Fix the Trade Deficit, Fix the Economy

These are real numbers that were carefully calculated. This is a real problem that is hurting people, hurting small and mid-sized companies, hurting communities, hurting our tax base and hurting our ability to make a living in the future. And there are real solutions available to fix the problem.

If you saw the movie “Roger & Me,” you saw what happened to Flint, Michigan when GM’s executives moved the jobs out of the country. That movie showed what a trade deficit does. “Roger & Me” came out in 1989 and was really only a small, local look at what was coming to much of the country. In the decades since then, the problem spread to entire regions. This is not some economic dislocation due to changes in the economy; this is regional and even national devastation that doesn’t have to happen and that no country should tolerate.

The trade deficit is huge. It transfers around $1 billion a day out of our country. For those well-to-do elites so worried about the budget deficit instead of American jobs, factories, industries and our ability to make a living in the future, the trade deficit increases our budget deficit by between $78.8 billion and $165.8 billion.

New Report From EPI

A new report from the Economic Policy Institute, “Reducing U.S. trade deficit will generate a manufacturing-based recovery for the United States and Ohio,” written by Robert E. Scott, Helene Jorgensen, and Doug Hall, shows that:

The U.S. goods trade deficit could be reduced by between about $190 billion and $400 billion over the course of three years (modeled in this paper as having started in 2011) by eliminating global currency manipulation. Without any increase in federal spending or taxation, the United States would reap enormous benefits. As this paper explains, over three years a reduction in the U.S. goods trade deficit of this magnitude would:

• Create between 2.2 million and 4.7 million U.S. jobs (equal to between 1.4 percent and 3.0 percent of total nonfarm employment)
• Reduce the national unemployment rate by between 1.0 and 2.1 percentage points
• Create about 620,000 to 1.3 million manufacturing jobs (27.5 percent of all jobs created by eliminating currency manipulation)
• Increase U.S. GDP by between $225.0 billion and $473.7 billion (an increase of between 1.4 percent and 3.1 percent)
• Shrink the federal budget deficit by between $78.8 billion and $165.8 billion (reductions that would continue as long as the trade balance remained stable), as growth in output expands tax receipts and reduces safety net payments

Ohio Senator Sherrod Brown: Multinationals “like the system the way it works.”

On a Thursday call to discuss the report and efforts to fix the problems, Sen. Sherrod Brown, D-Ohio, said that currency manipulation is the largest single cause of our trade deficit. He added,

“Our nation’s record trade deficit is more than just a statistic: it affects real jobs in important industries. When industry and the government get tough on cheaters and enforce our trade laws, America wins. That’s why we need to act now on the recommendations published in this new report—and stand up for Ohio’s workers and businesses.”

On the call I asked Senator Brown who in America is on the other side of this – who is encouraging (i.e. paying) Republicans to block things like the currency manipulation bill. Brown replied that in the last 20 years large companies have followed a different manufacturing strategy to move manufacturing to China and sell back into the U.S. The large multinational companies have benefited, always very large companies. “They like the system the way it works,” he said.

The companies get less expensive labor, less environmental and worker safety regulation, and the currency advantage. It works for these multinationals, and House Speaker John Boehner is listening to them. There is this economic benefit to them, at the expense of smaller companies, companies in the supply chain, American workers and their communities.

The Cause

The trade deficit is caused by one-sided trade agreements that were agreed to because, as Senator Brown referred to, they benefit a few already-wealthy interests in our country. But like when you sell the farm for a bunch of cash now, these trade deals give away our country’s manufacturing ecosystem, lack of enforcement of even those agreements, mercantilist policies in other countries that we do not respond to, violations like currency manipulation and subsidies of various kinds to strategic industries.

Currency manipulation alone is costing us between 2.2 million and 4.7 million U.S. jobs and between 1.0 point and 2.1 points of the unemployment rate. Right now.

A “Shot In The Arm” For Economy

Scott Paul of the Alliance for American Manufacturing said of the report,

“Eliminating our trade deficit would be an incredible shot in the arm for the U.S. economy. We are pleased the EPI report sheds light on this overlooked deficit. We commend Sen. Sherrod Brown for his leadership in working to grow manufacturing jobs in Ohio and the rest of the nation, and we look forward to working with him to enact common-sense solutions.”

Fixes

Fixing currency manipulation would go a long way toward solving the problem. Currency manipulation is the single biggest factor in our huge trade deficit. According to the EPI report, currency manipulation by China and as many as 20 countries is responsible for between $190 billion and $400 billion of our trade deficit, in a single year.

