By Kevin G. Hall
WASHINGTON — This year, as the nation celebrates Independence Day, the sputtering U.S. economy offers a stark reminder that today we’re more dependent upon foreigners than ever before.
We need them to finance our debt; China and Japan together hold more than $2 trillion of U.S. Treasury bonds. We need them to supply much of the oil that’s critical to our economy. We need them to make the shoes we wear and the gadgets that dominate our lives. We even need them to buy more of the products we make, as growing exports are vital to our economic rebound.
None of these dependencies is particularly new, but there’s growing concern about how much economic independence we’ve lost.
“We’re much more dependent than we have been, probably since the 1800s,” said Clyde Prestowitz, a former U.S. trade negotiator and the author of the 2010 book “The Betrayal of American Prosperity.”
“I think dependence per se is not necessarily a bad thing. The question is whether the dependence is working to your advantage or against you… Our dependence is growing in ways that are disadvantageous to us.”
The most obvious example of dangerous dependence comes from foreigners owning our debt. Through April, the most current reading, foreigners held 31.4 percent of Treasury Department-issued securities, worth almost $4.5 trillion. (That’s up sharply from June 2005, when foreigners held 24 percent of U.S. Treasury debt.) Two countries account for half of today’s number — China ($1.152 trillion through April), and Japan ($906 billion).
If China or Japan were to sell their holdings at once, that would badly disrupt financial markets. Such a scenario is unlikely, since it would reduce the value of their holdings and harm relations with a vital market for their exports. But holding huge amounts of U.S. debt gives these nations a degree of leverage over us, especially on issues such as trying to get China to devalue its currency.
And China’s undervalued currency gives it a trade advantage over us. It makes China’s exports to us cheaper and our exports to them more expensive. Our two-way trade imbalance skews widely in China’s favor.
U.S. exports to China in April, the last monthly data available, were $7.9 billion, about 8.5 percent of all U.S. exports, up sharply from $4.7 billion in exports to China in April 2007.
That’s in line with April U.S. exports of $124.9 billion to the rest of the world, up nicely from $92.5 billion in exports in April 2007, the last year before the U.S. financial crisis and start of the Great Recession.
The tale of dependency is clearest in imports. Overall imports from the world in April totaled $182.2 billion; China accounted for more than 16 percent of that at $29.6 billion.
The U.S. last year had a trade deficit of $497.8 billion, up from a deficit of about $375 billion in 2009. That includes trade in services, such as insurance. On merchandise trade alone, the U.S. deficit last year was $634.9 billion.
Trade deficits are pernicious. They exaggerate the consequences of dependency in a down economy. The larger value of imports cancels out the economic growth associated with exports. In a down economy, imports drag down the economy’s broader growth rate, weighing on consumer sentiment and employment.
To counter this drag, President Barack Obama last year vowed to double the nation’s exports within five years. That’s a good goal; it would boost jobs and growth. However, it also would make the U.S. economy more dependent on foreign buyers of our goods and services to sustain our prosperity.
The composition of our trade balance may seem odd: Our top categories of goods imports are also our top exports. For merchandise trade, top exports and imports are both in transportation equipment, computers and related products. Boeing and its European competitor Airbus — as well as their aircraft parts suppliers_ account for the biggest single share of trade, both exports and imports. U.S. consumers gobble up foreign-made laptop computers, but U.S. exporters sell computer-based medical technology around the globe.
Much of the $634.9 billion merchandise trade deficit for 2010 comes from imports of foreign oil _$270.7 billion through June 24. Computers and electronics accounted for another $134.6 billion, apparel and accessories a smaller but still significant $71 billion.
On the plus side, U.S. farm products were a trade surplus, selling $36.2 billion, with machinery close behind at $32.3 billion, followed by waste products and scrap metal at $24.3 billion.
Obama’s export goal faces long-term hurdles. Many big corporations have opted against exporting and instead now manufacture where they sell. In 2010, almost half — 47 percent — of the sales of companies listed on the benchmark S&P 500 stock index came in foreign markets, according to preliminary data.
That’s up a tad from 46.6 percent in 2009 and up sharply from 41.84 percent in 2003, according to Standard & Poor’s. There’s no reliable data on this from the 1990s, when globalization moved from a trot to a gallop.
These percentages mean that big American companies increasingly depend on sales abroad. America is a large developed economy that offers steady but not stellar rates of sales growth. The real opportunity rests outside our borders.
“The size and magnitude of it makes it important to profits and corporate futures,” said Howard Silverblatt, a senior index analyst for Standard & Poor’s. “The foreign growth, which is substantially higher than the U.S. growth, emphasizes where the companies continue to expand production and, unfortunately, do the hiring.”
