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Mr. Chairman, members of this Committee, I think that your hearing today on the trade deficit provides all of us a most useful opportunity to discuss many issues of great public importance.
To begin, I would like to place the issue of the trade deficit in the broader macroeconomic context. The United States has the strongest economy among the major industrialized countries in the world today. Unemployment is 4.3 percent and it has been under 6 percent for nearly four years. The economy has generated 16 million new jobs over the last five years, inflation has remained low and real wages are rising.
At the same time, we have an expanding trade deficit. The current account deficit -- the broadest measure of the trade balance -- is rising, but it is worth noting that, relative to the overall size of the economy the present deficit is considerably smaller than the deficits of the mid-1980s. We estimate it equaled around 2.5 percent of GDP in the first quarter, compared to 3.5 percent of GDP in the mid-1980s. Private forecasters estimate that it will be between 2.5 and 3 percent of GDP in 1999.
The reasons behind the rising trade deficit are many, and Chairman Yellen will discuss how the savings rate affects the deficit, but the most important is that the U.S. economy is considerably stronger than the economies of almost all of our significant partners. The driving force behind the U.S. economy's current strength has been domestic demand, while, even though exports have been performing well, foreign demand for our exports has been notably weak. This has been particularly true in Asia, which has accounted for one-third of our total exports. First quarter data indicate that U.S. exports to the countries most affected by recent instability in Asia -- Thailand, Malaysia, Indonesia, the Phillippines, Singapore, and Korea -- are currently on pace to fall between $17 billion and $21 billion (annualized) since the crisis began, depending on how one does the seasonal adjustment , and the decline could be larger if further contraction occurs. If you include Japan, the figure is between $23 and $29 billion.
That takes us to the industrialized nations, most of whose economies have also been relatively weak compared to ours. Most troubling, the Japanese economy still fails to show signs of recovery, and Japan's economic difficulties and weak currency are having substantial adverse impact on the East Asian countries. Obviously, the worse these conditions in Japan, the greater that adverse impact on the region. We, the IMF, the OECD, and the G-7 -- in our case for well over a year -- have strongly urged the Japanese government to undertake the necessary steps to stimulate domestic demand-led growth, including fiscal stimulus, an effective program to address the problems of the banking sector, and deregulation and market opening. In this regard, we have in the past several months said on many occasions that we share the Japanese government's growing concern about the weakness of the yen, because of its implications for economic recovery in Asia and Japan's growing external surplus. In turn, the weakness of the yen reflects the economic conditions in Japan, and can only be remedied by restoring economic strength in Japan.
In short, Mr. Chairman, the recent rise in our trade deficit, and the trade deficits of the last few years, reflect the strength, not the weakness of the U.S. economy. Even with the rise in the trade deficit, we estimate the most likely scenario for the U.S. economy for the period ahead is sustained growth, low inflation, and low unemployment.
Let me now begin a discussion of the impact of the trade deficit on our economy. One thing that is clear is that the trade deficit has not undermined our strong economic performance. Having said that, let me focus on two dynamics regarding the trade deficit. On the one hand, it means we are attracting foreign investment, which does create claims from abroad that, at some point, have to be repaid. On the other hand, if we use that investment in areas that promote higher productivity in the long term, it will result in higher growth, and, on balance, increase, not drain, future income, assuming the return to the economy on the investment exceeds the foreign obligations. Currently, the United States is experiencing record levels of business investment, and thus, the probability is strong that higher productivity gains and growth will occur in the United States. It is also important to note that increased trade deficits and increased claims against our country, even if the capital inflows on balance promote long term growth, do create greater vulnerabilities to changes in global financial markets' views toward investment in the United States and they give rise to greater sectoral dislocations in our economy. All of this underscores the importance of having strong economic policies at home.
Mr. Chairman, trade contributes importantly to the economic health of this country. Millions of Americans owe their jobs directly or indirectly to trade, and all of us benefit through the lower prices and greater choice that international competition fosters. Our economic well-being truly is inextricably linked to the rest of the world.
