Download The US Trade Deficit: Are We Trading Away Our Future

The US Trade Deficit: Are We Trading Away Our Future?
By Robert E. Scott, March 4, 2002
The Changing Effects of Trade on American Workers
In the 1950s and 1960s, the US was the world's leading export powerhouse. The Unites States became the
world’s strongest economic power following World War II. The Marshall plan helped provide the capital needed to
rebuild Europe and Japan, and fueled a tremendous demand for US exports.
During this period, the US ran a substantial trade surplus, of about one percent of Gross Domestic Product, as
shown in Figure 1. The US also benefited initially from strong export demand in a wide range of industries, from
low-tech textiles and apparel to sophisticated aircraft and machine tools.
Since the 1970s the US moved from a trade surplus to a deficit position, as Europe and Japan began to compete
effectively with the US in a range of industries. There are many ways in which trade has injured US workers since
then. First, deterioration in the trade balance (the difference between exports, which create jobs, and imports,
which eliminate domestic employment) has reduced employment, especially in manufacturing and other
industries producing traded goods
The trade surplus of the 1960s was transformed into a deficit that reached 2.9% of GDP in 1998, as shown in
Figure 1. This deficit will grow rapidly in the future as a result of the continuing global financial crisis. Although
financial markets are beginning to recover throughout the world, the real economies of many developing
countries and Japan remain mired in recessions. For example, reliable private sector reports show that
unemployment in Sao Paulo, Brazil currently exceeds 20%.
The growth in the trade deficit over the past two decades has destroyed millions of high-wage, high skilled
manufacturing jobs in the US, and pushed workers into other sectors where wages are lower, such as restaurants
and health service industries. The US has lost nearly 500,000 manufacturing jobs since March of 1998, due to
the impact of the rising trade deficit.
Trade deficits also have a direct impact on wages, especially for non-college educated workers, who make up
three-quarters of the US labor force. The other line in Figure 1 shows that the average real wage for US
production workers peaked in 1978, declining more or less steadily through 1996. Real wages have begun to
increase in the past 3 years. However, the small upturn increased real wages by only 4.5%, not nearly enough to
offset a decline of more than 11% since the 1978, nor to return workers to the path of steadily rising wages they
experienced from 1950 through 1973.
What is responsible for the decline in US wages? Trade is certainly one of the most significant causes, because it
hurts workers in several ways. First, the steady growth in our trade deficits over the past two decades has
eliminated millions of US manufacturing jobs. As we showed in another recent EPI report, trade eliminated 2.4
million jobs in the U.S between 1979 and 1994. Growing trade deficits eliminate good jobs and reduce average
wages in the economy. Since then, many more jobs have been lost to NAFTA and other sources of our trade
problems, including China, and recently, Europe.
The second way in which trade depresses wages is through the growth in imports from low wage countries. If the
prices of these products fall, it puts downward pressure on prices in the US Domestic firms are forced to cut
wages or otherwise reduce their own labor costs in response. A third way in which globalization depresses wages
is through foreign direct investment. When US firms move plants to low wage countries, as they have done at an
increasing rate in recent years, it has a chilling affect on the labor market. The mere threat of plant closure is
often sufficient to extract wage cuts from workers. This tactic has also been used with increasing frequency in the
1990s and is effective even when plants don't move.
The Geography of US Trade Flows
US trade imbalances are concentrated in a few regions of the world, as shown in Figure 2. Trade flows at the
country level are discussed below. Trade flows are shown for 1991, 1993 and the most recent period available
(1997 or 1998) in each of the figures discussed here.
The vast majority (about three fourths) of our trade deficit in manufactured goods is caused by imbalanced trade
flows with Asia, as shown in Figure 2. The deficits with Asia are large and rapidly growing, despite very high rates
of growth in the region until 1997. Europe and NAFTA were each responsible for about 13% of the deficit in 1998.
The US ran a small surplus with the other countries in the Western Hemisphere, and with the rest of the world, in
this period.
The causes of American trade deficits with Asian countries are discussed below. There are many important
differences in the economic structure and strategy of each country in the region. However, each follows a general
pattern established by Japan in the 1950s and 1960s. The Japanese strategy revolved around export-led growth.
Exports were increased through state promotion and control of targeted critical industries. Exchange rates were
systematically undervalued to enhance the competitiveness of domestic industries, and to discourage imports.
Imports were also restricted through a combination of tariff and non-tariff barriers to imports and through private
associations that acted to restrain trade and provide a protected home market for domestic producers.
US trade with Europe
moved from a substantial surplus in 1991 to a large and rapidly growing deficit in 1998. This deficit reflects at
least two trends. First, growth in Europe has slowed while the US economy has recovered. The difference in
growth rates has increased sharply in the past two to three years. Higher growth in the US pulls in imports from
Europe, while the slowdown on the continent has reduced the demand for US exports.
Second, the European trade deficit was also increased by EU industrial and agricultural policies. European
subsidies to Airbus have dramatically increased EU aircraft exports and reduced US exports to the continent.
European subsidies to agriculture have also increased substantially since the WTO agreements, which were
designed, in part, to reduce such payments, went into effect in 1995. In addition, EU firms have illegally dumped
steel and other products in the US, injuring US workers and industries.
In addition to eliminating hundreds of thousands of US jobs, NAFTA has also initiated tremendous structural
changes in all three member countries. For example, the US trade surplus in agricultural products has declined
sharply with Mexico, and has turned into a deficit with Canada. However, changes in the trade balance mask even
larger changes in the structure of agriculture. Some US producers of corn and cattle have profited, as have all the
major grain trading companies, while Canadian Dairy farms, US farmers growing wheat, barley, fruits and
vegetables, and Mexican corn producers have all suffered catastrophic losses.
Trade Deficits are Concentrated with a Few Countries
Only ten countries were responsible for the entire US trade deficit in 1998, as shown in Figure 4. Japan, China
and Germany had a combined deficit of $144 billion with the US in 1998, nearly two-thirds of the total deficit in
goods trade of $229 billion.
US trade deficits with Japan are the result of numerous public and private barriers to imports, and a policy of
export led growth that has been maintained by a Japanese Ministry of Finance policy of consistently undervaluing
the yen. While many official, government policies that restrained trade have been reformulated or phased out in
recent years, private institutions that act to bar imports, such the extensive networks of Kieretsu relationships,
have assumed a more important role in sustaining the trade deficit.
China's trade policies are modeled on Japan's, in many ways. Government ownership and control of the majority
of economic resources, and an extensive network of government controls over banking, economic activity, trade
and foreign exchange flows have combined to create the US' most unbalanced bi-lateral trading relationship. US
imports from China are five times as large as exports to that that country. Even at its most extreme, the USJapan trade imbalance never exceeded a three-to-one ratio.
China's trade policies reflect an aggressive, state-led modernization effort that uses the pull of China's massive
low-wage labor market to lure foreign direct investment from multinationals, while extracting the maximum
amount of technology, jobs and exports from those relationships. China is rapidly moving up-stream from lowtech products such as shoes and apparel into higher-technology products such as aircraft and parts, computers,
motor vehicles and telecommunications equipment.
China and Germany also stand out among the top ten deficit countries for having the most rapidly growing
deficits (24 percent and 25 percent per year, respectively). The German deficit reflects the combination of
macroeconomic, industrial and agricultural policies discussed above. The US deficit with Mexico also grew very
rapidly in this period, especially after the 1994 Peso crisis. The US deficit with Mexico was caused by the
resulting devaluation, plus a combination of low-wages, proximity to the US market, preferential tariffs, and a
package of investor protections and intellectual property guarantees that was codified in the NAFTA.