Why You Should Care About The US Trade Deficit
President Donald Trump claims the negative US balance of trade—otherwise known as America’s trade deficit—is causing unemployment, and killing America’s economy.
This is nothing new: ending America’s trade deficit was a central tenant of Donald Trump’s presidential campaign.
China is robbing us blind in trade deficits and stealing our jobs, yet our leaders are claiming 'progress' https://t.co/2r9DHxHo SAD!
— Donald J. Trump (@realDonaldTrump) December 20, 2012
In fact, Trump’s been critical of America’ trade policy, and trade deficit, for decades—long before he ever stepped into the political arena.
And many people, millions in fact, agree with Trump.
It’s a big part of what got him elected—America’s working class supported Trump at the ballot box largely because of his stance on trade. Specifically with China and Mexico.
But it’s not just ordinary Americans who want to eliminate the trade deficit: many of America’s business leaders do too.
Ending America’s trade deficit is one of the few things that billionaire hedge fund managers Carl Icahn and Warren Buffet agree on.
On the other side, academics and journalists often argue that the trade deficit doesn’t matter—note that neither group has skin in the game.
The Financial Times, for instance, makes the tongue-in-cheek claim that Trump and his supporters suffer from “trade deficit disorder”—you’d have to be crazy to care about the trade deficit.
Likewise, the libertarian Cato Institute—who supports granting amnesty to all illegal immigrants, by the way—claims that the trade deficit is actually good for the US economy, since it represents greater economic efficiency.
Who’s right? Ordinary people and businessmen, or academics?
As usually, America’s academic and “intellectual” elites have it wrong: the trade deficit is bad for America. Period.
I’ll explain why (and I guarantee there will be some reasons you’ve never considered), but first, let’s define what a trade deficit actually is.
What is a Trade Deficit, and How Big is America’s Deficit?
Defining the term “trade deficit” is the easy part.
All it means is that a country has a negative balance of trade (imports are greater than exports).
In plain language: if America buys more stuff from foreign countries than it sells, America has a trade deficit; if it sells more than it buys, then America has a trade surplus.
Now let’s look at the numbers.
America’s run a trade deficit every single year since 1973.
Not only that, it’s big and it’s growing.
In 2016, America’s goods trade deficit was $750 billion, while we ran a services surplus of $250 billion.
Overall, according to the US Census Bureau, America’s balance of trade was a negative $500 billion in 2016.
The US has a giant trade deficit.
In fact, America’s goods trade deficit is almost $5,000 per working person. If the deficit were a country, it would be as big as the Netherlands, South Africa, or the Philippines in terms of GDP.
All these deficits add up: over the last two decades alone the cumulative trade deficit is roughly $12 trillion—over $85,000 per employed person during the period. That’s double what an ordinary American earns in a year.
OK, you get it. America’s trade deficit is giant.
But more importantly, it’s been growing for decades—and it’ll keep growing unless something is done. Aside from the hiccup caused by the Great Recession of 2008, the above graph makes this trend fairly obvious.
It’s also worth noting that the reduction of trade barriers between the US and developing countries is largely the reason the deficit’s grown.
For example, when Bill Clinton signed the North American Free Trade Agreement (NAFTA) with Mexico in 1994, America’s balance of trade soured from a modest $1.3 billion surplus, to a $63 billion deficit today.
The same thing happened with China: when China joined the World Trade Organization in 2001 the growth rate of our deficit increased dramatically.
To hammer home this point, let’s look at the state of US foreign trade. As I said in my book The Land of (Rancid) Milk and Honey:
There is a stark difference in the type of trade that occurs between America and developed nations, as opposed to developing nations. A survey of our twenty largest trading partners reveals a few interesting facts.
First, we are almost twice as likely to run a trade surplus with a developed country as with a developing country; second, the surpluses with developed countries are, on average, larger as a percent of total trade volume than are surpluses with developing countries (39.2% vs 10.4%); and third, the deficits with developing countries are larger, as a percent of total trade volume, than with developed countries (35.1% vs 26.6%).
