DEBATE: TRADE DEFICITS ARE BAD
Position Statement: The trade deficit drains money from our economy, lowers our wages and forces us into an ever-lower standard of living.
A trade deficit occurs when the total imports of goods and services are greater than the total exports of goods and services.
The trade deficit not only drains the economy jobs, it sends essential pieces of our industrial ecosystems out of the country. And this means that it is sending our ability to make a living in the future out of the country, too.
Trade deficits lead to a lowering in the value of the dollar compared to other currencies. This raises the costs of imported goods and causes inflation. It leads to more foreign ownership of our assets and companies.
This is a real problem that is hurting people, hurting small and mid-sized companies, hurting communities, hurting our tax base and hurting our ability to make a living in the future. Every dollar of trade deficits makes our country a dollar poorer.
When factories are closed and shipped out of the country people lose their jobs. And the rest of the people are afraid of losing their jobs, so they “keep their heads down.” Companies can make them accept lower wages. They work longer hours. They even stop taking vacations and sick days. They certainly don’t ask for raises or better working conditions, which also hurts the economy. This terrible job fear everyone has helped a few at the top get even richer.
Trade deficits many times are symptoms of some deeper structural weakness in the economy, perhaps reflecting poor public policy.
Cases in which trade deficit represents a problem:
1. Tax and social insurance regimes that discourage saving.
2. Tax systems that favor corporate debt over equity.
3. Banking regulation that encourages excessive lending, via a wide range of policy distortions (deposit insurance, “Too-big-to-fail”, the GSEs in America, tax deductibility of mortgage interest, etc.)
If a trade deficit represents borrowing to finance current consumption rather than long-term investment, or results from inflationary pressure, or erodes U.S. employment, then it’s bad.
Trade Deficit Is The Root
From last month’s post, Trade Deficit – One Root Of Many Problems, You buy things till your wallet is empty. So you raid the savings account to buy more stuff. Then you get a loan, and buy more stuff. Another loan, another, you keep buying stuff… Finally you’re selling off the tools you had used to make a living. That’s where the country is now because of the huge imbalance in our trade relationships. We buy more from them than they buy from us and we have let this go on and on and on. This is the deficit we should be worried about.
Trade Deficit in USA
However, a deficit has been reported and growing in the United States for the past few decades, which has some economists worried. This means that large amounts of the U.S. dollar are being held by foreign nations, which may decide to sell at any time. A large increase in dollar sales can drive the value of the currency down, making it more costly to purchase imports. The trade deficit is huge. It transfers around $1 billion a day out of our country. For those well-to-do elites so worried about the budget deficit instead of American jobs, factories, industries and our ability to make a living in the future, the trade deficit increases our budget deficit by between $78.8 billion and $165.8 billion.
Trade Deficit in China
A new report, The China Toll, takes a look at the effect of our trade deficit with China since that country joined the World Trade Organization (WTO) ten years ago, and comes up with some very specific numbers. In summary: “Growing U.S. trade deficit with China cost more than 2.7 million jobs between 2001 and 2011, with job losses in every state”
Between 2001 and 2011, the trade deficit with China eliminated or displaced more than half of all U.S. manufacturing jobs lost over that period. The growing trade deficit with China has cost jobs in every congressional district in all 50 states as well as in the District of Columbia and Puerto Rico. The total losses include 662,100 jobs from 2008 to 2011 alone—even though imports from China and the rest of the world plunged in 2009 before recovering and surpassing the previous peak reached in 2008. The trade deficit in the computer and electronic parts industry grew the most, displacing more than 1 million jobs in high-tech industries. In fact, rapidly growing imports of computer and electronic parts, including computers, semiconductors and audio-video equipment, accounted for nearly 55 percent of the $217.5 billion increase in the U.S. trade deficit with China between 2001 and 2011. http://ourfuture.org/20121023/the-next-debate-china-and-trade-deficit Some economists believe that our GDP and employment can be hurt by large deficits. In the real world, currencies are not as free to float in value as some economists’ claim, Instead they are often manipulated by some governments (In our current situation, China.) to their benefit. Trade deficits lead to a lowering in the value of the dollar compared to other currencies. This raises the costs of imported goods and causes inflation. It leads to more foreign ownership of our assets and companies. The company’s treasurer is seeking to increase bank borrowings in order to become current in meeting its trade obligation
Trade deficits can actually be beneficial in times of rapid economic expansion, as an economy flush with imported goods creates increased price competition, limiting the prospects for inflation and providing a richer variety of products for consumers to choose from. But in times like these, when inflation is an afterthought to bringing back jobs and kick-starting the economy, you’d like to at least see exports on the rise, as it reflects increasing domestic production and therefore a heightening demand for labor. (Use Nicolas’s evidence about Australia)
Unfortunately, a widening trade gap negatively affects gross domestic product, one of the market’s favorite economic indicators. GDP is calculated by adding up private consumption, gross domestic investment, government spending, and the trade balance. When that balance is negative, it detracts from GDP. As a result, we saw Wednesday’s surprising jump in the trade deficit directly hit second-quarter GDP estimates: Goldman Sachs cut its growth projections by 0.2%, while Royal Bank of Scotland and Barclays were more bearish still, each slashing GDP estimates by 0.6%. Those may seem like modest adjustments, but with growth outlooks now ranging from 0.8% to 1.6% for the second quarter, every small tick downward has a meaningful impact.
