The Hindu Business Line : Dollar slide and mounting US trade deficit

THE US trade deficit stood at $483 billion for the calendar year 2002. According to the latest US Statistical Abstract released earlier this month, this figure went up by $65 billion to touch $548 billion in 2003.

Like its predecessors, the latest abstract does not highlight China in its `Table on International Transactions by Area and Selected Country', even though China has, for years now, been the largest single contributor to the US trade deficit.

According to the figures posted on the Internet by the US-China Business Council, China, with its $111.4-billion deficit in trade with the US, accounted for 23 per cent of the total US trade deficit in 2002. Over 2003, this share moved up by another 1.6 per cent, even as the total US deficit increased by more than 13 per cent, due to a 21-per cent bump in China's trade deficit with the US, to $134.8 billion.

The dollar began its sharp decline against other currencies in May 2002. The most striking result was a sharp increase in the value of the euro relative to the dollar, as the dollar dropped from a value of about 1.08 euros in May 2002 to 0.7929 euros on December 31, 2003. Correspondingly, the exchange value of the euro rose from about 93 US cents in mid-2002 to $1.26 by the end of 2003 — 35 per cent in little more than 18 months.

With China having effectively pegged its currency to the US dollar, the RMB/$ stayed put at 8.28 over the entire period, as it has for more than six years.

The decline in the dollar, which the US Treasury Department Officials have recently begun talking about, has been taking place despite the administration's definite preference for a strong dollar. It began with the declared intention of promoting employment in the US economy by deterring the `dumping' of imports into the US by making them more expensive, and encouraging the dumping of US exports by making them more `price competitive', without in any way violating any of the WTO restrictions on subsidisation of exports.

The interesting thing is that the US should have `allowed' the drop in the dollar to continue even after it became apparent that, ostensibly, the `wrong party' was getting hurt (the EU countries together, including the UK, accounted for only 18 per cent of the overall US trade deficit over 2002 and 17.8 per cent in 2003).

Actually, this is far from being the case. The thing to bear in mind is that US exports to the EU exceed US exports to China by $100 billion a year.

Even a small percentage step-up in this figure over a period of years, due to the drastic change in the exchange rate, could make a large difference to the number of jobs created in the US.

Meanwhile, unlike the trade deficit, absolute levels of the US imports from the EU too exceeded those from China - $175.5 billion to 125.2 billion over 2002 and $186.7 billion to $152,4 billion over 2003. The point is clear. If it is jobs the US wants to increase or protect, with the help of foreign trade, rather than decrease its deficit, it would probably do better to target the EU. Because its trade volumes with the US are greater than those of China by a large margin. And because the US anyway simply cannot compete with China, given the very much lower wage levels there and the highly sophisticated US-owned production facilities.

The latter by itself does not give the US much of an edge vis-a-vis the EU. But in conjunction with the former, the US is certainly better off taking its chances there.