In short: we are more likely to run a big surplus with a developed country, and we are more likely to run a big deficit with a developing country. We should rethink our trade partners.
The below graph illustrates my point: freer trade with developing countries leads to massive trade deficits, since American consumers maximize their short-term consumption by purchasing nominally cheaper products abroad.
Of course, if we’re not trading stuff we make for these goods, this begs the question: how does America afford its trade deficit?
How Does America Pay for the Trade Deficit?
The obvious question (that no one ever asks) is how can we afford this trade deficit? After all, nothing’s free.
There are four, and only four ways for the US (or any country, or person for that matter) to acquire foreign goods:
1. We could get them for free via theft or gifts. Unless we’re prepared to become Viking raiders, or default on all of our foreign debts, this probably isn’t a viable option.
2. We could trade our own goods for them: this would result in a neutral balance of trade. We’re doing this, obviously, but we’re not selling enough to balance the books.
3. We could trade for them using stuff we made in the past—ie. selling off assets, like property, stocks, and land. This causes a trade deficit.
4. Or we could buy foreign goods using stuff we promise to make in the future, in other words, debt, like US Treasury Bills. This also results in a negative balance of trade.
Since America’s running a trade deficit, this means we’re either selling assets and/or debts to pay for foreign goods—there’s no such thing as a free lunch.
If America were one big family, this is a little like buying the groceries by selling your furniture (the assets) and putting them on your credit card (the debt).
Let’s look at some real-world figures to see how this plays out.
As America’s trade deficit rises, so too does foreign ownership of American property. For example, foreign investors now own 20% of all US equities—up from just 12% in 2007.
Likewise, foreigners have been buying up billions-worth of US property (land and housing). In 2015 alone, foreigners purchased over $100 billion in US land assets.
This is one of the reasons that homes are 73% more expensive (in real terms) today than they were in the 1970s.
It’s clear that America’s selling an enormous quantity of assets to pay for our trade deficit—but this is nothing compared to our debt-financing.
Right now, foreign entities hold roughly 44% of America’s national debt—that’s $6.3 trillion.
As you can see in the below graph, our national public debt’s been increasing along with our deficit—the books are always balanced at the end of the day. We buy their goods, they buy our debt, which enables more and more government spending.
It’s a cycle. Unfortunately for us, we’re on the wrong end of the bargain.
Because not only do we owe them the principle (the amount of our debt that they bought), but we also owe them interest—we’re paying foreigners for the privilege of buying their products.
Likewise, foreign countries and private investors now own 29% of all US corporate bonds. And this number’s increasing.
Like I said: everything comes with a price. We’re paying for our trade deficit by selling foreigners US assets and debt.
Is this a responsible way to run a household? No. You’d be bankrupt sooner rather than later. So why is it magically a prudent way to run a nation?
It’s not. The “economists” are lying.
Eventually, we’ll run out of stuff to sell.
At that point, we’ll either have to lower our consumption (which decreases our standard of living) or increase our output to trade for foreign goods (why delay what’s inevitable?).
Right now we’re living in a consumption bubble, paid for by selling our inheritance and mortgaging our future.
When the bubble bursts, we’ll be worse off than if we had never traded. Mathematical modeling done by Joseph Stiglitz proves this point.
Eventually we’ll have to pay the piper—everything has a price.
Why Are Trade Deficits Bad?
1. A Negative Balance of Trade Hurts America’s Economy
I think we can all agree that America’s economy doesn’t work like it used to—in fact, there’s a strong argument to be made that we’re nearing economic collapse.
But all the figures in the world are meaningless without a causal mechanism, so that’s where this discussion of the economic impact of the trade deficit must begin.
How does the trade deficit hurt America’s economy? Not only does the trade deficit make America’s economy more fragile by increasing debt, and serve as a vector for economic contagion, but it harms America through offshore outsourcing—specifically, the offshoring of our growth-generating industries.
What Is Offshore Outsourcing?
Offshore outsourcing is when a domestic company hires a foreign company to do something for them in the foreign country.