Moreover, trade with developing countries, which absorb 43 percent of our exports, is increasingly important to the United States. Trade deficits with low wage countries, such as most developing countries, are often seen by Americans as evidence that the United States cannot compete with low wage nations. While low wage countries are able to produce a range of low-wage, low-skill items at lower cost than U.S. firms -- to the benefit of U.S. consumers -- this is not true across the board because the productivity of American workers allows them to compete, even given their higher wages. Moreover, the developing countries buy American goods such as airplanes, construction equipment, entertainment products, and hi-tech goods produced by high-wage, high-skill American jobs. Indeed, studies have shown that over the last several years, six out of ten of the jobs created have been high-wage jobs. As a highly productive and competitive economy, the United States can -- and does -- export to low wage countries, and increasing trade with these countries benefits our economy.
To put the same thing in conceptual perspective, trade is not a zero sum game. A nation does not win by exporting, and lose by importing. If a nation produces its relatively most competitive goods and services and then exchanges with other nations to obtain the relatively less competitive goods and services, the nation will be better off than it would be without trade.
In the natural course of trade, some industries will be buffeted by foreign competition. That means there will be dislocations for some, although I think it is worth observing that technology contributes far more to dislocations than trade. Thus, while trade benefits most, there is a risk to some. The answer to these problems is not to try to halt the inevitable tide of technology or globalization that has benefited so many. Instead, the answer is to equip all of our people to compete in the global economy, very much including those outside the economic mainstream in inner cities and distressed rural areas, through education and training; to help the dislocated re-enter the economic quickly and successfully through adjustment programs such as the North American Development Bank; and to have an appropriate social safety net where needed. Having said that, we all need to continue to focus on how best to help those who are hurt by the dynamic changes in our economy including trade and technology that greatly benefits the whole.
A forward-looking international economic policy to derive the full potential from trade and to best promote our exports of goods and services includes three components: First, continuing an aggressive effort to open markets and liberalize trade, as this Administration has done through Nafta, the WTO agreement, scores of other trade agreements and through strong enforcement of our trade laws. We estimate that U.S. exports have accounted for one-third of our nation's real growth during the recent economic expansion. The President has made clear he is committed to working with Congress to secure fast track negotiating authority so that we can pursue a trade policy that creates jobs and promotes higher standards of living and that, as the President said recently, will harmonize our goals of increasing trade and improving the environment and working conditions.
Second, is promoting growth and reform in developing countries. By helping them continue on the path of reform, we help to build markets that already have been buying 40 percent of our exports.
Third, is to address financial instability, both when it occurs, and in the long term, by developing an architecture of the international financial system that is as modern as the market.
The IMF is critical both to promoting growth in developing countries and addressing financial instability. Those who are most concerned about the trade deficit ought to be among the strongest advocates of IMF funding. As its core mission, the IMF works to promote or reestablish financial stability and economic growth, helping to create the conditions where other countries have the economic strength to buy our goods, as well as solid currencies that do not provide undue competitive pressure for our goods and services in countries around the world. The IMF is especially critical to our economic well-being in countries experiencing severe financial instability and economic difficulty, both by helping those countries and by preventing contagion to other developing nations. Moreover, IMF programs, including the recent Asia reform programs, have long included significant trade liberalization measures which have the effect of opening foreign markets to U.S. goods and services.
Yet, as a result of the recent situation in Asia, the IMF's normal financial resources are approaching a historically low level, and the IMF does not have sufficient funds to deal with a truly major crisis, for instance if the Asian crisis were to worsen or if a new crisis were to develop. The probability of such events occurring is low, but if they occurred, the effect on our economy would be severe and we should not take the risk that such events could start to unfold and the IMF not have the capacity to try to cope effectively.
Mr. Chairman, with the help of your leadership, the Senate approved funding for the IMF by a vote of 84 to 16. We urge the House to follow suit as quickly as possible. The full IMF funding is needed now, to protect our economic and national security interests.
The key to prospering in the global economy is to maximize our productivity and competitiveness. That requires fiscal responsibility to keep interests rate down and maximize savings for investment, and investing in our people through education, training and other areas critical to future productivity. If we put all of these pieces together -- fully funding the IMF to promote financial stability, continuing to open markets to U.S. goods and services, promoting growth and reform in developing countries, and maintaining our strategy of fiscal discipline and investment in people -- all of which constitutes the basic economic strategy for the past five and a half years -- we have a recipe for economic growth, and for containing the trade deficit to a sustainable level over time. Thank you very much.