Our Trade Deficit Is Our Fault

Jon Basil Utley The American Conservative March 8, 2011

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Trade Deficits Are Made in America // Share|

Jon Basil Utley

Several writers in these pages have urged restrictions on trade with China and other protectionist measures, claiming these would produce large numbers of American jobs.

Although they make compelling arguments, they ignore key reasons for job losses that are mostly of America's own making.

Below are seven factors to consider. The consequences of protectionism would be far more damaging to America than critics of free trade assume. Most of our trade deficits are the result of our own policies. Protectionism is a two-way street and would injure many American companies without bringing back large numbers of factory jobs"”indeed, half of the profits for U.S. firms listed on the S&P 500 index are earned overseas.

American labor has always in the past competed effectively against low-wage foreign competition. Germany today has higher manufacturing wages than those in the United States, yet it has a very favorable trade balance. Obviously there must be other factors responsible for American job losses beside China's lower wages.

1.) America's trade deficit is primarily due to oil, which accounts for some 50 percent of imports. This imbalance could be curtailed by billions of barrels if Washington allowed new domestic drilling in Alaska and offshore in parts of the Atlantic and Pacific coasts. Such drilling would provide hundreds of thousands of solid, mostly blue-collar jobs"”exactly the kind that have been lost in recent decades.

2.) Trade statistics are very misleading. Much manufacturing in China is done for American companies, which gain most of the profits. For example, the Apple iPhone adds $2 billion to the trade deficit with China, although it is entirely designed and owned by Americans and is made of parts imported from Europe and other Asian nations. China's actual input is $6.50 out of the $178 wholesale cost, according to a Wall Street Journal analysis, "Not Really Made in China." It explains that the actual trade deficit with China is about half of what the statistics show.

The same consideration applies to many other imports"”sneakers, for example. A pair of Nike shoes may cost $3 to produce, which goes to China. The rest of the retail price is accounted for by advertising, shipping, design, raw materials, and profits, most of which revert to Americans.

China's imports of raw materials are bought from Latin America, but their value shows as part of our trade deficit with China. Latin Americans, meanwhile, use their surpluses to buy planes and software from the United States.

3.) Large numbers of manufacturing jobs have been lost because of increases in productivity from the computer and communications revolution, not from foreign competition. Add to this the factor of labor-union work rules and spurious law suits that so damage American industry.

4.) Is the dollar too strong relative to other currencies? We already have an example of a nation raising the value of its currency, as protectionists are demanding of China, without making a dent in America's trade imbalances. That was Japan in the 1980s. Its rising currency did not reduce Japanese trade surpluses with America. It did, however, lead to Japanese companies producing more cars here. A cheaper dollar would similarly allow China to buy up more American industry.

5.) Healthcare costs are brutally destructive of lower-wage manufacturing. We pay double the proportion of our gross national product compared to Europeans and Canadians. Health-insurance costs bankrupted two of our auto manufacturers. A worker with a family who earns $30,000 per year can easily cost his employer over $8,000 for health insurance. The high cost of healthcare is our fault, not that of our Chinese competitors.

6.) We are almost the only nation to tax its citizens working abroad. This makes it very expensive for companies to station American executives, salesmen, and engineers overseas.

7.) America's incredibly high military budgets drain many of the best and brightest minds away from the civilian sector. Exorbitant warfare spending also begets high welfare spending"”what is a few more billion for welfare when spending tens of billions for warfare?

Devaluing America's currency or restricting imports is not the way to address job losses. Protectionists should focus on the items above rather than attacking China's surpluses and free trade in general. Free trade has brought about the greatest degree of prosperity and development in history. Our businesses profit tremendously from it. Americans' livelihoods depend on addressing the real sources of our problems, not devaluing our currency, reverting to protectionism, and trying to seal our economy off from the world.

The American Conservative needs the support of readers. Please subscribe or make a contribution today. // Share| 13 Responses to “Trade Deficits Are Made in America” Art R., on March 3rd, 2011 at 12:39 pm Said:

Mr. Utley summarizes his essay with this clichéd mantra of free trade:

Free trade has brought about the greatest degree of prosperity and development in history. Our businesses profit tremendously from it.

