(What’s Left of) Our Economy: Which Sectors are America’s Biggest Trade Winners and Losers?

Tags

commmodities, exports, imports, manufactures, Trade, trade balances, Trade Deficits, trade surpluses, {What's Left of) Our Economy

Welcome to installment two of RealityChek‘s deep dive into new U.S. data that enable us to compare the economy’s merchandise trade performance during the first half of this year with that of the first half of last year. Yesterday, we reviewed America’s biggest goods exporters and importers, and trade deficit and trade surplus sectors – all on a stand-still basis. Today, we’ll look at the fastest and slowest merchandise export and import growers over the last year, and the sectors whose trade balances have improved or worsened to the greatest extents.

Because the subject today is rates of change, and in order to avoid results distorted by unusually small numbers (e.g., the ease with which big percentage changes in a given indicator are resulting from the use of unusually modest base figures), the following lists are drawn from larger lists of the top 50 goods industries in these performance categories. And fortunately, because U.S. imports and exports are relatively highly concentrated, drawing the line at the top 50 costs almost nothing in terms of creating a very representative sample.

Also, as was the case yesterday, these industry categories examined here are those drawn from the six-digit level of the North American Industry Classification System (NAICS), the federal government’s main system for slicing and dicing the economy. The one exception: aerospace. Because of data limitations in that sector, the five-digit data, which combine final products and their parts and components, are presented.

Let’s start with the ten goods industries whose exports, measured in value terms, grew fastest between the first half of last year and the first half of this year, along with the growth rates:

1. Non-anthracite coal & petroleum gases: +180.9 percent

2. Crude oil & natural gas: +109.0 percent

3. Cotton: +89.9 percent

4. LNG: +62.4 percent

5. Semiconductor manufacturing equipment: +58.2 percent

6. Primary smelted non-ferrous metals: +54.0 percent

7. Soybeans: +27.6 percent

8. Petroleum refinery products: +26.1 percent

9. Motor vehicle engines & engine parts: +19.2 percent

10. Corn: +18.7 percent

As is clear, five of these ten sectors are commodity sectors, which add relatively little value to the economy. Two more are industries where relatively little processing, and thus value-adding, takes place (liquid natural gas and the smelted metals). Only three could be considered high value manufactures – the types of industries that historically have made outsized contributions in terms of productivity growth and innovation, and that tend to pay high wages.

Here are the ten industries with the worst export performances on a year-to-date basis:

1. Medicinal & botanical drugs & vitamins: -25.4 percent

2. Turbines & turbine generator sets: -15.1 percent

3. Computer parts: -9.4 percent

4. Autos and light trucks: -8.3 percent

5. Telecomms equipment: -6.6 percent

6. Electricity measuring & test instruments: -5.9 percent

7. Aerospace: -4.0 percent (5-digit, due to reporting limits)

7. Surgical and medical instruments: -1.1 percent

8. Electro-medical apparatus: -0.9 percent

9. Industrial valves: -0.1 percent

9. Computers: -0.1 percent

10. Surgical appliances & supplies: +0.2 percent

10. Analytical laboratory instruments: +0.2 percent

As should be obvious, every single sector here belongs in the high-value manufactures category.

Now for the industries that saw the fastest import growth between the first six months of 2016 and the first six months of this year:

1. Switchgear and switchboard apparatus: +174.3 percent

2. Crude oil and natural gas: +53.7 percent

3. Printed circuit assemblies: +44.2 percent

4. Iron and steel: +41.3 percent

5. Primary aluminum: +38.6 percent

6. Non-diagnostic biological products: +29.4 percent

7. Petroleum refinery products: +22.2 percent

8. Miscellaneous non-citrus fruits: +20.8 percent

9. Motors and generators: +13.7 percent

10. Lighting equipment: +12.7 percent

10. Surgical appliances and supplies: +12.7 percent

This group, too is dominated by high-value industries. And look at those numbers for steel and aluminum, two sectors where the Trump administration has been talking about imposing national security related tariffs

The list of sectors with the worst import growth – indeed, where imports have declined the most – is much more of a mixed bag:

1. Medicinal and botanical drugs and vitamins: -39.4 percent

2. Computer parts: -12.3 percent

3. Women’s and girl’s blouses/shirts: -12.1 percent

4. Primary smelted non-ferrous metals: -8.8 percent

5. Men’s and boys non-work shirt shirts: -8.3 percent

6. Non-costume jewelry: -6.7 percent

7. Semiconductors and related devices: -6.4 percent

8. Audio and video equipment: -5.3 percent

9. Jewelers materials/lapidary work: -4.1 percent

10. Aerospace products: -3.4 percent

Now for the trade balance figures. Remember, they’re especially important because economic theory tells us they’re strong indicators of which industries the United States trades most successfully – and therefore which industries have the brightest futures.

Here are the ten sectors where the trade balance has shown the greatest improvement from the first half of 2016 to the first half of 2017. They’re presented in percentage terms except where deficits have turned into surpluses :

1. Primary smelted non-ferrous metals: $5.00 billion deficit to $0.76 billion surplus

2. Relays and industrial controls: $1.27 billion deficit to $2.26 billion surplus

3. Semiconductors: $1.48 billion deficit to $1.01 billion surplus

4. Non-costume jewelry: +574.44 percent

5. Drawn/rolled/extruded miscellaneous non-ferrous metals: +305.69 percent

6. Miscellaneous basic inorganic chemicals: +300.00 percent

7. Non-anthracite coal and petroleum gases: +224.29 percent

8. Medicinal and botanical drugs and vitamins: +104.35 percent

9. Cotton: +91.09 percent

10. Semiconductor manufacturing equipment: +64.82 percent

Encouragingly, high value manufacturing is pretty well represented here.

And now for those sectors that experienced the worst deterioration in their trade balances.

