as American exporters found it increasingly difficult to sell overseas. This reflected a spreading global economic slowdown and the strong dollar.
American manufacturers were the hardest hit sector of the economy during the 2001 recession with a loss of nearly 2 million workers. While the economy began a recovery in 2002, the progress has been uneven and so far it has not resulted in a rebound in hiring.
American imports, which fell 6 percent in 2001, reflecting the U.S. recession, staged a rebound in 2002, rising by 3.8 percent to $1.41 trillion. That, however, was still below the all-time high of $1.44 trillion set in 2000.
But in individual categories, imports of autos and auto parts set a record high $203.9 billion and imports of other consumer goods, a category that includes everything from clothes to televisions and toys, also hit a record high of $307.7 billion last year.
Imports of oil totaled $103.6 billion last year, basically unchanged from the level in 2001.
After China, deficits with other countries included imbalances of $$70.1 billion with Japan; $49.8 billion with Canada and $37.2 billion with Mexico.
On the export side, manufactured goods suffered a setback but sales of American farm products managed to eke out a tiny 0.3 percent increase to $49.54 billion last year over the 2001 level.
However, imports of farm products rose a much faster 6.6 percent to $49.72 billion, representing in a deficit in farm trade of $176 million, the second such deficit in history. Farm imports topped exports in 1986 as well.
Remember when the CIA thought that East Germany's economy was bigger than West Germany's?
You really believe China's economy grew 8% in 2002?
Which manufacturing technology have we lost that threatens our security?
"It is as useless to argue with those who have renounced the use and authority of reason as to administer medication to the dead."
-- Thomas Jefferson
Your answers always seem to involve keeping taxes high and raising costs to American consumers.
Did Jefferson say that was a good idea?
"The prohibiting duties we lay on all articles of foreign manufacture which prudence requires us to establish at home, with the patriotic determination of every good citizen to use no foreign article which can be made within ourselves without regard to difference of price, secures us against a relapse into foreign dependency."
--Thomas Jefferson to Jean Baptiste Say, 1815.
"We are infinitely better off without treaties of commerce with any nation."
--Thomas Jefferson to James Madison, 1815.
In the movie Love Story, the famous line went "love means never having to say you're sorry". I think on FR "I'm not going to waste my time" is another way of saying "I will never admit I may be wrong"
It's a little like the kettle calling the pot black don't you think ?
Actually I do know what I'm talking about. The trade balance keeps getting worse, despite the increase in exports. That we are transfering wealth by investing more of our capital each year in foreign production for domestic consumption cannot be disputed. That same capital invested in domestic production for domestic consumption, instead of trade, would cause twice the wealth at home. By encouraging international division of labor (which is different than trade), we are decreasing the per capita capital investment in domestic labor, i.e., decreasing our standards of living, and we are increasing the per capita capital investment in foreign labor. Increased exports are more than offset by increased imports, and the effect is a net loss of capital.
The formula for GNP is C + I + G + X - M. Since M has been consistently worse than X for the last 40 years, the government decided to use the term GDP, which conveniently sets aside M, to avoid having to show red ink.
Now if X + M were spent on C instead, our DNP and GDP would increase by exactly that much. If X and M were equal, then entire capital expended in trade would amount to a wash - the "zero sum" that free traders claim doesn't exist.
Now the reality is we have to trade. But we do not have to "free trade" - which is to say, we do not have to engage in division of labor with other countries. The cost for the privledge to trade with us should be an ad valorum tariff. The cost for free trade - i.e., division of labor -- should be statehood, in which case the division of labor might really be beneficial to all involved. But few people think of trade in this way, because of the low degree of mental rigor applied to the issue in our colleges and our talking head shows.
For me the issue isn't what the domestic labor is doing, services or manufactures, but how much capital is being invested in it. My concern is that we are engaging in division of labor with other nations without the proper free market framework (which our Constitution provides for the 50 United States), and in so doing causing capital that would otherwise be invested in domestic labor to be invested in foreign labor - the exact OPPOSITE of what Smith identified as the most efficient use of a nation's capital for the purpose of increasing national wealth. As a matter of policy, we should promote domestic industry and domestic capital investment, and discourage activity that would cause that capital investment not to occur. I don't pretend to know what that industry "ought" to be doing, but I damn well want it to be doing it with American labor. Not, mind you, because I have any illusions or delusions of grandeur about labor per se, but because I (selfishly) want to live in a wealthier, more prosperous country. Call me silly.
In 2002 it was 3.6% foreign deficit versus 4.7% domestic growth. Reverse those numbers and then you'll have a valid point (presuming that it isn't too late by that time).
Also, your statement that we are investing more capital each year in foreign production is as erroneous as your statement that exports failed to materialize. Trade deficits result in net foreign investment in the United States. The net foreign investment is equal to the amount of the deficit.
Net foreign investment equals the amount that foreigners invest in the U.S. (their purchase of assets here) minus the amount that U.S. residents invest abroad (U.S. residents' purchase of assets in other countries). Net foreign investment generally equals net exports.
