The U.S. Trade Imbalance: What to Do?
There's a reason that President Trump is drawing a line with new tarriffs. The USA has been on the short end of trading with almost every country, and the problem had gotten a lot worse since NAFTA. Dr. Brian Long is the Director of Supply Management Research at Grand Valley State, an was a guest on the WBCK Morning Show with Tim Collins. Dr. Long explains the trade imbalance:
A positive balance of trade, simply put, means that a country sells more goods and services abroad than it imports. For over 90 years, our overall balance of trade with the world was very positive and propelled us to be the world’s leading economic power. By 1948, we had become the world’s banker and financier, a title we took from the British following WWII. But in the early 1970’s, we began importing large quantities of oil from the middle east, resulting our balance of trade turning negative. We began selling off our country one small piece at a time to the rest of the world. No one on main street paid much attention, but it forced our treasury department to no longer exchange our dollars for gold. Thus, after 5000 years, world trade was off the gold standard.
So what changed? Initially, absolutely nothing. It’s kind of like the rich kid working a menial job that inherits the family fortune, and then begins spending it at a rate far larger than his/her income. It can work great for, say, twenty years, and then he/she (and everyone else) realized that the money is gone—and is never coming back. He/she may even begin collecting food stamps. People may say, “You inherited a fortune, why are you now poor?” But what is done, is done. There’s no way back. From rages to riches, and back to rags.
Attached in PDF is a chart depicting the trade deficits with some of our major trading partners. The chart compares the 2016 trades deficits with 1990, a time not all that long ago. We hear about the trade deficits with China, but as the chart conveys, our trade deficits with other countries has skyrocketed as well. Many of these countries have an array of subtle trade barriers which our government has not addressed because we would not want to “offend” our trading partners. But just like the rich kid with the inheritance, at the present rate, some future generation will have to deal with the fact that most of our corporations, real estate, and resources will be owned by foreign entities. The world community allowed China to join the World Trade Organization in 2001, which generally opened the borders of all members to each other. WTO members are supposed to follow the rules, but many don’t. Despite numerous example of “reshoring,” our trade deficit with China hit a record in 2017.
Regrettably, putting a 25 percent tariff on steel will not by itself result in us selling more of our goods and commodities to a given foreign customer, unless we can identify and eliminate the restrictions they are placing on importing our goods. Instead, the other countries could retaliate by placing a new tariff on our goods. This, of course, forms the beginning of a trade war, which is often considered to be one of the causes of the Great Depression. Today, a trade war would probably not cause a depression, but a trade war could drive us into another recession.
Take a look at the chart again. Why have we let this situation get so far out of hand without addressing it years ago? Previous administrations have paid lip service to the trade deficit issue, but the foreign entities did nothing to help fix the problem because they knew there would be no consequences. This is what the president is now trying to do. It looks like a “bull in a china shop” approach, but at least we have gotten THE ATTENTION of our trading partners. One-by-one, the president hopes to negotiated a better trade deal with all of the countries that have large trade deficits with us. At this time, we don’t know if it will work, but again, we have finally gotten their attention. However, if the full force of these new tariffs were fully implemented, it could easily put us into another recession. Ouch.
Anyway, this is something to think about.