Boasting for a “trade surplus” is something every president has wanted to do since 1975. Unfortunately, few seem to understand exactly how to get there, and what to do about the trade deficit.
In 1975, Gerald Ford was the American president. Japan was the biggest challenger to the USA’s economic supremacy. Germany had been split into West Germany and East Germany for 30 years. The United States recognized a small island called Taiwan as China.
Today, in 2017, the China that America recognizes is an economic powerhouse that’s the biggest threat to U.S. economic hegemony. Germany is united, and is Europe’s pre-eminent economic power. Japan is weaker economically while Mexico and immigration have emerged as larger threats to the American economy, at least in the rhetoric of many politicians.
America’s economic problems are different today than they were in 1975, but the trade deficits remain. Is that a bad thing? Yes and no. As Forbes magazine notes in a 2016 headline, the USA is still strong after 41 straight years of trade deficits. It’s now 42 years. The 2016 trade deficit was $502.3 billion, the highest figure since 2012 and roughly 2.5 percent of the USA’s gross domestic product (GDP). The April, 2017, deficit was $47.6 billion.
During the past 42 years, the U.S. economy has often thrived. The economy boomed during the 1980s and the mid- and late 1990s. Many politicians say that trade deficits mean an overall loss of U.S. jobs, but trade and jobs are not always on the same page. In fact, the trade deficit actually improved during The Great Recession.
On the other hand, the fact that U.S. consumers are buying so many products manufactured in foreign nations means that U.S. manufacturers aren’t satisfying consumers. Trade deficits might not mean an overall loss of jobs, but they mean that certain areas of the nation are suffering and manufacturing jobs in some industries are being lost because of the success of foreign manufacturers.
“Deindustrialization in the Rust Belt is partly a result of the fact that America meets its domestic demand for manufactured goods by importing more than it exports,” explained The Atlantic magazine article “Why Trade Deficits Matter.” “One oft-cited academy study found that imbalanced trade with China led to the loss of more than 2 million U.S. jobs between 1991 and 2011, about half of which were in manufacturing.”
Authors Jared Bernstein and Dean Baker criticize policymakers for viewing trade deficits as harmless. “At full employment, trade deficits mean the loss of good jobs, wages, and incomes for those in firms hit by competition from imports,” they wrote.
There Are Solutions
Before we take a look at possible solutions to economic problems that are reflected by the trade deficit, let’s look at figures that show the USA has trade deficits with its five largest trading partners. They are:
* China: Our deficit with China of $347 billion is a reflection of low exports to China and deficits in clothing, consumer electronics, and machinery.
* Japan: Most of our $69B deficit is due to demand for Japanese cars.
* Germany: The deficit is $65B. The culprits are cars, auto parts, industrial machinery, and medicine.
* Mexico: The deficit is $63B. Our major imports are cars, trucks, and auto parts.
* Canada: The $11B deficit is primarily due to oil and gas imports.
A chart in this Los Angeles Times article shows the discrepancy between our deficits and our surpluses. Our largest surpluses are with Hong Kong ($28B), the Netherlands ($24B), the United Arab Emirates ($19B), Belgium ($15B), and Australia ($13B).
You might have noticed that cars were a primary factor in the deficits. However, the deficits are misleading because foreign manufacturing plants such as those owned in Mexico by U.S. car companies regularly import parts from the USA and assemble them abroad. The L.A. Times reports that approximately 40 percent “of the value of the goods imported from Mexico is made in the U.S.”
It’s also true that trade deficits do NOT reduce GDP, reports Forbes magazine. Imports minus exports reduces the GDP figure, but the imports are also in the C+I+G (consumer spending plus investments plus government spending) part of the GDP equation.
Nevertheless, Peter Navarro, the director of the Trump administration’s Office of Trade and Manufacturing Policy, had a point when he told PolitiFact “Germany literally takes bread out of the mouths of American workers” because its tariffs on American cars are higher than U.S. tariffs on German cars.
The L.A. Times cites another factor that affects the economy and the trade deficit — Americans’ savings rate. The U.S. has a savings rate of 3 percent of GDP while China, South Korea, and Germany’s savings rates are 47, 16, and 10 percent respectively. Smart American policies could increase the savings rate.
“Because the country is saving too little, it is indirectly paying for much of its consumption — and its investments — by borrowing from foreigners,” the article says. “The failure of Americans to save more means the country has trouble financing the big modernization and educational projects that would give it a better future.”
U.S. companies could do a better job of producing better products and, thus, provide more manufacturing jobs if their employees had better skills. The U.S. government can help by investing money in educational programs that will improve workers’ technical skills. These programs could make American workers more productive than low-wage foreign workers and, thus, reduce the advantage that low-paying foreign companies have.
Ethan Warrick
Editor
Wealth Authority
