Why Trade Deficits Matter

By JOEL D. JOSEPH

Bill Maher said recently that we should not worry about trade deficits. Maher is not an economist—he is merely mouthing the conservative (and liberal establishment) view that is fundamentally flawed. The Wall Street Journal noted, “Perhaps the best way to think about the US trade deficit is not to think about it.” Well, considering that Germany, China and Japan think about their trade surpluses constantly, not thinking about our trade deficit is merely putting our head in the sand and allowing other nations to profit at our expense.

When the Wall Street Journal and Bill Maher agree on something, red flags should go up: something is amiss. The founder of Politically Incorrect is mouthing political correctness.

The Harm Caused by Trade Deficits

A trade deficit occurs when a nation buys more overseas than it sells overseas. It is comparable to a consumer spending more money than he has. When a consumer’s checking account goes negative, it is a danger sign. Our checkbook has been flashing massive red negative numbers for more than 20 years.

The harm caused by our massive trade deficit is the loss of millions of jobs, increased income inequality and real estate inflation. When we spend $500 billion more than we we sell, that money has to go somewhere. These dollars are washing up in China and other nations. They are now coming back and buying up America.

The Wall Street Journal understands that Chinese citizens are using trade surplus dollars to buy American real estate (primarily California real estate) and US securities. Because of the massive influx of foreign money being poured into California real estate, Los Angeles homes are now simply unaffordable for most working-class Americans.

The trade deficit is the single largest cause of increasing inequality in America by eliminating manufacturing jobs and increasing price of real estate. Even the very conservative Peterson Institute for International Economics has found that trade deficits lead to greater income inequality. Further, the stock market boom, or bubble, is caused in part by surging foreign investments in American equities.

Not only does the trade deficit mean that we are losing manufacturing jobs, and $600 billion in annual income, our standard of living is declining as housing prices get beyond the reach of the middle class.

What effect does all this have on American workers? Even the economists who argue (incorrectly, I believe) that the trade deficit doesn’t affect the total number of jobs do admit that it affects the composition of jobs. There is, for example, a lot of research confirming that the hollowing out of Rust Belt manufacturing is primarily a result of the fact that America is importing more than it exports. One academic study found that imbalanced trade with China led to the loss of more than two million US jobs between 1991 and 2011, about half of which were in manufacturing (which worked out to 17% of manufacturing jobs overall during that time). Economist Josh Bivens found that in 2011 the cost of imbalanced trade with low-wage countries cost workers without college degrees 5.5% of their annual earnings (about $1,800). Far from a small, isolated group, these workers represent two-thirds of the American workforce. US wages are still stagnant even a decade after the Great Recession.

Bubbles and Bursts

And trade imbalances have negative impact far beyond the labor market. Ben Bernanke, the former Federal Reserve Chairman, noted that trade deficits can have a role in producing financial-market bubbles and the devastation that’s caused when those bubbles burst. The problem arises when other countries suppress spending and investment and manipulate their currency, thereby boosting their trade surpluses. By the fundamental rules of accounting those surpluses have to go somewhere, and many flow into the United States. This further strengthens the demand for and value of the dollar, making American exports less competitive — and thus exacerbating the trade deficit.

Chinese citizens, and other foreign nationals, are buying up American companies, land and houses. This is pushing up the price of American homes, making it more and more difficult for workers to own their own homes. The percentage of Americans living in their own homes has declined, for the first time in American history, from a high of 69% in 2004, to 63% 12 years later. That means that 7.5 million American families, who formerly owned their homes, are now renters, or worse, homeless.

What We Should Do About It

Too many economists and political commentators, have viewed trade deficits as harmless. Trade deficits mean the loss of good jobs, wages, and incomes for those in firms hit by competition from imports.

By ignoring the downsides of imbalanced trade, many establishment politicians created an opening for a demagogue like Trump to offer an unrealistic nostalgia for a 1950’s economy that existed before world trade expanded exponentially.

President Trump is right about one thing: trade reciprocity. However, under Article I, Section 8 of the Constitution, tariffs are the domain of Congress, not the President.

Elon Musk, Tesla’s CEO, recently noted that China puts a 25% tariff on US cars while the United States charges only 2.5% on cars imported from China. General Motors is now importing Buicks that are made in China. GM would not do this if the US charged a 25% tariff on Chinese cars. I have proposed CARTA, the Chinese American Reciprocal Trade Act, which would raise US tariffs to the level charged by China. This should not ignite a trade war. The problem is that the rest of the world is already in a trade war with us, but we are not fighting back. We allow other nations to take advantage of us. CARTA would merely level the playing field

Joel Joseph is chairman of the Made in the USA Foundation, a non-profit organization dedicated to promoting American-made products. Email joeldjoseph@gmail.com. Phone 310 MADE-USA

From The Progressive Populist, May 1, 2018

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