1. Non-diagnostic biological products: +856.00 percent.

2. Switchboard and switchgear apparatus: +437.35 percent

3. Oil and gas field machinery and equipment: +130.00 percent

4. Iron and steel: +76.25 percent

5. Surgical appliances and supplies: +71.55 percent

6. Printed circuit assemblies: +47.08 percent

7. Crude oil and natural gas: +45.30 percent

8. Primary aluminum: +42.73 percent

9. Turbines and turbine generator sets: +39.46 percent

10. Copper and nickel ores: +35.96 percent

High-value manufactures are well represented here, too – and this list, too, includes steel and aluminum. At the same time, these rates of deterioration are generally smaller than the rates of improvement in the sectors where trade balances changed for the better. So that’s an encouraging development as well.

Of course, whenever “trade” comes up, the word “China” usually isn’t far behind, especially since the Trump administration just announced it was beginning a process that could lead to tariffs on Chinese goods in response to Beijing’s practice of forcing companies to hand over at least some of their best technology in exchange for the privilege of doing business in the vast Chinese market, and to the more conventional intellectual property theft that’s still SOP in the PRC. So tomorrow, RealityChek takes a deep dive into U.S.-China goods trade.

(What’s Left of) Our Economy: Into the (Crucial!) Weeds on America’s Trade Performance

Tags

comparative advantage, exports, imports, manufacturing, Trade, trade balances, Trade Deficits, trade surpluses, {What's Left of) Our Economy

The U.S. International Trade Commission has finally added the June American trade statistics to its wonderful Trade Dataweb, an invaluable database and search engine. So now it’s possible to view in needed detail the nation’s trade performance for the first half of 2017, and the first groups of these figures is presented below.

Just so you’ll know exactly what you’re seeing, these are results according to the most granular level of the North American Industry Classification System (NAICS), the federal government’s main system for slicing and dicing industry-specific economic data. I like this six-digit level because it draws the greatest number of distinctions between final manufactured products and the parts and components of these products. This distinction is critical because the rapid growth in recent decades of global supply chains (i.e., the rapid growth of American production offshoring) means that a large percentage of U.S. and global trade consists of trade in these manufacturing inputs.

Another technical note: Because trade data for major aerospace products aren’t made public in order to protect corporate information considered proprietary, the six-digit NAICS results in this sector are unreliable, and the five-digit level data are being used.

So here are the nation’s top ten goods exports for the first half of this year, and how their performance has changed in dollar terms since the first half of 2016:

1. Aerospace: -4.0 percent

2. Petroleum refinery products: +26.1 percent

3. Autos & light trucks: -8.5 percent

4. Special classification provisions: +9.7 percent

5. Semiconductors & related devices: +4.7 percent

6. Miscellaneous auto parts: +1.4 percent

7. Miscellaneous basic organic chemicals: +3.7 percent

8. Pharmaceuticals: +3.9 percent

9. Plastics materials & resins: +6.3 percent

10. Primary smelted non-ferrous metals: +54.0 percent

It’s an encouraging list because most of these products are high-value manufactures, which historically have been very productive, still create lots of high-wage jobs, and incorporate lots of innovation. At the same time, these export growth rates seem pretty meh.

Here is a similar list of the top ten goods import categories and how their levels have changed on a year-to-date basis:

1. Autos & light trucks: +4.5 percent

2. Crude oil & natural gas: +53.7 percent

3. Pharmaceuticals: +2.3 percent

4. Goods returned from Canada: +4.3 percent

5. Broadcast & wireless communications equipment: +10.3 percent

6. Computers: +6.2 percent

7. Telecomms equip: +8.2 percent

8. Aerospace products: -3.4 percent

9. Petroleum refinery products: +22.2 percent

10. Semiconductors & related devices: -6.4 percent

This looks like a higher value list, and the growth rates seem somewhat higher. So that appears less bullish.

The real test of trade performance, though, has to do with trade balances. For the theory of comparative advantage that’s at the heart of modern thinking and policy in the trade field tells us that economies that trade goods and services most successfully (as indicated by surpluses) will wind up as the most successful producers of those goods. Conversely, economies that trade goods and services least successfully will wind up as the least successful producers of those goods. How else could unfettered trade flows create an optimal global division of labor – which is supposed to be their prime economic virtue according to mainstream economics?

So here are the ten goods sectors that wracked up the biggest trade surpluses in the first half of this year, and how those balances compare with the first-half 2016 figures:

1. Aerospace products: -2.03 percent

2. Petroleum refinery products: +33.11 percent

3. Plastics materials & resins: +4.73 percent

4. Soybeans: +28.21 percent

5. Other special classification provns: +7.13 percent

6. Corn: +20.26 percent

7. Waste & scrap: -7.82 percent

8. LNG: +56.54 percent

9. Semiconductor machinery: +64.73 percent

10. Non-anthracite coal & natural gases: +223.22 percent

If you recognize the outsize economic value of manufacturing, this is a less encouraging list, since fully half the products are commodities. Nor is the growth rate of the surpluses in these manufacturing sectors impressive except for semiconductor production equipment and petroleum refinery products.

And here’s the trade balance flip side: the sectors with the top ten U.S. goods trade deficits and their rates of change:

1. Autos & light trucks: +10.64 percent

2. Crude oil & nat gas: +45.31 percent

3. Goods returned from Canada: +4.25 percent

4. Computers: +1.16 percent

5. Broadcast & wireless communications equip.: +11.06 percent

6. Telecomms equipment: +19.10 percent

7. Printed circuit assemblies: +47.12 percent

8. Audio & video equipment: -11.50 percent

9. Institutional furniture: +8.56 percent

10. Iron & steel: +76.28 percent

This list is full of high-value manufactures – so that should be a concern. Ditto for the growth rates, which are mainly well into the double-digits. And check out the number for steel — a sector that’s been making headlines because of the Trump administration’s consideration of national security-related tariffs.  

