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US Trade Imbalances: Soaring Trade Deficits Gutting the Economy and Dollar

Balance of trade refers to net exports (exports – imports) in an economy over a period of time, with a positive balance known as a trade surplus (exports > imports) and a negative balance known as a trade deficit (exports < imports). 

Before I go in depth into the structural trade problems of the US, it is important to highlight some of the positives of its international trade position. The United States is one of the most significant nations in the world when it comes to international trade. For decades, it has led the world in imports while simultaneously remaining as one of the top three exporters of the world. Main exports are: machinery and equipment, industrial supplies, non-auto consumer goods, motor vehicles and parts, aircraft and parts, food, feed and beverages. U.S. imports non-auto consumer goods, fuels, production machinery and equipment, non-fuel industrial supplies, motor vehicles and parts, food, feed and beverages. Main trading partners are: Canada, European Union, Mexico, China and Japan. The US is home to some of the largest corporations in the world, such as the oil octopus Exxon Mobile, the ubiquitous manufacturing giant General Electric, the Silicon Valley triad Apple-Microsoft-IBM, and the Walmart retail monolith. The US has an educated labor force where virtually the entire native born population finishes high school, two thirds receive some post secondary education, and its universities are some of the best in the world. New products and methods burst out of its research labs, with America being a leader in new materials, electronics and logistics. 

The positives out of the way, it is important that we now turn to an overwhelming negative: a massive $500 billion per year and growing trade deficit that has become a cumulative $8.9 trillion merchandise goods trade deficit (1985-2010) and over $7 trillion cumulative current account deficit (1980-2008).

Monthly Trade Deficits: > 50 Billion
After more than 100 years of trade surpluses, the United States went into constant deficits since 1976 that have grown larger month by month and year by year.  In 1996 the monthly trade deficit was $10 billion, in 2002 it was $30 billion and now in 2012, it is averaging $50 billion per month. Today’s US trade deficit with the rest of the world is about 5 times larger than it was back in 1996. That means that each month the U.S is buying $50 billion more stuff from the rest of the world than the rest of the world is buying from it.  Ultimately, that money is leaving the country and not coming back. That $50 billion per month is the rate by which the United States is pouring its money into the pockets of foreigners. (By the way, you can get 47 pages of small-print numbers on all aspects of trade at the main web site at the US Census Bureau at http://www.census.gov/foreign -trade/Press-Release/current _press_release/press.html) .

Yearly Trade Deficits: > $500 billion
If we zoom out to a yearly basis, the trade deficit looks even grimmer. In 1981, the year end trade deficit was $16 billion ($11 billion with Japan), which was then considered unsustainable, and by 1987, it had mushroomed tenfold to $161 billion ($60 billion with Japan). In the interim the U.S. textile, steel, auto semiconductor, machine tool and consumer electronics industries, amongst others, had been savaged and laid off millions of workers. But it got much worse than that. The yearly trade deficit doubled in size to $230 billion in 1998, and ten years later by the end of 2011, it had doubled again to be $558 billion ($295 billion with China). 

Although the United States had a surplus in trade of services, which increased by $33.2 billion (22.8 percent) in 2011, that surplus paled in comparison to the U.S. trade deficit in trade of goods, which increased from $645.9 billion to $737.1 billion in 2011 (an increase of $91.2 billion or 14.1 percent). Crude and refined petroleum products are currently responsible for 45% of the trade deficit. The trade gap with China accounts for another 30% (as we shall see later on). Looking at the big picture, the merchandise import ratio has soared six times, from 3% of national income in the mid-1960s to today's 18% ratio, while the export ratio has failed to improve in the last 25 years despite numerous devaluations of the dollar.

Currently the yearly trade deficit of $558 billion is 3.7% of GDP's $15 trillion.

US Cumulative Goods Trade Deficits: > $8.9 Trillion
Keep in mind that these increasingly larger monthly and yearly trade deficits in goods must be added together to get a cumulative picture of what our total goods trade deficit is. The cumulative merchandise goods trade deficit was $8.9 trillion during the last 25 years (1985-2010). US cumulative goods deficit since 1976 is $9.3 trillion. See chart to the left. All these deficits are owed to non-Americans. 