To the free trader, I say that there is no such thing as pure free trade between nations, only degrees of same. Nations like Japan, China, and S. Korea practice adversarial trade, whereby they forego the spirit of fairness in order to gain an advantage over their trading partners. They are aided and abetted by the rapaciousness of U.S. big business elites and their political stooges who do their bidding by passing free trade agreements that do immense harm to working class Americans and the U.S. economy in general.

Some of Mr. Utley’s points are valid such as the wastefulness of military spending and the cost of U.S. health care which, incidentally, is close to $7,500 per capita per year vs $2,600 in Japan. This fact should be a major reason why there needs to be a levelling of trade through tariffs.

But other points are off the chart, like the oft-repeated notion that increased productivity, due to the computer and communications “revolution,” has eliminated huge numbers of U.S. jobs. If this were the case, why does IBM now employ 85,000 programmers, researchers and other support personnel in India? How many US IBMers have been forced into early retirement or fired?

We do import huge quantities of petroleum products, 11.5 million barrels per day in 2009, which adds immensely to our trade imbalance. We would need a comprehensive energy policy to make a dent in imports, but this would entail “industrial planning” which is anathema to the free market/free trade types. And even if we did drill wherever there is a hint of petroleum and utilized every enhanced recovery technique there is, we might increase produc

Trade Deficits Are Made in America // Share|

Jon Basil Utley

Several writers in these pages have urged restrictions on trade with China and other protectionist measures, claiming these would produce large numbers of American jobs.

Although they make compelling arguments, they ignore key reasons for job losses that are mostly of America's own making.

6.) We are almost the only nation to tax its citizens working abroad. This makes it very expensive for companies to station American executives, salesmen, and engineers overseas.

Mr. Utley summarizes his essay with this clichéd mantra of free trade:

Free trade has brought about the greatest degree of prosperity and development in history. Our businesses profit tremendously from it.

The notion that the Chinese are only adding grunt labor costs to Apple Computer products (manufactured incidentally by Hon Hai Precision Ltd.) is absurd. The Ipad may be partly designed here, but the manufacturing processes and a lot of the component parts are designed and/or made China. The Chinese ain’t stupid coolies who can only do simple repetitive things as Rupert Murdoch’s rag would have us believe. They learn, improve and innovate. I should remind people that the commercialization of the computer was made possible by something called the “core memory,” developed by Dr. An Wang of China in the early 50′s.

Mr. Utley, exactly how would continuing our free trade policies put the unemployed back to work and in what fields?

Mike W., on March 3rd, 2011 at 2:51 pm Said:

I interested, go to the attached website and view each country’s import restrictions, either through tarriffs or red tape.

So much for Free Trade. We are a bunch of chumps and the world is laughing at us.

http://www.ustr.gov/about-us/press-office/reports-and-publications/archives/2007/2007-national-trade-estimate-report-fo-0?ht

Concerned American, on March 3rd, 2011 at 5:42 pm Said:

I advocate a barter at the border, goods for goods trade policy, where no goods come into the U.S. unless paid for at the dock or border with goods. I would press for the domestication of the use of the U.S. dollar. I think a large part of our problem has been caused by distortions of perception which in turn were caused by the U.S. dollar’s current but fading status as the world’s reserve currency, and barter at the border would take currencies and currency manipulation out of the equation. Also, it would build in the costs of our domestic taxes and regulations into the cost of imports, because our exports, which bear those costs, would be the currency for our imports. As for drilling, of course we should be using whatever we have here, and nuclear power, too. And we should be reforming our tax system so that foreigners are taxed at least as harshly as Americans. Most people do not know that if a foreigner structures his investments properly, he can own U.S. real estate that will never be subject to U.S. estate, gift, or generation-skipping transfer taxes, while an American would be. WTF? Finally, sorry, but as much as I want our troops largely home (especially off the Korean peninsula and out of Japan), we have to reconcile ourselves to spending some beaucoup bucks defending our own borders and constantly upgrading our military capabilities. Remember, the Roman aphorism is if you want peace, prepare for war. The Bushes and neocons twisted it into, if you want peace, fight war – big mistake.

