What is causing our trade deficits?
By Grace Norton
Legislative Chair
Both Bernie Sanders and Donald
Trump are blaming “trade deals” for the loss of manufacturing jobs in the
United States that so many of their supporters see as the root cause of their
being “left behind” because wages have stagnated or even declined for what used
to be the middle class. Bernie Sanders
sees himself as some sort of visionary for casting votes against NAFTA and
subsequent trade agreements. Trump
argues that American negotiators were simply incompetent and allowed themselves
to be bested by the Chinese and others.
Both Sanders and Trump are dead
wrong.
The real causes of the economic
situation we now have are quite different from what those candidates blame.
They began decades before any of the trade agreements now being blamed were even
contemplated. One of the most important
of the actual causes dates from the 1950's and three others date from the late
1960's. Each of these has had more of
an impact on the restructuring of the American economy and the changes in
people’s relative economic status than
all of the trade agreements combined.
At the close of World War II, the
United States had the only major industrial economy that had not been
absolutely devastated by the war. Our
wartime industries had ramped up to produce everything needed to win the war,
often by stopping production of hundreds of kinds of consumer goods. When the war ended, we had a huge backlog of
domestic demand as well as a huge demand from abroad for materials to re-build
the economies of war-torn nations. We
were running three shifts a day getting every ounce of production we could get
out of factories built before and during the war. Meanwhile,
the Europeans and Japanese were busy building new, more efficient
industrial facilities to replace those destroyed by war; and the Third World was starting to actually
develop industrial economies instead of merely producing raw materials. The entry of new producers meant that there
was soon to be too much production capacity for some products, among them
steel. Much of the new production came
from factories that were more efficient than the American factories and paid
their workers less. Their products could
be sold for less than American-made products.
For awhile, the non-European producers could not match the quality of
American-made products, but they soon learned how to make products of
competitive quality.
The second of the causes was the
collapse of attempts to create a system of monetary management among the major
economic nations of the world. The
Brettotn-Woods system was created in the later
years of World War II to try to ensure that there would be a system of
financial rules and institutions that would facilitate fair trade and other
international relations. Parties included
the U. S., western European nations, China, Australia, and, after the war
ended, Germany and Japan.
The idea was to tie the value of these major currencies to an agreed
upon price of gold bullion ($35 per ounce) with the United States as guarantor
of what was necessary to maintain flexibility and liquidity to faciltate trade
and economic development. The fatal
flaw of Bretton-Woods was the impossibility of maintaining a stable price of
gold on the open bullion market. It was
possible to accumulate dollars, trade 35 paper dollars for an ounce of gold,
then sell that gold on the bullion market for much more than $35 an ounce. Other problems with Bretton-Woods created
recessionary pressures within the U. S. economy that both the Kennedy and
Johnson administrations tried, without much success, to address. In 1971, President Nixon unilaterally took
the United States out of the system, allowing the American dollar to “float”
against the value of other currencies of the world. Absent the United States’ participation, the
Bretton-Woods system could not function.
But in a condition of “floating”
currencies, the relative strength of one currency against another affects the
relative price of goods to consumers. A
strong U. S. dollar causes American goods to be quite expensive when they are
sold in countries with relatively weaker dollars. Conversely, goods made in countries with weak
dollars should cost less when sold in the U. S., although the benefits of any
lower cost may well go entirely to the importer rather than to the actual
consumer.
The third major problem is an
outgrowth of the second. Some nations
engage in currency manipulation to gain trade advantages. Currency manipulation involves a government
buying or selling its own currency in order to change the exchange rate of its
currency-what people get when they convert, for example, dollars into
Euros. Artificially changing the
exchange rate drive the currency’s value away from the equilibrium that would
have been achieved by market forces alone.
The object of manipulation is to be unfair to trading
partners. In a lot of ways, currency
manipulation is to business what point-shaving is to sports. For some time now, China and some other
nations have believed that it is in their own national interest to manipulate
currency to make their goods cheaper than comparable items made in other
countries so that trading partners will buy more from them. For example, the Chinese government thinks
this will stimulate demand for goods made in China and result in more jobs for
their workers and more profits for their industries. Currency manipulation is actually independent
of the terms of trade agreements, but it affects the results of trade agreements to the nations
invovled. To continue the analogy to
sports, point-shaving will affect a team’s win/loss record and possibly enrich team owners independently of
league rules, the schedules agreed to by the teams, etc. The point-shaving effects can spill over into such things as
where teams stand in the draft choices, player salaries, etc. Several well-designed and reputable studies
have concluded that currency manipulation alone has cost the United States 5.8
million jobs and Canada millions more.
The third of the 1960's era problems
was a conscious decision by the Nixon administration to actually facilitate the
transfer of manufaturing jobs to low-wage areas. One Nixon-era grand idea was what has come to
be known as “trickle-down economics,” the idea that if we make it possible for
businesses to maximize profits, they will create more jobs and the wealth will
funnel down to ordinary workers. One
Secretary of Defense proclaimed that
“whatever was good for General Motors was good for the country.” The other grand idea of the Nixon-era
economic advisors, which actually worked to some extent against the other big
idea, was to take advantage of the
advances in technology by fostering the growth of high-technology jobs in the United States
while moving the low-skilled production jobs to lower-wage countries and
lower-wage states so that the workers there could afford to buy more
American-made products. Simultaneously,
there was a determined effort to hold down
wages for American workers because labor costs are among the easiest costs to
control. Wages had increased
dramatically after World War II because of union activity in the post-war years
to make up for wage freezes during the war.
The push for “right-to-work” laws is an on-going part of efforts to hold
down wages. What we need to realize is
that manufacturing jobs began to be eliminated on a large scale in 1970, when
Nixon was president--not after the passage of NAFTA in 1994. Between 1970 and 1974, each of the industrial states in the northeastern
part of the country lost hundreds of
businesses each year–many to southern states. Wages for American workers
began to stagnate in 1970, a quarter of a century before the passage of NAFTA.
What has happened to the United
States economy since 1970 has also happened to some extent in other First World
nations. Germany fared better than most
because it took steps to make it expensive for companies to move out of the
country–for example, requiring them to fully fund pensions for workers who would
be out of jobs, requiring them to repay communities for infrastructure and
other expenditutes made for the benefit of the business but otherwise
unnecesary to the community. Faced with
large up-front costs to make moving the company possible, most decided to stay
put. European nations that bought into
austerity as the means to recover from the effects of the world-wide economic
chaos of the 2008-10 have not fared nearly as well as the U. S., which took a
stimulus approach. Japan is among the
Asian nations that is having problems similar to our own. China, too, is having major problems
now. Trump, at least, woud hae people
believe that all of these nations are “beating” the United States in everything
having to do with manufacturing and trade–but it simply is not true.