From the EPI report, “Reducing U.S. trade deficit will generate a manufacturing-based recovery for the United States and Ohio,”

Fully eliminating the goods trade deficit requires implementing policies that will help restore demand for U.S. goods and boost supply-side supports. As detailed in this paper, such policies include:

• Greatly expanding investments in manufacturing R&D and technology diffusion programs
• Providing public financial support to small and medium-sized manufacturers
• Developing school-to-work job training systems for non-college-educated workers, including apprenticeship programs modeled on Danish and German models
• Developing new trade policies that support fair, balanced, and sustainable trade
• Planning and implementing manufacturing and traded industry strategies, including establishing an institution akin to Japan’s Ministry of Economy, Trade, and Industry
• Making massive investments in infrastructure, for example by meeting the United States’ $2.2 trillion worth of infrastructure needs over the next five years
• Greatly expanding public and private investments in green and renewable energy technologies

Such steps could lead to the complete elimination of the U.S. goods trade deficit, which would allow U.S. manufacturing to recover most or all of the market share and employment lost since the late 1990s.

Why Act Now?

From the EPI report:

Why now is the time to act

The leading role played by manufacturing in the nation’s recovery from the Great Recession underscores the urgency of addressing the more than decade-long decline in manufacturing employment. Between February 2010, when U.S. employment fell to its lowest point, and October 2012, the nation created 504,000 manufacturing jobs, which constituted 11.1 percent of the 4.5 million jobs created in that period (BLS 2012a). But manufacturing employment declined slightly between July and October 2012. The recent slowing of U.S. manufacturing employment growth, evident also in Ohio and the Midwest, was expected as federal spending under the American Recovery and Reinvestment Act of 2009 wound down. The slowdown suggests that further growth in manufacturing will require additional demand stimulus.

Read the entire EPI report here.

Here are just a few recent articles and posts looking at this problem:

FT: How Berlin and Beijing tilted world trade,

Chinese bond-buying, he writes, is matched by increases in the supply of US bonds because Washington has boosted the fiscal deficit to counter the effect of jobs going abroad. If Chinese bond-buying falls, it will be because there are fewer savings to export, and that will happen only when China boosts consumption, creating demand for, among other things, US goods. US unemployment will fall and so will the fiscal deficit.

Ralph Gomory at Huffington Post, Jobs, Trade, and Mercantilism – Part I – Facing Reality

Our nation’s continuing massive trade deficits are destroying important sectors of American industry and eliminating desperately needed jobs; yet balancing trade is not even on our government’s agenda. This is happening because we are not facing reality, the reality that we are not living in a free trade world but that we are dealing with countries that practice mercantilism.

If we continue to turn a blind eye to this reality, we will become a poor nation.
[. . .]
Our global corporations do not wish to see the negative impact of their actions; they are profiting from the present situation, even if the country is not. They make their goods cheaply abroad aided by foreign subsidies, manipulated exchange rates, and cheap labor, and then import them very profitably into the U.S.

Wall Street is lined up with the global corporations because it too finds the present situation profitable.

Michael Stumo at Trade Reform: Germany uses VAT for export competitiveness. We don’t.

An increased VAT does several things.
* imports are part of the tax base, i.e. imports fund the domestic government;
* exports receive VAT refunds, so they are cheaper;
* allows reduction of other taxes, which is why other countries’ corporate tax rates, for example, are lower than the in the U.S.

Twenty one percent of China’s national government revenue is from border taxes. When imports pay over one-fifth of the taxes, the reduces the burden on domestic citizens and businesses, and enables them to subsidize exports in several ways including VAT rebates and other means.

The bottom line is that a VAT is a powerful tool to use for trade competitiveness.

Scott Paul at USA Today: Obama’s second term foe – China,

What did we get in return for this deal? A trade deficit with that country that keeps shattering records ($295 billion in 2011, $290 billion through November 2012), fueled by a glut of artificially cheap imports that are swamping stateside competition. But it’s hard for working families to benefit from the modestly lower prices on the shelves of retail chains when household incomes have been drastically reduced by the loss of a steady paycheck.

W. Raymond Mills at Trade Reform, Moving Towards Balanced Trade

… unbalanced trade requires cash to move from one country to the other. This can lead to problems if the cash needed to complete the transaction becomes scarce in the trade deficit country. It can also cause problems for the trade deficit country because domestic production of goods and services are the source of national wealth, as Adam Smith said. Sending money overseas to pay for exports (net) means that domestic production has not kept pace with domestic consumption – a situation that weakens the wealth creating capacity of the trade deficit country. Unbalanced trade is a beggar-thy-neighbor activity. Each nation should seek to avoid become a habitual trade deficit country.