Weak Dollar Won't Fix Huge U.S. Trade Deficit
Dollar's Fall Boosts Asian Exporters; Some Economists Say a Bubble Grows By REBECCA BUCKMAN Staff Reporter of THE WALL STREET JOURNAL
HONG KONG -- Add this to the current unease about a weakening U.S. dollar: It may not do much, at least in the short term, to reduce America's huge trade deficit, particularly with Asia.
International currency markets have been roiled by recent comments from U.S. Treasury Secretary John Snow, who has redefined Washington's longstanding policy of supporting a strong dollar. U.S. government tolerance for a weaker currency should, in theory, help reduce the country's almost $500 billion trade deficit, since a weaker dollar means U.S. exports cost less and imports cost more. That could help American companies sell more overseas. What's more, a sliding dollar also could help stave off deflation, another worry for Washington policy makers. But some Asia-based economists aren't sure the dollar could depreciate enough -- or depreciate against the right Asian currencies -- to fix the U.S.'s burgeoning trade deficit, a large chunk of which is with Asian countries. Drastic remedies, such as a sharp cutback in U.S. imports of consumer goods, would be necessary for any real trade-account turnaround, these economists say.
'Time Bomb'
The U.S. trade deficit, which has doubled in recent years, has grown so big against the backdrop of persistently sluggish global economic growth that it could be "a ticking time bomb," says William Belchere, head of Asian economic research for J.P. Morgan Chase.
One of the deepest wrinkles in the fabric of the trade deficit is the rise of China as a low-cost, export powerhouse. China is running a nearly $100 billion trade surplus with the U.S., showering American consumers with inexpensive products ranging from toys to TVs to running shoes. In March, China had the single biggest trade imbalance with the U.S. of any country, a surplus of $7.67 billion.
The U.S. "has dug such a large hole" in its trade account with China, as well as other East Asian countries, that conventional remedies such as the dollar's depreciation "would not help much," says Andy Xie, an economist with Morgan Stanley in Hong Kong. The U.S. simply isn't competitive enough with low-cost Asian manufacturers in many industries, including electronics, and that means it doesn't have much to export in these areas regardless of the dollar's value.
China Currency Peg
A more basic problem is that the dollar can't depreciate much against the yuan, which is pegged to move in a limited range against the U.S. currency. The dollar has a similar problem throughout Asia, where some other currencies are directly or indirectly dollar-linked.
In Japan, which has a free-floating currency, the central bank has been intervening in the market to buy dollars to make sure the yen doesn't appreciate too much as the dollar slides. While the dollar has declined about 7.5% against the yen during the past year, it has fallen about 22% against the euro.
"It's not the euro that matters," says Richard Duncan, a Hong Kong banking analyst who recently wrote a book about the dangers of the U.S. trade deficit. "The current-account deficit is with China, it's with Japan, it's with other developing countries."
For currencies linked to the dollar, a weak dollar can be a boon. In places like China or Singapore, it can keep prices of exports low and competitive.
But some see a much more dangerous situation developing. Mr. Duncan says the U.S. trade deficit -- which he doesn't believe will be reduced much by the dollar's current weakness -- is serving only to artificially pump up the export-driven economies of many developing countries, particularly China.
These countries are sitting on huge reserves of dollars accumulated through their lopsided trade with the U.S., as exporters get dollars as payment when they sell goods to U.S. But those cash hoards have led to reckless development and easy credit, which will eventually blow up into banking crises, Mr. Duncan predicts in his book, "The Dollar Crisis: Causes, Consequences, Cures."
Overdevelopment in the form of excessive investment in manufacturing capacity and construction, for instance, will lead to global deflation and other problems, Mr. Duncan predicts. Eventually, the malaise will circle back to the U.S., he says, which will see its own property-sector bubble burst and fall into recession. The U.S. won't have the money to be such a big buyer of Asian exports anymore, the dollar will collapse and "the engine of [the world's] economic growth will be out of fuel," Mr. Duncan says. Though it may be years before this all plays out, "these imbalances can't last forever."
Doubting Doomsday
Others doubt this doomsday scenario, although they don't discount the idea of a Chinese economic bubble.
Still, "it's hard to see that that bubble is ready to burst anytime soon," says Mr. Belchere of J.P. Morgan Chase. He adds that economic recoveries in Europe and Japan could ease the U.S. trade-deficit situation by boosting purchases of American exports. Asian countries could grow wealthier and stimulate domestic demand for their products, meaning the world "would become less dependent on the U.S. to drive global growth."
Some global trade imbalances could "naturally unwind" before reaching the point where the rest of the world pulls the plug on the dollar, he says.
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