The Folly of Trying to “Compete” Our Way Out of The Trade Deficit

http://www.reuters.com/article/newsOne/idUSTRE4A220W20081103?sp=true

For decades, economists, government leaders and business leaders alike have blamed our trade deficit on “competition.”  First, it was that our product quality was uncompetitive.  Then it was wages.  Then benefits.  Then it was business practices.  We improved all of these, matching our foreign competitors every step of the way.  Yet, our trade deficit has exploded, draining five million jobs and $9.1 trillion from our economy.  Why?

Our approach of improving our competitiveness doesn’t work because our trade deficit has nothing to do with our competitive position.  Our trade deficit is rooted in the fundamental, gross disparity in population density and, consequently, in per capita consumption between us and so many of our trading “partners.”  (Read Five Short Blasts for a full explanation of this theory.)  It’s rooted in the belief that exchanging free access to our healthy market for access to emaciated markets is somehow sound economics that will propel our economy to new heights. 

It’s impossible to compete our way out of this mess because every move on our part to improve our competitive position forces a corresponding move by our foreign competitors.  The linked article illustrates this point:

From bankers to factory staff, workers in the West face the bleak prospect of losing their jobs as a global recession starts to bite. For colleagues in the East, the pain is more likely to come through a pay cut.

In Hong Kong, senior staff at CLSA, the Asian brokerage arm of Credit Agricole, have agreed to a voluntary pay cut of up to 25 per cent to stave off the threat of redundancy. CLSA made similar cuts in 2003 when business slowed due to SARS.

Singapore’s Chartered Semiconductor also implemented temporary salary reductions of 5-20 percent after posting a loss, with senior management taking the biggest hit. And in Japan, chipmaker Elpida cut its chief executive’s pay by 50 percent.

We cut jobs.  They cut salaries.  We cut benefits.  They cut more.  It’s a vicious, global race to the bottom, driven by the glut of labor available in the grossly overpopulated regions of the world, the very regions with whom we attempt to trade freely in manufactured products, casting our own labor force into the global over-supply.  The result is an automatic trade deficit accompanied by rising unemployment and poverty here in the U.S.  Our free trade policies are tantamount to economic suicide.

Before closing, I should point out that it’s equally ludicrous to believe that currency valuations will somehow shift in our favor and save the day.  Every time that we improve competitiveness and increase productivity, the dollar rises, counteracting everything that we’ve accomplished.  Since our last trade surplus in 1975, we now have thirty-three years of proof of the folly of relying on competitiveness to combat the trade deficit.  Our focus on cures that are unrelated to the disease has only sickened our economy more. 

It’s time to step back from the free trade policies we’ve pursued since the signing of GATT in 1947 and compare the results to the policies of rationally-applied tariffs that we employed for the first 171 years of our nation’s history.  Any unbiased observer would conclude that we’ve taken a turn down the wrong path.  Only by putting tariffs back in our economic tool bag and by recommitting ourselves to balanced trade can we hope to put our nation’s economy back on sound footing.

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