Free Trade May be Suicide

The Income Implications of Rising U.S. International Liabilities
Matthew Higgins, Thomas Klitgaard, and Cédric Tille
http://www.newyorkfed.org/research/current_issues/ci11-12.pdf


the ongoing buildup in U.S. net liabilities to the rest of the world
means that the United States is likely to begin making net
payouts in the near future.

When this occurs, net income flows will begin to add to
the U.S. current account deficit instead of working to reduce
it.As the net income deficit grows, the U.S. trade deficit must
narrow merely to prevent the current account deficit from
increasing. Achieving an actual reduction in the current
account deficit would require the trade deficit to decline
even further.

This Paper outlines the degree of the problem of the Current Accounts deficits which the United States is running:


the rate of return on U.S.FDI assets has
consistently been higher than that on FDI liabilities (Chart 4).
Since 1982, the rate of return on FDI assets has, on average,
exceeded that on FDI liabilities by 5.6 percentage points,5
and not once during this period has the differential dropped
below 3.2 percentage points

The Paper states there is no discernible reason for the above fact, but the Author believes a simple reason can be found: Foreign investments in this Country were made to dispose of Dollar stocks in safe investments, said elimination necessary to maintain their Trade position with the United States which accounted for a large proportion of their own GDP. This will diminish in the future, as the Dollar weakens further (20% between 2000-2004), foreign native economies develop and raise their Trade exchange rates between each other, and their own native populations absorb more of their own production. All of these effects will impact, if the United States does not take Steps to reduce the Trade imbalance.

This Author believes strongly in the third Scenario presented by the Paper. The United States will not retain a rate of 9% increase per year in the returns of their Foreign investments. Foreign Investors will not continue to accept the disportionaite rates of Return. The United States will eventually have to switch Imports from Finished Goods and Interim Production Parts to a heavy concentration of Resource importation alone. This means that American industry has to be restarted in major degree.

The current round of Free Trade agreements may be exactly the wrong Proscription for the American economy. It impoverishes Our own Labor force, puts Our Current Accounts balance in liability, and will eventually raise Our Payments posture on foreign liabilities to unacceptable levels which constrict Our economy. The lesson of the Great Depression was Free Trade was the answer to avoid economic dislocation. What We have to determine Now is what elements of Free Trade have to be maintained, and what elements must be canceled for continued success. lgl