By recent standards, the dismal U.S. trade figures for April 2000 counted as a relief. After all, imports fell slightly, and this helped narrow the trade deficit for the first time since August 1999.
So much for the good news. Now for the bad: At $30.4 billion, the April deficit was just fractionally below the record $30.6 billion deficit set in March. That makes it the second-highest deficit ever. Worse, the narrowing trade gap in April was evidently no more than a temporary aberration, reflecting an all too brief easing of world oil prices for a few weeks in the spring. The underlying trend remains worrisome--far worse than almost anyone has noticed.
Just how bad is it? Awful. That April figure is 60 percent higher than the April figure of a year ago. Even if oil prices don't rise any further, America's current account deficit--which is the broadest measure of America's trade deficit with the rest of the world--is on course to approach 4.5 percent of gross domestic product this year. By comparison, the worst the deficit ever ran in the 1980s--which, remember, was supposed to be a truly terrible time for American trade--was 3.6 percent of gross domestic product.
Comparing today's trade deficit with the then-shocking deficits of 1971 and 1972 is even more telling. The deteriorating trade balance in the early 1970s was considered so serious by August 1971 that it forced the Nixon administration to make the historic--and deeply humiliating--decision to abandon the dollar's gold convertibility. (The Nixon administration's idea, at least in part, was that if the dollar floated against other currencies, the dollar's value would fall, making exports cheaper and imports more expensive, thereby reducing the trade deficit.) But those shockingly high deficits of the early 1970s? A mere 0.1 percent and 0.5 percent of gross domestic product, respectively, in 1971 and 1972, a far cry from today's much larger 4.5 percent.
And yet the recent deficits have so far caused hardly a ripple of public concern. The conventional economic understanding used to be that a country running large trade deficits wouldn't be able to pay for all the products it imported. Paying for the imports would then require borrowing from other countries, which in turn would require making interest payments on foreign debt. Paying the interest on this debt would require earning more, and that would require exporting more--all of which ultimately would lead to a drop in the value of the national currency.
But the U.S.'s triumphalist economic view today is that "trade deficits no longer matter." This idea was once associated solely with the wilder shores of globalism. For example, it has long been a hobbyhorse of The Wall Street Journal's neoconservative editorial pages, and it achieved perhaps its most memorable articulation in a 1993 commentary by Kenichi Ohmae, a former McKinsey guru in Tokyo. "No one worries about trade balances between California and Texas," he said. "Why should they worry about the balance between the United States and Japan?" It was for comments like this that Michael Lewis dubbed Ohmae the "galloping globalist." These days, however, judging by the ennui with which papers like The New York Times and The Washington Post have treated the deteriorating trade trend, Ohmae's view has gone mainstream.
Is it really true that America's mounting trade deficits are not a problem? Hardly. The negative implications are legion. In fact, it may not be much of an overstatement to say that unless Washington can quickly reverse the trade trend--by exporting more and importing less--America's days as the world's leading economy are numbered.
Of course, talk of this sort rankles proponents of the conventional view, who see a cyber-charged America triumphantly leading the world into a new era of unprecedented economic overachievement. The irony, however, is that the very speed with which the United States has embraced postindustrialism is what has caused its trade deficits to burgeon so rapidly: Postindustrial businesses earn very little from foreign exports and therefore do little to contribute to our balance of payments with other countries.
Even the mighty Microsoft Corporation is a disappointing exporter. Its exports in a typical year account for less than one-quarter of its total sales revenues. (By comparison, strong American manufacturing companies in, for instance, the American aerospace industry can achieve export ratios of close to 50 percent of total output, and some leading Japanese manufacturers export as much as 80 percent of their total output.) Microsoft's export ratio is particularly disappointing given that the company has long enjoyed a famously all-embracing lock on the global market for personal computer operating systems. Few major companies have ever enjoyed such a large share in an important global business.
But Microsoft's disappointing export performance is hardly surprising; Microsoft's story is a classic illustration of the weaknesses of postindustrial businesses in foreign markets. For one thing, Microsoft--like many other postindustrial businesses--suffers badly from piracy in many foreign markets. For another, cultural barriers also importantly limit Microsoft's contribution to the American balance of payments. Its word processing programs, for instance, must be comprehensively adapted to sell in many key foreign markets. The costs of these adaptations, usually done abroad, eat severely into the revenues remitted to the parent company in the United States.
If Microsoft is a lackluster exporter, other postindustrial businesses are abysmal. America Online, Yahoo!, and eBay--the story is always the same: These companies contribute virtually nothing to America's balance of payments. No area of the postindustrial economy turns in such a disappointing performance as financial services. Although many of America's great financial services firms have been serving foreign markets for more than a century, their long experience abroad does not translate into superior export performance. Take Merrill Lynch. Although the firm generates about a quarter of its revenues outside the United States, only a small fraction of such foreign revenues count as U.S. exports. This is because the firm is a classic service business: It generally serves its foreign customers from offices in the markets concerned. Virtually all the salaries and other expenses involved in serving foreign customers count as deductions from the company's foreign revenues. When these are netted out, it is apparent that even in a good year, less than 5 percent of the firm's revenues contribute to the American balance of payments.
