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  • U.S. Trade Deficit Improves

    On July 13, the government released international trade statistics for the first five months of the year showing a growing trade deficit—and almost no one got the story right. Here are some examples:

    Trade Deficit Gets even Worse,” announced the July 13, 2010 Yahoo! Finance headline.

    Trade Deficit’s Increase Seen as an Unwelcome Surprise,” reported the Sacramento Bee.

    Surprise Jump in Trade Deficit Worries Economists,” warned the Los Angeles Times.

    U.S. Trade Data for May Presented yet More Unfortunate News for the U.S. Economy,” reported The Wall Street Journal.

    The gloom-and-doom reports resulting from the government’s trade data all had one thing in common: they got the story absolutely backwards.

    The trade data showed good news on the export front, with U.S. exports up 17.7 percent for the first five months of the year compared to 2009.

    The data also showed good news on the import front, with imports for the first five months of the year up 21.4 percent from last year. As The Heritage Foundation has pointed out in the past, that’s good news because a growing U.S. economy leaves Americans with more money to spend on imports. Fewer imports would have been an unmistakable sign of a weak U.S. economy.

    Perhaps the best news is that the U.S. trade deficit for the first five months of the year widened. That’s “widened,” not “worsened.” If anything, a growing trade deficit is an improving trade deficit. That’s because historically, when U.S. trade deficits get bigger, U.S. unemployment rates decline and GDP increases.

    When the government releases its trade statistics next month, maybe someone will get the story right for a change.

    Posted in International [slideshow_deploy]

    4 Responses to U.S. Trade Deficit Improves

    1. Drew Page, IL says:

      Americans are afraid to spend money and since everything they would like to buy is manufactured overseas, it is only reasonable that our balance of trade reflects this. What's the big surprise?

    2. George Colgrove says:

      I like that the export numbers are higher. But I don't understand why it is good that the imports is also higher – at a higher growth rate as the exports. I also do not understand why it is good for the country that the divide is getting bigger. We need jobs here. The best jobs are factory jobs. This is where the dollar lands. There are no middlemen between the factory worker and the manufactured product. The dollar paid to the factory worker lands in the town or city that product was made.

      Conversely, retail or service employment is simply a pass through occupation. Service jobs have no product; therefore, it has perceived value so long as the service seems worth it to the customer. When it comes down to it, a service company has nothing other than its name and experience to base its value on. Retail is simply a pass through. There are intermediaries in the way skimming value off the product as it goes from the factory to the central warehouses to the distributor to the truckers and so on to the retailer.

      Therefore, a product that costs $10, may actually cost the factory $3 to make. The intermediaries are fewer in number then the factory workers on the floor. Therefore, if we buy our goods from China, we do get very rich intermediaries who have skimmed the $7 in the transportation and distribution of the product. That $7 goes to a few wealthier people. However, the $3 landed elsewhere. For that $10 purchase, we the United States of America lost $3 to the factory workers in China. Had those employees been employed in small town USA, that $3 would have been earned and spent or saved there in that small town.

      The way I see it, the larger trade deficit means we lose more of that factory floor earnings that land wherever the factory is located. This is the true wealth of the country and is where true economic growth starts. You cannot have a local barber, diner, or hardware store without a local population earning a living from factory work. The service and retail sectors are important, but does not bring in enough jobs or incomes high enough to support a local economy. My dad is a carpenter. His livelihood depends on a strong local economy. Times as we are in now, he finds it difficult to get work, as there is not a lot of local economic might to justify private property construction.

      We need more factory work here. I do not mind importing, so long as we are exporting more than we import. It is with this equation America becomes a wealthy nation once again. We want European Euros landing on Main St. America. Not the other way around.

