U.S. Records Huge Trade Deficit

Today, the Commerce Department reported the November trade deficit was $40.4 billion. This was down from $56.7 billion in October, largely because oil prices fell and the recession is curbing demand for imported consumer goods and petroleum.

To the extent stimulus packages expected to be enacted in the United States, Europe and China lift the global economy, the reduction in the trade deficit will reverse. Oil prices will rise again, and with China increasing subsidies on exports, U.S. imports of consumer goods will soar. The trade deficit will emerge as a major drag on the demand for U.S. made goods and services, and pull the U.S. economy back into recession as the effects of stimulus spending wear off.

At 3.4 percent of GDP, the huge trade deficit indicates Americans continue to consume much more than they produce and borrow too much from the rest of the world, especially China and the Middle East oil exporters.

The huge trade deficit is nearly entirely by trade with China, imports and automobiles and parts. These are caused by a combination of an overvalued dollar against the Chinese yuan and Chinese protectionism, a dysfunctional national energy policy that increases U.S. dependence on foreign oil, and the competitive woes of the three domestic automakers. Together, the trade deficit with China and on petroleum and automotive products account for virtually the entire deficit on trade in goods and services.

To finance the trade deficit, Americans are borrowing and selling assets at a pace of about $400 billion a year. U.S. foreign debt exceeds $6.5 trillion, and the debt service comes to nearly $2,000 a year for every working American.

The trade deficit will make the recession longer and deeper, and lessen the positive benefits of President-elect Obama’s proposed stimulus package. If Obama does not fix the banks and significantly reduce the trade deficit, stimulus spending will not permanently pull the economy out of recession, and the economy will slip into a prolonged malaise or depression.

Simply, money spent on Middle East oil, Chinese televisions and coffee markers, Japanese and Korean cars can’t be spent on U.S. made goods and services, unless offset by a comparable amount of exports. Since U.S. imports exceed exports by 3.4 percent of GDP, the trade deficit creates an enormous drag on demand for U.S.-made goods and services. Along with the credit crisis and resulting slowdown in new housing and commercial construction, the banking crisis and trade deficit could push unemployment above 10 percent for a long time.

The trade deficit imposes a significant tax on GDP growth by moving workers from export and import-competing industries to other sectors of the economy. This reduces labor productivity, research and development (R&D) spending, and important investments in human capital. In 2009 the trade deficit is slicing $400 billion to $600 billion off GDP, and longer term, it reduces potential annual GDP growth to 3 percent from 4 percent.

Cutting the trade deficit in half would pull the country out of recession and get the economy on a stable growth path. A fiscal stimulus package, increasing the federal budget deficit by two or three percent of GDP, will make things much better for a period of time; however, successive stimulus spending and permanently larger federal budget deficits will be needed to sustain the GDP and employment gains. Whereas, cutting the trade deficit in half would yield lasting benefits for U.S. GDP and employment growth, far transcending any fiscal stimulus in its permanent effects. Cutting the trade deficit would substantially increase tax revenues and reduce the federal budget deficit.

Each dollar spent on imports that is not matched by a dollar of exports reduces domestic demand and employment, and shifts workers into activities where productivity is lower. Productivity is at least 50 percent higher in industries that export and compete with imports, and reducing the trade deficit and moving workers into these industries would increase GDP.

Were the trade deficit cut in half, the movement of workers and capital into more productive export and import-competing industries would increase by at least $400 billion or about $2500 for every working American. Workers’ wages would not be lagging inflation, and ordinary working Americans would more easily find jobs paying higher wages and offering decent benefits.

Manufacturers are particularly hard hit by this subsidized competition. Through recession and recovery, the manufacturing sector has lost more than 4 million jobs since 2000. Following the pattern of past economic recoveries, the manufacturing sector should have regained at least 2 million of those jobs, especially given the very strong productivity growth accomplished in durable goods and throughout manufacturing.

Longer-term, persistent U.S. trade deficits are a substantial drag on productivity growth. U.S. import-competing and export industries spend three-times the national average on industrial R&D, and encourage more investments in skills and education than other sectors of the economy. By shifting employment away from trade-competing industries, the trade deficit reduces U.S. investments in new methods and products, and skilled labor.