US Cumulative Current Account Deficit: > $7 Trillion 
The current account takes into account the trade in goods and services, plus net earnings from rents, interests, profits, and dividends, and net transfer payments (such as pension funds and worker remittances) to and from the rest of the world. The balance of trade is the most important part of the current account. Yet the current account also takes into account the total of foreign-owned assets in the US minus US claims on the rest of the world. It is published in quarterly and yearly form, and adding the yearly deficits together gets the cumulative size. The US current account has been in deficit from 1980. The last 10 years the quarterly current account deficit has ranged from -100 to -200 billion (see chart below), which means a yearly deficit over $500 billion. See chart below.

A yearly $500 billion current account deficit is near the same size as the yearly $500+ trade deficit. Ultimately these years add up to get a similar cumulative deficit picture:  $7.3 trillion current account deficit from 1980 till 2008. See map below to see how the US compares with other countries in terms of current account 

Source: Wikipedia (numbers in billions) 

Alternatively, one can go to the CIA factback and see that of the 198 countries ranked in order of current account, the US current account is at the bottom, the largest negative balance in the world. Compare the United State's cumulative current account deficit of $7.3 trillion to the cumulative current account surplus of its leading competitors: Japan (2.7 trillion surplus), China (1.5 trillion surplus) and Germany (1.04 trillion surplus). These competitor nations are handily beating up the US in terms of international trade. The US is slowly losing its wealth to these trade surplus giants. It is interesting to note that most of the wealth has flowed from the US to Asia.

$295 Billion Yearly Trade Deficit with China in Perspective. This is the largest trade deficit that one country has had with another in the history of the world. This was not always so. Back in 1985 the U.S trade deficit with China was only 6 million dollars for the entire year, and it was Japan who comprised the bulk of the US trade deficit. In 2001, for the first time, China surpassed Japan as the country with the largest trade gap with the United States. It has since surged over 95%, reaching $295 billion and 30% of total US trade deficits in 2011, and 70% of the trade deficit in goods. US trade deficit with China has grown more than 49000 times larger. Thus why half the stuff you buy in U.S stores says “Made in China”.

The Accounting: Who finances the deficit?

Trade deficits must be financed by foreigners investing in the U.S. economy or Americans borrowing money domestically or abroad. Since direct investments in the United States provide only a tenth of the needed funds, Americans are forced to borrow about $50 billion each month to finance their consumption. US debt held by foreign countries is currently exceeding $5 trillion (source: usdebtclock.org). These same foreigners winning the trade game are handing Americans back their winnings, now in the form of loans, so Americans can continue to buy their stuff. In a circular loop, Americans buy the products of foreigners (giving the foreigners an accumulation of dollar profits and reserves), and when Americans can no longer afford to buy more out their income or savings, these same foreigners lend back to Americans these accumulated dollar profits in order to allow Americans to buy more of their stuff. Americans get stuff in return for debt. Foreigners get the wealth of America. With that wealth they own an increasing percentage of businesses, stocks, bonds, real estate and government treasury bonds. I should point out that foreigners cannot fuel all the American debt consumption: a good part of the debt fuel also comes from the FED printing presses, and the debt creation from the fractual reserve banking system. 

Causes of the Trade Inbalance

There are three primary causes for the trade imbalance: 

1) Americans consume more than they produce and borrow heavily to live beyond their means.

For decades Americans have consumed more than they have produced, borrowing from the future to make-up for the shortfall with unprecedented ratios of domestic and foreign debt that is increasing much faster than national income. Every business day, American consumers buy $1 billion more in Chinese exports than American manufacturers sell to China, and China alone accounts for about 70% of America's trade deficit in goods, excluding oil imports. This "Chinese import dependence" has led a democratic America to owe the largest communist nation in the world more than $1 trillion, while China holds more than $3 trillion in foreign reserves, most of them in U.S. dollars. These dollar reserves are more than enough money for China to buy a controlling interest in every major Dow Jones company. When America lives beyond its means, consuming more goods made by others (notably China) than it produces for foreigners, the result is an explosion of debt in favor of foreigners.

America's total debt (sum of all government debt and all private debt of households, business, and finance sectors) started a steep ascent in 1976 to become $57 trillion today, and it is this debt that has driven over-spending and over-consumption beyond incomes and savings (As for savings, it use to be 8% in 1992 but it is now barely above zero). This excessive debt has driven import consumption and created soaring trade deficits. Americans need to consume and borrow much less and save much more to begin to change the trade deficit.  