The other side of postindustrialism is the continuing decline of many of America's erstwhile worldbeating manufacturing indus-tries. Various vested interests--from the McKinsey Global Institute to the American electronics and aerospace industries--have sought to disguise the extent to which American manufacturing has lost competitiveness in recent years. While many disingenuous arguments have been advanced to suggest that American manufacturing has rarely been stronger, a glance at America's international trade position tells a different story: A rapidly increasing percentage of American imports now comes from nations where wages are actually higher than in the United States. (Nations whose wage levels at last count were higher than America's include Switzerland, Germany, Denmark, Sweden, and Austria, all of whom enjoy booming exports to the United States.) This is significant. The usual argument made by the more Pollyannaish globalists is that the American trade deficit derives in large part from U.S. trade with countries whose wage levels are lower than ours: This makes imported products less expensive than products manufactured here. But if a growing portion of our manufactured imports comes from high-wage countries, the clear message is that manufacturers in such nations are now more productive--they're making better products, more efficiently--than their American counterparts.
Still Affluent Japan
The manufacturing achievements of these European countries, however, pale in comparison to Japan's. Amid all the triumphalist talk in recent years about America's supposed besting of the Japanese economic challenge, Americans have lost sight of a basic fact: The Japanese yen has generally risen in recent years. Measured against its level at the end of 1989, the yen has gained more than 36 percent against the U.S. dollar. Thanks in large measure to this rise, Japanese wages are now the world's highest. In fact, unbelievable as it may seem to those who accept the American press's presentation of Japan as an economic basket case, wages in Japan now run nearly 40 percent higher than in the United States. Yet today, after a decade of banking problems and much else, Japanese exporters are in line to generate a surplus of about $85 billion with the United States alone in 2000.
Why does the United States buy so much from a nation where labor is so expensive? Because America literally cannot make the products for itself--they are too advanced. While Americans associate Japan with assembling consumer goods like television sets and cars, an estimated 70 percent of what the United States imports from Japan these days consists of highly sophisticated producers' goods such as high-tech components, advanced materials, and complex capital equipment. The manufacture of such products is not only highly capital-intensive but also highly know-how intensive--so much so that it is generally much more difficult to enter than most areas of the vaunted postindustrial economy on which the United States is betting its future.
Unseen by the American consumer, Japan is the world's main--and in many cases, only--source of the key machines without which the American economy would literally grind to a halt. Many of the most advanced presses used to stamp out car bodies in Detroit, for instance, are made in Japan. So too are the sophisticated robots used to paint cars. Meanwhile, behind the scenes in American television studios, most of the cameras and other highly advanced broadcasting equipment are Japanese-made. Ditto for the huge printing machines used by publishers like The Washington Post.
The United States is also heavily dependent on Japan for key components in all sorts of consumer products. Often Japan's contribution consists of supplying enabling components without which whole classes of products would simply not exist. Consider laser diodes. Unless you're an engineer, you've likely never heard of these tiny devices, but they are the key technology in CD players, CD-ROMs, and DVD machines, and are essential also in everything from fiber-optic communications to laser printers. The Sony Corporation, based in Tokyo, alone produces about 50 percent of the world's laser diodes--all the rest come from other Japanese manufacturers.
Even the American aerospace industry is becoming increasingly dependent on Japan. The Japanese are vital sources of such crucial aerospace requirements as carbon fiber and refined titanium. They also dominate the manufacture of a host of key components such as liquid crystal displays and charge-coupled devices. (Although charge-coupled devices are not familiar to the nonengineer, they perform a variety of vital tasks, including such national security-sensitive functions as guiding American cruise missiles down enemy ventilation shafts.) Boeing acknowledges that 20 percent of the components in its most advanced passenger jet, the 777, are sourced from Japanese suppliers. When account is taken of Japanese-made subcomponents used by Boeing's American and European suppliers, ultra-high-wage Japan probably accounts for more than 30 percent of the manufactured content in the 777.
America the Dependent
America is widely seen as the driving engine of the global Internet economy, and in some sense, it is. But few people are aware just how dependent the United States has become on higher-wage nations for the fundamental technologies that make the Internet possible. Americans laughed when Al Gore claimed to have invented the Internet, but they are guilty of advancing a similarly self-serving myth when they claim that the rise of the Internet is an exclusively American achievement.