Coming up tomorrow: the best and worst export and import growers, and the sectors with the most rapidly improving and the most rapidly worsening trade balances.

(What’s Left of) Our Economy: Will Trump Take Ford’s New China Trade Hint?

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(What's Left of) Our Economy Trump, automotive, border adjustment tax, China, Ford Motor Company, imports, Jobs, manufacturing, Mexico, NAFTA, North American Free Trade Agreement, offshoring, tariffs, trade agreements, trade balances, Trade Deficits

President Trump and his administration have certainly been active on the trade front in their first months in office, both in word and deed. The question remains whether they’ve been effective, and a breaking news story has just added powerfully to the doubters’ case.

The news has to do with Ford Motor Company’s announcement that it will scrap plans to relocate its remaining small car production from the United States to Mexico and supply the American market from an existing plant in Hermosillo, and instead import the vehicles from a retooled factory in China. The initial Ford production decision came under fire from Mr. Trump, and the company’s reaction – a rejiggered Mexico plan – looked chancy for two main reasons:

First, the president had declared his intention to renegotiate the North American Free Trade Agreement (NAFTA) in large measure to stop such production offshoring. Second, the staunchly pro-trade Republican leaders of the GOP-controlled House of Representatives had been pushing a border adjustment tax proposal that would have imposed new costs on imports from anywhere.

Ford has now underscored why both opponents and supporters of a transformed, less import-friendly U.S. trade policy have been right in one of their major criticisms of Mr. Trump’s emerging strategy: A tight focus on bilateral trade issues and balances overlooks the ability of multinational companies to shift export-oriented production in order to evade country-specific tariffs or other trade curbs.

Not that business’ ability to hopscotch is unlimited. The massive level of sunk corporate costs in export-focused production in China, for example, won’t always be easy to walk away from. And not all countries offer comparable advantages to manufacturers. So given, for example, that China accounts for more than 43 percent of the American merchandise trade deficit, or that Mexico’s geography makes it such an unusually attractive base for selling to U.S. customers, focusing on individual-country or regional priorities often makes good sense.

It’s also legitimate in principle to base trade preferences on non-economic aims, like national security (e.g., rewarding allies or strengthening third world economies against the appeal of terrorism) – though Mr. Trump has expressed strong skepticism for this approach, notably in his Inaugural Address. And of course, prioritization is often the key to any successful public policy.

But what’s especially strange about the Trump trade strategy so far is the president’s indifference – at best – to the border adjustment tax idea. On top of undercutting corporate tariff arbitrage strategies by levying a tax on all imports (and encouraging exports), the measure would also bring in revenue needed to finance crucial domestic needs like infrastructure and healthcare reform without completely busting the federal budget. And its passage would by no means preclude addressing special trade priorities of all kinds with additional restrictions.

Ford’s new production announcement is just the latest in a series of comments from Corporate America that bear out one of President Trump’s central insights: that trade policy changes can decisively influence corporate sourcing decisions to America’s benefit. Now, however, he needs to recognize that his essential goal of using trade restrictions to lure valuable manufacturing production and jobs back to the United States requires policies with global scope. The half- (at best) measures he’s favored so far are just too easily gamed.

(What’s Left of) Our Economy: Why Ag Fears Mustn’t Drive Trump’s NAFTA Revamp

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agriculture, automotive, exports, imports, Jacob Bunge, manufacturing, Mexico, NAFTA, North American Free Trade Agreement, offshoring, The Wall Street Journal, Trade, Trade Deficits, Trump, {What's Left of) Our Economy

You have to hand it to the American agriculture industry: It has great lobbyists and public relations flacks. Just look at the job they’ve done convincing the Trump administration to pay special attention to the farm sector’s concerns when renegotiating the North American Free Trade Agreement (NAFTA) with Mexico and Canada. And as made clear by The Wall Street Journal today, they’re keeping the pressure on in an effort to convince the president that the United States doesn’t hold such overwhelming leverage in these talks with Mexico in particular.

No one can blame ag from doing its job. But maybe the press could do a somewhat better job of providing valuable context, as the Journal article today simply didn’t?

It’s indeed noteworthy, as The Journal‘s Jacob Bunge reported, that American farm exports to Mexico have fallen so far this year, especially given that Mexico is the third largest foreign market for these goods. Moreover, it does look like the drop stems at least partly from Mexico’s search for alternatives to U.S. suppliers in order to create NAFTA revamp bargaining chips.

But a broader examination of bilateral trade flows shows that, however important, agriculture doesn’t deserve pride of place in America’s trade negotiations – with Mexico or any other countries. First of all, according to the U.S. Bureau of Economic Analysis, last year, agriculture (along with forestry, fishing, and hunting) comprised 0.9 percent of the American economy on a value-added basis. Manufacturing represented 11.7 percent.

Last year, moreover, manufactures exports (of $1.05127 trillion) topped agricultural exports ($134.88 billion) by a factor of nearly eight. It’s true that agriculture ran a trade surplus and manufacturing an immense deficit. But the former – about $20 billion – was hardly an economic game-changer, and that was especially so considering the nearly $862 billion scale of the latter.

U.S.-Mexico trade tells a similar story: According to The Journal, 2016 saw America sell $18 billion worth of agricultural products to Mexico. Manufacturing exports were about eight times as great: just over $143 billion.

But there are some big problems with these manufacturing exports. For example, they’re much more than offset by U.S. manufactures imports from Mexico. In fact, since 2009 (the year the current recovery began), this bilateral trade deficit has risen more than twice as fast (by 125 percent) than that with China (52.56 percent).