Cutting the trade deficit in half would boost U.S. GDP growth by one percentage point a year, and the trade deficits of the last two decades have reduced U.S. growth by one percentage point a year.

Lost growth is cumulative. Thanks to the record trade deficits accumulated over the last 10 years, the U.S. economy is about $1.5 trillion smaller. This comes to about $10000 per worker.

Had the Administration and the Congress acted responsibly to reduce the deficit, American workers would be much better off, tax revenues would be much larger, and the federal deficit could be eliminated without cutting spending.

The damage grows larger each month, as the Administration and Congress dally and ignore the corrosive consequences of the trade deficit.

Comments

[Anandakos:]

Mr. Morici,

Your statistics in your sandwich bun are excellent; the condiments of your analysis are flavorful. But where's the beef? HOW does the United States cut "the trade deficit .. in half"? Who beside the owners of Chinese factories does not want this?

This fairly long article appears to be a strong endorsement of a platitude.

Jan 13 10:22 AM

[Moon Kil Woong:]

At least the public actually gets something with the Trade deficit. I can't say so much with other government spending or TARP. As the recession worsens the demand for the lowest cost things will only grow fueling an interest to buy everything overseas (Asia and SE Asia not European of course).

How to solve this is a daunting task of market imbalances. Decreasing US wages by 66% would go a long way. I think perhaps that's what the Fed and Treasury are aiming for because I see 0% help on their side in preventing 10% unemployment and the coinciding wage deflation that follows.

2009 may be the first year in a line of years the average wage drops.

Jan 13 10:52 AM

[Jubilee Year:]

The trade imbalance is not a product of the free market, it is a product of foreign government policy, hoarding dollars to keep their currency low, to their own economic advantage. Why should we cooperate with their predatory policy? Decreasing US wages in the face of foreign attacks on our economy is hardly a legitimate public policy.

Thank you, Mr. Morici, for spelling out the negative consequences of the corrent global economic system, which are uniformly glossed over by the powers-that-be who are currently establishing trade policy.

Jan 13 12:04 PM

[socrateazz:]

Here is the arrow that would hit the heart of the problem. The value of the US dollar needs to drop. Foriegn goods become more expensive so US companies can better compete. Of course that makes goods americans want more expensive! And you still end up with consumers having less. There is a trade off...but if nothing is done the trade off becomes more extreme. The reality is nobody can consume more than they produce without some subsidy. When the subsidy becomes greater than the production, problems are brewing! Obamanomics need to be excellent to solve those problems

Jan 13 12:35 PM

[Dave Wrixon:]

Boils down to what is the value of the GDP statistics in the first place? Are the invoices of a couple of overpaid lawyers arguing really to be aggregated with value churned out by high tech and pharmaceutical industries? Didn't economists just get lazy somewhere?

Jan 13 01:35 PM

[Smarty_Pants:]

The per capita cost of $2000 for debt servicing resulting from any trade deficit pales in comparison to the per capita cost of taxes and regulation. All the extra hoops that US businesses are made to jump through in the name of regulation or taxation are a significant portion of the high cost of producing here in the states.

A forthcoming example:

On February 10, 2009 it will be illegal to sell any children's products that haven't been tested for safety, including toys and clothing, per a new federal regulation from the Consumer Protection & Safety Commission.

Toys, clothing and other items used by children under 12 will be subjected to lead testing and will have to have labels on them to prove that they have passed inspection. Children’s products manufactured on or after February 10, 2009 cannot be sold if they contain more than 0.1% of certain specific phthalates or if they fail to meet new mandatory standards for toys.

And with the typical disregard for common sense that only a bureaucrat can muster:

"CPSC expects ... RESELLERS [to] pay special attention to certain product categories. Among these are

1)recalled children’s products, particularly cribs and play yards;
2) children’s products that may contain lead, such as children’s jewelry and painted wooden or metal toys;
3) flimsily made toys that are easily breakable into small parts;
4) toys that lack the required age warnings;
5) and dolls and stuffed toys that have buttons, eyes, noses or other small parts that are not securely fastened and could present a choking hazard for young children."

www.cpsc.gov/cpscpub/p...

So much for saving money at garage sales. Bye bye hand me down anythings. I'm sure that every mom and pop will be happy to simply throw away their perfectly good children's clothes instead of sell them to someone who could use them for a reasonable price.