The widespread use of the Internet would never have been possible without major breakthroughs in fundamental manufacturing technologies. Remember that computer chips are now nearly 100 times more powerful than the already almost magically powerful chips of a decade ago. To make more powerful chips, the world's semiconductor companies have had to print ever-finer lines on ever-more-refined silicon.
For a time, the United States had the lead in the chip market. No longer. Japan dominates the world market both in refined silicon and in the lithographic machines that print lines on silicon chips. By dint of these technologies, as well as several lesser ones, Japan is the prime mover of the entire electronic revolution.
Perhaps the ultimate symbol of America's dependence on imported technology is mobile phones. Although these devices--undoubtedly the most impressive exercises in miniaturization the electronics industry has so far produced--are sold under American as well as European and Japanese brand names, they are almost entirely Japanese in their fundamental manufacturing technologies. According to an analysis by Deutsche Securities, a subsidiary of Germany's Deutsche Bank, of the 36 leading manufacturers that make the nine highly miniaturized enabling components in mobile phones, all but seven are entirely Japanese.
In view of facts like this, it is hardly surprising that exports from Japan recently accounted for 13 percent of all America's imports. Germany accounted for an additional 5 percent, other ultra-high-wage nations for yet another 5 percent. All in all, therefore, close to one-quarter of American imports are now coming directly from nations where wages are higher than America's. But the situation is even worse than these figures would imply because much of what America imports from lower-wage nations represents value ultimately attributable to ultra-high-wage nations. For instance, close to one-third of the value in the exports from China and other low-wage East Asian nations is probably accounted for by the Japanese-made components, materials, and capital equipment that went into the construction of the final product. Similarly, exports from the lower-wage nations of Europe are in large measure made up of added value created in high-wage nations, most notably Japan and Germany. Add it all up, and we find that upwards of 35 percent of all of America's manufactured imports come from nations that have passed America in wage levels.
Even absent this sobering fact, the scale of America's current account deficits is in itself a clear warning that the American economy's supposed success in boosting its competitiveness in recent years is a lot more sizzle than steak. As Alan Greenspan has pointed out repeatedly, trade deficits are ultimately unsustainable.
Why Trade Deficits Matter
Sooner or later something will give, and that something is the exchange rate. If the past is prologue, the dollar will fall suddenly and precipitously, in much the way it did in the mid-1980s and early 1990s, two occasions when it lost half its value against the yen. (To pay for all those imports, Americans must sell dollars to buy the foreign currency necessary to pay for imports; the flood of dollars into the exchange market drives the value of the dollar down.) That we are close to a similar adjustment seems obvious given that--entirely overlooked by the American media--America's current account deficit last year hit an all-time record of 3.8 percent of gross domestic product, with preliminary indications that the deficit this year could exceed 4.5 percent. This compares with a previous record of 3.6 percent set in 1987.
Even putting aside worries about foreign-exchange rates, there is still this to consider: Every dollar of current account deficit the United States incurs represents another dollar of assets transferred from American to foreign hands. No one in America seems to have perceived how rapidly the country is going into hock to its major economic competitors. The most obvious manifestation of this phenomenon is the takeover of major American corporations by foreign interests. In recent years, we have seen Amoco taken over by British Petroleum and Chrysler by Daimler-Benz. Much of American finance is already foreign-owned: First Boston, for instance, is owned by Credit Suisse, Republic Bank by HSBC Bank USA, Dillon Read by Union Bank of Switzerland, the Kemper Corporation by Zurich Insurance, and Bankers Trust by Deutsche Bank. More than half of the American book publishing industry is now German-owned. Even in the dot-com sector, foreign ownership has penetrated much further than almost anyone has noticed. Tokyo-based Softbank Corporation, for instance, has reputedly acquired stakes in more than 100 American cyberspace businesses of which Yahoo! and E*TRADE are only the most visible. Meanwhile, Paris-based LVMH is a major investor in the Datek online brokerage firm as well as in Cisco Systems and MP3.com.
Every day, it seems, brings news of another foreign takeover. In the past few months alone, we have seen WPP Group of London bid for Young & Rubicam while Madrid-based Terra Networks has made an all-stock bid for the Lycos Internet portal. The Anglo-Dutch food company Unilever has bought Ben & Jerry's and agreed to purchase Bestfoods.
The cumulative effect of all this is a dramatic diminution in America's economic standing on the world stage. While it may not be immediately apparent to voters or even to opinion leaders, it is obvious in national asset/liabilities figures published by the International Monetary Fund. These show that in the first nine years of the 1990s alone, America's net foreign liabilities ballooned from $49 billion to $1,537 billion.
Faced with such figures, many American opinion leaders may be tempted to bury their heads in the sand. They should be reminded of the fate of earlier empires that paid too little attention to trade. It is time they checked out what happened to the Ottoman Empire. ¤