Moreover, Trump is right about much of this imbalance resulting from NAFTA-induced American production offshoring to Mexico that aims to sell back into the United States. That’s had much to do with the 1990-2013 drop in the United States’ share of North American light vehicle production from 78 to 64 percent, and the rise in Mexico’s share from six to 19 percent. That’s also had much to do with the more than tripling of the U.S. bilateral trade deficit in autos and light trucks since NAFTA’s signing.

In fact, in the first eleven months of 2016, Mexico exported nearly 80 percent of the 3.22 million autos it produced, and fully 77 percent of them were sent north of the border.

As a result, auto industry leaders have plainly stated that without the unfettered access NAFTA provides to the American market, and without the incentives to produce in super-cheap and largely unregulated Mexico created by the treaty, most of their auto investment in Mexico would lose its raison d’etre.

No one is calling for neglecting America’s farm sector during the NAFTA renegotiation. But the outsized role played by manufacturing, and manufacturing trade deficits in regional trade, along with manufacturing’s historic role as the United States’ productivity growth and innovation leader, couldn’t make clearer that letting ag export fears dominate this economic diplomacy would be a classic case of letting the tail wag the dog.

(What’s Left of) Our Economy: Where Trump Deserves High, Low, and “Incomplete” Marks on Germany Trade

Tags

advanced manufacturing, automotive, commodities, comparative advantage, Financial Crisis, Germany, Global Imbalances, Great Recession, innovation, manufacturing, productivity, Trade, Trade Deficits, trade surpluses, Trump, {What's Left of) Our Economy

As I’ve suggested, President Trump has big, valid points to make about Germany’s auto trade with the United States. Not only does America run an enormous deficit with Germany in vehicles and parts, but claims that Germany deserves great praise from Washington because it makes so many vehicles in the United States are completely unjustified. For they overlook its companies’ very low levels of U.S. content and only very modest improvement on this score. That is, German vehicles are overwhelmingly screwed together in the United States, and therefore add much much less value to the American economy than autos made with domestic parts.

The trouble is that America’s troubles with German trade policies greatly transcend the automotive industry and, to a great extent, Germany. I’ve previously written that there’s a fundamental problem that both the administration and it’s critics are missing:  Germany’s economy, like China’s and many others around the world, is simply not structured in such a way as to make mutually beneficial trade with the United States possible.

But there’s another big U.S.-Germany trade issue that needs highlighting, along with a major danger that Bonn’s approach to trade is creating for the entire world – at least in the medium or long-term.

That other U.S. Germany trade problem has to do with the makeup of bilateral commerce. If you look at the nature of what the United States trades most successfully with Germany and vice versa, you find that the former category contains a mix of high value manufactures and commodities, while the latter is dominated by advanced industrial goods. Here are lists of the sectors in which America last year ran its biggest trade surpluses and deficits with Germany. (To the surplus list should be added – prominently – aircraft, which are not counted accurately in the U.S. International Trade Commission database I’m relying on.)

Top ten U.S. trade surpluses with Germany: 

glass products 

tree nuts 

soybeans 

computers 

non-costume jewelry 

non-anthracite coal & petroleum gases 

fin-fish products

computer parts 

surgical appliances and supplies 

pulp mill products 

 

Top ten US deficits with Germany

autos and light trucks 

pharmaceuticals

goods returned from Canada 

motor vehicle transmissions and transmission parts

aircraft engines and engine parts

construction machinery

miscellaneous general purpose machinery 

miscellaneous basic org chemicals 

miscellaneous engine equipment 

motor vehicle parts

These results are disturbing because, contrary to the superficial conventional wisdom, if you take seriously standard trade theory and its core concept of comparative advantage, sectoral trade balances matter tremendously. For the main idea behind the freest possible international trade is structuring the world economy so as to enable those countries most proficient at producing various goods and services to dominate their output. So surpluses and deficits in different industries show which countries are passing and failing this test – and thus which countries look likely eventually to control worldwide supplies of the sophisticated goods that create so many high wage jobs and foster so much innovation and productivity growth.

Since the U.S.-Germany data aren’t U.S.-global data, in theory they could be anomalies. In other words, Americans could be doing better with the world as a whole, and therefore, the nation’s prospects in high value industries could be a lot brighter. Unfortunately, that’s not the case at all. The makeup of U.S.-Germany trade isn’t terribly different from the makeup of U.S. global trade, in that America’s trade winners are, again, a mix of commodities and high value goods (again, including aircraft), and its losers are nearly all advanced sectors.

Top ten US surpluses globally

petroleum refinery prods

soybeans

special classification goods

plastics materials andcresins

waste and scrap

corn

liquid natural gas

semicaonductor manufacturing equipment

non-poultry meat products

turbines and turbine generator sets

 

Top ten US deficits globally

autos and light trucks

crude oil and natural gas

goods returned from Canada

broadcast and wireless communications equipment

computers

pharmaceutical products

telecommunications equipment

audio and video equipment

aircraft engines and engine parts

games, toys, and children’s vehicles

Yet Germany also is contributing significantly to a major trade-related threat that threatens the entire world, not just the United States. I’ve repeatedly spotlighted blue chip academic research concluding that unprecedented global imbalances centered on American trade shortfalls were instrumental in setting the stage for the last global financial crisis and the painful recession that followed. Worse, evidence keeps accumulating that international commerce is becoming worrisomely lopsided again, and that Germany’s overall international surpluses – currently the world’s largest – have generated much of the problem.

Indeed, a valuable reminder came in this morning’s Washington Post:

“[G]ermany is one of a number of countries, including China, Japan, and South Korea that are now saving far more than they are either consuming or investing….At some point, the world will be unable to absorb the capital surpluses of Germany, China and others, leading to another painful correction that might undermine the liberal order.”

Interestingly, Germany itself has indirectly acknowledged these risks, and hinted that it recognizes some responsibility to get the surpluses down. Unfortunately, Berlin has demonstrated few signs of following through. So although some of President Trump’s focus on the German trade issue seems off target, it’s also clear that the sense of urgency he’s brought to the issue, from both an American and global standpoint, is not only appropriate, but necessary.

