GWEN IFILL: Now, America's growing trade deficit with the rest of the world. The Commerce Department announced today that it grew nearly 9 percent in October, and now stands at $55 billion, an all-time high.
But that's not the first time-- and economists say, not the last time-- a record has been set. So as Americans snap up cheap imported holiday goods and drive the deficit even higher, what is the cause and effect?
For that, we turn to C. Fred Bergsten, director of the Institute for International Economics here in Washington. Mr. Bergsten, start off by explaining kind of economics for dummies. What is the trade deficit?
C. FRED BERGSTEN: The trade deficit is the difference between what the United States sells to the rest of the world, that's our exports of goods and services, versus our imports from the rest of the world, what we buy from other countries, both merchandise goods and services.
You compare the two and the difference is the trade balance. In our case, a huge trade deficit
GWEN IFILL: How did it get to be so huge?
C. FRED BERGSTEN: Two reasons. One is that the exchange rate of the dollar is way overpriced in terms of the underlying economic fundamentals.
GWEN IFILL: If you travel abroad, it costs an awful lot more money than you anticipate to spend American dollars.
C. FRED BERGSTEN: Now with the dollar getting weak, but for a long time, and still, the dollar is much stronger than our underlying competitive position would support. That means that that our exports are priced too high.
Imports are priced very cheaply and therefore can compete quite actively with domestic production.The other big factor is that the U.S. economy has been growing a lot faster than the other major economies in the world.
We've been growing at 4 percent or more. Europe and Japan have been growing at 2 percent or less. So we with higher economic activity just draw in a lot of goods from the rest of the world. Their growth is not enough for them to buy nearly as much from us.
GWEN IFILL: Is this part of a design, or is it a tradeoff, we have a stronger economy and therefore this is the tradeoff for it, or the Asian and European economies have decided they want to build their economies based on exports and imports?
C. FRED BERGSTEN: There's some of both. The Europeans and Japanese would like to have lots faster overall economic growth but they've had a bunch of structural impediments. They had some poor policy choices, and so they have not had much growth in domestic demand.
Their consumption, their investment have lagged for ten years or more. Therefore, they have been stuck with relying on exports, and the growth of the U.S. has been one of the big drivers for them.
We've bailed them out, but the result for us is this big trade deficit, which we have to finance by borrowing the equivalent amount from the rest of the world, and that now puts us and in fact the whole world economy in big jeopardy.
GWEN IFILL: If Japan and China are basing their economies on exports and they're taking American dollars in exchange for the products they said us, why don't those American dollars just get recycled and come back to us in some other fashion. Are they holding on to American dollars?
C. FRED BERGSTEN: They are. What they're doing instead of buying products from us is putting that money in their financial reserve. The central banks essentially pile up dollars. They buy the dollars on the exchange market, selling their own currencies to do that.
That keeps their currency weak: It keeps our currency strong. It keeps the trade deficit very large from our standpoint. While it lasts, it's not so bad. We get a lot of cheap imported products.
They buy those nice treasury bills and it's kind of an implicit bargain. The trouble is it stores up big, big imbalances that are bound to come crashing down if not corrected in a more orderly way.
GWEN IFILL: Now it seems that every couple months we report on a new record set on the trade deficit. So if that's going to keep happening, why does it matter?
C. FRED BERGSTEN: It matters because it's not sustainable. As I said, for every dollar of trade deficit that we run, we have to borrow a dollar from the rest of the world to finance it.
It's like your personal credit card. If you spend more than you are earning in your weekly income, you borrow the difference. As long as the credit card company doesn't collect, it's okay. It's fun while it lasts.
The trouble is the chickens do come home to roost. And right now we've been seeing foreigners start to move out of the dollar. The exchange rate of the dollar has been coming down for three years. So far it's been very gradual, very orderly.
If it continues that way for another year or two, we might be able to reduce the trade deficit in a pretty constructive way. The risk is that it could at any moment literally cascade into an accelerated freefall of the dollar, in which case our inflation would shoot up, our interest rates would shoot up.
There could be a very big global financial crisis and our economy could be hit very hard.
GWEN IFILL: But our economy would be able to withstand the possibility of prices going up at the big buck stores at holiday time for instance. People want those low prices.
They want to be able to get these toys and imported clothing for cheap prices. The cost, as you're saying, is a bill that is going to come due later. Wouldn't there be backlash?
C. FRED BERGSTEN: There sure would be. Retailers like Wal-Mart, consumers love it and it holds down overall inflation. The flip side though is our workers get hurt.
The people that produce goods for the export market get priced out and can't sell so much. The domestic industries that compete with imports lose jobs.
Therefore, unemployment is raised. It's a tradeoff between better prices for consumers versus fewer jobs for workers in the industry whose products are traded.
GWEN IFILL: The next possible fallout of this become protectionism, where people put in their own tariffs to stop them from sending us all these goods?
C. FRED BERGSTEN: Absolutely. One thing we've already seen as a result of this large and growing trade deficit is protection. Almost every week the U.S. is putting on new protectionist barriers, particularly against Chinese goods.
Practically all textile and apparel product, wood furniture, color television sets, semiconductors, shrimp, practically every week there are new barriers against Chinese trade, but we have also got pressures to do it in other industries, as well.
That is always the result of an overvalued exchange rate for the dollar that hurts our competitive position and a large and growing trade deficit.
GWEN IFILL: And finally is this a crisis right now?
C. FRED BERGSTEN: No, not right now. But it is a potential crisis that could literally break at any moment. I think the key is going to be whether President Bush next month presents a credible program to reduce the budget deficit because the budget deficit is an underlying key part of the trade deficit.
If he puts forward a credible budget reduction plan, then I think world confidence in the U.S. and the dollar may be sustained and the rest of the correction could be as orderly and gradual as it has been.
If he fails to do that, and people think the U.S. budget deficit is also heading toward a trillion dollars, like the trade deficit is, then literally all hell could break loose.
The dollar could drop sharply and we could then have a crisis. There is still time to head it off, but that's going to take some policy action starting here in the United States itself.
GWEN IFILL: Fred Bergsten, as always, thank you very much.
C. FRED BERGSTEN: Thank you.