How to Fix the Trade Deficit

May 02, 2017

The Commerce Department is expected to report the U.S. deficit on trade goods and services in March was about $44 billion, indicating the United States is on track for another trade gap in excess of $500 billion for 2017.

[PETER MORICI] May 1st, 2017 [Market Watch

For decades, the trade deficit has been a source of torment. Critics blame it for jobs losses, and apologists say it permits Americans to consume more and cheaper products without much harm.

Both arguments have an element of truth but most importantly, the trade deficit must be financed. Foreign governments and private persons buy U.S. Treasuries, corporate stocks and bonds, and real estate in tony locations like Manhattan and Miami Beach, and we have to pay interest, dividends and rent on those assets that grow larger each year.

Americans make similar investments abroad, but overall foreigners are buying more here. The U.S. net international investment position (NIIP) is now minus 45% of gross domestic product, and economists at the Peterson Institute estimate that deficit will increase to 53% in 2021. No nation has seen its position reach minus 60% without enduring a major financial crisis.

China accounts for more than 60% of the U.S. trade deficit and petroleum for more than a quarter of the rest.

The Trump administration proposes to fix the China trade by applying pressure to open its markets — if Americans can sell more in China, then we can continue to enjoy cheap consumer goods at Wal-Mart. And by liberating the oil and gas sector from Obama-era regulations and continuing to build out wind, solar and other renewable energy sources.

As for China, the president’s recent statement on trade policy indicates revved up use of trade remedy laws to keep out or at least penalize subsidized and dumped imports. For U.S. industries that benefit — hooray! — but Beijing advantages domestic producers in so many ways, from forced technology transfers from foreign investors to generous benefits for technology startups, that Trump’s strategy reminds me of the farmer chasing an infestation of grasshoppers with a butterfly net.

The Peterson Institute suggests in a forthcoming study a program of currency-market intervention to offset foreign government intervention in currency markets and lower the value of the dollar BUXX, -0.14%  across the board. These days, manipulation by foreign governments is not the problem — but rather the lack of confidence in the durability of existing regimes. Marine Le Pen challenging the future of the European Union and China’s authoritarian regime are scaring investors and driving down the euro EURUSD, +0.2752%  and yuan USDCNH, -0.1392%  .

At the Mar-a-Lago Summit, Presidents Trump and Xi announced a 100-day review of policies to address the trade deficit but that is as unlikely to yield results as were similar bilateral talks initiated by Presidents Bush or Obama.

Warren Buffet, for many years, has suggested a system of import certificates and elsewhere, I have advocated a tax on the conversion of currency into yuan. The latter would essentially raise the price of imported goods and encourage reshoring.

Under the Buffet plan, exporters would receive certificates to import goods in amounts equal to their foreign sales and in turn, those could be sold to importers, who would be required to present certificates to bring goods and services into the country. Those certificates would go to the highest bidders and hence be used to import goods that had the highest value to consumers.

Rather than apply it to all our trading partners — and cause global outrage — I would just apply it to trade with China and endure its bellicosity as needed. Either Beijing finally starts realigning its economy to rely less on trade surpluses with the United States or this scheme would do it for them.

No matter which tack chosen, Americans would pay more for toasters, T-shirts and TVs. However, that burden would pale by comparison to losses in jobs and living standards imposed by a debt crisis on the scale of that endured by other nations who left their problems to fester until international investors quit buying their bonds and other assets.


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  • Bruce Bishop
    Communist China is a criminal enterprise. We should not be doing business with China at all, much less be allowing them to steal our technology, our intellectual property, and our jobs. China is draining our wealth, not to improve the lives of its citizens, but to build up its military and to enrich the honchos of the Chinese Communist Party.

    The Chinese workers at Foxconn, who build our iPhones, work 16 hour days, six days a week, for about $240 per month. They live in worker dorms, adjacent to the factory, with suicide nets under the windows. Their room and board takes most of their wages. They will not be buying U.S. made products any time soon. A Jeep Grand Cherokee, which costs $27,500 here, costs $85,000 in China because of their protectionist tariffs.

    While we are practicing “free trade” by opening our market to China, China is practicing mercantilism, which is the opposite of free trade. Our lazy, greedy, incompetent government has ignored this for two decades.

    The barriers to re-entry for U.S. manufacturing entrepreneurs are overwhelming. China has a ten-to-one cost advantage, not just in labor, but in all the cost factors — material, overhead, energy, and compliance. U.S. entrepreneurs will never trust our government to support them in the long term.

    Check out “Death by China,” by Peter Navarro and Greg Autry. (Yes, that Peter Navarro.) Here is the trailer to the free documentary, available on YouTube. https://www.youtube.com/watch?v=p9pXRSzFcKg