The American Empire at Millennium's End

In a spirit of millennial gloom and long-term thinking, brood with me on the Great American Trade Deficit.

This chart shows the long-term decline from the early '60s until today:

Imbalance of Trade Ratio of U.S. exports to imports

Source: Commerce Department

How bad is it? Pretty bad, but not yet catastrophic. For a proper millennial perspective, the next chart shows data from Werner Schlote's 1952 study, British Overseas Trade, for each year from 1697 to 1933. Great Britain ran trade deficits -- at least as measured in constant prices -- almost continuously for more than two centuries. But a trend decline set in after 1850 -- at the height of the Empire -- culminating in serious problems with World War I. After that, British manufacture essentially collapsed. The ratio of real exports to imports is barely above 30% by the end of the series.

The British Balance of Trade 1697-1933

Source: Werner Schlote, "British Overseas Trade from 1700 to the 1930s."

The reasons for the British decline and fall were already known to John Maynard Keynes in the 1920s, and he spelled them out in his famous essay, "The Economic Consequences of Mr. Churchill," following on to his even more famous book, The Economic Consequences of the Peace. Versailles had inflicted a Carthaginian peace on defeated Germany and Austria, imposing vast reparations obligations while depriving those countries of the industrial means of making payment. As a result, European economic recovery was stalemated and industrial markets for British machinery were not re-established.

Winston Churchill was then Chancellor of the Exchequer, and in 1926 he returned Britain to the gold standard. Churchill was a Tory chancellor and responded to the interests of the City. London was then the financial capital of the world. Banks generally favored a strong pound; this, alongside the Imperial Fleet, was thought to assure the strength and stability of the Empire. But unfortunately, poor nations cannot finance rich ones indefinitely. And when they stopped doing so, beginning with the Creditanstalt crisis in 1930, which quickly spread to Latin America as commodity export prices collapsed, the world centered on British financial hegemony fell apart.

Do I see a parallel here? Of course I do. The U.S. emerged as the world's dominant power following World War II. We waged, and won, an exhausting struggle of military competition -- mercifully without pushing matters to the ultimate war -- against the Soviet Union. Victory came in the 1980s. But the cost of winning was a sharp erosion of our competitiveness in many mundane markets, especially for automobiles and heavy machinery. And afterward we were, in fact, exhausted. Deeply in debt, politically leaderless under Bush and Clinton, we did not take the difficult, expensive, far-reaching and generous steps that could have placed our former adversaries (and their former satellites) on the path of strong and sustained growth, including growth of demand for our exports.

Today, like Britain in the 1920s, we are under the spell of financiers, whose faith is in the God-almighty dollar, in the strength and power of our markets, in our capacity not to produce and trade but to deal and speculate. And so, with high real interest rates and a strong dollar, we too have suffered a vast increase in our terms of trade -- getting rich at the expense of others. Since 1997, the situation has been aggravated by the collapse of our Asian trading partners, who can no longer purchase our goods.

Can we stay rich, this way, for a while? Sure. But as for the millennium to come ... sad to say, the empire model does not work in the long run. Just look at those British numbers.

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This column is a short version of testimony delivered on Dec. 10, 1999 to the U.S. Trade Deficit Review Commission.

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