Another Year, Another Record Trade Deficit

Bill Scher

The trade deficit ballooned to $764 billion in 2006, a new record shortfall.

The White House shrugged its shoulders. From the W. Post:

“Trade is good for America,” [White House spokesman Tony] Fratto said. “There are dislocations for people when you trade. A factory closes, those are real people. But the benefits that accrue to all Americans are clear.”

But this severely unfair trade may not benefit all Americans. Also from the W. Post:

Some analysts fret that the trade deficit’s continuing climb raises the possibility of a precipitous drop in the dollar. For now, China, Japan and many oil-producing countries are plowing the proceeds of their exports to the United States back into the country by buying U.S. Treasury bills, propping up the dollar and allowing the Fed to keep interest rates low.

But if these nations get spooked by the size of the trade deficit and reduce their dollar purchases, the value of the U.S. currency could plunge, forcing interest rates higher and hurting the economy.

“Instead of producing products, we’re just printing money,” said Peter Schiff, president of Euro Pacific Capital, a brokerage firm in Darien, Conn. “We’re in serious trouble.”

That analysis is in line with Campaign for America’s Future Straight Talk report, where we conclude:

Neither political party has a response to the unsustainable trade deficits. Both end up leaving it to market forces to make the necessary adjustments.

China, Japan and the East Asian countries will eventually stop keeping their currencies cheap. The value of the dollar has already begun to fall, but it isn’t clear how far down it must go for US exports to be competitive again.

Without a strategy to rebuild production in the United States and a coordinated effort overseas to boost demand and manage currency adjustments, we risk a long and painful economic recession here and the perils of a global depression abroad.

House Dem leaders responded to the news calling for:

a fundamental shift in U.S. policy … that addresses the burgeoning deficit, and starts the process of reversing the trends in job declines and wage stagnation.

The NY Times says the letter shows some disagreement between the Dem leadership and grassroots organizations:

The Democratic response from the House was notable, however, for its basic embrace of the principle of negotiating trade deals and its openness to renewing the president’s negotiating authority, which is known as fast track because of the provision allowing for one up-or-down vote.

A much tougher stance was taken by consumer, environmental and labor groups. They called on Congress to let the president’s negotiating authority expire and to reject the various pending trade deals and the philosophy of free trade that led to past accords like the North American Free Trade Agreement, or Nafta, with Mexico and Canada.

Actually, the Dem letter didn’t mention fast-track at all, probably glossing over an issue that the caucus isn’t in full agreement on. (Of note, activist David Sirota just joined Wall Street businessman Leo Hindery in an oped calling for the rejection of fast-track.)

And we have not implemented a “philosophy of free trade” but of rigged trade where too many workers get the short end.

Lots more background at the AFL-CIO blog.

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