(What’s Left of) Our Economy: All the Trade Fakeonomics That’s Fit to Print

Tags

China, globalization, John Maynard Keynes, Mainstream Media, Paul Krugman, Peter S. Goodman, The New York Times, Trade, Trade Deficits, Trump, US-China summit, World Trade Organization, WTO, {What's Left of) Our Economy

Last week’s U.S.-China summit turned out to be as close to a nothing-burger as any meeting between the leaders of the world’s two most important countries could possibly be. But at least one useful purpose was served by the understandably suspenseful run-up to this eagerly anticipated first direct encounter between President Trump and the human face of the economic rival he blasted during his White House campaign: It reminded once again how relentlessly terrible Mainstream Media coverage of trade and globalization issues tends to be.

Any number of reports and columns dealing with the summit and the surrounding economic issues deserves targeting by buckets of rotten tomatoes. Worthy of special attention, however, was a “news analysis” on the economics of trade and U.S.-China trade by New York Times correspondent Peter S. Goodman. Indeed, his April 5 article, “Behind Trump’s Trade Deficit Obsession: Deficient Analysis” was so permeated with fakeonomics and outright howlers that even zeroing in on the following three will produce a pretty lengthy post. 

First, Goodman portrays as detached from “economic reality,” President Trump’s belief that “international trade is a zero-sum affair, as if every country were jockeying for a share of forever limited amounts of business.” Instead, according to Goodman, “Trade is not zero-sum. Expanded trade has historically tended to support economic growth, which generates more spoils to be divvied up for all.”

That may indeed be what the economics textbooks say. It may even be what many economists have told Goodman. But this claim misses a far more important reality. Whatever the import of trade balances in a strongly or even normally growing world, the world of recent years hasn’t fit that description. Why didn’t Goodman note that – or an equally important point that economists such as John Maynard Keynes and his own newspaper’s Paul Krugman have observed: In today’s slow growth world (to quote the latter) “mercantilism makes a fair bit of sense”? And of course the corollary is equally true: Countering that mercantilism is sensible, too.

Second, Goodman correctly reports that “Economists generally dismiss bilateral trade deficits as essentially meaningless, for reasons easily recognizable in the rest of everyday life. Most people surely run lopsided trade deficits with their dentists, handing these professionals their dollars without expecting them to purchase anything in return. One may assume that successful dentists will distribute their profits throughout the economy — on marketing, accounting, laundry and streaming music services. One way or another, these dollars generate jobs and income for other people. So it is with countries.”

But apparently, Goodman doesn’t believe that his “news analysis” mandate permits him to analyze this particular statement. If it did, he’d surely recognize that this analogy has nothing do with America’s current circumstances.

For starters, this comparison with everyday life is generally used by economists to illustrate the virtues of specialization – which unfettered trade enhances in theory and often in fact. That is, no one need worry about running a trade deficit with his or her dentist because attempting to take care of their own dental needs would be a foolish waste of their talents, resources, and time. Far better to leave that responsibility to someone with expertise and experience. And this strategy is viable because patients presumably can offer the dentist equally valuable services, or (in a more complex model), because the total amount of goods and or services that patients can offer to all of the merchants that they patronize roughly balance the amount of goods and services that the patients consume.

In other words, patients can run trade deficits with their dentists and remain financially solvent because they are earning the income to pay for these services by successfully “exporting” their own output.

Of course, this is far from the position in which the United States finds itself, since its global trade is in deep deficit, and has been so for many decades. Its economy has remained viable because it’s been able to finance those deficits by a combination of selling off assets and ever more borrowing. Its ability to borrow at affordable rates, in turn, largely reflects the reserve currency role of the dollar – which itself stems from the nation’s past record as a matchless creator of real wealth, its still world-class financial markets, and the lack of any suitable alternative. If Goodman thinks this situation is fine and dandy, he should at least say so. Then he should try remembering how similar circumstances led to the entire world economy’s near-meltdown less than ten years ago.

The financial crisis also should have taught Goodman how unrealistic it has become to expect that “one way or another,” America’s creditors will recycle their trade surplus earnings back into the U.S. economy that generate “jobs and income.” For as I’ve explained frequently, the very offshoring-happy trade policies of so little concern to Goodman (and the rest of the American establishment) greatly reduced the odds that capital inflows would be used productively (e.g., on new factories and labs) and greatly increased the odds that they would be used instead to finance consumption and crackpot finance. Responsible and productive use of recycled trade surpluses is also unlikely when they reach the mammoth scale seen during the bubble decade. For the very abundance of cheap credit greatly erodes the incentive to use it prudently. 

As for the bilateral deficits, it is indeed reasonable to downplay them – when the global deficit is fairly evenly distributed across a nation’s foreign trade partners. When nearly half of the total merchandise deficit is concentrated in U.S.-China trade, as is the case now, bilateral deficits clearly count for a great deal – unless the importance of trade deficits is discounted completely.

In fact, like Goodman, we can analogize to daily life: If an individual or family’s over-consumption is highly concentrated in a single product or service area, that’s a conspicuous target for belt-tightening.

Third, it was nothing less than jaw-dropping to see Goodman emphasize that “even if China were a paragon of fair trading practices, it would almost certainly run a surplus with the United States. Despite tremendous economic advances, China remains a relatively low-income country, home to hundreds of millions of people who cannot afford the more sophisticated fruits of the American economy.”

Just recall: This statement is being made a quarter century after the United States decided to prioritize the expansion of trade with China, and a decade-and-a-half after the landmark decision to admit China into the World Trade Organization – which was based on predictions that China would soon become a market whose growth would contribute to America’s prosperity.

