Let's look at the data, but then drill down a bit to the nuances. Undirected bluster to reduce trade deficits and grow jobs will likely stumble on those nuances. Rather, an appreciation of economic intricacies must go hand-in-hand with bold action.
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For authenticity, we turn to (by all appearances) unbiased and authoritative sources. For trade balances, we use the ITC, International Trade Commission, in Switzerland; for US employment, we use the US BLS, Bureau of Labor Statistics; and for overall economic data across countries we drawn on the World Bank.
Per the ITC, the United State amassed a merchandise trade deficit of $802 billion in 2015, the largest such deficit of any country. This deficit exceeds the sum of the deficits for the next 18 countries.
The deficit does not represent an aberration; the US merchandise trade deficit averaged $780 billion over the last 5 years, and we have run a deficit for all the last 15 years.
The merchandise trade deficit hits key sectors. In 2015, consumer electronics ran a deficit of $167 billion; apparel $115 billion; appliances and furniture $74 billion; and autos $153 billion.
Some of these deficits have increased noticeably since 2001: Consumer electronics up 427%, furniture and appliances up 311%. In terms of imports to exports, apparel imports run 10 times exports, consumer electronics 3 times; furniture and appliances 4 times.
Autos has a small silver lining, the deficit up a relatively moderate 56% in 15 years, about equal to inflation plus growth. Imports exceed exports by a disturbing but, in relative terms, modest 2.3 times.
On jobs, the BLS reports a loss of 5.4 million US manufacturing jobs from 1990 to 2015, a 30% drop. No other major employment category lost jobs. Four states, in the "Belt" region, dropped 1.3 million jobs collectively.
The US economy has only stumbled forward. Real growth for the past 25 years has averaged only just above two percent. Income and wealth gains in that period have landed mostly in the upper income groups, leaving the larger swath of America feeling stagnant and anguished.
The data paint a distressing picture: the US economy, beset by persistent trade deficits, hemorrhages manufacturing jobs and flounders in low growth. This picture points - at least at first look - to one element of the solution. Fight back against the flood of imports.
The Added Perspectives - Unfortunate Complexity
Unfortunately, economics rarely succumbs to simple explanations; complex interactions often underlie the dynamics.
So let's take some added perspectives.
While the US amasses the largest merchandise trade deficit, that deficit does not rank the largest as a percent of Gross Domestic Product (GDP.) Our country hits about 4.5% on that basis.
The United Kingdom hits a 5.7% merchandise trade deficit as a percent of GDP; India a 6.1%, Hong Kong a 15% and United Arab Emirates an 18%.
India has grown over 6% per year on average over the last quarter century, and Hong Kong and UAE a bit better than 4%. Turkey, Egypt, Morocco, Ethiopia, Pakistan, in all about 50 countries run merchandise trade deficits as a group averaging 9% of GDP, but grow 3.5% a year or better.
Note the term "merchandise" trade deficit. Merchandise involves tangible goods - autos, Smartphones, apparel, steel. Services - legal, financial, copyright, patent, computing - represent a different group of goods, intangible, i.e. hard to hold or touch. The US achieves here a trade surplus, $220 billion, the largest of any country, a notable partial offset to the merchandise trade deficit.
The trade deficit also masks the gross dollar value of trade. The trade balance equals exports minus imports. Certainly imports represent goods not produced in a country, and to some extent lost employment.
On the other hand, exports represent the dollar value of what must be produced or offered, and thus employment which occurs. In exports, the US ranks first in services and second in merchandise, with a combined export value of $2.25 trillion per year.
Now, we seek here not to prove our trade deficit benevolent, or without adverse impact. But the data do temper our perspective.
First, with India as one example, we see that trade deficits do not inherently restrict growth. Countries with deficits on a GDP basis larger than the US have grown faster than the US.
And further below, we will see examples of countries with trade surpluses, but which did not grow rapidly, again tempering a conclusion that growth depends directly on trade balances.
Second, given the importance of exports to US employment, we do not want action to reduce our trade deficit to secondarily restrict or hamper exports. This applies most critically where imports exceed exports by smaller margins; efforts here to reduce a trade deficit, and garner jobs, could trigger greater job losses in exports.
