How the U.S. trade gaps hurts the economy

The U.S. trade deficit with China, which topped more than $295 billion in 2011, is on track to reach a record high this year. / STR

(MoneyWatch) Although exports by American companies to China reached record levels last year, the U.S. trade deficit with the People's Republic is on track to top last year's all-time high of $295.5 billion. What gives?

Simple: The amount of goods and services China ships abroad still far surpasses its imports. Although U.S. exports to China grew more than fivefold over the last decade or so, Chinese exports to the U.S. nearly quadrupled. In short, our trade gap is growing, and not only with China (see table at bottom for a list of the top U.S. imports from China).

The global U.S. trade deficit rose in March at its fastest clip in 10 months, as sales of consumer goods coming from overseas outstripped gains in U.S. exports, according to new Commerce Department data. Despite Europe's financial woes, imports from the region jumped nearly 23 percent in March and hit a new high of roughly $35 billion. Since the U.S. economy officially started recovering in 2009, the trade deficit has doubled, notes economist Peter Morici.

Trade gap widens at fastest pace in 10 months
China's trade surplus widens in April
Jobbed: How offshoring threatens economic recovery

It's worth noting that many of those clothes, electronic gadgets, and other low-priced products coming into the U.S. from China and elsewhere are, in fact, goods made overseas by American companies. In theory, that should drive job-creation here in the states. The lower the price of, say, a Chinese-made flat-screen TV, the more units American consumers will buy. Rising demand for nice TVs is supposed to boost hiring, as U.S. companies gear up to fill orders.

If only theory jibed better with reality. With the U.S. economy still showing symptoms of depression, demand has yet to fully rebound. Hiring remains slow.

As the trade deficit has grown, meanwhile, U.S. businesses have moved a lot more jobs abroad in recent years than they've created at home. Between 1999 and 2008 U.S. multinationals slashed their domestic workforce by 1.9 million, while increasing overseas employment by 2.4 million, economist Martin Sullivan has shown. And it's not only about wages. The U.S. has lost more manufacturing jobs since 2000 than several countries that pay their workers more, including Australia, France, Germany, and Sweden. Nor is it only about manufacturing. The number of financial services, IT, HR, and other white-collar jobs lost to offshoring has risen since the financial crisis.

How does offshoring relate to America's growing trade deficit? Both stifle job-creation, which in turn is affected by U.S. trade policy. Since 2001, for example, the U.S. trade gap with China has resulted in a loss of 2.8 million jobs, according to the Economic Policy Institute, a Washington think-tank. More broadly, a widening deficit can act as a drag on the economy by muting the job-creating effects of consumer spending. Why? Because when people hit their local mall or big-box retailer, what they buy is mostly made abroad.

That creates more jobs overseas than it does here. It also weakens the impact of government stimulus by reducing the "multiplier" effect you get when formerly unemployed workers in the U.S. suddenly have a job and money in their pockets. (Again, the idea there is that higher consumer spending drives hiring, which continues the virtuous circle by pushing up spending.)

Is there a way to shrink the trade deficit? Yes, but not an easy one. It will require a shift in U.S. trade policy to encourage hiring at home and to promote exports. For its part, China must let the value of its currency appreciate and foster domestic personal consumption by allowing wages to rise. Such fundamental changes, subject as usual to the complex politics and power relations that govern global trade flows, remain as uncertain as ever.

US-China Business Council

[hypnotoad72]

http://endoftheamericandream.com/archives/new-world-trade-center-tower-to-be-made-with-glass-from-china-and-steel-from-germany

So read it and keep that in mind the next time China blames the US for any trade deficits, or anything else. The moment they do, assuming they've not already done so, just take the jobs out of their country (especially given how much the US subsidizes the companies going there) and see what China gripes about at that point.

And let's take a quick peek at the track record that the world is apparently so proud of:

http://www.c-span.org/Events/Senate-Investigates-Counterfeit-Parts-in-Military-Equipment/10737425339/
(hey, there's the C-word again)

http://economyincrisis.org/content/oakland-bay-bridge-built-china

http://prestowitz.foreignpolicy.com/posts/2011/06/27/cheap_is_expensive

http://abcnews.go.com/US/bringing_america_back/american-infrastructure-jobs-shipped-china/story?id=14592567

http://www.theatlantic.com/national/archive/2011/07/why-are-our-bridges-made-in-china/242115/

http://www.time.com/time/world/article/0,8599,1856168,00.html

http://www.bbc.co.uk/news/world-asia-pacific-13036943

http://www.chinatoday.com/china.topics/china.milk.scandal.htm

http://www.fda.gov/AnimalVeterinary/SafetyHealth/RecallsWithdrawals/ucm129575.htm

http://www.nytimes.com/2007/06/19/business/worldbusiness/19toys.html

http://www.ifixit.com/Teardown/MacBook-Air-13-Inch-Mid-2011-Teardown/6130/2
(slick under fan, and MacBook Airs are not cheap and their owners often state they are built with quality and care...)

http://www.ifixit.com/Teardown/MacBook-Pro-15-Inch-Unibody-Early-2011-Teardown/4990/2
(stripped screw and poorly applied thermal grease in what is a VERY expensive product, and xbox 360 owners and scores of other electronics owners might find similar issues... poor thermal grease application can lead to overheating...)

http://news.injuryboard.com/chinese-recall-of-leukemia-and-arthritis-drug-methotrexate.aspx?googleid=27994
(that came out just three MONTHS after it was deemed Canadian drugs couldn't be imported in our "free market" culture because their drugs were "unsafe" or "counterfeit"... irony, ouch...)

http://www.usatoday.com/money/economy/housing/2009-03-16-chinese-drywall-sulfur_N.htm
(let's see - if it causes allergies, just get medication. That helps the medical industry AND the economy. Oh, the drywall also rots electronics, but just repurchase - via cash or credit, that's stimulating the economy too. Especially credit, since something has to supplant your wages dropping to match the market values caused by these market forces...)

[thechooch1]

"The lower the price of, say, a Chinese-made flat-screen TV, the more units American consumers will buy." You don't buy if you don't have a job making that flat screen TV here in America. Easy answer, make the effort to buy American, and if we all do that, more American jobs, lower prices and less imports. It may cost a bit more, but think of the results.

[sjc_1]

Henry Ford knew he had to pay his workers a decent wage so that they could buy a Ford one day. This from a simple man that did not even finish the third grade, but now we have people that think they know better, while they drive their Toyota made in Ohio.

[MegaProcrastination]

I've found that by not buying imports unless it's something I absolutely need and there are no alternatives, I can afford to pay a little more for a U.S. made product. I also try to support small businesses since that means more of my money filters through our economy before going elsewhere. We live near a small town with a tiny grocery store that goes out of its way to sell locally produced stuff and I love seeing what they've found to sell. I know I'm very fortunate, though, in that I do have a few extra dollars that I can spend on U.S. made products. I remember a time when that wouldn't have been possible.

[James Chan100]

The average U.S. citizen is not generally aware of two less obvious aspects of American-style global trade. First, some of our US-made products that are exported to China and other countries "come back" as parts of finished goods that we import and consume. This is one reason why an "increase" in our exports does not correct our trade deficit. Secondly, by outsourcing manufacturing overseas to cater mainly to U.S. consumers as opposed to overseas consumers, we are depleting our monetary resources. It is a one-way street where money leaves and rarely comes back. I have been exporting US-made products for 31 years, this is how I feel. We are killing the American goose that lays the golden eggs.

[hypnotoad72]

*bingo*

Great post, thank you