The real trade story
Two headlines caught my attention in the Oct. 12 Washington Post. One read, in the print version, "Exports faring better than indicators hint", and just below it the other proclaimed, "Summers urges extension of payroll tax cut." Ever since the U.S. trade balance turned consistently and increasingly negative in the early 1970s after nearly a ...
Two headlines caught my attention in the Oct. 12 Washington Post. One read, in the print version, "Exports faring better than indicators hint", and just below it the other proclaimed, "Summers urges extension of payroll tax cut."
Ever since the U.S. trade balance turned consistently and increasingly negative in the early 1970s after nearly a century of surpluses, the leading U.S. media have tended to downplay the trend by arguing either that it is about to reverse as a result of international agreements to rebalance and of rising American competitiveness in key export markets. The Post‘s story last Friday is just the latest example of this bent. Although the latest figures from the Department of Commerce show the U.S. trade deficit for August widening from July’s $42.5 billion to $44 billion, the Post said they mask more promising signs.
Among those cited by the Post are that America exports a wide range of goods and services from soybeans and aircraft to banking services and Disneyland vacations that totaled $2.1 trillion dollars last year and represented a 14 percent increase from 2010. These exports supported millions of jobs and accounted for 14 percent of GDP. Moreover, the Post noted that aircraft exports are up 38 percent so far this year while those of oil field and agricultural equipment are up 24 percent and 23 percent respectively. Pharmaceuticals and telecommunications equipment exports are both up by 7 percent. The Post did note that wheat and corn exports are down 34 percent and 22 percent respectively, but explained this as a special circumstance resulting from the drought in the American heartland. It went on to emphasize solid progress in sales to China which are up 5.9 percent year to date, or roughly, said the Post, in line with the growth of the Chinese economy.
The Post did admit that these numbers are less impressive on an annual basis. August to August, U.S. exports to China are up only 2.2 percent and are actually down 3.5 percent to the EU, which after all is the world’s single largest market. The Post said the big question is whether the recent downturns in Chinese and EU growth will be short lived enough that the more positive trends of the past eight months can take hold and presumably lead to rising U.S. growth and employment.
The weakness of this presentation is that it ignores much history. The story of the past forty years has been one of rising U.S. trade deficits, then the imposition of various "rebalancing" policies that capped or even reduced the deficits for a time, but then followed inexorably by another repetition of the cycle. It’s not clear to me why the Post so emphasizes the first eight months of this year or even why it identifies the above trends as particularly positive. After falling in the wake of the financial crisis of 2008-09, the U.S. trade deficit has risen for each of the past two years and for the first eight months of this year. Indeed, the January to August trade deficit has risen during each of the past three years. In 2010, it was $331 billion and for this year it was $371 billion. Nor are the U.S. numbers are good as the Post thinks they are. For example, China’s GDP growth was last reported to be about 7.8 percent. So that is more than the 5.9 percent growth of U.S. exports to China, meaning that the U.S. is losing market share in China. On top of that, the notion emphasized by the Post that U.S. exports are of sophisticated , complicated things like aircraft and telecommunications equipment is somewhat misleading as are the references to job creation. For one thing, less and less of the components of an American airplane are made in America. Take the Boeing 787 Dreamliner. Its wings are now made in Japan. Of course, exports do support jobs, but since the United States has a huge trade deficit of about $500 billion, on a net basis, trade costs America jobs.
But the real problem I have with this story is its suggestion that downturns in China and Europe may be short lived and that a long term surge in U.S. exports will take hold and bring the U.S. and global economies back to balance. There is virtually no chance of this happening. In the first place, for deep structural reasons both the EU and Chinese economies have to slow down. But remember that the United States had big deficits with them when they were growing at record rates. Remember that the EU is now imposing austerity and looking for export led growth while China remains an economy with strong export led tendencies. It is highly unlikely that the United States could rebalance its trade accounts only by increasing exports, desirable as that might be.
This brings me to the article about Summers. He, of course, is an advocate of further stimulus or, at least of not reducing existing stimulus to the economy. His view is that more stimulus provide demand that will jump start additional production, employment, and output that will provide the wealth to pay down debt as the economy gets back to a growth cycle. I am sympathetic to Summers on this point. But I also have much experience in Japan where I have seen stimulus piled upon stimulus without the forecast jump start starting but with an inexorable accumulation of a vast mountain of debt piled upon an increasingly aged population.
I fear the Japanese precedent, but am convinced that America does not have to follow it. Why? Because we have a huge trade deficit. Making things in America that are now imported from abroad could dramatically jump start the U.S. economy with no need for additional debt accumulation as the result of deficit spending stimulus. Make It In America should be the theme song of whichever candidate wins the upcoming presidential election. We now have studies from a variety of agents including the Booz&Co., the Boston Consulting Group, and McKinsey all of whom argue that manufacturing of a wide range of presently imported goods could be done competitively from an American base.
That’s the real ticket for U.S. GDP growth. Exports are wonderful and the more we ship of them, the better. But if you double exports while tripling imports, you’re not ahead. You’re behind. So the real focus must be to reduce the trade deficit and that can most easily be done by "making it in America."