Job Loss Nuances
As note earlier, manufacturing has endured significant job losses over the last quarter century, a 30% reduction, 5.4 million jobs lost. Key industries took even greater losses, on a proportional basis. Apparel lost 1.3 million jobs or 77% of its US job base; electronics employment dropped 540 thousand or 47%, and paper lost 270 thousand jobs, or 42%.
A state-by-state look, though, reveals some twists. While the manufacturing belt receives attention, no individual state in that belt - Pennsylvania, Ohio, Illinois, Indiana and Michigan - suffered the greatest manufacturing loss for a state. Rather, California lost more manufacturing jobs than any state, 673 thousand.
And on a proportional basis, North Carolina, at a manufacturing loss equal to 8.6% of its total job base, lost a greater percent than any of the five belt states.
Why then do California and North Carolina not generally arise in discussions of manufacturing decline? Possibly due to their generating large numbers of new jobs.
The five belts states under discussion lost 1.41 million manufacturing jobs in the last quarter century. During that period, those five states offset those loses and grew the job base 2.7 million new jobs, a strong response.
Similarly, four non-belt states - California and North Carolina, mentioned above, plus Virginia and Tennessee - lost 1.35 million manufacturing jobs. Those states, however, offset those loses and generated a net of 6.2 million new jobs.
The belt states thus grew 1.9 jobs per manufacturing job lost, while the four states grew 4.6 jobs per manufacturing job lost.
Other states mimic this disparity. New York and New Jersey ran a job growth to manufacturing job lost ratio of under two (1.3 and 2.0 respectively), Rhode Island less than one (at .57), and Massachusetts just over two (at 2.2).
Overall, the 8 states of the Northeast (New England plus New York and New Jersey) lost 1.3 million manufacturing jobs, equal to 6.5% of the job base, but grew the job base by only 1.7 jobs per manufacturing job loss.
In contrast, seven states that possess heavy manufacturing employment, and losses, but lie outside the belt, the Northeast, and the CA/VA/TN/NC group, grew 4.6 jobs per manufacturing job lost. These seven are Maryland, Georgia, South Carolina. Mississippi, Alabama, Missouri, and Arizona.
For the four groups, here are the job growth percentages, over the last quarter century.
Northeast 12.6% 8 States
Belt 12.3% 5 States
VA/TN/CA/NC 30.2% 4 States
Group of Seven 27.3% 7 States
Imports definitely triggered manufacturing job loss. But states in the last two groups rebounded more strongly. In a particularly good recovery, North Carolina, once heavy in furniture and apparel, lost 44% of its manufacturing jobs, but did not see stagnation of its economic base.
Why? Manufacturing loss due to imports stands as only one determinant of overall job growth. Other factors - climate, taxes, cost of living, unionization (or lack of), congestion (or lack of), government policies, educational base, population trends - impact job creation equally or more.
North Carolina for example, features universities and research centers; moderately sized and relatively uncongested cities (Charlotte and Raleigh); low unionization; temperate winters; and so on.
This does not downplay the hardships that individuals, families and communities experience from manufacturing job loss.
And job growth in other sectors does not offer a direct cure for manufacturing declines. The higher paying jobs in other sectors often require college or advanced degrees, something those losing a manufacturing job may not possess.
A note of caution though. Even absent trade, technology and automation drive growing requirements for college education. Manufacturing workers directly build less; rather workers control machines, complex computer-controlled machines, which build.
Operating those machines, designing those machines, programming those machines, that type work increasingly involves advanced degrees.
Think historically. Automation reduced farm employment, and all but made extinct elevator operators, ice deliverers and telephone switchboard cord workers. Similarly, automation today has and will continue to impact manufacturing employment.
Trade Deficits and National Growth
Let's return now to country-to-country comparisons, to search for added insights. Earlier we saw that countries with trade deficits had achieved strong economic growth. So a deficit does not inherently create economic stagnation.
Let's now look at the flip side - do trade surpluses trigger growth. China certainly has achieved both. They have grown, on average, an amazing 9-10% per year for the last quarter century, and have amazed a trade surplus with the world of $325 billion per year over the last five years.
Other countries have achieved the same dual success, of trade surpluses and strong growth. Korea, Ireland, Singapore, Nigeria, are among a list of ten major countries with consistent trade surpluses and strong growth.
