Friday, October 28, 2016

Trade Deficit Slowly Bleeding the U.S. of Money and Jobs



A primary topic in this year’s election cycle has been trade.

Former Democratic presidential candidate Bernie Sanders and Republican presidential nominee Donald Trump have vigorously denounced past trade agreements, noting that they have hurt American workers. Both have taken a strong stance against the Trans Pacific Partnership (TPP).

Their condemnations have resonated with millions of voters.

While serving as Secretary of State, Hillary Clinton praised TPP as a deal that “sets the gold standard in trade agreements."

However, last fall, once the trade pact was finalized after years of negotiations, Clinton said she opposed it. Her change of heart may have been nothing more than political expediency.

Clinton’s history on free trade is mixed. She spoke in favor of NAFTA when her husband signed it into law in 1993, but called it a "mistake" during her 2008 presidential campaign. She voted both for and against trade deals during her eight years in the Senate.

Her running mate, Tim Kaine, recently said that finding more American export markets would “add workers” and result in “more jobs and higher wages.”

That has always been the promise of free trade agreements, but the reality has been something different, as I highlighted previously.

The median household income in 2015 was $56,516, an increase of 5.2 percent over the previous year — the largest one-year rise since at least 1967, the Census Bureau reported in September.

Median household incomes finally rose across virtually every American demographic after years of stagnation or decline, according to the latest government data.

However, the median income is still 1.6 percent lower than in 2007, before the Great Recession. Most troubling, it also remains 2.4 percent lower than the peak reached during 1999.

Consider that for a moment: the typical American household now has less income than in 1999. That’s stunning!

Meanwhile, Americans pay more today for needs like health care and higher education than they did in 1999.

Rents, health insurance, prescription drugs and tuition have all risen -- and are still rising -- much faster than the general rate of inflation and, more importantly, much faster than median family income.

Anyone arguing that current trade policies somehow benefit America or it’s workers is either woefully ignorant or hopes that he/she is speaking to the woefully ignorant.

The U.S. has run a persistent trade deficit every year since 1976 — yes, for four decades.

As I noted in 2013:

The U.S. has consistently run a gaping trade deficit for decades because we import more than we export. In fact, the U.S. has led the world in imports for decades and is also the world's biggest debtor nation.

Countries with big, persistent trade deficits have to continually borrow to fund themselves. The problem for the U.S. is that we don't export nearly enough to continue paying for all those cheap foreign goods that we've grown so accustomed to.

Our greater oil production and independence was supposed to diminish the trade gap, but that hasn't happened.

The U.S. trade deficit in goods and services totaled $351 billion through August, the latest data available. With four months to go this year, that figure will continue to rise and will likely reach $500 billion once again.

As you can see below, half-a-trillion dollar annual trade deficits have been the norm for many years.

U.S. Trade Deficit, past decade (source: U.S. Census Bureau)

2005 - $714 billion
2006 - $762 billion
2007 - $705 billion
2008 - $709 billion
2009 - $384 billion
2010 - $495 billion
2011 - $549 billion
2012 - $537 billion
2013 - $462 billion
2014 - $$490 billion
2015 - $500 billion

Year after year, the trade deficit sucks hundreds of billions of dollars, and millions of jobs, out of the U.S. as we continually buy products from overseas that could instead be made here at home.

Yes, we get cheaper goods at the local Walmart as a result, but is it really worth the lost jobs and the lower paying ones that have replaced those in manufacturing?

Manufacturing employment in the United States fell by 9 percent from 2008 through 2014, according to the Congressional Research Service (CRS). However, the CRS also notes that Canada, France, Italy, Japan, Sweden, and the United Kingdom all saw similar declines over that period.

The United States’ share of global manufacturing activity declined from 28 percent in 2002 to 16.5 percent in 2011. Since then, the U.S. share has risen to 17.2 percent, according to the CRS. Yet, the evidence shows that manufacturing still contributes significantly less to our economy today than it did in 2002.

As the CRS notes, “Part of the decline in the U.S. share was due to a 23% decline in the value of the dollar between 2002 and 2011, and part of the rise since 2011 is attributable to a stronger dollar.”

While manufacturing’s share of GDP in the U.S. stood at 24.3 percent in 1970, it now contributes less than half that amount.

Manufacturing amounted to just 12.1 percent of total U.S. gross domestic product in 2014, according to United Nations calculations.

To be fair, even the U.S. Chamber of Commerce refers to this trend as “a global phenomenon,” noting that this issue is plaguing advanced economies around the world.

The Chamber observes that, “The decline in manufacturing’s share of U.S. GDP over the last forty years is nearly identical to the decline in world manufacturing as a share of world GDP, which fell from 26.6% in 1970 to 16.2% in 2010."

That’s because Big Business (i.e., capital) always seeks cheap, or cheaper, labor, which developing economies provide.

This has created undesirable outcomes for the U.S., since lost manufacturing has led to greater importing of the things we no longer make, which hurts our economy.

While exports add to GDP, imports subtract from it. Quite simply, a trade deficit creates a drag on the economy.

Every $1 billion of a larger deficit subtracts about 0.1 of a percentage point from the annualized GDP growth rate. That's bad news for an economy that is currently struggling to eek out a mere 2 percent annual growth rate.

Ultimately, America’s greatest export over the past few decades has been its own jobs. This is a terribly self-destructive trend.

America needs to produce more, export more and save more. For more than four decades, we've done exactly the opposite.

No nation can continually buy more from abroad than it sells. It's simple arithmetic. Where will the money for all these purchases come from?

It’s a very simple logic: You can't buy more than you sell indefinitely.

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