America's Trade and Production Problem

The US and China just concluded another round of lower ranking official trade negotiations. The next step is more formal talks with senior officials and there is great anticipation that a trade deal will be struck between China and the US before the next round of tariffs hit on March 1.

Yet, no matter the final terms of any trade agreement the US must face a simple fact about trade economics; that is, if a country does not produce goods its consumer want or what the world marketplace demands it will run a trade deficit.

In the past 20 years, the US has lost over 85,000 manufacturing establishments and with it an enormous amount of productive capacity. Once the productive infrastructure is hollowed, abandoned or even transferred offshore, new trade deals don't have the “bang” of yesteryear since the capacity to produce is no longer present. As a result, the solution to the massive US merchandise trade imbalance goes well beyond opening new markets and brokering freer trade deals.

The US has been running trade deficits almost every year since 1970, and in most years the swings in the scale of the trade imbalance was dictated by the price of oil as the US relied heavily on foreign oil to offset its domestic shortfall. Yet, since 2000 the US trade imbalance has morphed into a structural imbalance, as domestic production, especially for consumer goods, has been replaced with an ever-rising amount of imports.

Indeed, since 2000 imports of consumer goods have doubled in size (from $480 billion to over $1 trillion today), and the resulting deficit in consumer goods accounts for nearly three-fourths of this year's nearly $900 billion merchandise trade imbalance. Part of the reason why the trade deficit in consumer goods has widened so much is because in many instances domestic production of consumer goods has been slashed or idled, due to relentless competitive pressures.

For example, consumer goods industries, such as appliances, furniture, apparel and paper industries, experienced production declines of 50% or more since 2000 due to firm failures, plant closings and the transfer of production to offshore affiliates. Domestic production of motor vehicle and parts did post a marginal increase, but that gain was due to foreign producers (mainly from Europe) establishing production facilities in the US, while US firms closed a number of assembly and parts plants. Nonetheless, even with the small gains in the vehicle sector, the overall domestic consumer goods sector has shown no output growth since 2000, or nearly 20 years, which is grim reminder of how deep-rooted the competitive problems have proven to be for many consumer industries.

The US has also lost standing in the capital goods area. Prior to 2000, the US consistently ran trade surpluses in the capital goods sector and now capital goods imports exceed US exports by nearly $200 billion a year. Over half of the capital goods deficit is centered in the technology segment.

The US has made important gains in the energy area as dramatic increases in domestic production have reduced imports and increased exports resulting a much smaller deficit in overall energy trade. At the same time, the US has widened its large trade surplus in business services-- finance, insurance, telecommunications, computer and information---to nearly $300 billion. But despite those gains the US overall trade deficit in goods and services will still total $600 billion in 2018, a new record high for this economic cycle.

The US still needs to pursue the trade talks with the urgency that it has, but in order maximize the benefits of “freer trade” the US needs a larger manufacturing base. To be sure, an export-oriented growth strategy needs three pillars; first, a corporate tax structure that is close to the average of its competitors (v); second, a cheap and abundant supply of oil and natural gas (v); and third, a productive and expansive physical manufacturing infrastructure (?). The US is still missing the third peg so the economic gains from new trade deals will be positive, but limited in scope.

Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.