For example: an American company (Acme Inc) hires a Chinese company (China Corp) to build laptops for them—China Corp builds the laptops in China, and then Acme Inc imports them to, and sells them in America.
For the sake of brevity, know that when I say offshoring in this article, I actually mean offshore outsourcing.
Now, I know many of you are probably skeptical on this point.
The economic narrative for the past 40 years has been dominated by the Austrian School of economics, which preaches the credo of unfettered liberalism (notice how they invent for themselves an anachronistic origin story to deepen their intellectual roots).
But, like most extremist ideologies, economic liberalism is nothing but political radicalism—it’s not grounded in the logic of history, or fact.
It’s interesting to note that David Ricardo himself (the inventor of the theory of comparative advantage) recognized that offshoring was a hypothetical problem for the free trader.
Regardless, if you’re going to be unreasonably skeptical, read this article on economic globalism, and this one on mercantilism before proceeding.
So that’s what offshoring is, but how does it hurt America’s economy?
I. The Trade Deficit Causes Unemployment
In 2015, America’s goods trade deficit was $736 billion, or 4% of our GDP. Since GDP is simply the total output made by America’s working population, and since 4% of America’s GDP is imported, then it follows that 4% of America’s workers are displaced by these imports.
This means roughly 6 million workers are displaced imports.
Of course, this neglects the jobs gains in the service industry surplus, but on the other hand, it doesn’t account for the fact that labor-intensive jobs are more likely to be offshored.
Looking specifically at manufacturing:
American manufacturing contributes $2.2 trillion dollars to our economy. And since 78% of our trade deficit is in manufactured goods, this means that we’ve offshored $573 billion worth of production. That’s one-third of our manufacturing industry. Finally, since manufacturing employs 12.3 million Americans, then we know that roughly 4 million more are displaced by imports.
Manufacturing brings wealth into a region, and therefore supports local services and supply chains. For example, a car factory supports hairdressers and accountants, but not the other way around. This “job multiplier” has been studied extensively.
As it turns out, each manufacturing job usually supports 1.58 other service jobs. This means that since 4 million manufacturing jobs are displaced by imports, then about 6 million service jobs were also lost.
According to this method, the goods trade deficit costs America at 10 million jobs.
This makes sense, especially when you consider how many Americans are actually unemployed.
And no, you can’t blame this on automation.
II. The Trade Deficit Makes America More Unequal
Offshoring replaces demand for domestic output with demand for imports (rather than make it, we buy it). In turn, this replaces demand for domestic labor with demand for foreign labor (we hire foreigners, not Americans).
This increases income inequality because it lowers American wages.
When a business is offshored, people lose their jobs. Some of these people cannot find new work, and drop out of the labor force; the rest find other work, but usually earn less (since manufacturing jobs pay so well).
In fact, the average wage cut for a worker who lost his job in an exporting industry (America’s largest exports are manufactured goods) was 17.5% (you used to make $50,000 a year, now you make $40,000).
Additionally, people who are laid off compete with everyone else for (fewer) jobs.
This shifts bargaining power from workers to employers, who can pay less to attract the same number and quality of employees.
How much are wages impacted? A lot.
From 1950 to 1973 worker’s productivity gains were reflected in wage gains on a nearly 1:1 basis (the more work you did, the more you were paid).
However, since then productivity increased by 72%, but average wages stagnated.
If wages had continued to rise with productivity, the current median wage would be $33.60 an hour, as opposed to $21.00.
Most of this divergence is caused by the trade deficit, although immigration (especially illegal immigration), higher taxes, and superfluous regulation also helped murder the American dream.
III. Offshoring Lowers America’s Standard Of Living
The offshoring and the attendant trade deficit also lowers most American’s standard of living by boosting foreign demand for America’s assets (this is on top of wage stagnation, of course).
Foreigners are furiously buying US stocks and property, which inflates their prices.
Most Americans are being squeezed—particularly by increasing housing costs.