A wider scan though, across approximately 140 countries for which the World Bank/ITC report data on both GDP growth and trade, shows more complexity. In particular, another group of 18 countries achieved trade surpluses, but did not growth appreciably more than the US.
Germany, Denmark, Sweden, Switzerland, and Brazil, among others, populate this group. Overall, this group attains trade surpluses at five percent of GDP, but has grown on average only about 1.5% in real terms over the last quarter century. This growth underperforms the US.
In a further look, three countries with apparel imports to the US - Vietnam, Pakistan and Bangladesh - have extraordinary growth, but have trade deficits. Overall, across the 140 countries, no detectable relation exists between trade surpluses/deficits and growth.
Productivity
What does show a relation to growth, in the World Bank data? Per capita GDP, in a counter intuitive way. Countries with lower per capital GDP have grown faster, while those with the highest per capita have averaged a meager 2% growth over the last 15-25 years.
This reverse relation, higher per capita aligned with lower growth, highlights a major, if not the major, determinant of growth, productivity. GDP represents that total of what a country produces. And for a given worker base, GDP can grow only if the workers produce more per worker, i.e. improve productivity.
Now compare the opportunity to apply efficiency gains in low per capita verses high per capita countries. Though not universally true, in many parts of low per capita countries good opportunities exist due to the limited adoption of the best available means. Efficiency gains in farming, and in manufacturing, and in distribution, basically in almost all facets of the economy, can be achieved by adopting efficiency measures already available from and proven by other countries.
Not so in high per capita countries. Such countries, in achieving high per capita GDP, their high output per worker, have likely already deployed available efficiency techniques.
Efficiency gains cannot simply be pulled "off-the-shelf" or brought in from other countries or firms. Rather such gains must arise from, often complex and pain-taking, research, trial and analysis.
Productivity alone certainly does not determine economic growth. Population trends, labor force participation, education infrastructure, capacity utilization, these and other items also enable or retard economic growth. But productivity provides the base upon which those other factors build.
North America
We should study a region receiving strong attention, the North American market. Much discussion has been directed at the trade in that market and the impact of trade agreements.
In the last 15 years, rather than increase, the US combined trade deficit with Mexico and Canada has decreased $5 billion per year, from $87 billion to $82 billion. This decline consists of a $35 billion decrease in the deficit with Canada and a $30 billion increase with Mexico.
At a product level, the US trade deficit with Mexico/Canada combined increased for autos ($23 billion a year increase), oil ($11 billion), and electronics ($5 billion); and decreased for chemicals ($14 Billion), aircraft/ships/trains ($7 billion) and apparel ($6 billion). The deficit also decreased for paper products, lumber, and metals, and increased for furniture, agriculture and pharmaceuticals.
The $5 billion shift in the deficit masks the rather enormous growth on a gross basis of trade. Imports to the US from Canada and Mexico increased $245 billion between 2001 and 2015, and exports increased $251 billion in the same period.
Note the balance between the increases, with export growth matching, actually exceeding, import growth. This speaks of a relative balance in employment impacts.
For example, North American trade can involve US sending medical equipment to Mexico, equipment not available from a Mexican producer, and Mexico sending agricultural goods to the US, goods out of season for US farms.
Both countries benefit with added products, and both benefit from added employment. Even if imports from Mexico substitute for goods that could have been produced in the US (i.e. the imports hurt American workers), the relative balance of import/export growth in North America means this substitution offsets.
That relative balance is important. We will see later a lack of such balance with China.
North American trade also builds efficient supply chains. We can picture that US efficiently produced chemicals feed into low cost production of auto parts in Mexico, while American engineers in Michigan design cars which will use engines from Canada and plastic parts from Mexico for assembly in Ohio.
Certainly we would like the parts made in Mexico to rather be made in America, and same with the engines, but the US competes with the world in the auto market. Absent efficient supply chains, US autos will become increasingly non-competitive in the world market.
China has yet to significantly penetrate the American auto market, and efficient North American supply chains will provide a defense against the Chinese juggernaut.
Trade also lowers prices. While lower prices lack the visceral impact of a closing plant, we can picture that American sub-compact cars, made lower in cost through production across North America, remaining competitive with imports. Thus a US college graduate buys a Ford, Dodge, or Chevy, rather than a Korean import.