US citizens are not all to blame. The Wallstreet-FED-Washington riskfree greedster alliance is to blame as well. Much of that debt has been promoted by Federal Reserve's ultra low interest rate policies of Greenspan and Bernanke. The FED has repeatedly injected money into the system (via printing press and fractual banking) to make the top 1% more rich while the 99% are made more poor and indebted. The financial sector has used Fed money creation as a tool to expand the debt on the shoulders of Americans, leading Americans into investing into one debt bubble after another, making the 1% richer at the expense of the 99%. Even when their schemes threaten to unravel upon themselves, the financial sector still has their people in Washington to bail them out with tax payer money. 

2) Americans are too dependent on oil and thus rely heavily on importing increasingly more expensive oil to satisfy their oil demand.

America's dependence on foreign oil drives a good part of the trade deficit. Oil imports account for 45% of the trade deficit in goods. Oil imports also amount to 45% of the petroleum consumed in the U.S, most of it coming from Canada, Mexico, Saudi Arabia, Venezuela, and Nigeria. The oil barons in those countries (as well as our own) can build outrageous palaces and afford exotic car collections with this money. The US energy production base has declined at the same time that energy consumption has risen. The US has become more dependent on imported foreign oil than ever before. The oil consumption-production gap is a whopping 71%, as consumption soars and production and reserves continually decline. At the time of World War II the US produced all the oil it needed and even exported to others. Over the last 23 years petroleum consumption has increased by 5.5 million barrels a day, despite improvements in mileage standards, automobile and appliance technology, and conservation. Moreover, oil prices are becoming rapidly more expensive with peak oil, which dramatically increases the overall trade deficit. Lastly, oil is different from other stuff Americans import (like computers and cars) in that once it is burned up in cars, it is gone for good and there is nothing to show for it. To stay in the game, Americans will need to retune conventional engines and transmissions, driving more hybrids, electric vehicles, lighter vehicles.

3) China has cheap labor and low production costs, it has strategically devalued and pegged its currency to the falling US dollar, and it actively engages in export-led mercantilism.

First, Cheap Labor.

The average net worker salary for manufacturing jobs in China in 2005 was roughly $134 per month (http://www.worldsalaries.org/china.shtml). Compare this to the $2372 monthly salary for a US worker in the same sector. A Chinese worker is 95% cheaper. Impossible to beat. It would take 20 years of sustained 15% annualized Chinese wage inflation (or 15% annualized US wage deflation) to close only half the wage gap with the US. Don't kid yourself. When the exposure of the American workers to a deregulated, dog-eat-dog global market began, you have China's comparative advantage not just in lower wages but also in the authoritarian deployment of its massive labor force. Many of us have heard now of the stories about Foxconn, where the foremen are able to deploy hundreds of thousands of workers over 12 hour shifts to step up production of iPhones and IPads to meet production deadlines. The same could not happen in the United States. The facilities that produce iPhones and iPads not longer have US counterparts and Steve Jobs once famously told Barack Obama, "Those jobs are not coming back." Vietnam has even lower wages than China and it will take what little is left at the bottom end of U.S manufacturing. To keep their jobs, American industrial workers will take cuts in pay and see middle class benefits like pensions and health care disappear. 

Second, Yuan devaluations and pegging to US dollar.

As late as 1983, when exports were a relatively small part of the Chinese GDP, the yaun was massively overvalued at the rate of 2.8 yuan to the dollar. As the export sector grew, China engaged in a series of six devaulations over ten years so that by 1993 the yuan had been cheapened to 5.32 yuan to the dollar and then it 1994 it devalued the yuan further to 8.7 to the dollar. This made Chinese goods very cheep for Americans to buy. Consequently, Americans started to buying more Chinese goods than domestic goods. By 1997 the yuan was pegged at 8.28 to the dollar when the US trade deficit was less than $50 billion, and in the space of three years, from 2003-2006, the trade deficit exploded from $124 billion to $234 billion. After much pressure from the US, the PBOC started to incease the value of the yuan in 2005 by 3% per year, eventually bringing the yuan to 6.40 to the dollar in August of 2011. Nevertheless, the yuan is till grossly undervalued to the dollar by as much as six times. The US would like that the yuan float freely and make a dramatic upward evaluation to make the trading game more fair

Note: The yuan does not trade freely on international currency markets and its use is tightly controlled by the People's Bank of China, or PBOC, the country's central bank. When a Chinese exporter ships goods abroad and earns dollars or euros, it must be handed over to the PBOC in exchange for yuan at a rate fixed by the bank. The process of absorbing all the surplus dollars entering the Chinese economy created a few unintended consequences: 1) PBOC did not just take dollars but purchased them with newly printed yuan, which meant that as the Fed printed dollars and those dollars ened up in China to purchase goods, the PBOC also printed more in order to maintain the pegged exchange rate; 2) with its massive foreign reserves derived from their growing trade surplus with the US, they invested over $1 trillion in US government obligations of one kind or another.

