by Michael Stumo, CEO of CPA
The big news this week is that the annual US trade deficit increased in 2017 by 12% over 2016. Here are five reasons you should care.
1. Your stock market gains could be at risk - The economy that really matters—the jobs and industries that support middle class families across the nation—isn’t tied to Wall Street. But when we import more than we export, US consumer demand “leaks” overseas to companies producing in other countries. American companies do not get the benefit of those sales, which limits both workers' wages and company profits. While the stock market can rise based upon speculation and debt-fueled consumption, those gains can be fleeting. Reducing or eliminating the trade deficit would mean more demand for American-made products, which can boost consumer spending. But until we revitalize middle class jobs, the stock market will remain vulnerable to a soft economy.
2. Your wages don’t grow as fast - A large number of US companies have closed down or moved overseas—and they’ve taken good jobs with them. This includes very sophisticated manufacturing and advanced technology work. When these companies close down, their workers are forced to compete for replacement jobs further down the wage scale. The result? Wages go down for everybody when competition for jobs increases and the quality of jobs decreases.
3. Our economy grows more slowly - Economies are built upon investment and demand for goods. When too much of our consumer demand shifts to imported goods, our economy loses out on growth. A trade deficit means US dollars going overseas, rather than into our businesses and workers. In the reverse case, a trade surplus would mean we benefit, on net, from demand in foreign countries. Unfortunately, right now investment in new plants and businesses is simply not justified in this country due to a lack of strong demand. Thus, our own spending is financing new plants and businesses in other countries. Or it’s invested in speculative opportunities, like real estate, that can cause a bubble but produce few jobs.
4. Foreign countries have nationalistic trade strategies - Countries like Germany, China, South Korea, and Taiwan intentionally produce more than their citizens can consume. And then they export the surplus. Those countries gain in two ways: their industries benefit from their own demand, and they also profit from the purchases made by other countries, principally the US. It’s a smart move for these countries, since they enjoy full employment—generously funded by US dollars. These countries don’t want to change course, since it’s working for them. That’s why the US must take similar action to stop being the world’s largest importing nation.
5. A “strong” dollar hurts you and your family - The US dollar is overvalued by roughly 20 percent in relation to its “trade balancing equilibrium price”—ie. the price at which the dollar must be maintained to keep exports and imports in balance. The excessively strong dollar was a substantial factor in driving 2017’s rising trade deficit. All US goods and services are, as a result, 20 percent too expensive for foreign consumers to buy. And imports become 20 percent cheaper in the US market, causing consumers to putchase imports rather than comparable, American-made products.
Here's another way to look at it: Consider a Japanese company considering purchases of beef from Iowa. If the dollar price is 20 percent too strong, the beef costs the Japanese 20 percent more. Conversely, if a US consumer wants to buy an American-made car or a Toyota, they’ll find the Toyota to be less expensive. The Japanese yen is simply lower than its “fair” or equilibrium price, so the Toyota costs less than a car made in Michigan. The sad truth is that the American car is not more expensive because of the automaker, but because of the dollar’s exchange rate.
Unfortunately, media talking heads, former Treasury secretaries, and Wall Street “experts” continually urge a strong dollar. Yes, that “strong” dollar will help sell Treasury bonds and equities at a higher price. But the real economy—the one that matters to you—depends upon selling goods, services, and our labor. Treasury secretaries and the financial industry sell intangible assets and debt, but those sales don’t help everyday families.
Bottom line: Countries like China, South Korea, and Germany benefit from weak currencies when selling goods in the US. That helps to growing their own consumer demand and US consumer demand for imports. Someconomists continue to say that trade deficits don’t matter. But that view has driven the loss of middle class jobs we’ve seen over the past 20 years. And nothing will change unless America gets its trade balance under control.