In fact, the primary reason why the median household has less disposable income today than in 1985 is because the cost of housing has increased so dramatically (by a multiple of 3.5), while wages have not.
Not to mention the fact that offshoring hasn’t brought down the cost of goods, when you account for product quality. For example, household appliances are twice as expensive today as they were 40 years ago.
This is made abundantly clear in the graph below, which shows the change in US disposable income over time.
You can clearly see the regression in the median, not the mean, which means that most of the gains are going to a small portion of the population.
2. The Trade Deficit Makes America Weaker
Enough of economics. Let’s talk politics.
Economists work under the assumption that maximizing absolute utility is the economy’s goal. Therefore, it makes economic sense to trade with someone if you gain—no matter how small the gain may be, nor how large the discrepancy between the trading parties is.
This is why economists make horrible businessmen—they’re suckers.
For example, let’s say that a new free trade agreement between the US and China would benefit both countries: China’s economy would grow by an extra 10% a year, while America’s would grow an extra 1% a year.
An economist would say that’s a great deal—trade isn’t zero sum, we should both benefit.
A businessman would say it’s a terrible deal—let’s renegotiate and get a bigger slice of the pie.
Likewise, an intelligent (and honest) politician would say the deal’s so bad it’s almost treasonous: this deal would empower China relative to the USA, thereby diminishing our international might.
Why? Because whoever has the gold makes the rules. Wealth is power. This is what economists refuse to understand.
Trade with China may have enriched America, but it’s enriched China much more. In fact, since 1984 China’s economy has grown ten times as fast as America’s—they benefited an order of magnitude more from trade than we did.
Now China has the world’s largest economy, and it’s rivaling America’s hegemony, at least in East Asia. Thanks to our own stupidity and greed, we’ve created a new rival from scratch.
Economics may not be zero sum, but power is.
And frankly, it’s better (and safer) to be a big fish in a small pond, than a shark in a shark tank.
3. The Trade Deficit Makes America Less Free
Have you ever heard of import dependency?
It’s pretty self-explanatory, but economists don’t seem to get it. It’s when a country depends upon imported products to maintain its standard of living or survival. For example, Singapore doesn’t produce its own food, and is therefore dependent upon producers, like Indonesia, to survive.
It’s not a good position to be in. Why?
Because of leverage. If you depend upon someone, they own you. It’s that simple.
Why do you think Saudi Arabia sits on the UN Human Rights Council? Because America needs their oil.
Why do you think China gets to do whatever it wants in Tibet without any pressure (beyond the occasional scolding)? Because we need the laptops and iPads they make for us.
In fact, there are so many things America no longer makes (from spoons to laptops) that our entire foreign policy is practically disabled.
This is exactly the situation our Founding Fathers tried to avoid by imposing tariffs on British imports after the Revolution—George Washington knew that political independence requires economic independence.
Washington himself said:
A free people ought not only to be armed, but disciplined; to which end a uniform and well-digested plan is requisite; and their safety and interest require that they should promote such manufactories as tend to render them independent of others for essential, particularly military, supplies…
What have we done? The opposite. We’ve offshored critical segments of our industries to foreign powers. This makes us less free, and it also makes us less safe.
4. Trade Deficits Make America Less Safe
It’s worth delving a little more into import dependency and autarky (economic independence, or self-sufficiency).
A country that depends upon another is fragile. It’s vulnerable.
A good example of this is what happened during the American Revolution itself. America’s freedom was made possible because the French gave us weapons (80,000 firearms, swords, even uniforms), which we could not make ourselves because we lacked sufficient industry.
This began to change after independence, but progress was slow until the War of 1812, which served as a wake-up call. After that, American policy was geared towards promoting economic, and therefore political, independence.
The success of this policy was obvious in the Civil War: the North used America’s protectionist tariffs to develop an industrial base, while the South maximized their advantage in agriculture.
As a result, the South still depended upon British imports at the time of the Civil War (they imported guns, bullets, you name it). Because of this, the North defeated the South the moment it captured New Orleans, since this cut the supply of Southern cotton to Europe—this devalued the Confederacy’s cotton-backed bonds so badly that they could no longer afford supplies.
