Our nation's continuing massive trade deficits are destroying important sectors of American industry and eliminating desperately needed jobs; yet balancing trade is not even on our government's agenda. This is happening because we are not facing reality, the reality that we are not living in a free trade world but that we are dealing with countries that practice mercantilism.
If we continue to turn a blind eye to this reality, we will become a poor nation.
Balanced Trade is about Jobs and Productivity
Balancing trade matters. Our massive trade deficits mean simply that we are consuming more than we produce. We are importing the difference between what we consume and what we produce and paying for that, not with American goods made by American jobs, but by giving our trading partners, in various forms, promises to pay later.
Today the Chinese government, which retains the dollars earned by the excess of Chinese exports over imports, has roughly $2 trillion in U.S. Treasury Bills and various other financial obligations. These holdings are all promises to pay later. And this amount is rapidly and steadily growing.
The jobs whose output could fill the widening gap between our production and our consumption are disappearing overseas, and as they vanish our productive capacity disappears with them. This is especially true in the vital area of manufacturing.
As Warren Buffett put it in an insightful article in Fortune in 2003, "America's growing trade deficit is selling the nation out from under us."
This cannot continue.
But it does. Trade figures show the trade deficit to be rapidly growing. Despite that, balancing trade is not a goal of our government; instead we have taken as our goal the doubling of exports. But for many years imports have grown faster than exports, so if anything even remotely like the present situation continues, by the time exports have doubled imports will have grown even more and the trade deficit will be more than twice as large.
If we achieve our present goal, far from balancing trade, we will have a sharply increased trade deficit with a corresponding increase in all its painful effects on jobs and productivity.
But there are policies that could balance trade and end this country's painful downhill slide. To see what can be done we must first be willing to look at the situation we are actually in.
Mercantilism
What does a country do when a key trading partner chooses mercantilism and uses the full powers of its government to advance its industries? What does a country do when that trading partner continues to misprice its currency and subsidize its industries without regard for the impact on its trading partner and disregards repeated requests to stop? This situation is not discussed in basic economics textbooks but, in dealing with China, it is the situation that we are in.
Most of these textbooks do have a chapter on trade; a chapter that persuasively describes the benefits of free trade. In former presidential advisor Greg Mankiw's economics textbook a farmer, who is better at growing potatoes than raising cattle, trades potatoes for meat with a rancher whose strength is raising cattle. Both come out ahead. But the farmer trades potatoes, not IOU's for the rancher's meat.
Today we are trading IOU's for many of the things we no longer make and those promises to pay later are building up on the other side of the Pacific while the people who could have made those goods in the U.S. are looking for new jobs, having lost their old jobs to subsidized and underpriced imports.
If Mankiw's farmer was doing what we are doing he would know he was on the way to losing his farm.
Refusing to See
When people fail to see the obvious it is natural to immediately accuse them of stupidity. But those who ignore the destruction of our industries and the ever-increasing outsourcing of jobs are in no way lacking in intelligence. They are much more accurately described by the old adage, "There are none so blind as those who do not wish to see."
Unfortunately, today our country's economic policies are deeply influenced by those who do not wish to see what is actually happening.
Global Corporations and Wall Street
Our global corporations do not wish to see the negative impact of their actions; they are profiting from the present situation, even if the country is not. They make their goods cheaply abroad aided by foreign subsidies, manipulated exchange rates, and cheap labor, and then import them very profitably into the U.S.
Wall Street is lined up with the global corporations because it too finds the present situation profitable.
It is easy to underestimate and hard to overestimate the influence of this combination on both Congress and the Administration. That influence has resulted in rescue packages for the major financial institutions that have enabled them to resume their high-flying pay packages while doing little lending, and as the auto companies revive, we have seen them intensifying their transfer of production and technology out of the country.
As long as profitability is the only goal of Wall Street and of our global corporations, and as long as our government accepts that point of view and refuses to see or act on the negative effects on the country, we can expect only more of what we have seen through both Republican and Democratic administrations, an ever increasing trade deficit with all that means to jobs and productivity.