Third, Beijing actively subsidizes the trade game in their favor.

Following Japan's lead, China has assumed an export-led mercantile model for its economy. It has rejected the American free trade model, and instead protects and subsidizes its favored export industries. In direct violation of China's WTO obligations, China provides numerous tax incentives and rebates, and low interest loans to encourage exports and replace imports with domestic products. It also sets up a set of investment packages aimed at inducing offshoring of production. China, Singapore, Malaysia and many others offer big tax holidays, free land, cut-rate utilities, free worker training, sweetheart loans and big capital grants to companies as enticements to invest. 

Symptoms or Consequences of Massive Trade Deficit

There are three symptoms / consequences to the massive trade deficit: 

1) Americans indebted to Foreigners.

As much of the trade deficits must be Americans borrowing money from foreigners, and there is so much of this foreign debt, to the tune of $6 trillion, it comes out to a big financial burden for Americans to shoulder it. A total debt of $6 trillion at 5% interest ($300 billion) spread across 141 000 million workers amounts $2127 per worker each year. Imagine the struggling American worker of today, hobbling along with declining wages and benefits trying to pay for increasing more expensive goods (because of price inflation and dollar devaluation) while loaded down with a massive foreign debt chain around his neck. It is not a pretty sight. 

Note: This is only part of the debt problem. Total personal debt is now $16 trillion, which amounts to $61000 per citizen. The ratio of household debt to personal income in the US is now 154%. Crushing. 

2. Decline of US manufacturing base and loss of jobs.

The US manufacturing base has declined by 60%. There are a couple different ways of measuring this decline: 1) from 1960 to 2008, the trend of the number of manufacturing workers as a percentage of all U.S. employees (non-agriculture) goes from 26% in 1960 to 9% in 2008, a 64% drop in the manufacturing ratio; 2) the US manfacturing base declined from 28% of GDP in 1959 (when there was a trade surplus) to 11.7% in 2008, which is a 60% drop in the manufacturing share of GDP.

Here are some other numbers to consider: 
  • Back in 1970, 25% of all jobs in the US were manufacturing jobs. Today, only 9% of all jobs are manufacturing jobs. 
  • The US has lost a staggering 32% of its manufacturing jobs since the year 2000. 
  • America has lost an average of 15 manufacturing facilities a day over the last 10 years. During 2010 it got even worse. In 2011, an average of 23 manufacturing facilities a day shut down in the US. 
  • More than 56,000 manufacturing facilities in the US have permanently closed down since 2001. 
  • In the first decade of the 21st century, Americans lost 5,500,000 manufacturing jobs. US employment in the manufacture of computer and electronic products fell by 40%; in the production of machinery by 30%, in motor vehicles and parts by 44%, and in the manufacture of clothing by 66%. These unemployed workers had to find work in non-trade competing industries like department stores and restaurants, if they were lucky. Otherwise they joined the growing ranks of the growing unemployed. 
  • Manufacturing employment in the US computer industry was actually lower in 2010 than it was in 1975. 
  • The television manufacturing industry began in the US, but today all TV’s are made overseas. 
  • Since 2001 America has lost approximately 2.8 million jobs due to US trade deficit with China alone. 
  • The US economy loses approximately 9,000 jobs for every $1 billion of goods that are imported from overseas. 
  • The new World Trade Center tower is going to be made with imported glass from China and imported steel from Germany. 
  • There are more unemployed workers in the US than there are people living in the entire nation of Greece. 
This manufucturing base shrinkage can only work to further undermine America's trade balance, economic independence and future living standards.

3. High and Rising Trade Deficits Tax Economic Growth.

As Dr. Peter Morici explains in Why US Trade Deficit Matters:

Productivity is at least 50 percent higher in industries that export and compete with imports. By reducing the demand for high-skill and technology-intensive products, and US made goods and services, the deficit reduces GDP by about $250 billion a year or about $1750 for each worker...Cutting the trade deficit in half would boost US GDP 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 20 years, the US economy is about $3 trillion smaller. This comes to about $1000 per worker. As a consequence of decades of trade deficits, our children will be less productive, poorer, and saddled with huge interest payments to foreign creditors.

Nicely put. But things get uglier still.