If after all this time, China is still too poor to be able to support a reasonably balanced trade relationship with the United States, then its at least arguable to conclude that liberalizing trade with China so rapidly was a major mistake and was sold to the American public with completely erroneous arguments. It’s also crucial to remember that during the vigorous China trade debates that surrounded those decisions, numerous critics predicted that such imbalances would result – and in part precisely because China’s very low income levels made export bonanza forecasts so ludicrous.

But strangely, none of their views was included in Goodman’s article. Apparently being right isn’t news that’s fit to print.

(What’s Left of) Our Economy: Latest Trade Deficit Scuffles Still Missing Lessons of 2008

Tags

bubbles, finance, Financial Crisis, free trade agreements, G20, Germany, Global Imbalances, investment, Japan, manufacturing, offshoring, tax reform, Trade, Trade Deficits, trade policy, trade surpluses, Trump, Wall Street, {What's Left of) Our Economy

Roughly ten years after it broke out, it’s still incredibly rare to see economists or pundits link U.S. and resulting global trade imbalances with the financial crisis. So I’m always thrilled – as I tweeted this past week – to see it ever happen. All the same, even this insightful column by Reuters’ Edward Hadas simply dances around the crucial link between these imbalances and American trade policies, and in particular, their offshoring-friendly nature.

In a March 15 essay, Hadas commented on the German (and other countries’) trade surpluses that have attracted such attention this past week for two main reasons: German Chancellor Angela Merkel’s first-ever meeting with President Trump, and a conclave taking place at the same time of the finance chiefs of the world’s 20 leading economies (the so-called G20). The author’s main contention is indisputable as far as it goes. According to Hadas, the real problem with these imbalances is financial:

“The euros, pounds and dollars which Germany, Korea et al accumulate inevitably land in the global financial system. There would be no problem – only gains all round – if these monies funded valuable infrastructure, productive factories and other assets which can generate a reasonable economic return.

“Too often, though, though, the extra currency winds up supporting counterproductive finance. It backs ultimately ruinous property speculation, lends support to chronically weak governments, encourages unsustainable consumer spending and destabilises developing economies, not to mention enriching banks and bankers and stimulating corruption. A typical example: the recycled dollars from the U.S. trade deficit helped fund the American housing bubble whose pop created the 2008 crisis.”

But what Hadas – and so many others – fail to do is explain adequately why deficit countries (like the United States) make such dangerously shortsighted choices with their windfalls. Three main (and not mutually exclusive) reasons have been served up. First, financial systems in the deficit countries (especially the United States, which runs the biggest deficits) have over-rewarded uses of capital that produce the fastest possible payoffs, and under-reward longer-term projects. The result is too much investment that encourages speculation, financial monkey business, and simple consumption, and too little investment that builds factories and laboratories and funds other activities that create wealth more slowly, but on a more sustainable basis.

Second, such irresponsible uses of capital have become practically inevitable if only because the deficits have been so enormous, and so much money has become available. When anything is in such abundance, and therefore costs so little, most economists would agree that there’s little reason to use it carefully. After all, it looks like a sure bet that more of that thing at very attractive prices will be readily available.

A somewhat different version of this argument has to do with what economists call “moral hazard.” It argues that the American financial system used over-abundant money so recklessly at least partly because investors felt certain that they’d get bailed out of most or all of their mistakes by government. So why not take maximum advantage of what seems to be a “heads, we win; tails, we lose” proposition?

The third explanation for the irresponsible use of resources focuses on the consumption-heavy nature of the economies of the deficit countries. (This argument also tends to note that the surplus countries frequently try to limit and even depress consumption.) The more capital they take in, in other words, the more such spending (as opposed to productive investment) is likeliest to result either because such behavior is encouraged by government, because a “live for today” has been produced by that country’s culture, or because of some combination of the two.

Whenever something as a big as a global financial crisis strikes, many culprits are responsible. And all of the above explanations should be taken very seriously (along with others, like lax financial regulation). But what Hadas and all the rest continue to miss is how the world trade system, national trade policies, and the trade flows they have fostered have actively fostered in deficit countries like the United States a neglect of productive activities like manufacturing (which is so heavily traded).

Specifically, as Washington in the 1990s and 2000s signed more and more trade agreements structured to encourage multinational companies from all over the world to supply U.S. consumers from locations in super low-cost and virtually unregulated developing countries like China and Mexico, American leaders and other elites (e.g., in the media) naturally sought to rationalize their decisions by spreading the message that sectors of the economy like manufacturing (and the income loss produced by the accelerated offshoring that rippled throughout so much of the Main Street economy) could be neglected with impunity. And the administration of George W. Bush (along with Congress of course) and the Federal Reserve chaired by Alan Greenspan underwrote America’s spendthrift ways with big budget deficits and ultra-low interest rates, respectively.

Even worse, these destructive trends fed on themselves. The more offshoring seemed to pay off, and the more domestic manufacturing operations looked like losing — or at least anachronistic — propositions, the less interested financiers became in investing in them. So the amount of productive activity on which to use incoming capital to start with began shriveling. And the less productive activity available to sustain Main Street living standards responsibly (i.e., mainly through earnings), the greater the political establishment needed to prop up those living standards by providing more easy money — at least if it wanted to stay in power while maintaining the offshoring status quo.

Ironically, even though Hadas emphasizes regulation as the answer to global imbalances, his particular focus has big trade implications:

“Regulation can do more than strengthen bank capital ratios. It can reform the system, so trade surplus funds are not directed to economically counterproductive uses. That will be tough, both politically and practically. But it should be easier – and will be far more helpful – to solidify finance than to try to change the national characters of Germany or Korea.”

I’m all in favor of channeling the use of trade surplus funds by deficit countries into productive activity. In fact, I strongly support requiring such uses by U.S. multinational companies if much-discussed tax reform finally succeeds in persuading them to bring home the vast amounts of earnings they’re currently stashing abroad to avoid paying higher U.S. corporate rates. 

