As reported in the above-linked article on Reuters this morning, Brazilian aircraft manufacturer Embraer has been awarded a $355 million contract to provide small turbo-prop aircraft to the U.S. military.
I’m using this report to illustrate how such trade deals would work under the trade policy I proposed in Five Short Blasts. Those of you not familiar with that policy might assume that I, a real hawk on restoring a balance of trade, would be opposed to such a deal. After all, here we have the federal government, led by a President who speaks incessantly about the need to create jobs, awarding a contract to a foreign company. How can this be? We should all be outraged!
Those who know me better know differently. Under the trade policy I’ve proposed – one in which tariffs on manufactured products are indexed to population denisty, but one in which all other trade is essentially “free trade” – there would be no problem with this deal (assuming that there were no bidding irregularities). With a relatively sparse population, and being rich in natural resources, Brazil is a perfect example of the kind of country we should engage in free trade. And, in fact, Brazil is one of our best trade partners. In 2010, our trade surplus in manufactured goods with Brazil soared to over $20 billion, shattering the record of $17 billion set in 2008.
As one commenter to the Reuters article pointed out, these aircraft may actually be assembled at Embraer’s new plant in Melbourne, Florida. But it’s likely that many, if not most parts, will be imported from Brazil and other countries. But all of that is beside the point. The point is that Brazil isn’t the problem when it comes to our trade deficit. Neither is any other sparsely populated country.
The real problem is attempting to trade freely with the likes of Japan, Germany, China, Mexico and other densely populated nations, desperate to find work for their badly bloated labor forces. In November, the latest month for which trade data is available, we had a trade deficit of $20.9 billion. Our trade deficit with China alone was far larger – $26.9 billion. Throw in Japan, Germany and Mexico and those three alone account for another $16.4 billion trade deficit. Restore a balance of trade with those four nations and we swing to a $22.4 billion trade surplus. That’s a swing of $43.3 billion per month, or $520 billion per year. Assuming that 2/3 of that is labor, and assuming an average wage of about $50,000 per year, that’s 7 million high-paying manufacturing jobs. And here I’ve limited this analysis to only four densely-populated countries in the interest of brevity. I could have included two dozen more on the list and the numbers become even more staggering.
As tempting as it is to malign free trade in general and to be critical of all trade deals like the one illustrated in this report, that would make no more sense than the blind application of free trade to every situation like we have now. We don’t need to eliminate trade. We need to apply trade policy that is aligned with economic realities, especially the inverse relationship between population density and per capita consumption, and its role in driving global trade imbalances. We need to make smart use of tariffs where it makes sense and apply free trade principles where those make sense.
Current trade policy – confining ourselves to the extreme free trade end of the trade policy spectrum – makes no sense at all, and the results bear that out.