US Current Account Deficit and the Dangers of Protectionism

1. YINGJUN WU http://www.wu.net.au

2. Contents • Introduction Background Thesis • Arguments i. C.A. deficit will not cause unemployment ii. Protectionism weakens competitiveness • Conclusion

3. Background

4. NOT SERIOUS Globalization gathers global capital and easily supplies America with the funds it needs. (Greenspan, 2003) America became the centre of an international monetary system once again. (Newman, 2004) SERIOUS Deficit cause unemployment problems. (Summers, 1999) Deficit eventually lowers global productivity and income growth and, foreign investors’ appetites for U.S. assets could be spoiled and dollar would be weakened further. (Collyns, 2004) Literature Review (Current Account Deficit)

5. Literature Review (Protectionism is dangerous) • Newman (2004) quotes Greenspan (2004) who claimed that protectionism is more worrisome than the lack of fiscal restraint. • Protectionism would supply other countries an opportunity to retaliate against the rising U.S. exports (Hardaway 2004).

6. Thesis • U.S. current account deficit does not make loss of jobs and protectionism would weaken U.S. competitiveness

7. Current Account Deficit & Protectionism • Argument 1: The current account deficit will not cause unemployment. • Argument 2: Protectionism would weaken U.S. competitiveness.

8. The current account deficit will not cause unemployment. Current account deficit capital inflow. massive losses of jobs? employment opportunities? Protectionism is not a solution for unemployment problems.

9. The current account deficit will not cause unemployment. • First of all, what causes current account deficit? • Secondly, whether does the current account deficit causes unemployment? • Furthermore, increasing investment creates more employment opportunities.

10. Mann (2000) thinks that the result of the trade deficit directly caused the exacerbation of the current account deficit.

11. current account balance = domestic saving – domestic investment (Higgins,1998 & Klitgaard,1998)

12. Explanation • GNP = C + Ip + G + X – M • GNP = C + Sp + T + Tr C + Ip + G + X - M = C + Sp + T + Tr X - M - Tr = ( Sp - Ip ) + ( T - G ) Trade balance Current account balance

13. The current account deficit will not cause unemployment. • First of all, what causes current account deficit? • Secondly, whether does the current account deficit causes unemployment? • Furthermore, increasing investment creates more employment opportunities.

14. The relationship between lower employment and rising current account deficit does not be proved by employment statistics.

15. The current account deficit will not cause unemployment. • First of all, what causes current account deficit? • Secondly, whether does the current account deficit causes unemployment? • Furthermore, increasing investment creates more employment opportunities.

16. Increasing investment creates more employment opportunities • Buy cheap Asian goods • Disposable income raises • Investment increases

17. Conclusion of Argument 1 • The current account deficit could create employment opportunities instead of causing losses of jobs. • Protectionism for retaining jobs is not reasonable.

18. Protectionism would weaken U.S. competitiveness. • Cost American consumers enormously • Affect consumer confidence • Cause retaliation from other countries

19. Economical:protectionsim costs American consumers enormously • Globalization & Free trade • Over $60 billion is extra for tariff every year. (Dilorenzo, 1988) • Lack of disposable income No enough investment

20. Social:protectionism affects consumer confidence • Confidence recovery • ‘Unfair trade’ would strike confidence

21. Technological:protectionism causes retaliation • U.S. still dominates the globe market by the monopoly of new technology • A fresh example: US vs. China

22. Conclusion of Argument 2 • Protectionism would not alleviate the current account deficit, • on the contrary, it would lower the domestic savings, descent the investment, and cause retaliation from other countries.

23. Conclusion • In the short term, trade deficit – current account deficit – protectionism • In the long term, policy – deficit – protectionism – trade equity

24. Actions • On 30 June, 2004, Federal Reserve has raised 25 basis points of interest rate to 1.25 per cent. (FRB, 2004, http://www.federalreserve.gov) • New policies under discussing

25. References: • Clendenin, M. & Mannion, P. 2004, ‘Wireless security tops U.S.-China trade talks’, 19 April, 2004, Electronics Engineering Times, viewed 04 July, 2004 • < http://www.eetimes.com/showArticle.jhtml?articleID=18901865 > • Dilorenzo, T. 1988, ‘The Political Economy of Protectionism’, The Freeman, Vol. 38, no. 7, viewed 29 June, 2004 • <http://www.libertyhaven.com/theoreticalorphilosophicalissues/protectionismpopulismandinterventionism/politicaleco.html> • Ebeling, R. 1991, ‘Free Trade versus Protectionism’, The Future of Freedom Foundation, viewed 28 June, 2004, <http://www.fff.org/freedom/0191b.asp> • ‘FRB: Press Release--FOMC statement and Board discount rate action’, Board of Governors of the Federal Reserve System, viewed 03 July, 2004 • <http://www.federalreserve.gov/boarddocs/press/monetary/2004/20040630/default.htm> • Hardaway, R. 2004, ‘Protectionism doesn’t save jobs’, The Journal of Commerce，26 April – 2 May, p.37 • Higgins M. & Klitgaard T. 1998, ‘Viewing the Current Account Deficit as a Capital Inflow’, Current Issues in Economics and Finance, vol.4, no.13, pp.1-6 • Mann, C. 2000, ‘Is the U.S. Current Account Deficit Sustainable?’ Finance & Development, March 2000, pp.42-45 • Newman, E. 2004, ‘Greenspan Looks At Current Account Deficit’, 3 March, THE BOND BUYER, p.2 • Nikkei, 2003, ‘Working Spouses, Less Time To Cook Mean Higher Food Spending’, viewed 02 July, 2004, • <http://www.oranda.or.jp/index/english/agriculture/newsfiles/workingspouseshigherfoodspending.htm> • Porter, M. & Opstal, D., 2001, ‘U.S. COMPETITIVENESS 2001: Strengths, Vulnerabilities and Long-Term Priorities’, Council on Competitiveness, Washington DC • ‘Stop worrying and love the deficit – America’s deficit and the dollar’, The Economist, 29 November, 2003 • ‘Summers – U.S. trade deficit is “serious problem”’, 23 June 1999, Reuters News • Vitner, M., 2004, ‘Consumer Confidence Rises In January’, Wachovia: Economics Group, 27 January, 2004, viewed 03 July, 2004 • <http://www.fxstreet.com/economicindicators/consumer_confidence_jan04.pdf>

26. Questions?