KoJan, on March 3rd, 2011 at 9:47 pm Said:

To Art R. I have a question. Why would comprehensive energy policy entail industrial planning? Is energy not needed by households as well? Your point about drilling is valid. That is why we will eventually have to look at renewables. The sooner, the better. I know many scoff at this. But you correctly state that using resources that are finite will not get us far. I’d say much of what Mr. Utley says is right on the money and the next step should be to find ways how to rectify the current situation. KoJan

john, on March 4th, 2011 at 6:35 am Said:

Trade usually means that country A produces x more efficiently than country B. while county B produces y more efficiently than country A, so it is mutaullly beneficial to trade x, and y. However when,say, country B moves its capital to country A to manufacture its product for sale in country B this is not trade; this is labor arbitrage. Furthermore, why would Latin America shop in The United States when it too can shop in China? Without a vigorous manufacturing sector we will have a country with very wealthy corporate executives on top, no middle class, and service workers with minimum wage jobs servicing newly wealthy foreign tourists.

Downsize DC, on March 4th, 2011 at 12:02 pm Said:

It is easy to rip other nations rather than look at the U.S.’s own monetary policies, taxes, regulations, and government spending.

America’s best trade policy would be to free its own economy.

Thanks to Mr. Utley for setting the record straight.

Roger Kovaciny, on March 4th, 2011 at 1:43 pm Said:

Incoming cargo ships are not incoming battleships, but protectionists who think that they are are actually trying to do to us in peacetime what our enemies try to do to us in wartime–reduce our trade. Our problem is not with incoming imported goods. It’s with incoming shiploads of borrowed money. Deficit spending, not Chinese imports, is what will destroy our economy and our nation.

jsmith, on March 4th, 2011 at 3:27 pm Said:

Mr Utley is correct in quite a few points. Specially 1 3 5 and 7. But as long as Americans keep buying foreign cars over our domestic makes, we will keep on having a trade deficit. Contrast that to Germany where the top ten cars sold there are German made. Not only are they well made, but each German knows that his job and the nation depends on loyalty to his nations products. Again contrast that to Americans who have been sold the notion that all Asian cars are gold. Not only that, but Americans kneel and worship the BMW and Mercedes Benz at the altar. This nation is committing national suicide, and is learning a lesson in poverty. And don’t let me mention letting in 20 to 30 million illegal aliens and their poverty!

Will Binder, on March 4th, 2011 at 9:52 pm Said:

Good points, but please give statistics. How much imported is oil of the trade deficit? 50% but I like the actual # you quote so I can cross check it with Max Keiser, Gerald Celente and Paul Craig Roberts, whom I trust far more than other economists. Paul Craig Roberts claims we need to encourage the manufacturing of American goods,[ as does Mr. Buchanan]. We should therefore not be giving first nation trading status to slave labor states. Unless we wish to have the same standard of living here. According to Mr. Roberts"¦"¦

http://www.youtube.com/watch?v=mMYy9SOMoYM about 17:16 into the clip.

Captain America, on March 5th, 2011 at 12:40 pm Said:

One small, now defunct, manufacturer I’m familiar with (having seen the financials over a number of years) was getting absolutely killed—not by LABOR costs—-but by health care premiums and energy costs.

I’ve heard manufacturers tell me that the whole “high cost of labor” thing is sometimes actually an exaggeration.

Trade Deficits: Made in America! - Hit & Run : Reason Magazine, on March 7th, 2011 at 8:43 am Said:

[...] Whole thing here. [...]

Trade Deficits: Made in America! | Daily Libertarian, on March 7th, 2011 at 9:07 am Said:

[...] Whole thing here. [...]

laurent, on March 7th, 2011 at 11:19 am Said:

Drilling will not ease pain at the pump.

EIA predicts U.S. output will drop by about 170000 barrels a day in 2011 thanks to the ban.

Unfortunately, it’s peanut.

The unrest in the Arab world is threating a production of 25.6 million barrels per day of oil. Today, Saudi Arabia, Libya and Algeria are producing 14 million barrels per day. United Arab Emirates and Kuwait are producing 5 million barrels per day. Iraq and Iran are producing 6.6 million barrels per day

That is about 30 times the Arctic National Wildlife Refuge oil production expected in 2025. That’s 150 times the missing production due to ban in 2011.

As oil prices are set by supply and demand worldwide, even if US was able to stop dependence on Persian Gulf oil, gasoline price will be determined in the Middle East for years to come.

Our Trade Deficit Is Our Fault

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