Effects of a Trade Deficit
Short- Term: Initially, a trade deficit is not a bad thing. It raises the standard of living of a country’s residents, since they now have access to a wider variety of goods and services for a more competitive price. It can reduce the threat of inflation, since the products are priced lower. A trade deficit can also indicate that the country’s residents are feeling confident, and wealthy, enough to buy more than the country produces. Long Term: Over time, however, a trade deficit can cause jobs outsourcing. That’s because, as a country imports certain goods rather than buying domestically, the local companies start to go out of business. The domestic business itself will lose the expertise needed to produce that good competitively. As a result, fewer jobs in that industry are created in the home country. Instead, the foreign companies hire new workers to keep up with the demand for their exports.
Currency Fixes and Trade Cheating
Fixing currency manipulation would go a long way toward solving the problem. Currency manipulation is the single biggest factor in our huge trade deficit. According to the EPI report, currency manipulation by China and as many as 20 countries is responsible for between $190 billion and $400 billion of our trade deficit, in a single year. Trade cheating. Many countries violate trade rules (like manipulating currency), which brings them a competitive advantage in world markets. We don’t call them on it for various reasons, largely because powerful interest groups benefit from the cheating. When goods from elsewhere cost less than they should it undermines our own manufacturers and producers, but the lower prices enrich distributors, retailers, and others.
Destroying Our Economy And Standard Of Living
1) We open our borders to imported goods made in places where people don’t have a say, so they don’t have good wages or environmental protections. We send our factories over there and import “cheap goods” into the country. 2) This sends dollars over there, and they don’t buy back from us, so they accumulate the dollars as they drain our economy. 3) Then we borrow those dollars back to fund the tax cuts for the rich. Our rich get richer, the rest of us get poorer, while they gain more and more power over us. The tax cuts force us to cut back and cut back on schools and infrastructure and other things that make us competitive.
Why an Ongoing Trade Deficit Weakens the Economy:
An ongoing trade deficit is detrimental to the nation’s economy over the long term because it is financed with debt. In other words, the U.S. can buy more than it makes because the countries that it buys from are lending it the money. It’s like a party where you’ve run out of money, but the pizza place is willing to keep sending you pizzas and put it on your tab. Of course,
this can only go on as long as there are no other customers for the pizza, and the pizza place can afford to loan you the money. One day the lending countries may decide to ask the U.S. to repay the debt. On that day, the party is over. The U.S. Could Be Losing Its Competitiveness:
Another concern about the trade deficit is the statement it makes about the competitiveness of the U.S. economy itself. By purchasing goods overseas for a long enough period of time, U.S. companies lose the expertise and even the factories to make those products. Try finding a pair of shoes made in the America. As the U.S. loses competitiveness, it outsources more jobs, and the standard of living declines. Article updated March 8, 2013 http://useconomy.about.com/od/tradepolicy/p/Trade_Deficit.htm The Trap
Here is the trap of our one-sided trade agreements: these “free-trade” agreements increase exports. The reason this is a trap and a problem is that they increase imports more. So, on the one hand the agreements create and enrich interest groups that push for continuation and expansion of the agreements, while on the other hand they increase trade deficits, which drain our economy.