4. High and Rising Trade Deficits Weaken The Currency and the Weakened Currency DOES NOT Necessarily Diminish the Deficits (as some economists have you believe)

If currencies are free and floating, a rising trade surplus will increase the demand for country's currency by foreigners, so that there should be a pressure for appreciation. A trade deficit should weaken the currency.

This is true.The United States has had a dramatically widening trade deficit since 1992 and its currency has fallen precipitously since that time. Conversely, Germany and Japan have had sustained and growing trade surpluses since 1992 and their currencies have noticeably appreciated against the dollar since that time. 

Some economists assume that a currency weakened by trade deficits must rebound in strength, because then the goods denominated in that depreciated currency would become cheaper for foreigners, while goods denominated in stronger currencies would be come more expensive for domestic buyers, a dynamic that would create a boom in exports and a reduction in imports (for the trade deficit country), which would eventually lead to a trade surplus and a stronger currency. This logic sounds good but is largely a myth. The picture is more complicated. 

Exchange rate is just one of the many factors that drive the trade balance between two countries. Differences in interest rate, savings, growth rate, level of financial development (in terms of how easy to get access to consumer credit) all play a role. Moreover, not all countries trade on a level playing field. Not all currencies are free and floating and there is a good deal of manipulation by different central banks to enhance trade competitiveness.

A good case in point is to look at the trade balance and currency exchange rate between the US and Japan from 1970 to 2012. In the 1970s, one dollar exchanged for 360 Yen. Now it is worth less than 81 Yen. In other words, the Yen has appreciated over 80%. Yet Japan started its trade surplus with the US in the 1970s and that surplus exists in an even bigger fashion today. There was no reversal point as one might expect. American goods have become cheaper in deflated dollars for richer foreigners winning the trade game and yet the trade deficit has lingered on.

I think it can be fair to say that at once upon a time the drop in a domestic currency's value would have eliminate trade imbalances. But the invisible hand is being manipulated by government powers and their corporate banking cronies.  The extended low interest rates coupled with roaring printing presses of Greenspan and Bernanke caused a surge of pseudo debt-driven growth, as the private sector borrowed to the hilt to spend on houses and foreign imports. The fallout of the tech bubble and later the housing bubble should have caused the Americans to hunker down, borrow and spend less and save and invest in something more sustainable like the manufacturing sector; but instead the easy money from the Central Bank and Wall Street banks has tempted most Americans to continue to borrow and spend beyond their means. They have been lulled into thinking that borrowing is a better than saving. Low interest rates make it easy to borrow and punishes savings with low returns. Consequently,America of today may not be much of a producer, making things at home and abroad, but it feels entitled by debt to endlessly import and consume what it feels it needs from the producer nations in Asia. 

The central banks and governments of China and Japan likewise interfere with the invisible hand of the market, but their overt manipulations have been aimed at increasing production and export growth rather than consumption and import growth. Japan started this trend in Asia. It outright rejected the free trade model of countries not protecting or subsiding favorite industries:

It rejected direct foreign investment, imposed high tarriffs and other protective barriers, compelled a high rate of savings, and channeled the savings through a state controlled banking system into capital intensive industries with large economies of scale and rising technology input such as steel, shipbuilding, autos, and later semiconductors and consumer electronics, to name a few. Japan further intervened in the currency markets to keep the yen cheap versus the dollar as a subsidity to Japanese exports. It also provided a range of special loan and investment facilities along with outright subsidies to promote investment in and exports by the targeted industries. This was an export-led mercantilist growth model [and] Japan soon became a model for Asia (prospect.org). 

Later China got in on the act. China heavily subsidizes its leading manufacturing industries. China provides numerous tax incentives and rebates, and low interest loans to encourage exports and replace imports with domestic products. It also sets up a set of investment packages aimed at inducing offshoring of production, such as big tax holidays, free land, cut-rate utilities, free worker training, sweetheart loans and big capital grants to companies as enticements to invest.

So thus you have central banks pushing their economies in opposite directions: The Fed pushes its US citizens into over-consumption of imports via low interest rates and money printing that funnels through the financial sector into expanding consumer debt; and Asian governments push its citizens into over-production of exports via its export led mercantile growth model of protecting and subsidizing its favored export industries. As a result, Asian economies and currencies have been strengthening at the expense of a formerly superior US economy and currency. If there is no significant change in their respective models, then the future holds that United states will continue to accumulate larger and larger trade deficits, and the dollar will continue to depreciate against its Asian currency counterparts. 

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