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.