Losing Our Indepence

As we celebrate our nation’s independence this holiday, I find it ironic that we are increasingly losing our independence to foreign countries who loan us money to finance international trade.

Much like a homeowner taking out a second mortgage to finance spending beyond his means, our nation is trading its future away as a consequence of reckless consumption of imported merchandise and energy. If you’re waiting on the government to do something about this, don’t.

The objective of a public corporation is not to hire people; Their motive is to generate profits with the least amount of labor, the lowest labor costs, and they don’t care if the labor is in the U.S., Communist China, or India. The U.S. government ought to care about keeping its citizens gainfully employed; However, it is unduly influenced by the financial industry, multinational CEO’s, directors of multinational corporations, and lobbying firms (many of which often hold key positions in government at some point in their careers).

So, who in government is looking out for the economic interests of U.S. workers? Nobody of significance. As long as the political parties, bought and paid for by big multinational corporations, can continue to convince citizens to vote against their economic interests by diverting attention to wedge issues such as gay marriage, abortion, immigration, and Terri Schiavo, etc., the economic interests of workers and the nation will be ignored and the living standards of our country will continue to sink under a mountain of debt and job losses for the majority of citizens.

U.S. multinational corporations (including the financial industry) and their CEO’s have profited greatly from international trade thanks to increasing use of low-wage labor and trade agreements guaranteeing them tariff-free access to U.S. consumer markets for their foreign-made merchandise. I use the term international trade because I believe it is more accurate than the term free trade.

The U.S. says it practices free trade. The reality is that most of the countries the U.S. trades with practice managed trade. In simple terms, managed trade means that a country has rules and regulations that are biased favorably towards the interests of its workers and economy.

Free trade basically means that there are no rules, consumer markets in each country are open to any product, and let the best product win. The two types of trade models I just described are mutually incompatible from the view of U.S. workers and trade deficits. As evidenced by the long-running U.S. annual trade deficit, the U.S. does try to practice what it preaches by keeping its markets open. Unfortunately, it doesn’t require the same of its trading partners.

The result for the U.S. is the loss of millions of good-paying manufacturing and service-sector jobs, lower standards of living, lost tax base and, most of all, $6 trillion in debt that U.S. taxpayers owe to foreign creditors as a direct consequence of decades of trade deficits. Roughly one-third of the annual trade deficit is from imported oil. The remaining two-thirds of the deficit is merchandise. In the year 2006, the annual trade deficit was $817 billion. That’s a staggering amount in just one year!

The top corporation in the U.S., as ranked by Fortune Magazine, is Wal-Mart. An important part of Wal-Mart’s business model is to use vendors who rely on low-wage foreign labor, typically from China. The PBS FrontLine documentary series broadcast an exposé on Wal-Mart almost four years ago that focused on Wal-Mart’s ties to China. ^[1]

Interviews with former Wal-Mart store managers and its suppliers revealed how Wal-Mart raises its stock price by marking up merchandise by as much as 80% using low-wage, imported goods from China. U.S. suppliers were encouraged by Wal-Mart to move their factories to China if they wanted Wal-Mart to continue selling their products. There are many, many more cases besides Wal-Mart where U.S. corporations generate additional profits by replacing U.S. labor with low-wage foreign labor (automobile manufacturers, software corporations, etc).

I encourage you to pay attention to the U.S. foreign trade statistics ^[2], typically reported monthly and annually in the media as the trade deficit. More focus should be given to the annual report since the deficit can sometimes fluctuate quite a bit on a monthly basis. Measured in U.S. dollars, this report shows the net value of goods imported and exported. For the past quarter century, the U.S. has imported far more goods than it has exported, resulting in an enormous trade-related debt.

A trade deficit means more dollars left the U.S. than entered the U.S. And, for the last quarter century, the trade deficit has worsened nearly every year. Trade deficits must be financed by foreigners investing in the U.S. economy or Americans borrowing money abroad (otherwise, all the money would leave the country and there would be none left in domestic circulation). Direct investments in the United States provides only about a tenth of the needed funds and, consequently, Americans must borrow about $50 billion each month. ^[3]

It’s also important to pay attention to the net foreign trade statistics and not merely the import or export statistics. Lobbyists and corporate media with financial ties to the status quo try to spin the trade statistics in a manner to make them seem better than they really are. As the U.S. economy has worsened, and citizens are now paying more attention to the economy and their own pocketbooks, international trade is again in the spotlight. The relative few and the powerful that benefit from the status quo are touting recent growth in exports as justification to keep the status quo.

