NDN Blog

Thinking About Our Trade Deficit With China

As the United States files a major case at the World Trade Organization charging China with wholesale piracy of U.S. intellectual property, especially copyrights covering books, music and videos, let’s pause and think about our trade deficit with China.  The administration is entirely right to file the case – though a little late, given that it’s only our third complaint with the WTO over intellectual property violations since George W. Bush took office, compared to fifteen cases filed at the WTO by the Clinton administration in its second term alone.  We’ll get to why those violations matter economically, but first let’s look at an even bigger picture.

It may not be politically satisfying, but the truth is, we cannot blame any other country’s trade practices for the size of our trade deficit.  We run trade deficits for one reason: We consume more than we produce and then purchase the difference from abroad.  When China sells paper or t-shirts for less than they cost to produce and ship them here, it increases our imports of Chinese paper and t-shirts, hurting American workers and companies that still produce them here. But if China charged three times as much, and we bought more paper and t-shirts from American or other foreign suppliers, it could affect the composition of our trade deficit, but not its overall size: That’s because the size is locked in by how much we consume of everything, relative to how much we produce of everything.  The only way to reduce the trade deficit is to either consume less – which is what economists mean when they say that the answer is to save more – or to produce more. It’s used to be the case that the two were closely linked: In order to produce more, you had to invest more, and to invest more, you had to save more (and so consume less).  Global capital markets have changed that for the United States, where everyone wants to invest: Now, we can invest more even without consuming less – we just have to borrow the investment funds from foreign savers. There’s a big cost down the road, since foreigners end up owning more of our companies and real estate, and then taking home their profits and rent – but at least we get to invest.

Force China to play fair with her trade policies (if we can, which is often doubtful), and we’ll end up importing a little less from China and exporting a little more to China. But unless we also begin to consume less overall or to produce more overall, it won’t affect the total trade deficit at all.  There is one, possible way it could do so -- if demand for our exports to China goes up, it may lead to greater production at home to fill the need (after it had led to greater investment to expand production) -- and the increase in our production can bring down the trade deficit.

The one exception to all this is what the administration is finally focusing on -- foreign violations of the intellectual property rights of American producers.  If we could get China, India, Russia and Brazil (the four biggest offenders) to stop appropriating or pirating our pharmaceuticals, software or music and films, it would directly reduce our trade deficit. Our own consumption wouldn’t change, but foreign payments back to U.S. companies would increase, just as if our production had increased and all been exported. Stealing our intellectual property, in short, has the effect of reducing our production (more precisely, taking part of our production and pricing it at nothing), which in turn drives up the trade deficit.

So, now there are two reasons to crack down on intellectual property violations by our trading partners.  It’s the only cost-free way to reduce our trade deficit, and it should increase the returns and incentives for producing more of it, at a time when globalization and technology make intellectual property a central factor in U.S. economic growth and progress.

One more word on our trade deficit with China: Half of it comes from U.S. companies bringing back products they’ve produced in China by their Chinese subsidiaries. China’s currency is undervalued by all the standard economic measures. But if China does revalues its’ currency, so its exports become more expensive, it will raise the price of products produced by American companies there for sale here – and by itself can’t affect the overall trade deficit.

With Growth Slowing and Inflation Rising, What’s the Administration’s Plan?

For the last several years, with the economy growing more than 3 percent a year, job creation has been slow and most people’s wages and incomes have hardly gained at all.  So, what can we expect now, with the overall economy slowing down?  Industrial production is falling, so business investment is likely to lag; retail sales are flat, so consumer demand and spending will also slow; and home construction has plummeted.  It looks like we’re in for a spell of much slower overall growth -- 1.5 to 2 percent growth is a good guess. And that will mean even slower job gains and, in all likelihood, lower real incomes for average families.  What does the administration propose to do about it?  In a word, nothing.

A second shoe is also dropping: Inflation is up, even with energy prices generally behaving themselves.  A lot of it is fast-rising health-care costs, which again this administration has ignored for six years.  Some of it is the impact of last year’s higher energy prices now making their way through the economy – for which, again, this administration has no answer.  Some of it is food prices, driven up by bad weather and the unintended effect of government-directed demand for ethanol, which drives up the price of corn that goes into animal feeds and sweeteners, as well as the price of other gains as farm businesses shift from them to corn.  And some of it is higher import prices from last year’s weakening dollar.