But this requirement needs to be accompanied by (at the very least) strong measures to keep out foreign-made goods that benefit from predatory trade practices like dumping, subsidization, and intellectual property theft. Otherwise, foreign competitors will be able to keep undercutting their domestic American competition in the U.S. market, and these new productive investments will fail. It’s also entirely likely, however, that more sweeping trade curbs will be needed – to offset the scale economy disadvantages created by U.S.-based firms’ inability to sell into so many important markets and their rivals’ ability to sell freely in their home countries and the United States.

And this is in fact where recognition is needed that the trade problem created by American policy concerns not simply inducements to offshore, but the coddling of protectionism in high income countries like Japan and Germany.

The bottom line: As indicated in a post last week, the United States may have to accept that even reasonably balanced foreign trade is not achievable with competitors holding radically different economic priorities (as I argued last week was precisely the case with Germany), and that reducing trade flows is a more than acceptable price to pay for preventing financial crises caused by imbalanced trade. When you add in America’s great capacity for much more self-sufficiency in a wide range of manufactured good, that seems like a more than acceptable trade-off to me. More important, it’s where the Trump administration, admittedly in fits and starts, could be leading us.

(What’s Left of) Our Economy: Why Trump Voters Look Smarter on Trade than Big Media Journalists

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2016 election, automotive, Brookings Institution, China, exports, free trade agreements, industrial machinery, Mexico, Ronald Brownstein, Rust Belt, The Atlantic, Trade Deficits, trade policy, Trump, {What's Left of) Our Economy

Boy, those working class Americans who voted for Donald Trump for president. How ignorant! At least that’s the clear message sent by Ronald Brownstein’s recent article for The Atlantic reporting on new findings about the America’s trade performance and prospects and their likely impact on one of Mr. Trump’s main constituencies.

In Brownstein’s words, “If Trump’s moves ultimately reduce trade flows and squeeze exports, the biggest U.S. losers will include not only big metropolitan areas that almost entirely supported Hillary Clinton in November, but also the smaller places that provided the core of Trump’s support.” His evidence? A new Brookings Institution study purporting to show that (Brownstein’s words) “Although the big metropolitan areas generate the most exports, selling to the world is often proportionally more important to smaller places.”

More specifically, writes the author:

“The metropolitan areas where exports account for the largest total share of local economic output are smaller and midsized communities that are almost all hubs for either manufacturing or energy production. These places read like a recap of Trump’s campaign-travel itinerary: Columbus, Elkhart, Kokomo, and Lafayette in Indiana; Racine, Fond du Lac, and Sheboygan in Wisconsin; Lake Charles and Baton Rouge in Louisiana; Waterloo, Iowa; Hickory and Rocky Mount in North Carolina,; and Midland and Battle Creek in Michigan. The list of metropolitan areas where exports provide the greatest share of total gross domestic product doesn’t reach a big city until Seattle—which ranks about 40th.”

So what could be more obvious – and pathetic – than the conclusion that many of Mr. Trump’s supporters essentially opted to shoot themselves in both feet, at best?

Brownstein and the Brookings specialists do offer one explanation – though it plainly reinforces the impression created of Trump voters as know-nothings:

“Many of those smaller places…would initially welcome a more protectionist trade policy, on the belief that it will force manufacturers now relocating or building new facilities abroad to reinvest in the United States. The downside for them is less visible, but potentially more consequential: the cost to their local economies if retaliation from other nations, or simply a diminished effort to open other markets, leads to fewer sales from American firms to the world.”

Distorting these shortsighted Trump supporter views even more? “[I]t’s difficult for local officials to keep that broader perspective in mind when trade’s losers are so much more visible than its beneficiaries.”

Here’s a pretty big rub, though. Although most of the Mainstream Media for decades have swallowed claims from think tanks like Brookings about recent and current trade policies supercharging exports and benefiting the U.S. economy and its workers on net, the data tell the opposite story. Here are two leading (but by no means unusual) examples that have directly and powerfully affected the kinds of Trump strongholds listed in Brownstein’s article.

The first concerns U.S. trade in industrial machinery – a broad category of products that includes machine tools and construction equipment and farm machinery and engines and turbines and industrial heating and cooling equipment (think Carrier). Let’s see what’s happened on the trade front since 1997. That’s when the U.S. government adopted its current predominant system for classifying sectors of the economy, which has therefore generated nearly two decades of apples-to-apple statistics. It’s also when the first big effects began to be felt of major trade liberalization decisions made starting in the early part of the decade with places like Mexico and Canada — which were advertised overwhelmingly as “Big Emerging Markets” for American-made goods and services.

In 1997, this big segment of domestic manufacturing ran a $17.39 billion trade surplus. By 2015, this surplus had become a $14.33 billion deficit. And in the 2016 presidential election year, that shortfall was up nearly 60 percent through November (the latest figures available). Some net export bonanza.

The second example concerns the automotive sector – which has also been kind of important to the Rust Belt economy. In 1997, vehicles and parts combined racked up a trade deficit of $63.07 billion. In 2015, this figure was just under $178 billion – much bigger than the machinery gap. And through November of last year, it too had risen – though by a more modest 2.25 percent. Still, no export bonanza here, either.

And it’s the Trump voters who are ignorant?

(What’s Left of) Our Economy: Trump’s Globalization Promises are Already Producing Victories

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Canada, China, Digitimes, H1B visas, Immigration, India, Infosys, Mexico, NAFTA, Reuters, Taiwan, Trade, Trade Deficits, trade surpluses, trade wars, Trump, {What's Left of) Our Economy

America’s political and media establishments keep warning of the disastrous consequences of President-elect Donald Trump’s vow to conduct international economic policy by in effect telling U.S. competitor countries and offshoring multinational companies to “Jump.” And rather than responding indignantly by promising to resist or retaliate and touch off a series of international trade wars and other conflicts, businesses in these countries keep responding by in effect asking “How high?”

