The United States trade deficit is threatening to upend globalization as we’ve known it. The rise in the price of oil has been leading to a similar result: an international trading system in which there is much less trading. Now, that may actually be a good thing, in the long-run, but in the case of the United States it might happen in a very chaotic way.

This problem that has been accelerating since George W. Bush took office: The United States has been buying many more goods than it has been selling. As I hope to explain, eventually this will lead to a sharp fall in the value of the dollar, which will lead to a sharp fall in our standard of living.

If we have any hope of transforming our economy from one that is dependent on greenhouse gas-spewing fossil fuels, industrial agriculture, and inefficient transportation systems, then we will have to embark on a truly gargantuan building program in order to construct all of the wind turbines, solar panels, high-speed rail, light rail, electric cars, organic farms, and energy self-sufficient buildings that we can. In order to do that however, we have to be wealthy. At the rate we’re going, we won’t be, and poor nations can’t import lots of good stuff from abroad.

Allow me explain why buying too much and selling too little could have such devastating effects:

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Nations eventually get into big trouble when they import from other countries too much, and they sell too little. When this imbalance occurs, it’s called a trade deficit. The U.S. trade deficit has been getting bigger and bigger for many years now. Last year it actually improved to $711 billion. Even though we exported $1,148 billion worth of goods and $479 billion worth of services, we imported $1,966 billion worth of goods (including $331 billion in oil) and $372 billion worth of services (all figures from the Bureau of Economic Analysis [PDF], part of the Department of Commerce). Since the total of all goods and services produced in the U.S. (GDP) in 2007 was $13,807.5 billion, that means that the trade deficit was equal to 5.1 percent of GDP.

So, what’s wrong with that? The problem is that the people selling us all of that stuff have $711 billion that they’re stuck with. What do they do with the dollars? This has been going on for a while, so that there are now about $6,500 billion floating around the world because of our trade deficits.

According to Economy in Crisis, over $2,000 billion has been spent buying up the United States since 1978, while most of the extra dollars have been deposited in a variety of ways, with the interest being paid to foreign governments and companies. But that’s not the worst of it. The worst is what is happening in slow motion: The value of the dollar is collapsing.

Why would that happen? Because people holding dollars can’t buy what they want with the extra dollars, or can’t buy as much as they used to. They may have bought most of the good things to buy in the United States. Another prop of the value of the dollar could be kicked away: The oil-producing countries accept only dollars for oil, and if the dollar keeps declining, they’ll want to accept other currencies, meaning people will have even less reason to hang on to dollars.

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Price is determined by supply and demand. If supply goes up and/or demand goes down, the price goes down. The demand for dollars is going down while the supply is going up. When the dollar becomes worth less, then the cost, in dollars, of the things we buy from abroad go up. Foreign goods and services become more expensive, there’s inflation, we buy less.

It gets worse. What’s supposed to happen next is what is not going to happen next: since the value of the dollar is sinking, the cost to foreigners of our goods and services will go down, making our goods more attractive, meaning that foreigners should buy more of our goods, our exports should go up, the trade deficit should go down, bada bing, everything should be hunky-dory. And exports have been going up, except that according to The New York Times, the “Export boom helps farms, not American factories”:

But the world is not suddenly snapping up made-in-America goods like aircraft, machinery and staplers. The great attraction is decidedly low-luster commodities like corn, wheat, ore and scrap metal … while Boeing’s aircraft or Caterpillar’s tractors are distinctive and sought after, corn grown in Iowa is virtually interchangeable with corn grown in Argentina or any other bread-basket country. “Over a long period,” Mr. Bivens [of the Economic Policy Institute] said, “commodities contribute right around zero to export growth.”

This export boom is related to ethanol production, which is destroying the soil, and will lead to an impoverished agricultural system in the future … which means it can’t last anyway.

Even though the dollar is going down, exports of manufactured goods are not going up. And why not?

The manufacturers themselves acknowledge that they gradually undercut their ability to export as they moved more and more production to factories overseas. Bringing that production back to this country, so that it could be exported, would dismantle global networks constructed relentlessly over the last 25 years.

“We have achieved a worldwide manufacturing base, and we are not going to shut down our factories overseas,” said Franklin J. Vargo, vice president for international economics at the National Association of Manufacturers. “But on the margin, we will shift a little bit of manufacturing back to the United States.”

Thanks a bunch, Vargo, for some marginal adjustments. Meanwhile, as the dollar falls, the only way for the trade deficit to close will be for the dollar to fall even further until foreign goods are so expensive, and we import so much less, that our imports equal our exports.

What has this got to do with globalization? Since about $600 billion of that trade deficit comes from China, Europe, Japan, Mexico, and Canada[PDF] (table I.18), a slashing of trade would have a major effect on global trade patterns. China, in particular, has been unilaterally keeping its currency, the yuan, at too high a value; either they have to allow it to be valued by the global currency market, or the U.S. will be forced to unilaterally revalue the dollar (perhaps with tariffs).

The irony is this: in order to save globalization, the U.S. will have to lessen it. If the U.S. rebuilds its manufacturing sector so that it doesn’t have to import as many goods and can export more goods, then the dollar will not collapse, and a healthy amount of trade — that is, trade that will be possible with expensive oil — can continue. But if the U.S. continues to hollow out its manufacturing base, eventually it will turn into the equivalent of a poor country, only able to sell raw materials to the richer countries that can manufacture.

Rebuilding the manufacturing economy by building up green industries like wind and solar equipment, rail, and electric cars is not only good for green collar job creation, but it will also allow us to balance our trade because we would not have to import oil and we could trade our manufactured goods for foreign manufactured goods.

Here’s the political punchline: We can either have a green economy or a poor one.

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