The trade balance and American competitiveness

Christopher Columbus' trip to unknown waters in the pursuit of international trade routes led to the European discovery of a new continent, which forever changed history. Although the days of intrepid exploration across the world by adventurous businessmen of commercial empires have been left behind, extensive international trade has become a common aspect of society in the 21st century. While I write this memorandum on a computer that was assembled in China, sitting at a dining table built in Sweden while wearing a shirt made in Bangladesh, the effects of trade are subtle but always present. The United States jumped directly into the international market after the economic recovery of the COVID pandemic at a record pace, with Forbes reporting that trade increased by 20% in the first 4 months of 2021. At the end of the year, United States exports were slightly more than $2.5 trillion, while imports reached $3.4 trillion. The trade deficit of 851 billion dollars would be a new record for the country, representing 3.7% of the total GDP of the United States, a jump from 3.2% in 2020 according to the Office of Economic Analysis and the Department of Commerce. This growing trade deficit occurs in the midst of a political climate that heats up the reactivation of economic protectionism, and will surely be at the center of the arguments claiming that the United States is quickly becoming not only uncompetitive, but irrelevant at the stage of international trade.

The logic behind the previous statement seems quite simple. The United States buys more than it sells, while other countries such as China, Japan and Germany buy less than it sells. Basic money management says that a company or person who spends more than he or she earns will go bankrupt, or at best he or she will live paycheck to paycheck struggling to survive economically, while others who spend little and earn more will succeed. In addition, the United States cannot compete and have a trade surplus due to extremely low wages in third world countries. Those third world countries that have extremely low wages encourage companies in the United States to move manufacturing and production away from the United States and to those third world countries. This creates a massive suction of jobs and wages in the United States, causing mass unemployment and poverty, while other countries make it big at our expense by increasing their own exports. This is mentioned by the Economic Policy Institute (EPI), which says that a total of 3.4 million jobs were lost between 2001 and 2015 due to the trade deficit with China alone. The EPI also states that 74.3% (2.6 million) of those jobs lost due to the trade deficit with China were in the manufacturing industry. They also mention that this deficit has also absorbed $180 billion per year in salaries between 2001 and 2011, for non-university graduate workers who cannot compete with Chinese workers whose salaries are only a small fraction of their own.

If the previous narrative is taken literally, it seems convincing, but with just a little pressure it begins to break. First of all, countries are not corporations and international trade is not a zero-sum game. Countries trade when there is a positive incentive for those who participate in trade. If a country were to be worse because of trade, then they simply wouldn't do it because it wouldn't make sense for them to do it. I know that this seems something basic and given for granted, but protectionists surfing the waves of populism do not tend to give importance to the basics.

Secondly, protectionists like to equate wages with labor costs. This is called the "fallacy of high wages" and is explained by economist Thomas Sowell in his book Basic Economics. Wages are measured per hour of work, while labor costs are measured by unit of production, a crucial distinction in international trade. For example, if a worker's wages in the United States are twice as high while producing three times more than a worker in Mexico, the labor cost per production unit would be lower in the United States, despite the fact that their wages are twice as high. Therefore, corporations don't move only because the salaries of others are lower, but they move to where the difference in productivity between the United States and the other country is smaller than their difference in wage rates. Here's the math.

USA. Salary: $10 Production: 15 units Labor cost per production unit in the United States: 66 cents Mexico Salary: $5 Production: 5 units Labor cost per production unit in Mexico: $1 Where would it be cheaper for a Company to produce? Obviously in the United States, even if the salary is 2 times higher.

Thirdly, the assumption that third world countries with low wages will have massive surpluses is simply a disregard for economic rules. One of those rules is that of [Savings - Investments = Exports - Imports] (S-I=X-M), in which both halfs must be negative or positive. The populist protectionist narrative on the shown previously tries to convince us that low-wage nations will be able to attract capital and investment from rich high-wage nations to achieve productivity close to the first world while maintaining low wages. This will cause an increase in its trade surpluses, destroying the economies of the advanced nations. Then, the savings of these countries would be less than their investment, having the left side of the equation in negative, while at the same time it would have more exports than imports, thus having the right side of the positive equation. This is simply impossible, S-I = X-M is not a silly theory, it is a reality for the economy as much as gravity is a reality for humans. Humans cannot break gravity; economists cannot break S-I=X-M.

