- The Washington Times - Thursday, September 21, 2006

AMSTERDAM. — World financial and commodities markets are threatened with instability because the U.S. “overconsumes” money and China “overconsumes” commodities, Stephane Garelli, professor at the IMD International Business School at the University of Lausanne (Switzerland) said in a keynote speech to the annual meeting of the International Fiscal Association in Amsterdam Sept. 17.

According to Mr. Garelli, China now consumes 19 percent of the world production of aluminum, 27 percent for steel, 31 percent for coal, and 40 percent for cement. While China now uses only about 8 percent of world oil production, the trend there is clear, he said. The Chinese are now using increasing amounts of their excess dollars to buy up raw materials — and, more importantly, the companies that produce the raw materials — in Africa, Asia and Latin America, he said.

If, as Mr. Garelli predicts, the Chinese use less of their trade surplus to buy U.S. government debt and more of it to buy raw materials we also import, it could have a doubly troubling effect on the U.S. balance of payments, already in dire straits.

The U.S. current account deficit — the amount the U.S. is in debt to the rest of the world — is on track to reach a new record, the Commerce Department reported Sept. 18. Coincidentally, in Singapore, the same day, Rodrigo de Rato, chief of the International Monetary Fund called for renewing the Doha Round of trade talks aimed at further reductions in barriers to free trade.

The deficit represents the gap between how much we as a people earn and how much we spend. The deficit in the current account rose to $218.4 billion in the April-June quarter, an increase of 2.4 percent over the deficit in the first three months of the year, the department said. Like individuals who live beyond their means, the American people, as a whole, have to borrow the difference — something approaching $1 trillion this year.

Since President Bush took office, the U.S. has racked up five consecutive annual deficits. The all-time high for a single quarter was set at the end of 2005, with a record $223.1 billion imbalance. For the year, we borrowed just under $800 billion. Second-quarter 2006 is the second-highest on record. Foreign governments — notably China, Japan and Russia — now own $2 trillion in U.S. government bonds.

While we have found it reasonably easy, so far, to get others to lend us the money so we can continue living beyond our means, if Professor Garelli is correct, that may not continue forever. There are growing signs the Chinese are finding other things they would rather do with their excess dollars than use them to finance our taste for foreign cars, foreign electronic toys and foreign oil.

All this means, obviously, that many of the things we buy overseas will be more expensive, because we have to compete with the Chinese to buy the raw materials they are “overconsuming.” It also will add to inflationary pressures in the U.S., which could further weaken the dollar, which, in turn will increase the cost in dollars of things we buy overseas, which will add to the balance-of-payments deficit, add to inflation, and further weaken the dollar in a vicious cycle that will be difficult and painful to escape.

This could require significant changes for the U.S. economy. The most obvious response could be for the Federal Reserve to raise interest rates to slow our economy so we buy fewer things overseas and foreigners continue absorbing U.S. debt. But with the economy showing signs of slowing down, it could be difficult for the Fed to take enough monetary action to change the course much.

Another likely response is direct, congressional action. There has long been a hue and cry about “outsourcing” American jobs tied to a widespread perception “free” trade has not helped the American worker and the American economy. The coming congressional elections may well see Democrats use trade as an issue for bashing the Bush administration, and Republicans who rely on working-class votes might find it a good issue on which to distance themselves from the White House.

Of course, if the U.S. blocks the effort to reduce trade barriers and resorts to raising those in place or creating new ones, it may prompt retaliation by countries those measures hurt. That could provoke a war between those industrial sectors in the U.S. that depend on exports and those that are hurt by imports. And it might prompt a sell-off of U.S. assets by our foreign creditors, which could have a disastrous impact.

How will that affect the political landscape?

George H. Lesser has reported for more than 30 years on international political and economic developments for both U.S. and European publications. He has been based in Washington, New York, London and Brussels, and lives in Washington D.C. and Florence, Italy.

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