Obstacles to Balancing Trade: The Divisions within the Country
The largest and most important obstacle to taking meaningful steps to balance trade is that there are deep divisions within the country about the effects of what is going on. As we have seen, powerful segments of our society, such as the global corporations, are doing well now and steadily oppose change. But there are also segments that do want change. The domestic manufacturers are suffering; they are often in favor of imposing tariffs. The labor unions too see the standard of living of their workers endangered by both the reality and the threat of outsourcing. But in any battle for influence these groups are far outgunned by the opponents of change.
But what about the American people as a whole? How are they doing? After all, consumers benefit from the low-priced imported goods sold by Wal-Mart and others. However the tradeoff to that benefit is that the American jobs that earn the money to buy those goods are also disappearing.
Balanced and Unbalanced Trade
If balanced trade is maintained when an industry is lost to foreign competition, it means that the displaced workers have found new jobs in the remaining industries; and their new jobs create exports that the trading partner buys. The output of these new jobs balance trade. Depending on the productivity and scale of the industries being lost relative to those being retained, this new balanced trade situation can be better or worse than the original one in terms of what goods the entire country ends up able to buy and consume.
But a mercantilist trading partner, such as China, does not need to wait and slowly develop its industries to enter the most productive sectors, and it is not obliged to limit the scale of its entry to what matches its imports. By mispricing its currency, using subsidies, and demanding technology transfer in exchange for access to their market, a mercantilist nation can enter the most productive sectors very quickly. They can then continue to export into these sectors even if they are not importing to match, so that the new American jobs to match the imports with exports never materialize.
Such a nation is willing to live with what is for them a huge favorable trade balance. They are willing to develop their industries while destroying ours, and are willing to decide later what they will do with the huge accumulated debt that we owe them. They will decide that later, when they are dominant and we are weak.
But for us this is a steady downward spiral.
This is the scenario that we are facing, or rather ignoring. That is why we need to act. And we need to act now, before it is too late.
Balancing Trade with a Mercantilist Nation
There are ways to balance trade, even with a mercantilist nation. If, despite our internal divisions, we finally do determine to balance trade, we should choose methods that will actually work. This means that:
Clearly our present approach to China meets neither of these criteria and that is why we discuss other possibilities in Part II.
Conclusion
The future of our country is endangered by massive trade deficits that are destroying industries and destroying jobs. Yet balancing trade is not on our government's agenda. We must make clear to our government that it can no longer ignore the destruction of our jobs and our productivity that is caused by unbalanced trade. We must make balancing trade a national goal, and then act effectively to bring it about.
For the 20 years leading up to 2008, America was enjoying a golden age - unemployment was not a problem, thanks in large part due to the affordable, good quality goods from China and the recyling of trade dollars, even whilst oil prices went crazy, America still enjoyed low inflation, and very low interest rates. Asset values kept going up steadily, and most everyone had extra money to spend. That was the good life. During that period, the trade policies of America's trade partners did not change, so they should not be blamed for all that ails the American economy.
America lost 8 million jobs when the derivatives fraud of the American banksters "hit the fan" in 2008. You can't blame that on the foreigners.
Protectionism is going to HURT Americans during these difficult times. Protectionism jacks up consumer prices inevitably - WHAT American classes do you think can afford higher prices at this point? The higher prices will also reduce demand, leading to more job cuts on the retail front. Protectionism also will beget same, thereby blocking American exporters from promising expanding markets, again leading to loss of American jobs. Protectionism in this bad economy is a terrible idea.
Why does it make sense to ship industrial capasity + jobs to a totalitarian country that lacks the freedoms of speech, press, association, multi-party elections so they can loan us the money to buy stuff from them that we used to make here?
Warren Buffet came out against this trade deficit.
How long do you think this country can continue to print paper that will be accepted as currency?
Unfortunately, this concept is NOT gaining traction among Americans. Instead, the corporate media (the propaganda engine for the Global Elite) have convinced Americans that their government caused the economic destruction by over-supporting tens-of-millions of "undeserving", "unproductive" Americans at the bottom of our society. Not only are these "entitlement-dependent" Americans (who control the government?) the cause of all our problems, they are "criminals" (traitors, socialists, communists, terrorists?) intent on destroying the U.S.