The upshot of this inflation that even as growth slows, the Fed can’t cut interest rates – which means no relief from the slowing growth.

If the administration won’t take this seriously, Congress can do so.  Let’s not wait for the next election to see those who would be president submit real plans to contain rising health care costs, reduce our economy’s fossil-fuel dependence, and increase opportunities for average workers to improve their IT skills. 

Thinking Hard About the Trade Deficit

George Bush has managed to set another record – Our trade deficit hit a record high in 2006 of $763.6 billion.  That’s up about 7 percent from the previous year and up 25 percent from 2004.  The country’s 2006 deficit in manufactured goods was actually $836 billion, but some of that was offset by a $72.5 billion surplus in services.

 A number like $836 billion, especially written in red ink, can be daunting, so let’s take it apart and see in what exact ways it matters.  It’s certainly not good for the overall economy to purchase $836 billion more in goods from other countries than we sell to other countries, but it’s also not necessarily bad.  It’s hard to posit that it reflects a collapse in the competitiveness of U.S. manufacturing companies, since manufacturing accounts for about the share of our GDP as it did 20 years ago, and America’s global market share in manufacturing actually rose over the last 10 years from 20 to 22 percent – while Europe and Japan’s global market shares feel sharply.  And our companies’ global market share in high-tech manufacturing went up even more. The critical issue here is that we measure trade flows by the value of what passes across our border in either direction, and American manufacturers are more highly globalized than Europe’s.  So one-third or more of our manufacturing imports are actually shipments from the foreign subsidiaries and affiliates of U.S. manufacturers.

 That makes the $836 billion number less troubling from the perspective of the competitiveness of U.S. companies.  But it leaves U.S. manufacturing workers in the lurch.  The number of manufacturing workers is way down – down 3 million since 2000.  But that’s also more complicated than it may seem.  Some of those losses reflect technology, with the workers that have remained earning more, because the technology makes them more productive.  A lot of it is also probably domestic outsourcing designed to cut the costs of health care and pension benefits, shifting a whole range of services from cleaning crews to lawyers from in-house to sub-contractors.

 There are more manufacturing jobs in America’s future, and it’s mainly in the technologically-based aspects of overall manufacturing and the manufacture of the most advanced, high-technology products.  It’s time for serious, progressive efforts to provide American workers the training and skills to fill those jobs, so five years from now we don’t have to import them from India and other places under special visas.   Let’s also focus on the service surpluses, a good share of which comes from royalty and licensing payments for America’s most highly-competitive export, our intellectual property.   So it’s also time for serious, progressive efforts to expand the access of lower and middle-income workers and their children to the scientific and technical education that can equip to take part in creating and applying new ideas.

 There is one unequivocally scary aspect of the huge trade deficits that have emerged under this administration: We finance them by borrowing that much from other countries, especially China, Japan and the Gulf states. That means that every year, our lenders get to take home the profits, interest and dividends earned on their new holdings in the United States. If this administration were running $100 or $200 billion budget surpluses, as the last Democratic administration did, instead of $200 or $300 billion budget deficits, we could finance $300 to $500 billion of our trade imbalance ourselves.  And that ultimately would make America a lot richer, since the returns, interest or dividends which all that money earns year after year would stay here instead of flowing to Beijing, Tokyo and Riyadh.

But that would require that the Bush administration know what it’s doing in economic affairs, something that has been consistently beyond their capacity since they took office.

Bush’s New Found Concerns about Inequality Don’t Pass the Laugh Test

President Bush has never shown much understanding of the American economy or its global environment, but yesterday he at least acknowledged that all is not as it could be: Income inequality has been rising, he said, for more than 25 years.   Actually, that’s not true: The distribution of incomes and wealth is less equal today than it was 25 years ago; but the record is that those distributions deteriorated in the 1980s during the Reagan and first Bush administrations, improved significantly in the 1990s during the Clinton years, and then turned much less equal under this President’s watch.

