Cracks Appearing in Globalization?

March 26, 2008,9171,1725094,00.html

It’s a significant development in the fight for a sensible trade policy when a major pubication like TIME Magazine acknowledges that our enormous trade deficit is a problem.  There is definitely a building groundswell of dissatisfaction with what our trade policies have done to our economy.  For example, when articles about trade appear in USAToday, the comments come fast and furious from those upset with our trade deficit.  Virtually no one is defending it.  If only our political leaders would recognize this wave of discontent, things may actually begin to change.

There are some inaccuracies in this article, but first I want to high-light some important statements that TIME has exactly right:

That problem is America’s vast, unsustainable trade deficit with the rest of the world. The deficit has created stuffed storehouses of dollars and dollar-based securities at many of America’s most important trading partners. The dollar reserves are especially large in Asia, where export-oriented countries like China and Japan have run large trade surpluses with the U.S. The Bush Administration has attempted to pin the blame for the trade deficit on “unfair” practices by foreign countries. Special abuse was reserved for China. Bush has maintained that Beijing’s manipulation of its currency, the yuan, made Chinese-produced goods exceptionally cheap and as a result they have flooded the U.S. market.

This argument is nonsense and always has been. Since China ended its currency peg in mid-2005, the yuan has risen 17% against the dollar and hit an all-time high last week. But the trade deficit with China hasn’t budged.

The trade deficit hasn’t budged because currency values have nothing to do with the root cause of the deficit – the disparity in population density and per capita consumption between the U.S. and China and so many other of our trading “partners.” 

And if you don’t believe TIME, then how about Warren Buffett?

America, Buffett warned, was facing the same fate. “Our trade deficit has greatly worsened, to the point that our country’s ‘net worth,’ so to speak, is now being transferred abroad at an alarming rate,” Buffett wrote.

But, like I said there are some bad misstatements in this article.  Let’s begin with the sentences that followed that first quote above:

The real cause of the trade deficit is that Americans spend too much and save too little. That’s true for both the government, with its mammoth budget deficits, and the average consumer. American household debt reached $13.8 trillion at the end of 2007, or more than double the amount in 1999. This debt-financed consumption has led to a level of imports well beyond the nation’s ability to pay for them. Americans have no one to blame but themselves.

Nothing could be further from the truth.  Americans have simply been trying to sustain their standard of living.  It wasn’t their choice to out-source the manufacture of virtually everything.  What choice do they have?  In almost every case, there simply aren’t any American-made alternatives. 

Here’s another one:

That’s why today’s turmoil in U.S. financial markets will end in a massive transfer of wealth from America to the rest of the globe.

Today’s turmoil began with the massive transfer of wealth to finance the trade deficit, now totaling a cumulative $9 trillion since 1976.  The transfer of wealth has already happened and continues at a rate of $700+ billion per year.

The housing bust, the subprime catastrophe, the Bear Stearns evaporation, and the tanking markets have already dented household wealth. But this is just the beginning. These events are only the trigger to a larger problem that affects America’s standing in the global economy.

Again, TIME has the cause and effect reversed.  The housing bust and subprime catastrophe are due to wages not keeping pace with inflation, forcing average Americans to resort to subprime mortgage terms just to be able to “afford” (or so they thought) a home. 

But the worse error is the first sentence of the last paragraph:

There is, simply put, no way out of this situation for America.

Nothing could be further from the truth.  America is still a sovereign nation.  We can withdraw from trade treaties and revise our trade policy.  We can implement the tariff structure on manufactured goods called for in Five Short Blasts.  We could completely reverse this situation in a matter of a few short years.


2007 Trade Deficit

February 15, 2008

The Commerce Department released the December trade figures yesterday.  The good news is that the deficit shrank a bit in 2007 from the record in 2006.  The bad news is that it’s still a staggering $712 billion.  Don’t look for much further improvement.  The monthly data has been hovering in the $58-63 billion range for quite a while now. 

Almost all of the focus in this article is on our trade deficit with China.  But the size of the deficit with China should be a surprise to no one.  What did we expect when we applied to China the same trade policies that were already a proven failure in the rest of the world.  Of course our deficit with them dwarfs all other countries.  They’re one sixth of the world’s population.  Take our deficit with Japan as an example.  Japan is only one tenth the size of China (in terms of population), but our deficit with China is less than three times the deficit with Japan.  In terms of per capita deficit in manufactured goods, our deficit with Japan is three times as bad as the deficit with China.  Our per capita deficit in manufactured goods with Germany is twice as bad as it is with China.  (Note that both Japan and Germany are much more densely populated than China.)  In terms of per capita deficit in manufactured goods, China is only number nineteen on the list of the top per capita deficits in manufactured goods. 

The article also observes that, in spite of the fact that the yuan has risen over 15% in the last 2 years, prices of Chinese imports hasn’t changed.  Also, in spite of the fact that the dollar has plunged 24% against the world’s currencies and 37% against the Euro, exports have risen only 12%.  None of this should come as a surprise either because our trade deficit is not about costs.  It’s about the disparity in population density between us and these other countries.  They will simply cut their prices right along with the falling dollar in order to maintain market share.  The key factor will remain unaltered:  that we are giving free access to our market to countries who have no market (or markets badly stunted by over-population) to offer in return.  The only way to rectify this situation is through a tariff structure on manufactured goods that is indexed to the population density of our trading “partners.”  Failure to take such a measure only assures that the host-parasite relationship between the U.S. and over-populated nations will persist.  The global trade welfare state will be sustained.