Q & A

by Matthew Chavez

Daily Lobo columnist

The U.S. trade deficit - the amount by which America's imports exceed its exports - has quadrupled since the Bush administration took office in 2001. In 2006, the trade deficit reached a record $818 billion. There is little consensus among economists about the implications of such a large imbalance. I spoke with UNM professor Christine Sauer, a specialist in international economics, to help readers cut through the confusion.

Daily Lobo: Pat Buchanan called the trade deficit a "malignant tumor in the intestines of the U.S. economy." Why does the trade imbalance arouse such diagnoses?

Christine Sauer: Most economists would probably take a position different from Buchanan - I certainly would. When we think about an individual taking out a loan and going into debt, it matters why we go into debt. Are we running a deficit so we can have a big old party here in the U.S., where we engage in what (economist) Thorstein Veblen called "conspicuous consumption"? Or is the trade deficit actually a good debt in the sense that we are importing more than we're exporting in an effort to transform the U.S. economy, make it more competitive so our export industries are more successful on global markets? Back in the 1990s, we probably had more of this party atmosphere. I think now it's more good debt in the sense that the deficit is a reflection of the fact that U.S. economy is transforming itself to become more efficient, more competitive and so forth. That's to some extent confirmed by the fact that (foreign lenders) are willing to lend us these dollars, because the U.S. economy is still one of the better and safer investments around. U.S. government bonds are very safe. The U.S. stock market has made a comeback, and we're now talking about the Dow Jones

Industrial hitting 13,000. That's an indication that people think U.S. stocks and government bonds are a good deal.

DL: What is the trade deficit's impact on low-income Americans?

CS: Trade is a good thing because it gives us a bigger choice of things to buy and typically at lower prices than would be available if we were to produce everything ourselves. For low-income people, as much as we like to complain about the trade deficit with China and all the cheap stuff that's flooding our markets; look at Wal-Mart. Are the aisles ever empty there? The cheaper imports help their incomes to go further and therefore allow them to have a higher standard of living.

DL: What about Wal-Mart's negative impacts on small businesses, jobs and wages?

CS: That's really an internal issue, because what we need in the U.S. is better support for people that get displaced by international trade competition. There are some laws on the books, so-called trade assistance. But they're not particularly user-friendly, and they're not very heavily used.

DL: China is second only to Japan in its holdings of U.S. government bonds. Also, Chinese imports account for about one-third of the total U.S. trade deficit. Does that give China power over the U.S.?

CS: It's a two-edged sword. The imports from China mean that dollars flow to China, and they invest them in U.S. government bonds. You could say we're making ourselves more dependent on one particular lender, but the Chinese, while an important holder of U.S. government bonds, are not in a position where they can really jerk things around and call shots.

DL: Are they in a position to economically punish the U.S.?

CS: If they punish us, they punish themselves. If the Chinese were to start suddenly selling off all of their government bonds, the prices at which they can sell these bonds would suddenly start falling dramatically. In that sense, they would actually hurt themselves if this were a fire-sale type of reaction.

DL: Wheaton College professor John Miller warned in 2005 that if Asian lenders withdraw their financial support for the U.S. trade deficit, "the dollar would drop through the floor; U.S. interest rates would skyrocket ... the stock market and home values would collapse; consumer and investment spending would plunge; and a sharp recession would take hold here and abroad." How likely is this scenario?

CS: Not very likely, unless you have a kamikaze type of mentality as a foreign entity, that it's in your interest to have stock and bond prices fall rapidly and hurt your own investments. I don't want to play down the possibility that all of these things might happen, but I don't think they're going to happen on the order of magnitude that (Miller) might have envisioned. It's not really sure yet that this trajectory of ever-rising deficits is going to continue. If we're importing mostly consumer items that are being used up very quickly, that may not be good debt to go into. But if we're importing a lot of so-called capital goods that are used as inputs in the production process of U.S. firms that help them become more competitive, more efficient, then that's a good thing.

Matthew Chavez is a political science major with a focus on international relations and a minor in Middle Eastern studies.