The President is correct that the rising return on higher education and skills plays a role – but he apparently missed the point that the Clinton administration did something about it by expanding government assistance and tax benefits for higher education and skills training.  He cut back that assistance, and now he’s surprised that inequality in up?

Clinton and the Congress during his terms also used government to ameliorate inequality, by expanding the Earned Income Tax Credit and raising the minimum wage.  George W. Bush let the value of both decline with inflation, and now he’s surprised that inequality is up?

Clinton also recognized that American prosperity requires full engagement in the global economy, so he successfully completed negotiations on the most important trade-expansion agreement in 50 years – the Uruguay Round that gave rise to the World Trade Organization – and won its approval in Congress.  Bush offered piecemeal protectionism and let the next major round of global trade talks collapse.  Clinton also recognized that in a global economy, rising health insurance costs would erode the ability of American business to create jobs and raise wages.  He failed to pass his overall reforms but succeeded in a number of smaller ways, including extending health coverage for children and promoting the expansion of HMOs.  Bush ignored the problem entirely – and now he’s surprised that inequality is up?

Finally, President Clinton saw that globalization raises the returns on capital—he took the stock market boom seriously—and responded by making the tax code more progressive.  He raised rates on the wealthy while cutting tax burdens on everyone else.  Bush surveyed the same forces driving greater inequality and decided to accentuate them by cutting taxes much more sharply for the very wealthy then for anyone else.  So, no, he cannot be surprised that inequality is now up.

If President Bush expects his comments about inequality to pass the laugh test of the American people, he’ll have to take steps that could actually do something about it – which in his case would mean reversing most of his economic program.

Taking Responsibility at the SOTU

Last night, the President was a little more realistic about some of the country’s domestic issues than about Iraq, but not more forthcoming and honest.

So, he spoke of cutting the budget deficit in half without acknowledging that it was a deficit he created.  He talked about eliminating the deficit entirely in another five years – long after he’s gone -- again without acknowledging that federal spending has grown faster under his watch (and under of Republican congresses) than anytime since LBJ.

He talked about creating 7 million jobs under his watch, without acknowledging that the first 3 million replaced the 3 million jobs lost in the early years of his presidency.

He mentioned climate change for the first time, without acknowledging that he spent five years denying it was a problem and pulled the United States out of the global talks on the issue.  And by the way, his grand response would cut CO2 emissions in 2017 by perhaps 2 percent – far too little to have any effect on climate change.

He proposed an interesting direction in health insurance – recovering revenues from the tax deductions for “Cadillac plans” and using them to help support coverage for the uninsured – but again, without acknowledging that the number of uninsured has risen sharply on his watch. He also didn’t mention that his new tax deduction would take the place of the current untaxed treatment of employer-provided health coverage.   

He talked about his administration diplomatic efforts, without acknowledging its role in allowing multilateral trade talks to collapse.

And on the great economic challenge facing Americans – globalization -- he said … nothing. 

If our country is to be governed honestly or wisely in the next two years, it certainly seems like the leadership will have to come not from this President, but from innovative Democrats and perhaps a few dissident Republicans.

Debating The Bush Economic Record: Rebuilding the National Consensus on Trade

This is an important time for the cause of open markets and trade liberalization. The current round of global trade negotiations, the Doha Round, has collapsed; and we will soon learn whether the Administration and other leaders can restart them.   As British Chancellor of the Exchequer Gordon Brown wrote recently,  ” … the world economy faces an uncertain autumn … (from )not only the impact of terrorism and geopolitical uncertainty on our economies, but also a surge of protectionism.”  Brown also yesterday called for the restarting of Doha at a meeting in Singapore in the coming months.

On this side of the Atlantic, Brown’s warning should have the distinct ring of truth.  Pascal Lammy might have said this week that he is hopeful for a re-start, but there is little sign that the current administration will expend much political capital making this happen. More worryingly, The Times yesterday ran a timely piece arguing that the size of Bush’s trade deficit is a threat to growth not just in America, but for the rest of the world too.