Fourth, the impact of the trade deficit on employment is full of dishonest arguments and deceptions about the use of data, especially around manufacturing. The narrative of the EPI makes it seem like manufacturing jobs have been disappearing in the US economy since 1976, when big trade deficits began to be the norm. Before 1976, trade was always balanced, sometimes a little surplus, sometimes a little deficit, but balanced in general. Although yes, if you see that, in 1975, before the constant trade deficits, the number of manufacturing jobs as a total proportion of jobs is twice as large as in 2005, the narrative of the PPE sounds plausible. But it is interesting that they are only showing as for back as 1976 and not until 1943, that being the peak.

The truth is that the United States had been deindustrializing for 23 years before 1976, when there was no significant trade deficit. The gross number of manufacturing jobs has remained very stable, always between 12 and 18 million since 1941. The big change has been in productivity, which in 2005 was 6 times higher than in 1959.

Finally, the trade deficit itself is something that the United States should boast of and be proud of. As listed in a Harvard Business Review article, there are three components of a country's balance of payments that must be added to zero. The three components are the balance in the trade of goods, the balance in the trade in services, and the balance of capital inflows. If the trade balance of goods and services is negative, then capital inflows must be positive, which is the case in the United States. Through this, it is important to note that the last time the United States had a considerable trade surplus of goods was when it was exporting an unprecedented amount of capital in the Marshall Plan to rebuild Europe after World War II. Since then, the United States has been the most attractive country in which to invest capital. It is because it has the largest and richest market in the world, it has the most used currency, and its uninterrupted protection of investor rights. Not only that, the United States is leading the world in a transition to a service-based economy while having the largest commercial surplus of services.

This is exactly the reason why it has a trade deficit of goods; it is not because it is economically uncompetitive, it is because it is the best and safest investment in the world. After all, S-I = X-M will explain it quickly. Negative on the one hand is negative on the other, high investment = high imports. If what the last protectionist wave on both sides of the political spectrum want is to reduce the trade deficit of goods, then they do not need to look beyond the presidencies of Democrat Jimmy Carter and Republican George Bush. Inheriting an economy that goes from reasonably to very well and leave it working badly, making it considerably unattractive for international investments. Surely this sounds like a politically winning strategy.

Bibliografía

Coblin, A. (2019, 28 de agosto). El déficit comercial no nos cuesta puestos de trabajo. American Enterprise Institute - AEI. https://www.aei.org/foreign-and-defense-policy/the-trade-deficit-does-not-cost-us-jobs/

El crecimiento del déficit comercial entre Estados Unidos y China entre 2001 y 2015 costó 3,4 millones de empleos: He aquí cómo reequilibrar el comercio y reconstruir la manufactura estadounidense. (2017). Instituto de Política Económica. https://www.epi.org/publication/growth-in-u-s-china-trade-deficit-between-2001-and-2015-cost-3-4-million-jobs-heres-how-to-rebalance-trade-and-rebuild-american-manufacturing/

Krugman, P. (1997). Pop Internationalism (The MIT Press) (Edición revisada). La prensa del MIT.

↑ Mutikani, L. (2022, 8 de febrero). Las sólidas importaciones impulsan el déficit comercial de Estados Unidos a un nivel récord en 2021. Reuters. https://www.reuters.com/business/us-trade-deficit-rises-december-deficit-2021-largest-record-2022-02-08/

Sowell, T. (2022). Economía Básica 4ª (cuarta) edición. Thomas Sowell.

El déficit comercial de Estados Unidos explotó en 2021: el precio de 30 años de globalización desenfrenada. (2022, 10 de febrero). Calle del Lobo. https://wolfstreet.com/2022/02/08/us-trade-deficit-explodes-the-price-of-30-years-of-rampant-globalization/

Por qué el déficit comercial de Estados Unidos puede ser una señal de una economía saludable. (2018, 29 de julio). Harvard Business Review. https://hbr.org/2018/07/why-the-u-s-trade-deficit-can-be-a-sign-of-a-healthy-economy