Example: We opened up trade with China. China lets their imports grow, so we have some appearance of increasing sales to China, but they keep barriers while manipulating currency and subsidizing their companies, and their exports to us grow faster than their imports from us, which increases the imbalance. They can steadily reduce their import barriers and let their currency rise slowly, giving the appearance of moving toward open trade and providing what appear to be incentives to keep the relationship going, but by also increasing their exports they continue to drain us. Many leaders propose reducing the trade deficit to increase jobs. They often blame trade agreements for causing deficits. A great example is the world’s largest trade agreement, theNorth American Free Trade Agreement, or NAFTA. A response to trade deficits is often to raise import tariffs, or other forms of trade protectionism. However, these rarely work. That’s because the industry is usually already moribund, and the skills lost, by the time these policies are suggested.
1. Trade deficits cant always be good
2. Continual borrowing is not a viable long-term strategy. Selling long-term assets to finance current consumption undermines future production 3. LABOR UNIONS:
Imports>exports, jobs lost to overseas workers. Not use, statistics say the opposite 4. More like a symptom rather than a real issue. Trade deficit arise from loose monetary policy. 5. Perhaps the best view of trade deficits is the balanced view. If a trade deficit represents borrowing to finance current consumption rather than long-term investment, or results from inflationary pressure, or erodes U.S. employment, then it’s bad. If a trade deficit fosters borrowing to finance long-term investment or reflects rising incomes, confidence, and investment—and doesn’t hurt employment—then it’s good. If a trade deficit merely expresses consumer preferences rather than these phenomena, it is immaterial.
Cumulative U.S. jobs displaced by growing trade deficits with China since 2001
Source: Author’s analysis of U.S. Census Bureau (2009), U.S. International Trade Commission (2012), and Bureau of Labor Statistics Office of Employment Projections (2011a and 2011b).
One answer is that there are lots of cases that haven’t turned out as well as Australia or Korea. Before the recent crisis both Iceland and Latvia ran extremely large current account deficits, relative to GDP. In my view it’s best to think of these problem CA deficits as symptoms of some deeper structural weakness in the economy, perhaps reflecting poor public policy. Although the Australian case shows that current account deficits don’t always involve “debts”, the most troublesome cases almost invariably do.
As with trade deficits, economic theory doesn’t view debt per se as being harmful. Rather, it makes more sense to look at specific public policies that might bias a country toward too little saving, or too much debt:
1. Tax and social insurance regimes that discourage saving.
2. Tax systems that favor corporate debt over equity.
www3. Banking regulation that encourages excessive lending, via a wide range of policy distortions (deposit insurance, “Too-big-to-fail”, the GSEs in America, tax deductibility of mortgage interest, etc.)
http://www.economist.com/economics/by-invitation/guest-contributions/bad-trade-deficits-typically-indicate-insufficient-savin Balances of trade
Germany’s focus on trade surpluses will break the euro zone
Michael Pettis wrote on Jul 22nd 2011, 11:14 GMT
NO, IT will not. As John Maynard Keynes argued many years ago, the correct way to resolve persistent trade imbalances involves significant and often difficult adjustments on the part of both surplus and deficit countries. In that case the imbalances can be reversed and the deficit countries can successfully pay down the full value of their obligations to the surplus countries without a net contraction in total demand. This means that, yes, the deficit countries need to chnage, among other things by penalising consumption and reducing debt, but it also means that Germany and the other surplus countries must remove their own anti-consumptionist policies and forgive at least a part of the debt (or, which amounts to the same thing, institute a new Marshall Plan).
But Germany and the other surplus countries of Europe seem intent on ignoring
Keynes’ insight and want to force the brunt of the adjustment primarily onto the deficit countries. This means that total demand must contract and it leaves the deficit countries with very few options. They will have to force a reversal of their imbalances and pay down debt either by accepting zero growth and high employment for many years, or by intervening directly in trade so as to protect domestic demand from leaking abroad. There really are no other alternatives except for politically difficult ones like a massive and continuous sale of assets to continue funding the trade deficits, or fiscal union. http://www.economist.com/economics/by-invitation/contributors/Michael%20Pettis http://online.wsj.com/news/articles/SB10001424052702303464504579108703706141612