In the wake of five years of accelerating globalization during which American wages have stalled and job creation has slowed, the national consensus to continue to liberalize trade –one that has held fast for more than fifty years -- is in danger of unraveling,   To rebuild that consensus, we need a clear vision, strong leadership and a serious program to ensure that working Americans benefit as much from globalization as American businesses.

For the past half century, open trade has been a crucial part of the formula for global peace and prosperity; and  America’s greatest leaders have maintained a broad, bipartisan consensus against protectionism. FDR and Harry Truman created the architecture for an open post-war system. JFK launched the modern series of multilateral trade talks.  President Reagan began the Uruguay Round and the NAFTA negotiations – and President Clinton enacted both with bipartisan support.

President Bush has failed to show any comparable leadership through the Doha Round and his broader economic policies.  Whatever we do, globalization is not going away or even slowing down. As FDR, Harry Truman, JFK and Bill Clinton all understood, liberal trade and globalization are ultimately progressive causes.  Progressive need to rebuild the national consensus for trade and globalization with a new program that will ensure that all Americans can benefit from both.

New NDN Report and Debate: The Bush Economic Record

As Director of NDN’s Globalization Initiative I’m pleased welcome our readers to a new experiment - two days of economic debate on our blog. Today we are launching new report – The Bush Economic Record. It is a guide to the President's economic mistakes. More than that, it is a reason why this administration must be held accountable for its failed economic stewardship in November elections.

You can download a copy of the report in PDF format here.

Over the next two days we have invited various guest bloggers to debate the administration's record, to highligth the key economic issues facing our country, and to discuss the priorities for progressives to make our economy work for all Americans once again. Over the coming days you will see contributions from:

The debate about the economy is becoming more important by the day. Driven by the issue of stagnant wages and flat incomes, a new CNN poll this week showed that the economy is the single most important issue for most voters in deciding how to cast their vote in November. For the first time the economy is more important to voters than Iraq, terrorism and immigration.

The administration has tried, and will continue to try, to spin its dismal economic record. But it will fail because ordinary Americans know that they're not gaining ground under Bush when they manage their real paychecks and bills every month. Finally, the political establishment is also waking up to the fact, as this Washington Post editorial said over the weekend, that most Americans just are not benefiting from our current growth.

We hope that today’s report, and the debate on this blog over the next few days, will help to further focus attention on the current administrations poor economic choices, and what we as progressives need to do ensure our economy works for all American’s once again. And I encourage anyone reading this to take part, either by blogging the report or by offering comments to any of our guest posters.

The Hidden Cost of the Falling Deficit Forecast

Once again, administration officials are corrupting a branch of economic science, and the American economy will pay a much bigger price than they realize. This week, the Treasury announced that based on spending and revenue data through May, the 2006 budget deficit will be some $100 billion less than the Treasury estimated just last February. The White House used the new estimate to trumpet the success of its tax cuts – which makes no economic sense, because Congress hasn’t passed tax cuts since February that could affect current economic activity in any way.

That leaves two possibilities. Either the revenue estimators at Treasury and spending estimators at OMB are wildly incompetent, and only recently became so – which frankly is not very likely. Or, the Treasury and White House manipulated the February estimate upward -- for example, using the most pessimistic economic assumptions available and massaging pay-out formulas for entitlements – so they could claim progress for their controversial policies in July. For an administration that has pursued political gain at almost any price, time and again, that seems entirely likely.

When the senior economic agencies and officials of the United States Government produce deficit estimates which wouldn’t pass muster in economic forecasting 101, they mislead the capital markets. Tens of billions of dollars in investments are made assuming that these estimates are as accurate as humanly possible – and no private forecaster can do an equally authoritative independent estimate, because nobody outside government has the Treasury’s revenue datasets and OMB’s spending datasets.

When these estimates are manipulated for cheap political purposes, it corrupts vital information flowing into U.S. capital markets, impairing their basic efficiency and distorting the distribution and cost of investment capital. And if it becomes a pattern – and when has this administration given up any of its bad habits? – the markets could simply stop trusting government data, and then the American economy could really suffer.

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