I can hear the commercials now, ... "Ending is better than mending."

Welcome to our Brave New World!

Just remember when they catch you breaking that rule, they're going to prosecute you 'for the children'.

Why save money with used stuff when you can throw it away and buy new? Who needs food, or heat, or electricity when you've got an opportunity to spend more for new clothes instead of buying used?

Yep. That's really gonna rev the ol' economy up.

Jan 13 04:30 PM

[Bad Dog:]

Right. But there is a determined effort by the rest of the world to ensure that the USD remains strong. In order to make the USD weaker, direct counter actions have to be taken to increase the perceived risk of owning USD. In fact, I would argue that, rather than put huge amounts into tax cuts, the US government should just start buying foreign currencies and make FOREX trading a little harder to do, perhaps by enacting some kind of transaction tax.


On Jan 13 12:35 PM socrateazz wrote:

> Here is the arrow that would hit the heart of the problem. The value
> of the US dollar needs to drop. Foriegn goods become more expensive
> so US companies can better compete. Of course that makes goods americans
> want more expensive! And you still end up with consumers having
> less. There is a trade off...but if nothing is done the trade off
> becomes more extreme. The reality is nobody can consume more than
> they produce without some subsidy. When the subsidy becomes greater
> than the production, problems are brewing! Obamanomics need to be
> excellent to solve those problems

Jan 13 05:10 PM

[Steven Hansen:]

Peter, i buy the argument. what is the fix?

cannot screw with the dollar because everyone else will screw with their currency;

smarty is on the right trail but i don't think it will tilt the scales enough.

i want to hear an economist say that the free trade model does not work because of geo-political and currency issues.

there is only one solution i guarantee will work. trade is by barter only - no currency. a country cannot import any more than they export. there are companies in austria whom i have used in the past to do this type of trade.

Jan 14 01:07 AM

[Old Wizard:]

At Last someone is addressing the root of our basic problem, operating cash flow. Our current account has been negative since 1991 and getting increasingly so. But for the drop in oil , it was approaching a trillion dollars in 2008 and has been above 500 billion for a long time. My solution to the problem starts with my 5 and 10 plan. This plan startts with establishing a goal of the reduction of 5m barrels ofimported oil/day in 5 years and 10 million barrels/day less in ten years. To accomplish this, the gov should use at least half of the bailout money to jump start the production of alternative domestic energy. I have suggested in past comments that these should include 3 large scale wind farms and at least 2 large scale solar farms with the infra-structure improvements to accomodate them. There should also be 2 or three mass transportation projects for 3 selected suburban/city metroplexes. These mass transportation projects should be electric monorail spiders using for the most part existing hyways and roads as rights of way. The near term goals can be met with some increased off-shore drilling in known oil fields,conversion of all city,school and municiple vehicles to natural gas, the installation of the filling capacity at the appropriate garages and the pilot projects above. The long term goals can be met by more solar, wind and mass transportation and the building of 20 to thirty nuclear plants and the large modification to the infra-structure necessary. Spending over a trillion dollars of our money as the great political minds are leaning makes absolutely no sense,if we are to correct the increasingly negative operating cash flow our country faces. The above approach will not only contribute to a solution but will create real jobs that have some staying power, new products and services that the US can sell to the world, a decreased reliance on hostile providers of energy, and, oh by the way, less green house gases, if that is important. The idea that 15 or 25 billion a year will get us there is rediculous and naive or that we can wait until 2030 to be independent of hostile energy suppliers neglects the strategic issue that is both economic and geopolitical. The soaring rhetoric of change that accompanied the last election appears to be concentating on the wrong sylAble, by talking about tax credits for hiring workers, building more roads,schools, carbon credits,limiting emissions and a host of other bandaids. So far the bold steps that have been advertised appear to be the same old same old. If clean coal or if hydrogen cell- driven, or electric cars can contribute significantly to the goal of the 5 and 10 plan then we should jump start them as well,but solving the energy delivery problems and new mass transportation systems requires gov. action to reduce risks like interminable legal barriers, minority and self-interest pressure groups and uninformed media scare tactics and incompetance to analyze anything complex. The above would be bold indeed, but would show real leadership. I'm afraid that political expediency will result in the application of many bandaids applied to the surface while the patient bleeds to death internally.

Jan 14 11:05 AM