For the jobs that still exist here, there’s also a dependency on global forces. Economists point to a chilling effect on U.S. wages because so much manufacturing and even white-collar work can now be shipped abroad. The increasing integration of the U.S. economy into a poorer global economy is thought to be a key factor in growing U.S. income inequality, where the income gains of the middle class are far smaller than those at the top of income scale.
“I think it’s a very significant factor,” said Larry Mishel, the president of the Economic Policy Institute, a liberal research organization that closely tracks wage and labor issues.
EPI research suggests that trade with emerging markets, and globalization of trade more broadly, had the effect of reducing by $2,500 a two-earner family’s annual take-home pay in 2006 from what it otherwise would’ve been.
In addition, big emerging economies such as China, Brazil, and India will increasingly influence what we earn, the jobs we retain, the price we pay for a loaf of bread, a cup of coffee and especially a gallon of gasoline. Because their growing appetite for goods competes with others, including us, and drives up prices.
“It means there is going to be more upward pressure on commodity prices than we have seen in the past, and oil is prime among them,” said Alan Levenson, the chief economist for the Baltimore-based investment firm T. Rowe Price. “You can do the math about what happens to global demand if China wants to live like Europe.”
The growing dependence of the U.S. economy on China and other emerging economies results in a leveling out that Thomas Friedman famously noted in his book “The World is Flat.”
Prestowitz, the former trade negotiator, doesn’t buy that view of the new economic world order.
“It may be flat, but it is tilted, and it’s tilted in a way right now that technology, production, jobs and wages tend to slide away from us to the rest of world,” he said.
The growth of these economies — good for their people, and providing export markets for ours — brings with it a curse of bounty. As they develop, these nations consume more soybeans, corn, steel, cement, and oil. Over time, that will strain global supplies. This is already happening with oil.
“It was earlier in the decade that people woke up to the scale of the impact of emerging markets on the oil markets,” said Daniel Yergin, a Pulitzer Prize-winning oil historian and author of “The Prize: The Epic Quest for Oil, Money & Power.”
“The irony is we are looking at flat or declining demand in the United States, and it (global demand) is rapidly growing as incomes go up around the world. And that’s what is going to grow (global) demand. When countries reach a certain level of income, they start buying a lot of cars.”
Many energy experts think we’ve passed our peak level of energy demand and that we’re increasingly more energy efficient and self-sufficient. That’s thanks in part to deepwater drilling, which has boosted the domestically produced share of the oil we consume to about 53 percent. And two of our five largest foreign oil suppliers are next door — Canada and Mexico — which are more secure than Middle East sources.
Despite that, the price of oil and its related products continues to rise and of late has slowed U.S. economic growth. America consumes more oil than anyplace else, but even our improving ability to control that thirst has limited impact on the price.
Oil prices are set globally. Increasingly, they’re influenced by factors such as Chinese demand and subsidies for fuel consumption in prosperous but inefficient Middle Eastern nations. In addition, financial speculation plays a role. Taken together, these factors mean it’s likely that oil prices will remain volatile, and their impact on the U.S. economy largely beyond U.S. control.
In an increasingly inter-dependent world economy, shocks spread quickly. The U.S. financial system has limited exposure to the Greek bonds at the center of the current European financial crisis.
But U.S. banks and money-market funds are invested in European banks, and they, in turn, are invested in Greece, Spain, Ireland and other struggling euro-economies. If things unravel across the Atlantic, this inter-dependency could further endanger the U.S. economic recovery.
In addition, there’s the chance that foreign investors who hold much of the U.S. debt may come to view America as Greece — at risk of defaulting on its debt. Washington is struggling over raising the government’s debt limit. Treasury Secretary Timothy Geithner has warned that if Congress doesn’t raise it by Aug. 2, the nation will default on its debt.
In a recent breakfast meeting with reporters, Congressional Budget Office Director Douglas Elmendorf warned that flirting with default is dangerous because the U.S. has never defaulted on its debt, and we are increasingly dependent on the outside world for finance.
“That’s what makes it a gamble. Any government that has borrowed as much as ours has borrowed — and will need to borrow as much as ours will need to borrow — cannot take the views of its creditors lightly,” Elmendorf said. “Even a small increase in the perceived risk of Treasury securities would be very expensive for the country. If Treasury rates moved up by just 10 basis points (a tenth of a percentage point) over the next decade, that would add $130 billion to interest payments over the decade.”
If Washington fails to address this problem by Aug. 2, investors are likely to judge that U.S. credit is not as reliable as it was, and they’ll raise interest rates on loans to government, businesses and individuals alike. No fireworks would celebrate that day.
See Related: Happy Birthday America! – On Scene with Bill Wilson