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Why the Trade Deficit in Manufactured Goods Matters

June 17, 2013
Over 60% of the 5.7 million manufacturing jobs lost in the 2000s were due to the increase in the trade deficit.

While the United States has been running a trade deficit in manufacturing for more than three decades, it grew considerably worse after 2000.

During the ensuing decade, the United States accumulated an aggregate negative trade balance of $5.5 trillion, and in five of those years, the deficit topped $600 billion.

To put this in perspective, during each of those five years, on average, each American household imported $5,450 in goods and services that was not matched by equivalent exports. In other words, over five years every American household got the equivalent of a new BMW essentially on credit, since we were not exporting an equivalent amount.

Many Americans comfort themselves by thinking that the vast majority of the U.S. trade deficit in goods is comprised of oil, cheap low-value items, or the mass-market consumer electronics. Surely, the United States must run a trade surplus in advanced technology products from industries such as life sciences, medical devices, optoelectronics, IT, aerospace, and nuclear power.

But in the ten-year period from the beginning of 20002 to the end of 2011, United States ran a trade deficit in advanced technology products of $526 billion deficit.

But despite these trends, policy makers are strangely silent on the issue. While we might hear about the benefits of exports, there are no hearings on the trade deficit or speeches about how to cut it.

One principal reason is that most economists advise policymakers that the trade deficit is not a problem. According to them, if other nations want to sell us products without us selling them anything in return, they are doing us a favor. If they want to give us computers, cars, and clothes without giving anything in return other than “promissory notes” we should sit back and enjoy driving that BMW we got without Americans having to work for it.

This advice is misguided on several accounts. First, large trade deficits have led to a hollowing out of U.S. manufacturing and been a major factor in the continued stagnation of the economy as a whole.

Effects of Trade Deficit

Thanks to the large U.S. goods trade deficit, since 2000, the U.S. share of world exports has declined from 17% to 11%, even as the European Union’s share held steady at 17% over that time period.

In fact, between 1999 and 2009, America’s share of world exports fell in almost every industry: by 36 percentage points in aerospace, nine in information technology, eight in communications equipment, and three in cars.

ITIF has estimated that over 60% of the 5.7 million manufacturing jobs lost in the 2000s were due to the increase in the trade deficit. If we continue to cede production to other countries we will continue to lose the jobs and the economic growth that goes with it.

Second the accumulation of trade deficits has led to an ever expanding trade debt. Since 1975, the United States has accumulated a total trade debt of $8 trillion, and the cumulative trade debt could grow to $18 trillion in the next 10 years. Eventually, the surplus nations we trade with will want something other than green pieces of paper with American Presidents on them. They will want real U.S. goods and services. And when they do future generations of Americans will have to pay the bill we have accumulated by consuming less than they produce (just the opposite of now). So while policymakers talk about how it is immoral to pass on a growing budget debt to the next generation, they are strangely silent about passing on a trade debt to the next generation.

One reason economists are loathe to admit that the trade deficit is a problem, is that they fear that if they actually leveled with the public and policymakers that the latter would be swayed by the siren song of protectionism.  Better to pretend it’s not a problem. Or, if necessary, claim that the trade deficit is our own fault because we do not save enough as a nation.

Former George W. Bush economist Greg Mankiw reflects this when he writes: “My view is that the trade deficit is not a problem in itself but is a symptom of a problem. The problem is low national saving.” The Council on Competitiveness agrees, stating: “These threats [e.g., the trade deficit] stem from global financial imbalances rather than from the inability of American companies or American workers to compete in global marketplaces.”

The United States has among the highest corporate tax rate in the world, fails to match many foreign nations in investment in research or export credit financing, and has deteriorating infrastructure. But, according to the views above that blame us for the trade deficit, these factors have no effect on the ability of business establishments in the United States to thrive in international markets because that is determined solely by our savings rate. So why not double the corporate income tax rate to 70%, since it can have no effect on our trade deficit. 

The reality is that the savings rate does not mechanistically drive the trade deficit. As American University economist Robert Blecker states, “This identity does not prove causality, and is consistent with other causal stories about the trade deficit.” In other words, what the conventional story fails to recognize is that savings is a function of national competitiveness.

If, the Chinese stopped manipulating their currency, the U.S. trade deficit would fall and the Chinese would buy less of our government debt. The result would be a rise in both U.S. exports and interest rates. And both would spur more savings. Higher interest rates would lead more Americans to save. More exports (and relatively fewer imports) would boost U.S. corporate savings. And more jobs and higher wages through exports would boost individual savings and reduce the budget deficit.

So instead of continuing to claim we do not have a problem, policymakers need to focus on addressing the significant competitiveness issues America faces and set a goal of eliminating the trade deficit in a decade. If they did this, it would be much easier to then realize what reforms are needed: a more competitive corporate tax code, more investments in technology and skills, and much better enforcement against foreign mercantilist policies. 

We must address these challenges and create a better environment for economic and job growth, not stick our heads in the sand and claim that massive trade deficits are fine and our fault.

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