Further, North American trade gives American export producers greater economies of scale. So a Canadian or Mexican outdoor enthusiast buys an American made high-tech hiking boot, rather than one made in Asia because the American producer gained efficiencies by selling into the larger North American market.
What do we make of this? On balance, neutral. Some pluses, some minuses. Mexico has taken manufacturing jobs, but exports to Mexico offer job opportunities.
We compete with Mexican and Canadian products, but American producers sell to a larger market. We run a deficit, but the deficit has stabilized. Imports have risen, but exports more so. And all involved obtain lower prices and integrated supply chains.
Can trade agreements in North America be improved? Certainly. Can American companies bring a finer pencil to cost reduction to keep manufacturing in America? Certainly.
Should harsh publicity and government review of plant closings bring counter pressure on corporations driven by Wall Street interests? Certainly.
But on balance North American trade impacts America in a neutral way.
But this pertains to North America. Next, Asian Pacific. The impact reigns not so neutral, at least with respect to one country.
- Asian Pacific
- One country, China.
- China dominates.
China dominates the trade dollars with the US, with the whole word for that matter.
China ranks as the number one merchandise export country, with $2.2 billion in 2015. Since 2001, China has grown its exports by 750%. China has the highest trade surplus of any country, with an average surplus of $325 billion over the last five years, and $600 billion in 2015 as dropping oil prices trimmed the value of Chinese oil imports.
As for the US, China accumulated a 2015 trade surplus of $386 billion. That Chinese trade surplus with the US (aka US trade deficit with China) represents 48% of the total US merchandise trade deficit for that year. Japan, which in 2001 garnered 16% of the US trade deficit, dropped to 9% by 2015.
Mexico hit 7.0% of our deficit in 2001, and despite rhetoric took only 7.6% in 2015. Canada dropped from 12.6% to 2.6%. The Chinese portion of our trade deficit dwarfs that of any other country.
Between 2001 and 2015 the US deficit with China increased by $296 billion. That represents a mind-numbing 84% of the total increase in the US deficit in that period. That means the remaining 16% was spread across our almost 225 other trading partners.
A key feature of trade involves the ratio of imports to exports. We discussed that in the North American trade section. If that ratio, of imports to exports, stands near one, i.e. our imports do not radically exceed exports, then the trade export flow to that country nominally generates employment in the US offsetting lost employment opportunity of the imports.
With Canada we run 1.1, and Mexico 1.25 (and 0.7 and 1.22 on the increase since 2001), so that as explained above, our trade flows with those countries balance, and the employment impacts stays approximately neutral.
China does not fit that mold. We run an import to exports ratio with China of 4.3, or $4.30 of imports to every $1.00 of exports. Thus Chinese imports reduce employment potential with no offsetting employment generated by exports to China.
Removal of China from our trade statistics further highlights the singular impact of China. Removing China, and adding in services, the US exported $2.1 trillion in products and services in 2015, against imports of $2.3 trillion. The ratio of imports to exports, on this basis, drops to a favorable 1.1, and the $200 billion deficit runs at only a bit bigger than 1% of GDP.
With China removed, the countries with which the US runs the largest trade deficits are Germany and Japan. We should be able to compete with those two developed countries, without concern about low wage labor.
We can compare the Chinese trade dominance in the US with the lack of dominance of other Asian and Asian Pacific countries. India provides a critical example, as it parallels China as a large developing rapidly growing Asian country.
China, as noted before, achieved a world trade surplus of $325 billion per year over five years; India a trade deficit of $78 billion a year (5 year average). With respect to the US, India garnered a 2015 surplus of $25 billion, a positive, but quite small compared to $386 billion mentioned above of China.
A wider look across Asia shows the same. Combined, the 13 major Asian countries outside China and India (for example Japan, Australia, Indonesia, Philippines, Pakistan) run a world trade deficit, as a last five year average, of $45 billion.
The combined GDP of these countries equals China's, but the US trade deficit with the 13 amounts to about a third of China's, and importantly the increase in the deficit since 2001 hits a modest $29 billion, one-tenth China's increase. The key US import/export ratio with the 15 stands at 1.6, not outstanding, but less than the 4.3 with China.
China then has unmistakably outpaced it Asian neighbors in trade success, both with the world and with the US.