    3. Ames Tiedeman, Austi says:

      "Its the trade deficit, stupid!" No nation can export industry after industry and expect to have an economy that works. Take auto parts. When Bill Clinton was the President back in 1994 the United States ran an auto parts trade surplus. Fast forward to NAFTA, and the USA now has a 100 billion a year deficit in auto parts. All those good jobs gone. The U.S. economy has not produced one net new job since 1997. We cannot lose our home market and then be told we cannot sell in China or any other country and expect to have an economy that we are all pleased with. Read what the CEO of Harley Davidson has to say about doing business in China. The Chinese Government mandated that every Harley sold in China be made in China or no more dealership licenses would be issues. At last check Harley Davidson has but 4 dealerships in China. What some call protectionism here at home the rest of the world either calls Mercantilism or "good business practices." China would lose a trade war with the United States. They would not win. Their trade surplus would be gone. The problem for the U.S. is this: Virtually everything the American consumer wants and needs is made in China. Look around your house. Most of the products you own were designed by either American, Japanese, or South Korean companies, but I bet most all of them are made in China. We are not buying Chinese goods from China. We are buying American iPhones or LG (South Korean) televisions. We are buying goods from companies that use Chinese contract manufacturing services. Have a Dell computer? It is designed in Austin, Texas and made in China. It is an American product. Dell uses contract manufacturing in China to make the thing. If we shut all of this down we would not have these goods. There would be a lag time to get them either from another country or lag time to re-tool America to make these items. Then we will have a whole other problem. What American companies can make a television anymore? What American company can manufacture a cell phone in the USA? Do we know how to do any of this any longer? We have gotten ourselves in a heck of a fix over the past 35 years. Reversing this is going to be both painful and expensive. We need to basically rebuild the entire structure of the U.S. economy. What leaders do we have in this nation that are capable of leading our people in this great endeavor? Can we get it done? We have abandoned manufacturing. When you stop doing something you forget how to do it. How do we go from being the consumer nation that simply prints money to the great manufacturing nation we were from 1783 to 1975?

    4. Ames Tiedeman, Austi says:

      The United States has not had a current account surplus since 1975. We have not had a trade surplus with Japan since April, 1976. We have been in deficit with the EU since 1983. We have run trade deficits with both Russia and China for more than 20 years. How did America go from being the largest creditor nation in 1975 to the largest debtor nation by the end of the 1980's? To understand what has happened one must go back in time. Prior to 1860 much of the Western World practiced Mercantilism. After 1860, led by Great Britain, Mercantilism was abandoned in favor of the teachings of John Locke and the free trade principles of Adam Smith. Trade barriers throughout Europe came down. A great debate on economic policy took place in America. Lincoln for instance was a Mercantilist. For the next 110 years the Western World basically traded with itself. Good flowed across the Atlantic and trade disputes if they arose were generally settled quickly. By 1970 the world was changing. The post world war II era produced the eventual rise of Japan as an economic machine. Goods started to flow from Japan to the United States and to Europe. The problem was that goods were only flowing one way. America for instance was banned by Japan from selling rice or apples to Japanese consumers. While disputes like this in many industries were festering, Japan was quietly becoming a world power in automobile and electronics manufacturing. Auto's and electronics were exported out of Japan at an ever faster clip. By 1977 Japan was running steady trade surpluses with the United States and American politicians were raising alarms that Japan was simply practicing protectionism. What Japan was really doing is practicing a new form of Mercantilism which I have pegged, "Asian Mercantilism." Japan was more concerned with full employment in Japan than the loud voices of western politicians. By the late 1980's the United States and Europe were both running huge trade deficits with Japan. After 15 years of trade deficits America had found herself in the position of having gone from being the world's biggest creditor nation to being a debtor nation. The rise of China over the past 20 years has given the world another Japan but this time on steroids. If Japan practices Mercantilism then China practices Supra Mercantilism: Goods are exported, imports are controlled. The currency is massively controlled, not free floating. Production is favored over consumption. With a population of 1.5 billion China has been able to give Mercantilism a whole new dynamic. What we have in the world today are two competing economic models for prosperity. We have the Western model with relies on the system of Free Trade and we have the Asian system with relies on a super sized form of Mercantilism. We have the West running trade deficits and the Asians running trade surpluses. China, Japan, and South Korea are the producers of goods while Europe and America are the consumers. Who is winning the battle between Western Free Trade and Asian Mercantilism? Asia is clearly the winner. The question going forward needs to be how we reverse a trend that is leaving America and much of the western World indebted and economically broken. What the West now calls protectionism, the Asians call Mercantilism.

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