The BBC World Business Report aired a slightly revised version of this commentary last week:
Not long ago, my mother visited a gardening store looking to buy some smoothed rocks to decorate her garden. She was more than a bit startled to find the rocks — rocks! — had been imported from China.
That’s not the only surprise regarding place of manufacture one encounters in American stores these days. A few years ago, Hasbro, the maker of a popular board game called Scrabble that involves arranging wood tiles with letters on them into words, moved production to China. The Scrabble tiles are made of maple wood from the state of Vermont, which is where the Scrabble tiles used to be made. Now the wood is shipped from Vermont to China, and tiles with English letters are shipped back to the United States (or anywhere else people are playing Scrabble).
One might dismiss these stories as curiosities from the age of economic globalization, but they should perhaps give pause to incoming Federal Reserve Chair Ben Bernanke.
That’s because they are, in their own small way, emblematic of the out-of-kilter U.S. trade imbalance.
Mr. Bernanke comes to office with more than a few challenges on his hands: a housing marketing bubble and an explosion of predatory lending practices among the many problems.
Yet no challenge to the U.S. economy — and Mr. Bernanke — will be more important than addressing the trade deficit.
When the final numbers are in, the U.S. trade deficit for 2005 will have topped $700 billion — about 6 percent of GDP. If a developing country evidenced such a record, the IMF would rush in to impose austerity and structural adjustment.
The United States is immune to such treatment, but, ultimately, not to markets. There’s just no way the gaping U.S. trade deficit can continue. Foreign creditors will, eventually, refuse to finance the deficit.
Mr. Bernanke should use his considerable influence to prepare not just the United States, but the world, for this coming crisis, and do what he can to urge policies be undertaken now to reverse the trend of growing U.S. trade deficits.
One way or another, the United States is going to have to reduce its trade deficit and, eventually, run a trade surplus. And that’s going to require some form of protectionism — either overt, phased-in and planned, or sudden and reliant on the vagaries of international markets. If the United States does not impose tariffs or other measures to reduce imports, then imports will be reduced involuntarily, and likely quite suddenly — by a plunging dollar and perhaps a recession sparked by rising interest rates.
This will cause serious pain in the United States, where reliance on cheap imports has become a way of life. It will also deal a devastating blow also to countries — not just China — reliant on exports to the United States to grow their own economies.
Just as the United States will have a hard time adjusting to this state of affairs because it has permitted its industrial base to wither in recent decades, so too will countries that have oriented their economies to export to the United States have to go through extremely stinging adjustments.
Actually, at this point, it is very hard to see how this suffering can be averted altogether. But there are degrees of misery.
Mr. Bernanke’s predecessor, Alan Greenspan, chose to gloss over such concerns. He didn’t want to concede that his boosterism for corporate globalization might have such dire consequences, and he managed to escape office before the day of reckoning arrived.
Mr. Bernanke will not be so lucky.