"For example, if you and your neighbors want to buy jackets made in Mexico, a local wholesaler trades dollars for Mexican currency, the peso, and buys the jackets. The person or bank that traded the pesos for dollars must have a plan for those dollars. One possibility is that the person plans to buy something in the U.S.; U.S. exports would rise. Another possibility is that the person plans to invest in the United States (lend money to someone here or actually invest in the U.S. economy, perhaps purchasing stock or buying a company).
If the first option is chosen, exports will rise with imports and there will not be a merchandise trade deficit. However, if the second option holds, there will be a merchandise trade deficit (exports will be less than imports). And, if the "extra" dollars are used by foreigners to invest in the U.S., then net foreign investment (the difference between U.S. investments abroad and the investments of foreign residents in the U.S.)will be negative, equal to the merchandise trade deficit (the value of exports minus imports referred to as "net exports").
Net exports equal net foreign investment. In other words:
Exports - Imports = U.S. Investments Abroad - Foreign Investments in the U.S.
If dollars leave the U.S. to buy foreign goods and they are not used, in turn, to buy goodsin the U.S., then they must be used for some other purpose, and that is often directinvestment in the U.S. economy.Here is one way to think about it. The total value of all final products produced in a yearin the United States is called the Gross Domestic Product or GDP. The total value of final goods produced in the United States equals the total value of what is purchased.
These purchases can be broken down into several components:
Consumption Expenditures (C)
Investment Expenditures (I)
Government Spending (G)
Net Exports (Exports - Imports) (NX)
Exports are part of domestic production. Imported goods are produced abroad. Becauseimports are included in measures of consumption, investment and government expenditures -- yet they are produced abroad imports must be subtracted out.
This can be written:
Y = C + I + G + NX
Y C G = I + NX
If the economy is closed to international investment, there will be no imports or exports. In this case, domestic saving (S) will tend to equal domestic investment (I) in equilibrium. The interest rate will adjust until the quantity supplied of loanable funds (by those who save) is equal to the quantity demanded of loanable funds (by those who want to invest).
But, in an open economy, investments move across countries. If foreign individuals, from whom we purchase goods, decide to use the dollars they earn to invest in the U.S.economy, then NX will be negative and an equal amount of funds will be invested in the U.S. by foreign individuals and firms. Foreigners who hold our dollars will directly invest in the United States. Mathematically, S - NX = I (remember, NX is negative when imports are greater than exports, so "minus NX" is a positive number).
Alternatively, we can write:
S I = NX
If I > S, this means that NX < 0; in other words funds are flowing into the U.S. from abroad. (We must be borrowing from the rest of the world.)
If I < S, this means that NX > 0; in other words, U.S. savings are flowing out of the U.S. for investment abroad.
One more time: If imports are greater than exports, NX will be negative. Dollars will be in the hands of individuals in foreign countries who do not want to buy goods and services from us but, instead, plan to invest in our economy.
A merchandise trade deficit (imports greater than exports) means that net foreigninvestment is negative as well (more funds are invested in the U.S. than we invest abroad). The dollars that are traded to pay for our imports come back in the form of investments in the U.S. by foreign individuals or companies. We buy goods and services from them, they "buy" investments here.
Is this good or bad? Economists would say "resources are going to their highest valueduse." However, if you are an exporter in the U.S., you won't like it! Overall, foreign investment has a positive effect on economic activity in the U.S. When investment in the U.S. rises, the rate of capital growth increases (factories are built or remodeled). Investments in the U.S. economy also spur research and development, which leads to innovation and technological advances. Increases in the physical capital stock and advances in technology increase the productivity of U.S. labor and other resources, pushing up the market value of workers, thereby increasing domestic incomes and wealth overall.
So, don't get confused when you see a large trade imbalance. All you see, when you look at the trade balance, is the merchandise side, not the financial side of trade."
What did I say that was irrelevant or incoherent? The single post I made was to ask you to explain how tax increases would help the trade deficit. You obviously have this rote response when anyone points out that you don't know what you're talking about.
You want an example of irrelevant or incoherent? Here's one:
Service sector activities do not create wealth, they merely transfer, redistribute and eventually dissipate wealth as consumption. Thus, as value-added activities move offshore and the U.S. labor force shifts to the Service Sector, wealth is dissipated, not created. And the U.S. standard of living declines as a result.
This is idiotic second grade kind of stuff. By this logic production of goods also represents dissipation of wealth, since all physical goods eventually wear out. The definition of wealth includes financial assets, which are not physical. Most wealth is in that form, not physical assets, as anyone who's not a complete idiot understands. Those financial assets can be exchanged for either goods or services.
Your attempt to assert services somehow don't have a value is nutty. Your focus on the term "value added" is pointless. This refers only to manufacturing because only a manufacturing process has distinct stages where value is "added". The value of anything is what people pay for it. A service and good have the same value if their price is the same. Production of either goods or services adds to wealth.
You're thinking is one dimensional. There is such a thing as trade balance, where you have an equal amount of imports and exports. This would be the ideal place to be, not a net importer and not a net exporter.