While many factors contributed to Chinese success, unique trade deals do not appear among them. True China entered the World Trade Organization in 2001, but essentially every major country belongs.
China just managed trade and economic growth better. Other countries, India, Korea and Indonesia mentioned above, performed much less spectacularly, facing nominally the same opportunities and constraints as China.
China's dominance centers on four key areas: electronics, furniture/appliance, apparel and consumer products. (Call these the "four key groups"). In these four key groups they ran a trade surplus with the world of over $750 billion (2015 year). Astounding.
Can the US, or any non-Asian country take over Chinese dominance in the four key groups? The train has likely left the station for now. China has created an intricate supply chain, an extensive distribution infrastructure, and a large manufacturing base, in the four key areas.
These strengths are buttressed by their possession of a large, low cost labor pool. To the degree China falters (for example with rising labor costs), other Asian countries appear ready to take up slack.
The US can certainly grow its capabilities in these four key groups, and forestall and even roll back parts of the Chinese incursion. But overtaking China would likely involve years of steep tariffs to protect the American turnaround in the four key areas.
We can imagine trade wars, likely ugly. And we can certainly imagine significantly higher prices, both from what would initially and maybe ultimately be high costs in US production, and from the price impact of tariffs on imports.
But China does not dominate everywhere. They rate as minor players in a number of key sectors - autos, aircraft, chemicals, agriculture, pharmaceuticals and importantly fuel. China runs deficits in these areas.
What can we conclude so far?
A singular focus on trade deficit reduction will not assuredly stimulate economic growth or job creation. Rather, economic growth depends heavily on productivity; and high per capita countries on average grow slower since productivity increases must arise via innovation and not adoption.
And state-by-state data show that job growth depends not just on manufacturing and exports but many factors.
The data also show complex, intertwined trade flows in North America, and a lack of devastatingly large deficits. Rather, the net deficit has remained essentially level since 2001, and the integration of the North American markets likely helps North America remain competitive, for example in autos, in the world market.
Further, given the close balance of imports to exports in that market for the US, an all-out focus on reducing the trade deficits in North America will likely decrease export employment to the same extent that reduced deficits improve that employment.
But a clear finding involves China. China has built a dominance in four key sectors, a dominance that rests now on several decades of integration and investment.
A frontal assault on the Chinese juggernaut in those areas likely wastes resources. Also after China, Japan and Germany, having no wage advantage, still hold the next largest trade deficits with the US.
Oil, Auto, Areas of Strength, Divergence of Interest, and Export Deficiency. Within the US trade deficit hides an amazing story, oil. In 2008 our trade deficit in oil and related soared to over $400 billion. In 2015 that deficit shrank to under $100 billion.
This story shows petroleum clearly represents an area where the US possesses strong resources, advanced technology and deep infrastructure. Currently the US runs a net trade deficit in oil.
However, the amazing performance since 2008 points to petroleum as an area for further reduction in imports, and for actual net export growth.
Add to petroleum, the sectors chemicals, agriculture, pharmaceuticals, and even advance industrial and medical equipment. Thus US runs surpluses. And of course services. The US has tripled it trade surplus in services in the last 10 years.
Autos represents another success. Recall earlier that, unlike apparel, or electronics, or furniture, or paper, where imports devastated manufacturing employment and trade deficits increase by large multiples, auto trade deficits grew modestly. Auto manufacturing lost only 14% of its employment in the last 25 years.
And critically the integrated North America market arguably assists in the US capabilities. As for China, they run a trade deficit in autos. And US brands received wide acceptance and high sales in China.
Autos, unlike say socks, or even Smartphones, involve complex manufacturing and components, thus China can not immediately close its manufacturing gap in autos.
Realize, though, a divergence of interest. Global corporations seeks financial goals, regardless of geography. Workers, and governments, seek jobs, with specific regard to geography. A divergence ensues. American workers desire the US auto makers to produce Chinese bound cars in America, while the auto makers, seeking financial goals, produce those Chinese cars in China.
We also have another, surprising, divergence. While the US in dollar terms ranks high in imports and exports, as a percent of GDP the US stand apart in how low it ranks. US imports comprise but 12% of GDP, among the lowest percentage of all countries. On the export side, US exports comprise but 8% of GDP, not just among the lowest but just about the lowest of any country.
