Cost of borrowing includes national security

WHEN America buys imports from abroad and doesn’t cover their cost with the value of our own exports, we run a trade deficit. This means we borrow money and sell off existing assets to cover the gap. In recent years, we have been doing this to the tune of up to five percent of GDP – something like $500 billion a year.

Everyone knows this destroys jobs: about 9,000 for every billion dollars in trade deficit. So it has been estimated that our deficit has cost us approximately one-fifth of all the manufacturing jobs that would otherwise exist.

But what may be even worse in the long run is the way it’s gradually selling our own country out from under us, endangering not only our prosperity but ultimately even our national security.

As a result of over 30 years of trade deficits, foreigners now own just under 50 percent of all publicly traded Treasury securities, 25 percent of American corporate bonds, and roughly 12 percent of American corporate stock. Net foreign ownership of American assets (what they own here minus what we own there) is now $2.7 trillion – equal to roughly a fifth of annual U.S. GDP.

It has been estimated that, in the past decade, the U.S. has been absorbing up to 80 percent of the world’s internationally exported savings. Until 1985, the U.S. was a net creditor against the rest of the world, but since then, we have slipped further into debt every year. The chart below tells the story:

Another way to look at it is that we lose GDP. The Economic Strategy Institute has estimated that the trade deficit shaves at least 1 percent per year off our economic growth. This may not sound like much, but because GDP growth is cumulative, it compounds over time. Economist William Bahr has thus estimated that America’s trade deficits since 1991 alone – they stretch back unbroken to 1976 – have caused our economy to be 13 percent smaller than it otherwise would be.

That’s an economic hole larger than the entire Canadian economy.

Our accumulated financial obligations to foreigners mean that an increasing percentage of our future output will go to their consumption, not our own. This applies to both the public and private sectors: as of 2010, 4.9 percent of the federal budget goes to interest on debt, and about half the federal debt is foreign-owned. In 2006, for the first time since we paid off our own 19th-century debts to Europe due to British borrowing here to pay for WWI, America paid more in interest to foreigners than we received from them.

But we can’t keep borrowing forever. Both the private sector and the government are threatened by the surging interest rates that would result from our international credit drying up. This surge could easily knock America back into recession. And tens of millions of ordinary families are so indebted that they could be pushed into bankruptcy by a sustained rise in the interest rates on their credit cards and other floating-rate debt.

Because wage increases have been barely outpacing inflation for 35 years, consumer spending has only kept pace thanks to the ability of consumers to tap into the equity of their homes at low interest rates. Without this, the spending surge of recent years – consumer spending has gone from 63 percent of the economy in 1980 to 71 percent in 2010 – would have been unsustainable.

Americans have, in effect, papered over their economic difficulties in recent decades by massive borrowing from abroad. Because this borrowing helped enable the deficit, and because the deficit itself has been responsible for a large part of our economic difficulties, we have been caught in a slow-motion self-reinforcing doom loop.

America’s global overdraft is not only financed by debt, of course. It is also financed by selling off existing assets. This tends to make the news only when foreigners buy some huge thing people have actually heard of, like when a firm controlled by the United Arab Emirates tried to buy six of our major seaports in 2006 (and withdrew upon national-security scrutiny), but it is quietly going on all the time.

Sometimes the purchasers are private entities abroad, but they are sometimes actual foreign governments, by way of so-called sovereign wealth funds. Asian sovereign funds investing such monies are expected to have $12.2 trillion by 2013, with the funds of petroleum exporting nations reaching a similar level. Tiny Singapore has $380 billion. Little Norway, flush with North Sea oil wealth, has $512 billion. Kuwait has $203 billion and China $831 billion. South Korea, Brunei, Malaysia, Taiwan, and Chile also have such funds.

This raises profound issues of economic security, especially as some of these governments are not reliably friendly to the U.S., especially in the long run. Unfortunately, our mechanisms to prevent problems in this area, principally our government’s Committee on Foreign Investment in the United States (CFIUS), deliberately limit themselves to conventional national security concerns and ignore economic security. CFIUS rarely blocks transactions.

As a result, the U.S. government, like the old Soviet Politburo, remains stuck in a narrowly military definition of national security. It has no institution explicitly dedicated to protecting America’s economic security, and is uncertain how even to define the concept. We can perhaps best define it on a straight analogy to conventional military security: it is the ability to prevent foreign nations from doing us harm by economic means. In an increasingly economics-driven world, it is no laughing matter.

The first thing America needs to do, to get its trade deficit under control, is end trade giveaways to foreign nations – starting with the horrendous Korea Free Trade Agreement the Obama administration is pushing. Beyond that, we eventually need to start asking ourselves why none of our most successful economic rivals believe in free trade, which our own Founding Fathers rejected.

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Ian Fletcher is Senior Economist of the Coalition for a Prosperous America, a nationwide grass-roots organization
dedicated to fixing America’s trade policies and comprising representatives from business, agriculture, and labor. He was previously Research Fellow at the U.S. Business and Industry Council, a Washington think tank
founded in 1933 and before that, an economist in private practice serving mainly hedge funds and private equity
firms. Educated at Columbia University and the University of Chicago, he lives in San Francisco. He is the
author of “Free Trade Doesn’t Work: What Should Replace It and Why.”.