Why Trade Deficits Harm America

Americans spend more time mulling a drink order at Starbucks than worrying about the trade deficit.  It's tragic because the issue impacts millions of jobs.  Despite the recent flood of trade deficit news, Americans remain aloof because reporting on the issue is jargon-laced. Let's try to change that.

The most glaring U.S. trade deficit is the one with China.  In 2017, the deficit was $376 billion.  That deficit was created because the U.S. exported (or sent) goods valued at $130 billion to China, while that country shipped $506 billion to our nation. Simple subtraction yields the deficit number.

When goods and materials are shipped overseas they count as exports.  When the  arrive in another country, this is recorded as an import.  Without muddling the discussion, imports and exports may also include services, royalties and licensing payments.  But let's stick with goods.

China exports consumer electronics, clothing, machinery and finished materials such as steel, to our nation.  Those products are often lower priced than the same American manufactured goods.  China's competitive advantage is chiefly a result of two factors: lower wages and currency manipulation.

Chinese firms aren't more technologically superior, they just pay workers less.  An exact comparison of wages is complicated, so economists use a proxy called Gross Domestic Product per capita.  Using this formula, the average Chinese earns $16,600 per year compared to $59,500 in the U.S.

Think about that gap between the two countries.  It means Americans enjoy a higher standard of living, making it possible to purchase more goods and services than their Chinese counterparts.  However, that standard is threatened when more jobs are outsourced to overseas firms.

The second advantage for the Chinese is their currency exchange rate.  The Chinese claim to peg the value of its currency (yuan) to the American dollar.  However, the government has exerted more influence on the exchange rate, ignoring market fluctuations that would lower the value of the yuan.

While the value of the American dollar drifts upward and downward, the Communist Chinese government props up its currency to advantage its homegrown firms. As a result, American goods become more expensive in China, while Chinese products are less costly for American buyers.

The impact of currency control and labor costs have helped China become the world's largest exporter of raw steel. Once No. 1 in the world, America has fallen to the third position behind Japan.  The value of U.S. produced iron and steel was $113 billion in 2014, the latest year data is available.

In 2014, the U.S. produced 11 million tons of steel products but imported 39 million tons, the majority from China. In 1973, the U.S. produced 137 million tons.  Today's production is less than one-tenth that amount. The U.S. steel industry has been decimated by foreign imports.

As our country buys more Chinese steel, the U.S. industry has shaved payrolls.  In 1953, American firms employed 650,000 steelworkers, according to the American Iron and Steel Institute (AISI).  Today the number is 142,000.  One in five steelworkers have lost their jobs.

Once thriving steel cities, such as Chicago, Gary, Indiana; Cleveland and Pittsburgh have all paid a heavy price as factories have been shuttered and workers have been laid off. China has become the world's largest exporter of steel at the expense of the American worker.

Other American manufacturing industries, such as textiles and electronics, have also been hard hit. About 900,000 jobs have disappeared in the textile and apparel industry since the 1990's.  Some 760,000 computer and electronic jobs have gone overseas during the same period. Does anyone care?
 
The number of total manufacturing jobs in the United States has declined 34 percent between 1998 and 2017.  As these industries shriveled, U.S. competitiveness also suffers. But politicians, Fortune 500 firms and the Chamber of Commerce don't appear fazed by the impact on American workers.

Trade policy defenders like to point out that American firms profit by investing in the Chinese market with its $23.12 trillion economy and its mushrooming population of 1.38 billion. Hundreds of American firms already have established a presence in China.  It's good for their businesses.

But China extracts a steep price for allowing companies into its country. The Communist regime has turned a blind eye to the theft of U.S. technology and intellectual property, such as patents and copyrights. China also wields regulatory and legal power to hamstring U.S. firms.

Free trade benefits all countries when there is a level playing field.  When one country plays by a different set of rules, it gains an unfair advantage.  Right now it is a unassailable fact that the U.S. is losing the competitive trade battle with China because the Chinese are gaming the system.

Resolving the thorny issue will require political fortitude because China owns $1.17 trillion in U.S. debt, the largest amount held by any foreign country.  Imagine the stock market reaction if the Chinese dumped U.S. Treasuries. Although it may seem far fetched, never underestimate the Chinese.

Policy makers have to decide if the risk of a stock market earthquake and a trade war are worth fighting for a more favorable agreement with China.  American workers will be watching and hoping their jobs aren't sacrificed in the name of some Utopian view of free trade.