As a result, they keep adding to the already copious body of evidence indicating that the United States boasts more than enough leverage (thanks to the matchless power of its market) to achieve better terms of trade unilaterally. Here are two of the latest examples.

Yesterday, the reliable Taiwanese technology publication Digitimes reported that “US-based high-tech enterprises are expected to reduce their reliance on data centers abroad and add ones in the US.” In addition, the Digitimes piece quoted a Taiwanese tech magnate speculating – reasonably – that tech companies (like his) that have already built significant manufacturing capacity in the United States will have advantages over more foreign-centric competitors – who will “have to evaluate the feasibility of shifting factories from Mexico or other areas to the US….”

Meanwhile, on Sunday, Reuters quoted the COO of the Indian tech services giant Infosys as stating that because they expect Mr. Trump to curb significantly the visa programs that enable American tech companies to replace U.S. workers with low-paid imported Indian counterparts, companies such as his will “speed up acquisitions in the United States and recruit more heavily from college campuses there.”

Specifically, according to this Indian executive, “We have to accelerate hiring of locals if they are available, and start recruiting freshers from universities [in the United States].”

Previously, it should be noted, both Canada and Mexico announced in the wake of the Trump victory that they would indeed be willing to renegotiate or “discuss” NAFTA.

China may still apparently believe it can bluff Mr. Trump. But good luck to Beijing and its still export-heavy economic growth strategy if it thinks it can find foreign markets to substitute for America’s, with which it ran a $367 billion goods trade surplus last year. Good luck also to China’s efforts to maintain political stability if, as likely, declaring a trade war on such a crucial foreign customer raises unemployment.

America’s economic competitors are fully aware that its enormous trade surpluses have fueled much of their own, and global, growth for decades. The biggest change on this front represented by Trump’s election is that now a U.S. president clearly understands – and has been publicly touting – this indisputable reality as well.  In otherwise, for the first time in decades, America is led by someone well versed in “the art of the deal.”   

(What’s Left of) Our Economy: Manufacturing Should Indeed be a US “Obsession”

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Binyamin Appelbaum, Donald Trump, Federal Reserve, innovation, manufacturing, manufacturing production, manufacturing wages, multi-factor productivity, multiplier, productivity, research and development, STEM workers, The New York Times, Trade, Trade Deficits, {What's Left of) Our Economy

You have to give New York Times economic correspondent Binyamin Appelbaum credit. He decided to go the flood of recent media attacks on trade policy critics one better by not only charging that Republican presidential candidate Donald Trump and others are economic know-nothings, but belittling them for an ignorantly nostalgic focus on American manufacturing. Less admirable – Appelbaum’s decision to broach the subject before learning anything important about it, or much of the broader economy.

In an October 4 Times Magazine article, Appelbaum repeated standard claims that American politicians’ “obsession” with manufacturing misses the mark because the sector is doing better than ever, and because its only major problem is actually a sign of progress – its falling payrolls reflect higher productivity, and thus outstanding technological progress. His new wrinkle: a contention that U.S. leaders should spend less time trying to revive manufacturing employment (and wages, which have lagged badly, too?), and more on turning the low-wage service sector jobs into family wage jobs.

But Appelbaum’s own assessment of manufacturing badly misses the mark. His claim of record output, for example, is belied by Federal Reserve data clearly showing that industry’s output is down 4.45 percent in real terms since the Great Recession started – more than eight years ago. Nor does Appelbaum seem familiar with the productivity figures. They show manufacturing’s performance stagnating recently by the broadest measure (multi-factor productivity).

Industry’s record in international trade is another flag that’s at least deep orange. Manufacturing keeps racking up record annual trade deficits, and yesterday’s U.S. government figures revealed that August saw the latest in a string of monthly record shortfalls. These trade balances matter because standard trade theory teaches that one of international commerce’s main virtues is fostering the best possible international division of labor. By its logic, America’s failure to produce anywhere near as many manufactures as it consumes – including in numerous high-value industries like semiconductors, advanced telecommunications gear, pharmaceuticals, construction equipment, machine tools, and ball bearings – unmistakably signals that such activity has a grim future in the United States.

And if such pessimism is warranted, the entire American economic picture will look grim as well. For no other sector appears poised to replace manufacturing as the nation’s productivity growth champ. And it’s hard to identify major new employment prospects for science and technology workers if manufacturing continues stagnating (at best). After all, the sector conducts 70 percent of the private sector’s research and development, and its STEM workers comprise 60 percent of the national total.

Moreover, this funding and these workers seem to be doing an awfully good job on the innovation front, as they generate nine out of every ten U.S. patents.

But perhaps strangest of all is Appelbaum’s call for downplaying efforts to foster manufacturing employment and dramatically raising the wages and improving the living standards of America’s fast-food workers, home healthcare aides and the like via government fiat. At least he recognizes that such steps will have nothing to do with the free market principles so widely used to justify laissez-faire approaches to manufacturing’s woes. But why does he evidently suppose that productivity improvements and especially technological innovation won’t displace many of these jobs, too, especially if employment costs get high enough? And what kind of formula for boosting national competitiveness – and therefore hopes for longer term, sustainable prosperity – would this be?

Ironically, promoting domestic manufacturing looks like the best, most market-friendly way to help these low-wage workers, too. For the sector boasts the economy’s greatest multiplier effect for overall economic activity (which by definition creates new jobs) and one of the largest for employment itself. In other words, manufacturing punches far above its weight in generating new jobs throughout the rest of the economy (e.g., in transportation, construction, retail, and wholesale). Even better, most of these sectors already pay considerably more than those singled out by Appelbaum – and without new government props.