Is Trade Becoming A Drag On The American Economy?

The world may have already hit peak globalization, much of which was promoted on the idea trade was good for all parties concerned. Today it has become clear that many supply chain problems revealed themselves due to Covid-19. Supply problems are now being exacerbated by a slew of Geo-political issues. In short, it is time to honestly look at the role of trade in the American economy. It has also caused a review of the importance of having dual suppliers and not becoming dependent on factors beyond your control. 

The reasoning that we are trading worthless dollars, currency, or paper for goods is a bit misleading. It might be more accurate to say we are trading away jobs, wealth, and even our future. Making your rivals stronger at your expense has always proven to be a mistake in the long run. The question we should ask is whether free trade is really a win-win?

The answer probably falls into a grey area based on the terms on which transactions are based. While the idea behind trade has a great deal of merit it is often given far more credit for economic growth than it should. There is a lot to be said for being self-sufficient. a strong case can also be made for favoring trade with nearby friendly neighbors rather than distant countries in that it improves the neighborhood. 

When economists talk about labor cost they tend to minimize other factors that affect the productivity of an area and its ability to produce products at competitive prices. The tax structure, work rules, energy supplies, and healthcare cost a country places upon a business also play into the cost of goods. The fact is, we can build it here and America is big enough to be its own market. This case is strengthened by the monetary cost of shipping and the toll it takes on the environment.

An example of knowing where your money is going was explored in an AdvancingTime post years ago. The money our neighbor to the south receives by way of trading with America quickly passes through Mexico and flows to Asia. It could be argued that when all is said and done we are still transferring our wealth to the far east only by the scenic route. The numbers indicate that in addition to the United States being a huge importer of goods from China, Mexico also ran a trade deficit with China in 2017 of around 64 billion dollars.

This does not mean all trade is bad. The very fact the dollar is the world's reserve currency means countries will want to sell goods to America to get dollars. Some people argue that a trade deficit should have virtually nothing to do with trade policy because it represents only part of the flow of investment funds into or out of the country. I beg to differ because it directly plays into the bigger issue of how much the people of a nation save and invest. This is strongly linked to incomes and the standard of living. This all has an impact on the value of our currency and our balance of payments which is the broadest accounting of a nation’s international transactions. While the link is tenuous at best it is best we should not underestimate its importance over the long run.

But Where Does The Money Go From There?

When you start thinking about all the money and jobs we shift into Mexico each year you would think by now Mexico would be rolling in cash. Interesting trade deficit data concerning Mexico reveal a fact most people miss. A bit of research quickly confirms that the money Mexico receives by way of trading with America quickly passes through its lands and flows to Asia. It could be argued that when all is said and done we are still transferring our wealth to the far east only by the scenic route.

 

The true size of our trade deficit with Mexico is difficult to get a handle on, some figures show it as around 102 billion dollars in 2019. What really stands out is where Mexico sends this trade income. The following numbers show that when it comes to trade in 2019 exports of goods and services made up about 39% of Mexico's GDP but even with a huge trade surplus with the United States, Mexico still ran an overall trade deficit. This is the reasoning behind substantially strengthening NAFTA but in a way that gives a great deal more value to the United States.

Once Wealth flows To Asia, It Stays There

 

For years the overspending of consumers here in the United States has allowed countries like China, South Korea, and Japan to sell as far more than we export. We have enriched them through what often seems like rather lopsided trade arrangements, and during that time we have watched them grow stronger as we have weakened.

 

 Those preaching the virtues of globalism and free trade point out that American consumers pay far lower prices because of this but overlook the fact that in the long run such an unbalance will not end well. The bottom-line is the United States not only directly but even indirectly is shipping wealth off to Asia, this means such trade poses a far bigger issue than what is seen as the imbalance with our NAFTA partners.

This article ties in with several others published on AdvancingTime. One delves into how China has not been fair in trading with America and how a very strong strategic dimension exists for NAFTA and a powerful regional trade bloc to compete in a changing global economy. The second explores the strong business relationship between Japan and China that has grown stronger since Japan imploded decades ago. This tight relationship is apparent each time trouble surfaces in China. It seems, the yen jumps in value as wealth in a stealth move flees China through business back-channels. This should not be misinterpreted as the yen strengthening, but rather a temporary bump before the wealth moves on to an even safer place. 

 

It is likely the controversy over just how much trade contributes to America's economic growth will be ramped up as growth slows. Trade between countries is given far too much credit for being a big driver of our economy. It pales next to factors such as government spending and credit expansion. The fact is if John needs to buy a wheelbarrow for work it does not matter where it is built. John needs and will buy a wheelbarrow. Where trade does fit into this has to do with what country employs workers to make that wheelbarrow and how much it will cost. While John may save money if the wheelbarrow was produced in a low-wage country trade has more to do with who benefits from commerce rather than a force driving our economy forward.

Trade Is Not A Big Driver (click to enlarge)

In many ways, trade should be seen as a way to increase access to a greater variety of goods at a better price but this only works over a long period of time if it is balanced. A county that constantly enjoys a trade surplus at the expense of its trade partners often reaches a position to exploit the weaker countries and generally does so. 

 

Throughout history, trade policies have had massive long-term ramifications on the strength of a nation's economy. The recent promise by politicians that increased trade will create new jobs has turned out to be largely a myth. Still, we hear the narrative spun by politicians playing the "fear card" with statements such as "We can’t let countries like China write the rules of the global economy.” This implies we will lose the power to control our own fate if we stand firm and protect what is ours.

 

The big driver for free trade has always been big companies wanting to expand their markets and exploit ways to reduce labor costs. This is where it is important to remember it is not all about human labor but technology is playing a greater role in production. If factories filled with mostly robot workers are the future then we should do all that we can to see that they are located in America. While they would not necessarily be a massive creator of jobs they would at least allow us to have control of our own manufacturing and reduce America's trade deficit. Fortunately, several events that have taken place since then have fed into an awareness of the vulnerabilities created by allowing control of production to flow into foreign hands.

 

Footnote; For more on this subject see the link below.

  http://Nafta And Regional Trade Better than Buying From China.html

                                                                              

(Republishing of this article welcomed with reference to Bruce Wilds/AdvancingTime Blog)