The triumph of American autarky was proven again in World War II, where America’s industrial might out-produced the Germans and Japanese: it was our industrial output, not our accumulation of equipment and wealth, that made us strong.
This is a long-standing truth in the history of warfare.
During the Second Punic War, Rome lost battle after battle against Hannibal of Carthage, but they were always able to rebuild. Rome had a massive industrial base, and native population. Eventually, they wore the Carthaginians down: Hannibal could not afford a single loss, because his army consisted of mercenaries—Carthage was a trading empire that lacked the manpower and production to compete with Rome.
Therefore, once Hannibal was defeated by Scipio at Zama, Carthage was done.
Economic independence, and might, has also long been part of Russia’s survival strategy: defeat your opponent through sheer force of numbers.
For example, the USSR suffered enormous casualties during Operation Barbarossa during World War II, but they just kept building tanks and planes until the tides turned.
Economic power is military power.
So what does this mean in today’s world?
Basically, America’s relative economic decline is shifting the geopolitical paradigm from a hegemonic to a competitive power structure—we are moving from a big fish, small pond scenario, to a shark tank situation.
This makes the world less safe because there is no superpower that can preserve world peace, and more competing players means more political friction, and a greater likelihood of conflicts. Remember, the world is most peaceful when one power dominates, consider: Pax Romana, Pax Britannica, Pax Americana.
Conversely, history is most violent when there are a multitude of relatively equal powers, consider: the Chinese Warring States Period, the Hellenistic Age, or Western history from Charlemagne’s death until Napoleon’s defeat, and again after Britain’s decline until America’s ascendancy.
America is sleepwalking into a violent future. Do the elites care?
They will not be fighting when the dogs of war come.
They will be sitting back, as they always have, making money and getting fat while young men die.
We need to fix this before it is too late, and it starts by rewriting our trade policy—and “America first” must be its axiomatic principle.
I’ve also written a comprehensive article on the link between the trade deficit and national security, if you want more specifics.
5. The Trade Deficit is Bad for the Environment
I am an environmentalist—no, not the tree-hugging type. The conservative type. The practical type.
It is not an overstatement to suggest that a desire to preserve the natural environment is at the core of classical conservatism: you cannot be a true conservative without also being an environmentalist.
Conservatism was bred in the fires of the Industrial Revolution, and was in part a rejection of the wholesale spoiling of the English countryside. Conservatism sought to balance industrial and economic progress with future generation’s rights to the land.
It is not a coincidence that Theodore Roosevelt, one of America’s greatest republican presidents, was also one of her greatest environmentalists.
But what does environmentalism have to do with trade policy?
Simple: American factories are relatively environmentally conscious, or at least are subject to fair environmental regulation; Chinese factories are not—every time we offshore a factory to somewhere like China, we multiply humanity’s environmental footprint ten-fold.
Just look how polluted China truly is.
I will not provide a litany of examples beyond what was in Vice’s video to make my point: suffice it to say that China’s industries are filthy compared to ours, and that part of the reason their goods are so “cheap” is because the cost of pollution regulation is not factored in.
If Chinese factories were subject to the same environmental standards as American factories, the cost savings would shrink considerably.
And what is the solution here?
We made a democratic choice to pay a little extra for our products, so that we could impose environmental regulations—offshoring to China simply gives multinationals a way to pollute anyways.
This nullifies the point of our environmental regulations in the first place, and puts Americans out of work to boot.
America should stand by her conservative principles and protect the environment by ending offshoring to China (and other developing countries).
America Must End The Trade Deficit
It should be clear that running a large, perpetual trade deficit isn’t sustainable. It’s stupid.
We’re sacrificing long run economic growth for short-term consumption—and in the process, we’re eroding our international political dominance.
This makes us, and the world, less safe.
It’s in our best interests to retain our economic lead: that means doing away with asymmetrical trade deals once and for all.
It means embracing economic nationalism.