Is The Trade Deficit Really So Bad?

As with most economic issues, there are no completely wrong or right answers — the truth is that there are winners and losers.

I think America’s trade deficit is the single biggest obstacle to creating manufacturing jobs, and to keeping manufacturing jobs in this country. I also agree with Warren Buffett who says, “The U.S. trade deficit is a bigger threat to the domestic economy than either the federal budget deficit or consumer debt and could lead to political turmoil.”

But I am a realist, and it is pretty obvious that many pundits, bloggers, Wall Street bankers, multi-national corporations and the Obama Administration do not share my concerns. In fact, most stories in the media are focused on the federal deficit and which political party is the most to blame. It is as if the trade deficit is an open ended charge account that is simply an accounting summary, and will never have to be paid back.

The Basics

In reality, trade deficits must be financed. A country simply cannot have a trade deficit unless private or government investors are willing to finance it. In America, we have had a trade deficit for 39 years and it is now more then $8 trillion. This is not simply an accounting convention — it is real debt.

To finance our trade deficit, we borrow money from our trading partners. Our two biggest trading partners are Japan and China, who send the excess of the money they earn back to the U.S. by buying U.S. government bonds and other government assets so that we buy more of their imports.

Normally trade deficits are self correcting because, as the deficit grows, the country’s currency begins to decline in price in the world market. This makes exported goods less expensive and foreign goods more expensive, and trade is supposed to balance itself.

In the case of America, this balance is not happening because many of our trading partners have figured out how to manipulate their currencies to keep the dollar value high so that they can continue to increase our imports.

Who Are the Winners?

As with most economic issues, there are no completely wrong or right answers — the truth is that there are winners and losers. The businesses that are the biggest winners are the multi-national corporation. They have built plants in China and other foreign countries to sell products to the country and back to the U.S. They are able to take advantage of less environmental and safety regulation, manipulated exchange rates, foreign subsidies and cheap labor to sell cheap products back to the U.S. as imports. They do not want the U.S. government or the WTO to interfere with their foreign partners (particularly China) and spend huge amounts of lobbying money on Congress to maintain the status quo. The multi-nationals are profiting from our ongoing trade deficit even if the country is not.

The other winners in this game are the Wall Street banks who can make profits all over the world and foreign investors who use their profits to invest in America.

Who Are the Losers?

A February 2014 report from the Economic Policy Institute (EPI) shows that trade deficits have contributed to the elimination of 5.7 million American jobs over 15 years. So the primary losers under our current policy of accepting growing trade deficits are working people, jobs, manufacturing, communities, states and many industries.

Let me be clear: I believe in the free enterprise system, open markets, reducing tariffs and subsidies and employing fair trade. But free enterprise and free trade depend on open competition and a level playing field for all trading countries.

The problem is America does not compete in a free trade level playing field environment. Currency manipulation by China, Japan, and other countries distorts trade flows and artificially lowers the cost of imports and raises the cost of our exports. Currency manipulation is the primary cause of our trade deficit and unfair trading is illegal under WTO rules, but neither Democratic nor Republican administrations have been willing to do anything about it.

The positive message in the EPI report is that realigning our exchange rates could:

    • reduce our trade deficit by up to $500 billion by 2015;
    • increase our GDP growth by 4.9 percent per year;
    • grow the number of manufacturing jobs by 16 percent, or 2,300,000 jobs; and
    • the increased tax revenues could reduce the federal budget deficit $266 billion by 2016.

Robert Scott, the primary author of the report says, “new fiscal stimulus is all but impossible, so ending currency manipulation is the best available tool for stimulating demand for domestic spending and ending the hangover of excess unemployment from the Great Recession.”

The Unknown Factor

Besides the current winners and losers, there is another dangerous factor that sits like a land-mine in the garden. The winners and supporters of trade deficits assume that financing trade deficits can go on ad-infinitum. But at some point, the lenders may decide that they are holding too many dollars or U.S. Securities and reduce or stop loaning us money. Or even more likely, we may get into a military or state department dispute with China and they could punish us by cutting off the loans. This could cause a rapid devaluation of the dollar and lead to a currency crash. In a short period of time, the prices of foreign made goods would double or triple and interest rates would skyrocket, which could lead to a stock market crash and perhaps a worldwide recession

The trade deficit is slowly hollowing out our economy. We have lost approximately 12 percent of our high value jobs in manufacturing, transportation and related professions. When these people find new jobs they almost always take a pay cut, which has led to the decline of median household income.

Ignoring the growing trade deficit and accepting the status quo would certainly benefit the multi-national corporations,

Wall Street, foreign investors, and our trading partners who run surpluses with us.

But I am afraid it would be bad for the country, working people and manufacturing — and would create an economy with permanently low GDP growth, high unemployment and underemployment, and few good job opportunities.

Mike Collins is the author of the Growth Planning Handbook for SMMs. He can be reached at www.mpcmgt.com.

 


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