William R. Hawkins is Senior Fellow for National Security Studies at the U.S. Business and Industry Council.

The May 26, 2003 issue of Business Week heralded the decline of the dollar on world markets for reasons that seemed inconsistent with the magazine’s philosophy regarding international economics. Among the benefits of devaluation listed were the following: “a rise in import prices will have a silver lining since it helps stave off the risks of deflation. Longer term, the weaker dollar should help put a dent in the trade deficit, which soared 8% in March, to $43.5 billion, the second-highest monthly total ever.”

Being devoted to “free trade” as managed by private interests, Business Week has never cared much about whether the nation’s trade account was in surplus or deficit. Indeed, only a few months ago, BW stated “taken alone, an increase in imports isn't a problem. In fact, since it's a sign of healthy domestic spending, a rise in imports is positive news for most economies.” And a year ago (June 3, 2002) BW even credited low inflation “ held down in part by low-priced imports.” The same editorial advised “unilaterally reducing tariffs or taking down trade barriers rather than erecting new ones. Such moves would benefit U.S. consumers while giving a needed boost to struggling economies overseas....The U.S. is in a strong enough position economically that it can afford to make these gestures.”  

BW also pounded President George W. Bush for his imposition of duties on the surge of steel imports that was devastating American mills because it raised prices. Chris Farrell, BW’s contributing economics editor, wrote in the March 15, 2002 issue, “If steel can tax consumers, why can't agriculture, textile, timber, and other sectors similarly squeezed between falling prices and too much capacity?”

Yet that is exactly what a cheaper dollar does, it raises the price of all imports. Unlike tariffs which can be applied selectively to protect vital industries or redress unfair practices while leaving other sectors open, a declining dollar affects all markets indiscriminately. It is thus the antithesis of a reasoned approach to trade policy or international economic strategy.

Of course, the number of American industries “squeezed between falling prices and too much capacity” has grown markedly as imports have flooded into the country. As U.S.-based manufacturing loses market share across a wide swath of the economy, the problem becomes that of deflation. Today’s sluggish recovery from recession is not due to a lack of consumer spending, but of business spending. For 33 straight months, factory employment has dropped with 2.3 million lost jobs. A quarter of the nation’s industrial capacity is sitting idle. So where is the incentive for an American firm to invest and build a new plant or hire and train more workers? If foreign producers with Third World pauper labor and the support of mercantilist governments are allowed to bowl over American enterprise in its own home territory, why go on?  

  What a difference a year of bad economic news has done! In the February 3 issue, BW astoundingly acknowledged that the trade deficit slows U.S. economic growth – something any freshman economics student knows but which too many policymakers have denied. “What occurred in late 2002 exemplifies a long-term trend in the U.S. economy: Foreign trade, once an ignorable sector, can now significantly alter quarterly growth. Real GDP, after all, is a tally of domestic output, so when a bigger chunk of spending is satisfied by foreign suppliers, it's a drag on economic growth, especially in the manufacturing sector,” reported BW.

The magazine even noticed that “the fiscal and monetary stimulus of the past two years has helped global producers as much as U.S. companies.” Cutting income tax rates and sending out rebate checks may be appealing to politicians, but if the money is spent putting people to work in Asia rather than America, the U.S. economy is not going to rebound. A new round of tax cuts may not fare any better if the stimulus is again allowed to go overseas.

In the April 7 issue, BW noted, “Since the end of 1997, imports have grown almost five times faster than exports.”As a result, “the U.S. has racked up a net foreign debt of about $3 trillion, nearly the size of the German and French economies combined.” The United States has been able to finance this debt because dollar-denominated assets have been considered a profitable and safe form of investment. But a declining dollar raises the question of whether America can be trusted to remain a store of value in the face of incredible trade deficits. The “unsustainable” nature of American international economic policy has been recognized for some time, but until it actually starts to unravel it is hard to wean people from their comfortable adherence to the simple slogans of “free trade” ideology.

Business Week is not yet there. Its editors and writers continue to hope for simple solutions to massive problems. The current issue imagines that the declining dollar “could be a net plus for the global economy if America's trading partners respond by cutting interest rates or loosening fiscal policy....The result: worldwide economic expansion -- a kind of "competitive reflation" -- and a move away from the global economy's dangerous dependence on the U.S. for virtually all of its growth.”

But America’s trade rivals do not want that solution. If they did, they would have adopted it years ago – as at least three U.S. presidents have urged them to do. Foreign interests (including many nominally American firms which have “gone global”) like an open and subservient U.S. market into which they can dump not just products but the burden of adjusting economic factors downward (wages, output, currency) in a stagnant world economy. They will not change until forced to change.

There is now general agreement that the surge of imports across manufacturing since 1997 is depressing American growth, income and job creation, as well as gutting the nation’s industrial capacity and weakening its financial integrity upon which U.S. world leadership depends. The Bush Administration needs to invoke the trade remedy laws as it did in the steel case, but on a massive scale to regain control of the situation. Then, from a position of reasserted strength, it can negotiate a new set of trade arrangements based on balance and reciprocity to replace the failed policies of the recent past. The first step to putting the American economy on the mend is to stop the bleeding.

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