By convincing Americans "it's all the government's and poor people's fault", the Global Elite have accomplished two major objectives: 1) they've diverted attention and accountability away from their on-going accelerated looting, and 2) they've trained Americans to expect MANY more poor people (who "deserve to be poor"?).
Americans need to recognize what's going on and figure out how to protect themselves. If the Global Elite's actions are not criminalized (thousands thrown in jail and trillions of wealth repatriated) then the U.S. will continue to fall MUCH further.
During the era of north american slavery, most people made their living inspite of slavery, not because of it.
they practice market distortion, with illegal subisides, product dumping, IP theft, cheep labor, lack of environmental or safety regulation, currency manipulation and so on
When your equivalent imported products cannot compete in price and the local consumer are he!! bent on saving you have no market.
There is no solution to this problem. Yes, currently we can sell them Boeing Dreamliners, and high end processing power, but the day when China is manufacturing state of the art aircraft, and processors is not far off.
Technology transfer is by far the largest contributing factor to the entire "globalization" phenomena. We have effectively allowed China to skip the industrial revolution and join us in the 21st century.
We have given them the tools HW and SW to effectively compete with our local industries. A few decades ago it was illegal to sell certain HW and SW to foriegn countries. We removed those obsatacles and instantly made it possible for these countries to invest and compete.
We gave away our advantage. More correctly we sold our advantage for a relatively small profit. Some may argue philisophically the merits of sharing our intellectual property, but you can't argue that it has caused our industry to be shifted overseas.
PS I have been traveling to China for many years as an enabler of outsourcing. In my circles I would tell people "mark my words China would soon be the worlds super power" and was subsequently laughed at. These same people have since come around...
Why can't we change? This is the question Dr. Gomory is not willing to ask because he already knows the answer and is, like many others, unwilling to go to the next step.
And the next question is - why is that? Why are our intellectual leaders so reluctant to go wherever their analysis lead them even under such difficult economic conditions under which we find ourselves? This is in contrast with behavior of people like Irving Fisher, one of the greatest neo-classical American economist, who even after the Great Stock Market crash insisted that things will get back to normal. But as the time passed, he realized the crisis was much deeper and he was willing to explore the unorthodox economic thoughts, even of people like Silvio Gesell! Of course, FDR was willing to relentlessly experiment with social democratic programs to undo the systemic problems and ultimately to save the capitalist system from itself.
We no longer have either people like FDR nor like Irving Fisher. And why is that? Is it because we are so dominated by corporations? ;-)
Of course, the alternative down the road is a strategic default on our debts (both principal and interest). This would have the cleansing effect of forcing us to balance our budget, produce more at home since few would take our dollars for their goods, and make our exports more attractive since our costs of production would be measured in a currency that nobdy wants.
Build a mass transit system - get Americans out of their cars. This is the real price of trade imbalance.
Throwing around accusations like trade subsidies, currency manipulation and mercantilism won't fly
mer·can·til·ism (mûr“k…n-t¶-l¹z”…m, -t¹-) n. 1. The theory and system of political economy prevailing in Europe after the decline of feudalism, based on national policies of accumulating bullion, establishing colonies and a merchant marine, and developing industry and mining to attain a favorable balance of trade.
China doesn't do colonies. China doesn't do predatory pricing. She pays market prices and sells them at a profit, some two trillion dollars worth to date. You haven't been able to seek recourse through the WTO whose rules you wrote because what you accuse China of is all in your imagination. What you wish for China is a repeat of the accord that forced Japan to unilaterally revalue the Yen 20 years ago. That resulted in two decades of economic stagnation and counting. China knows well enough not to go there.
I know that Chinese consumers covet luxury goods (just count the Ferraris at the Grand Hyatt), but are willing to buy locally manufactured products.
And throw out the rascals who stand in our way.
Agree, however, the debate as currency formulated by policy makers gets lost in translation and won't achieve the desired objectives. What is needed is multinational firm access to Chinese markets and Chinese enforcing IP protection -- areas the Chinese bureaucracy will succeed in not letting happen.