This perspective points to a different approach to manufacturing jobs in trade intensive industries. Compete, not Confrontation with Trade Wars
What now emerges for our look at trade flows, jobs and economic growth?
First, if we desire overall American economic growth, do not focus first on trade. Trade can, but will not assuredly, stimulate overall growth. Rather, for general growth, take action on productivity (i.e. to jump start more output per worker), or stimulate demand (to pull more workers into the labor force and/or increase work hours per worker.)
But overall growth can leave groups of workers behind, including those employed in traditional manufacturing jobs in trade sensitive industries.
True, workers can move to a state which has seen job growth, and can get the necessary training and education to transition to a non-manufacturing job. We should, however, do better than just expect the workers themselves to deal with globalization and automation.
We all, in the form of our government, should help, with appropriate action to stimulate manufacturing employment.
What action? Well, do not pick a trade fight with Mexico. We export about as much as we import, so a fight risks as much as it might gain. And we need a unified North America market to build the supply chains and achieve the economies of scale needed to complete globally.
This does not preclude blunt, frank discussions, and even measures, but with the realization we want Mexico as a partner.
Do not mount a frontal assault on Chinese imports. Certainly, the US can sustain and even expand our apparel production, or furniture making, and electronics assembly, even with Chinese strength here. We can not though, beat back or overtake the well-developed, low wage cost, integrated production base of China and Southeast Asia.
What can we do? Boost exports. America ranks terribly low in export percentage of GDP. And America generates products other countries desire. China values American car brands, the world needs geopolitically neutral oil, our industrial equipment and medical technology vie world-wide, American designer furniture and custom apparel can still compete, and our natural gas feedstocks allow low cost, high value chemical production.
How can public policy boost exports, i.e. align corporate and national interest? In a way that might be an unusual twist. Allow corporations to bring back - untaxed - the billions in un-repatriated profits parked in foreign countries. But only if they invest the profits in manufacturing and similar job creation.
We must proceed with caution here as WTO rules restrict direct subsidization of exports. This special tax-free incentive thus would focus on jobs, with exports a means by which corporations could generate sales to support jobs.
Software companies hold the most un-repatriated profits, you might say. And software development provides only a poor opportunity for displaced manufacturing workers.
However, software will drive (literally) future self-driving cars. Unlike Smartphones, where China beat the US, and the world, in production, America appears at or near the fore front in development of self-driving cars, and then hopefully production.
Partnerships between software and auto corporations makes sense, and thus a repatriation incentive can advance such partnerships.
What else to spur exports? Publicize corporate performance. A rather obscure provision, Part 583, provides an example. That rule requires auto manufacturers to publicize the American and Canadian content of cars. For example, Mitsubishi, Audi, Volkswagen, Volvo, Mazda, Kia, among others, perform horribly in this metric, less than 10%. Honda, in contrast, reaches over 50%.
But I sense few follow these statistics. Thus, Part 583 requires supercharging. Very simply, expand the rule, dramatically. Specify that all major companies, Walmart, GE, Exxon/Mobil, automakers, and on and on, report key metrics like local content percentages, percent of foreign sales produced in the US, and similar items.
These two proposals, one for repatriation incentives and one for Part 583 expansion, are offered as real candidates for action. But any equivalent action can be taken. The key lies in the strategy. Do not start confrontations with Mexico and China over imports. Certainly stem the tide, and aggressively negotiate.
But do not retaliate. Do not start trade wars. Rather, especially given the export deficient stature of the US, focus on expanding exports to Mexico, China, and other countries, from sectors of American strength.
Look forward more, and backward less. We can not go back and become the electronics assembler of the world. We can go forward to excel in design and production of self-driving cars, of advanced aircraft and rockets, of both high volume and specialty chemicals, and in services, like software, architecture, law, environmental control.
Final words
Mexico provides a partner, not a foe. China offers a market, not an enemy. For plant closings, certainly bring scrutiny. On corporations, publicize export/import data. Negotiate hard. Compete aggressively. Boost exports with wise incentives. But don't pick fights. And don't start trade wars. Be tough. But also wise.
To get added perspectives on this and other subject areas, visit the website The Human Intellect. The site contains a wealth of short and medium length discussions on topics ranging from ethics to Einstein, as well as a selection of a few longer articles such as this one.
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