International Forecaster Weekly

Trade Imbalances

trade imbalances, trade deficits, inflation, deprecating dollars,  salvation in exports,  and a corrupt attorney general.

Bob Chapman | July 15, 2007

Over the last ten years we have said that a lower dollar is not going to appreciably affect our balance of trade and current account deficit. Many look to depreciation to curb our appetite for foreign goods by pushing up the cost of imports, which is already in process. There are other factors as well, such as the use of the dollar in invoicing US trade, the market share concerns of exporters to the US who will do their best to keep there currencies cheap and sizeable US distribution cost. The weaker dollar will boost foreign demand for US exports, but this is unlikely by itself to close the deficit. We simply do not export enough to make a sizeable dent by exporting. Thirty years ago we had the most vibrant export economy in the world, but that in great part has been destroyed by the offshoring of production and the outsourcing of jobs that number more than five million. Worse yet, corporate America tells us they will remove an additional 40 million jobs over the next ten years. That said, the only solution is tariffs on goods and services. That is the only thing that can bring us back into balance and that will take 10 to 15 years to be accomplished.

In 2006, the US trade deficit reached $759 billion, or almost 6% of GDP. A weaker dollar say at 72 on the USDX, the dollar index, would help, but unfortunately not very much. We believe a dollar at 50 would help substantially, because it would make US goods cheaper for exports and at the same time make imported goods more expensive. This would not provide the total answer and tariffs would still be needed, not only to bring us into balance, but also to force former domestic manufacturers and service providers to return their businesses back to the US to provide employment as well. We have been playing on an un-level playing field for far too long. Free trade is not fair trade. We have been unduly taken advantage of and it has to stop.

The experts, especially those trotted out by the CFR, Trilateral Commission, WTO and NAFTA, do not have any viable solutions. They are a good part of the problem. They want our economy emasculated because in that way they can more easily implement world government. In addition, Americans have to be prepared for higher inflation, which accompanies higher prices.

Normally foreign exporters would try to further depreciate their currencies in order to gain market share, or keep their market share. The problem with that is that they are already loaded with dollars and are trying to get rid of them because they are depreciating. The more they depreciate their currencies the more dollars they gain and the more losses on dollar-depreciation they take. Are they willing to absorb those dollars? No one really knows, but our guess is no. Besides if they do that we can assure you Congress will implement goods and services tariffs if they are not already in place. Another facet that will make success difficult is that ever-rising inflation caused by more expensive imports will feed throughout the US distribution system, pushing prices on imported goods even higher.

The elitists tell us our only salvation is exports. Twenty-five years ago exports were 25% of GDP, today they are 13%, so that doesn’t look like a successful avenue based on volume. In the absence of goods and services tariffs we won’t really know how this will work out until we get there. The path to recovery is export expansion, but we are limited due to lack of production. Regarding imports, there will be domestic substitution, but the greater impact will come from exports.

A ten percent dollar depreciation lowers the foreign currency price of US exports 7%, holding other factors constant. The same drop generates at most a 4% rise in prices of imported goods at the border. As you know economics is not a science, it is an art form, thus, we estimate that foreign demand for US exports would rise 10% while that of imports would decrease only 1%. A 35% depreciation would put the USDX at 52, and you could project those figures by 3.5. Exports, if we have the base left, could rise 35% and imports would fall 4.5%. An American recession would help on the import side to dampen demand. All these adjustments would have to be in place for several years to affect success and if foreign nations continue to depreciate their currencies all bets are off. That is why we should go to tariffs on goods and services and allow a 35% dollar devaluation. If countries like China cheat on the currency side then we simply unilaterally raise their tariffs. The idea is to stop the deficits. What will also be evident is that free trade and globalization has been an economic and social disaster for the US. Never again should we allow elitists to run our economy from behind the scenes.

Inventories at wholesalers rose 0.5% in May while sales rose 1.3%. Gasoline and energy costs pushed sales numbers higher. The May wholesale inventory-to-sales ratio was at a new low of 1.11 yoy, wholesale inventories continued to lag sales, rising 6.7%, while sales were up 8.7%.

Attorney General Alberto R. Gonzales, as he sought to renew the Patriot Act two years ago, lied when he assured lawmakers that the FBI had not abused its potent new terrorism powers, when in fact he knew they had. Just six days before that, the FBI sent Gonzales a copy of a report that said its agents had obtained personal information that they were not entitled to have. There had been half a dozen similar reports over the previous three months. The FBI was involved in unauthorized surveillance, an illegal property search and a case in which an interment firm improperly turned over a compact disc with data the FBI was not entitled to collect. We have the criminals minding the criminals. Who is going to protect us from our protectors?