Balanced Trade: Key To US Economic Rebirth

December 21, 2016

Balanced Trade: Key To US Economic Rebirth
By Michael Stumo, President, and Jeff Ferry, Research Director,

The United States has run a consistent deficit on our balance of trade for 40 years, a record for any major nation in the annals of modern record-keeping. A persistent trade deficit is a telltale sign that a nation is failing to produce goods and services that are competitive on the world market. It is no accident that U.S. relative economic decline, including stagnating real incomes and loss of good-paying manufacturing jobs, started precisely at the time (mid-1970s) that our trade fell into deficit. Our economic challenges are broad and require aggressive solutions on many fronts. But we believe that any fundamental effort to restore economic growth in the U.S. must begin with a commitment by the federal government to adopt balanced trade as the key performance measure for trade policy. 

Last year, the U.S. trade deficit on goods and services totaled $500 billion, or 2.8% of U.S. GDP.  That is a huge gap in our national accounts, weakening industries, depressing incomes, and hitting living standards nationwide, and especially in areas once dependent on manufacturing industry, which has seen the worst pressure from imports. Twenty years ago, the nation’s academic economists were united in preaching the gospel of free trade. They argued that, per 19th century economic theory, jobs lost to imports would turn into new jobs where U.S. workers have a “comparative advantage.” But in recent years, economists have begun to recognize that those new jobs have not appeared, or if they have they have been at lower pay and worse conditions. Addressing the debilitating effects of prolonged import penetration. MIT economist David Autor demonstrated in a recent study (1) that

“Individuals who in 1991 worked in manufacturing industries that experienced high subsequent import growth garner lower cumulative earnings, face elevated risk of obtaining public disability benefits, and spend less time working for their initial employers…Earnings losses are larger for individuals with low initial wages, low initial tenure, and low attachment to the labor force. Low-wage workers churn primarily among manufacturing sectors, where they are repeatedly exposed to subsequent trade shocks.

According to Autor, these “trade shocks” can last a decade or more, and it’s become clear they are associated with not only prolonged unemployment and reduced incomes, but also greater drug use and increased mortality. Even economist Paul Krugman, one of the most prominent advocates of free trade, recently conceded (2) that imports could be responsible for as much as 40% or two million of the five million manufacturing jobs lost in the last 15 years.

The core of the problem is that since 2000, a number of Asian nations, led by China, have entered the global market with aggressive plans to lead and in some cases dominate in numerous strategic sectors of the world economy, primarily within manufacturing. The challenge for the U.S. is compounded by the fact that many of these nations are running explicitly “mercantilist” policies, i.e. maintaining positive trade surpluses with the rest of the world to further boost their export sectors and domestic incomes. It’s not just Asia either---Germany runs the world’s largest trade surplus, worth 8% of its GDP. In total, the four largest trade surplus nations ran a monumental surplus of $1.1 trillion last year, representing a huge subtraction from demand for worldwide goods and services.

There are other negative effects we suffer as the world’s leading deficit nation, such as a greater likelihood of financial bubbles as we stimulate our home economy to make up for the lack of exports. But the worst effect is that the U.S. is getting crowded out of many of the most productive and profitable product areas on the global market. The International Trade Commission divides our trade into 12 categories. For 2014, the latest available figures, we had a deficit in 11 of those categories. The only one where our exports exceeded imports was agricultural products. In motor vehicles, to take one example, we had a deficit of $105 billion in 2014. In that year, Germany exported $163 billion worth of motor vehicles, more than double the U.S. figure. It’s not unrelated that Germany’s compensation for auto workers (including wages, taxes, and social insurance) have been stable at over $50 an hour, roughly double what U.S. auto workers earn today.

So what is to be done? Our organization, the Coalition for a Prosperous America, has been fighting for years for greater recognition of international trade as the key issue for U.S. economic growth. We believe that as a matter of urgency, the U.S. should:

  • Make balanced trade a priority. That means focus on increasing exports and reducing imports until our trade deficit is eliminated. There is a resolution before the House right now, proposed by Rep. Dan Lipinski (D-Mi.) and Rep. Mo Brooks (R.-Al.) supporting balanced trade. We urge all members of Congress to support the resolution (HR ???).
  • The incoming Administration should investigate currency and balance of payments issues as a priority, including actions to compel persistent surplus nations to restore global demand by recycling their surpluses. This should not be limited to action to reduce the dollar, but should consider a broad range of potential actions.
  • Prioritize tougher enforcement of unfair trading practices. Past enforcement actions have been hampered by evasive tactics by our trading partners and bureaucratic foot-dragging by our own officials.
  • The new Administration should investigate the creation of a revenue-neutral border-adjustable consumption tax as a means of shifting our industries to favor exports. Other nations’ experience has shown this sort of tax works, and it complies with international laws.

Since the November election, commentators speak increasingly of the alleged danger of “retaliation” should the U.S. take action to restore balanced trade. In effect, this is an admission that direct action to improve our trade balance would benefit U.S. companies, workers, and communities. The only challenge is to avoid retaliation. This is manageable. Our trading partners will understand when we tell them we can no longer be the world’s consumer of last resort.  They don’t expect us to impoverish our heartland or endanger our security for their prosperity. (And they have more to lose than we do.) If we approach them realistically and diplomatically with a new trade agenda, the reaction is likely to be: why did it take you so long?

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