What you should know is that the foreign trade statistics report counts “reexports”, and the total value of exports, all as U.S. exports, as if one hundred percent were manufactured in the U.S. ^[4] For example, if Canada manufactures a V8 engine and ships it to Texas for installation in a Chevy Tahoe, and the Chevy Tahoe is exported, the full value of the Chevy Tahoe (including the V8 engine from Canada) is counted as a U.S. export. Here’s another example: If China manufactures the electronics components used in a PC and ships them to Texas where they are assembled into a finished PC, and the PC is exported, the full value of the PC (including the parts from China) is counted as a U.S. export.

The only way you can get an accurate picture of the trade in these two examples is to add the exports and the imports together. As the chronic annual trade deficits prove, the U.S. always imports far more than it exports on an annual basis. ^[5]

High and rising trade deficits are a drag on economic growth. Each dollar spent on imports, not matched by a dollar of exports, shifts U.S. workers into activities in non-trade competing industries like department stores and restaurants. As I mentioned previously, the total accumulated trade-related debt is about $6 trillion and, at five percent interest, the debt service comes to about $2000 per U.S. worker every year. It took just 220 years for the U.S. to accumulate a national debt of $4 trillion. In the past seven years, the national debt has more than doubled for reasons that include enormous trade deficits (particularly with China), war with Iraq, and tax cuts.

As a consequence of decades of trade deficits, our children will be less productive, poorer and saddled with huge interest payments to foreign creditors. It’s no surprise that these costs are overlooked by advocates of the status quo. Many of these advocates work for private equity firms, hedge funds, and large commercial and investment banks on Wall Street. They champion outsourcing, as it offers them opportunities to finance big deals that move Midwestern factories to Asia and to enter Chinese financial markets. We should remember that they are the same bunch that gave us the subprime crisis, the collapse and foreign rescues at Merrill Lynch and Citigroup, the melt-down in the mortgage and housing markets, and the pending recession.

If you had a leaky roof on your house, you’d fix it rather than just let it continue to leak until the whole roof caved in. I wonder why we don’t stop the insanity of our nation’s failed economic and international trade policies. Already, Federal Reserve Chairman Ben Bernanke has said that the U.S. trade deficits are not sustainable. ^[6] The sooner we decide to solve our nation’s trade deficit, the easier the solution will be. In addition to millions of jobs already lost due to trade deficits, we are already suffering significant declines in the value of the dollar as the Federal Reserve tries to make U.S. exports cheaper and more competitive.

The risk from a falling dollar is that it makes imported commodities (e.g., oil, food, raw materials) and merchandise more expensive and worsens inflation. The danger from this is that the dollar will sink so low, and we will accumulate so much debt, that foreign creditors can no longer afford to loan the U.S. government money. A global economic crisis would surely follow.

In response to a comment I made over a decade ago to a friend about the importance of buying American to reduce the trade deficit, he replied that he’d buy whatever is good for him; Whatever is good for the country is not his primary concern. What can you say to that? Give him a U.S. flag decal to put on his new Subaru? I guess we have too many citizens around today who don’t remember The Great Depression and don’t know how bad things can really be. It seems to me that too many are consuming as though it doesn’t affect anyone else.

If it affects your neighbor, doesn’t it eventually affect you too? Waiting on the government for a solution to trade deficits is a waste of time since, as I mentioned previously, it is essentially bought and paid for by the very interests who want to keep the status quo. The solution is simple: The U.S. must consume less imports and produce more exports. How this occurs is up to us. The status quo is unsustainable. As consumers, we can start to solve this today by consuming fewer imports (check the label, see web site at bottom) and insist that our government leaders negotiate fair trade agreements to level the global playing field for two-way trade.

We can write our representatives to let them know that continued trade deficits and shipping jobs overseas for higher profits are no longer an acceptable economic and trade policy.

Let’s keep America independent.

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References

1. Video – PBS FrontLine: Is Wal-Mart Good For America?
2. U.S. Census Bureau Foreign Trade Statistics Trade In Goods with World
3. Why The Trade Deficit Matters, Dr. Peter Morici
4. U.S. Census Bureau Foreign Trade Statistics Information on the Collection and Publication of Trade Statistics

Related

o Morici – Antitrust in the Global Trading System: Reconciling U.S. Japanese and EU Approaches
o NY Times – Geithner Says China Is Manipulating Its Currency
o Morici – Currency Manipulation and Free Trade
o How Americans Can Buy American
o The Market Oracle: Falling US Dollar and Trouble with the Trade Deficit
o AP/Yahoo: The buck doesn’t stop here; it just keeps falling
o The Trade Deficit and the Fallacy of Composition
o Youtube: Greenspan Slammed on US free trade policies
o Youtube: FrontLine Documentary – Trade With Japan (watch below)

 

Illustrations

(source: U.S. Census Bureau, Foreign Trade Division)

(Total USA Trade Deficit With All Countries: $817 billion)

USA Trade Deficit: Top Ten Countries