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WASHINGTON — Americans shopping in Wal-Mart or Macy’s or just about any store find themselves in a sea of foreign-made clothing and accessories.
These imports are no longer considered cheaper or inferior in quality to merchandise manufactured in the U.S. — the prevailing belief 20 or so years ago — and now represent more than 90 percent of apparel sold at retail.
The consumer’s full acceptance of products made abroad has put aside protectionist sentiment or the feeling that “Made in the USA” is better. However, combined with the penchant for buying on credit, this evolutionary shift in sourcing and buying habits has changed the country’s economic profile, resulting in potentially serious consequences for the U.S. and the global economy.
“We’re increasingly the customer of first, last and middle resort,” said Charles McMillion, president and chief economist at MBG Information Services. “We are a driver for the economies of most of the countries in the world outside of the U.S.”
This has led to an imbalance in the global economy.
“The rest of the world is producing about $2 billion a day more in goods and services than they themselves are consuming,” said McMillion. “That adds to their economic growth, adds to their job growth and adds to their tax receipts.”
But the U.S. loses out in all those areas, he said.
The U.S. had a current account deficit with the world of $726 billion last year. That means, basically, that the U.S. bought more from other countries than it sold to them, to the tune of about 6 percent of gross domestic product.
Many see the deficit as a function of a low savings rate in the U.S. and high savings rates abroad. The Chinese, for instance, tend to save a lot of their earnings, since they don’t have a strong social safety net to turn to in times of trouble.
Others see the imbalance more as a result of unfair trading practices in other countries, such as an undervalued currency in China, which wracked up a record deficit of $202 billion with the U.S. last year, and poor labor conditions in many Third World countries.
This story first appeared in the September 19, 2006 issue of WWD. Subscribe Today.
Regardless of the cause, the deficit creates an unusual situation. Other countries take the extra dollars they hold and invest them in U.S. Treasury bonds or other assets. In effect, that means much poorer countries like China are lending the U.S. money, and the U.S. uses the funds to buy more goods and services on the global market.
“The great risk is that there’s no fundamental reason why all these things need to continue,” said Peter Rodriguez, professor of economics at the University of Virginia’s Darden School of Business.
“It is possible to see a quick reversal or backslide, and that’s why we worry about imbalances. Suppose one day China has a real change of heart with its appetite for our investments. That does portend at least meaningful swings in currency values and a spike in the U.S. interest rates.”
Given the size of the current deficit, he said, “we’re in uncharted waters.”
Robert Kennedy, executive director of the William Davidson Institute at the University of Michigan, pointed out, however, that the current account deficit has a corresponding capital account surplus that also brings benefits with it.
“The fact that we have a capital account surplus means interest rates are lower than they would be otherwise and asset prices are higher than they would be otherwise,” he said.
Kennedy said the deficit will sort itself out.
“It’s a self-correcting process,” he said. “One of two things is going to happen: Either the dollar’s going to get weaker … or Americans at some point are going to start saving more.”