In between arguments about building a wall and providing free college educations, the US trade deficit has been raised as proof that America is on the decline by both Trump and Bernie Sanders.
In Portsmouth, Ohio, where I grew up, the Republic Steel factory took up several city blocks along the Ohio River. The Harbison-Walker brick refractory, several shoe factories and a shoe lace manufacturer, Mitchellace all provided great jobs for people who graduated from high school and went straight to work in the plants next to their fathers. The annual wages paid to many of their employees were higher than the salaries my parents earned in their jobs as teachers. In 1975, the average high school teacher made $11,600 while the average worker in our steel mill was paid $11.87 an hour, or $24,600 a year. That same year, the US had a trade surplus of $12.4 billion exporting these and other products. It was the last year the United States had a surplus.
As other countries developed their own industries and became more competitive, global trade expanded and major changes began. In 1973, U.S. employment in textile manufacturing reached a peak of 1.4 million and declined ever since, as less expensive imports filled our stores. The energy crisis in the late 70’s was the catalyst for change in the auto industry, as more fuel efficient Japanese cars were imported to compete against Detroit’s offerings. Today, China’s Iron and Steel Association works to keep its own steel factories busy by exporting steel at prices below production costs.
While the factories in my hometown slowly faded away and disappeared, we all initially benefited from clothing that was cheaper to buy than sew, and electronics prices that allowed us to own not one, but several TVs. Everyone eventually had multiple cars in their driveway.
By the end of 2015, our trade deficit reached $539.7 billion. As a CPA, a deficit sounds like a terrible thing, but the trade deficit isn’t the result of only import and export balances. It’s also impacted by the fact the US dollar is a global reserve currency – meaning it’s used around the world in transactions that have nothing to do with the United States. When other countries do business with each other, they usually do it in US dollars vs. their own currencies. When they sell more things to us, and make a profit, they don’t want to invest all of it in their own country’s investments. When rich people in Dubai or China want to put away savings for an emergency, they do it in US dollar assets. It’s because people trust our currency. This demand, however, makes the dollar stronger, and as a result, American exports less price competitive.
Our current trade deficit isn’t just about poorly negotiated trade deals and currency manipulation by other countries. It’s also a byproduct of the role our country plays in the global financial system. It’s the price we pay for our success.
Because other countries and individuals want to invest in our currency, it’s kept our interest rates lower and stock prices higher. Countries that experience a banking panic see money leaving the country (think Russian billionaires investing in real estate in New York) which causes the currency to fall further and interest rates to rise. In 2008, when we experienced a near collapse of our US banking system, the opposite occurred. More money flowed into US dollars as people all over the globe, fearing a global financial crisis, ran for safety with their savings.
If our next administration worked to reduce our deficit back to the level of the early 70’s, the US dollar would have to fall significantly against other currencies. Prices for clothing, cars, electronics and other imports would go up. Interest rates on credit cards and home loans would rise, and while we might see higher interest rates on CDs and checking accounts, it’s unlikely we’d enjoy them, because interest rate increases on savings have rarely kept pace with the increases in the cost of living during periods of high inflation. Those of you who were invested in the early 1980’s might remember the pain of buying a house when 30 year mortgage rates were 18% vs. the 3-4% they are today.
To be clear, when Trump and Sanders use the trade deficit in their campaigns, they’re not focused on these facts. They’re speaking to the people in my home town. The people who know if companies in the United States are manufacturing less stuff, there are fewer jobs for them.
Economics 101 teaches us that markets are efficient, and the jobless will move to areas where there are jobs. But families have roots, and for many it’s difficult to move to an unfamiliar place where you’re no longer supported by other generations of family and friends. It sounds like a logical thing to do, but in practice it doesn’t happen.
They’re told to train for a new career in another field, but these are some of the same people who have been taken advantage of by for-profit colleges that advertise career training and end up putting people in costly student loans with little training to show for it. If trained, many of these people are older, and companies are reluctant to hire them as well.
The reality is life, and economics, are complicated. People want to do what’s best for themselves and their families. When you are standing in the middle of a store deciding between a pair of similar shoes for your kid, and one pair costs half of what the other does, chances are you’ll buy the less expensive pair. This perpetuates the cycle. We can put tariffs and sanctions on imports to prevent price differences, and keep workers out with walls, but the end result is a higher cost of living for the same folks. We are competing with the entire world now, and we can’t go back to the ‘good old days.’
We need to give this issue the careful thought and consideration it deserves, look at all aspects of the issue, and listen to the opinion of others with an open mind. Only then will we be able to come up with a reasonable compromise of commerce and compassion.