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See other Business/Finance ArticlesTitle: U.S. Trade Deficit Has Roots Here, Not in China
Source: Bloomberg
URL Source: http://www.bloomberg.com/apps/news? ... lumnist_berry&sid=ansUd.BWGoPE
Published: Nov 16, 2006
Author: John M. Berry
Post Date: 2006-11-16 13:12:30 by Starwind
Views: 636
Comments: 1
Nov. 16 (Bloomberg) -- The harsh reality of America's trade woes is encompassed by two prominent numbers: September's $64.3 billion trade deficit and October's 4.4 percent unemployment rate.
With the U.S. economy operating at what most economists and policy makers -- including those at the Federal Reserve -- regard as full employment, and simultaneously running a huge trade deficit, the nation is consuming far more in goods and services than it produces.
The ideal resolution of this dilemma would be for the demand for U.S. exports to rise gradually while American households increase their savings and cut spending. That would allow some of the country's factory capacity to shift to production of exportable goods.
Odds don't favor such a neat combination happening. And new legislation penalizing China's trade policy isn't going to help much.
The U.S. trade deficit -- which is likely to approach $800 billion this year -- isn't primarily due to the refusal of China to let the value of its currency, the yuan, rise significantly relative to the dollar.
Nevertheless, several Democrats defeated their Republican opponents for seats in the Senate and House in part because of voters' unhappiness with the loss of manufacturing jobs to overseas producers. That was particularly true in the Midwest where auto makers and other manufacturing companies and their workers have felt the sting of foreign competition.
Spotlight on China
In general, the Democrats have blamed China and its pegged currency for much of the loss of manufacturing jobs, and they have blamed President George W. Bush and congressional Republicans for not doing enough to protect U.S. workers.
Executives from General Motors Corp., Ford Motor Co. and DaimlerChrysler AG met on Nov. 14 with President George W. Bush to discuss their difficulties and to complain that the Japanese government was artificially depressing the value of the yen.
Most of the attention remains on China, and it's certain there will be attempts by the new Democratic majorities in the House and Senate to press for a faster revaluation of the yuan than the roughly 5 percent that has occurred since the peg to the dollar was loosened in July 2005.
It's not that simple to create more manufacturing jobs in the U.S. Factory employment has been falling for decades, primarily because of rapid growth in productivity in manufacturing, not because of globalization.
The Numbers
Over the past two decades, Bureau of Labor Statistics figures show that manufacturing productivity doubled. As a result of that greater efficiency, U.S. factory output grew by two- thirds while the number of manufacturing jobs declined by almost one-fifth.
This year about $4.5 trillion worth of manufactured goods will be produced in the U.S. Based on trade figures for the first nine months of the year, the U.S. will import about $1.4 trillion worth of goods and export about $775 billion, making a total of $5.1 trillion available for the U.S. economy.
The $625 billion difference in goods imported and exported - - or 12 percent of the $5.1 trillion total -- is a measure of this year's likely net reliance on foreign goods production.
In other words, even with a trade deficit approaching 7 percent of gross domestic product, the U.S. reliance on imported goods isn't nearly large enough to account for the long-term decline in manufacturing employment. Instead, the culprits are the big gains in factory efficiency and the major shift in consumption toward services and away from goods.
Jobs Decline
Since there is no reason to expect those trends to change, there is no reason to expect the number of factory jobs to stop declining.
Still, in the interest of fairer trade, shouldn't the U.S. government keep twisting Chinese arms to allow a faster yuan revaluation?
More flexibility by the Chinese would undoubtedly give freer rein to market forces within that country, which would be in its own interest. And it might slow the rapid rise in the U.S. deficit in trade with China, though only a bit.
Making the yuan more expensive in dollar terms would only affect the cost of the value added to a manufactured product in China. In many instances, Chinese exports include a substantial share of value produced in other countries in the form of components which are imported into China, assembled and then exported. In that case, the only value added is the assembly.
Only if the country exporting the components also revalued its currency relative to the dollar, would the U.S. buyer's cost rise noticeably. Even that assumes that someone in the production chain does not accept a lower profit margin to keep the dollar price unchanged.
Joint Ventures
The unusual nature of the Chinese economy and its export-led growth are laid out in a paper by economists John Whalley of the University of Western Ontario and Xian Xin of China Agricultural University published in May by the National Bureau of Economic Research.
Whalley and Xian found that what they call Foreign Invested Enterprises -- usually joint ventures between foreign companies and Chinese companies -- accounted for more than half of Chinese exports and 60 percent of its imports in 2003 and 2004. And even though the FIE's produced more than 20 percent of Chinese GDP -- and accounted for about 40 percent of its growth in those years - - they employed only 3 percent of its workforce.
FIE's production is geared to exports with the foreign partners providing ``both distribution systems abroad and product design for export markets,'' they say.
It doesn't seem likely that revaluation of the yuan in any reasonable measure would disturb this entrenched arrangement.
(John M. Berry is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: John M. Berry in Washington at jberry5@bloomberg.net
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It's not that simple to create more manufacturing jobs in the U.S. Factory employment has been falling for decades, primarily because of rapid growth in productivity in manufacturing, not because of globalization.No! No! No!
Productivity (a derived measurement) has increased because low or un productive jobs have been offshored to Mexico, China and even India (e.g. call center ops) and the mathematical consequence is that the higher productivity jobs remaining within US shores, not surprisingly, in aggregate show up as more productive than compared with aggregates of 10, 20, and 30 years ago. Duh!
And yes it is because of globalization, but more specifically because the US has priced itself out of a globalized labor market.
How has the US priced itself out of the globalized labor market?
A rising CPI (even a biased CPI) shows a 5-fold increase in the cost of non- energy & food related items for the US consumer since early 1970's, but wages have not risen 5-fold.
Then taxes on the worker have risen: payroll taxes, property taxes, income taxes (due to bracket creep if nothing else) and Social Security taxes.
Employment costs (health care, insurance, pensions) have risen as well.
None of those increases exist in Mexico, India or China. That is why those workers are paid 50-80 cents an hour. A US worker can not live on minimum wage of $5.15/hour let alone $0.80.
Why have costs increased on US workers (unlike Mexican, Indian, and Chinese workers)? Because:
the Federal Reserve has devalued the purchase power of the dollar by 50-80 percent since the Gold standard was ended in 1972.Rather than pay increased costs on jobs that can be done overseas for literally pennies on the dollar, the jobs are offshored. Lower productive jobs went first, but now higher productivity jobs (like programming and accounting) are following.Federal regulations and lawsuits keep raising the costs of medical care.
Congress (and States and counties) keeps raising taxes on US workers.
Congress keeps making it difficult for manufacturers to operate profitably in the US, or outside the US as foreign subsidiaries.
Congress keeps spending more than it borrows or taxes.
Federal deficit spending keeps the pressure on the Federal Reserve to monetize the Federal debt, so it keeps printing money and the dollar keeps devaluing while foreign currency exchange rates hold even or rise.
Rather than rein-in spending and dollar devaluation, congress, states, counties just keep taxing and borrowing.
There is a reason that there is a "savings glut" elsewhere in the world. With taxes and costs rising and wages flattening or falling, most US workers have little to save, after buying what is no longer affordably made in the USA (food, clothing, furniture, cars, tools, household items, appliances, yada yada yada).
This isn't rocket science.
Instead, the culprits are the big gains in factory efficiency and the major shift in consumption toward services and away from goods.Efficiency of those factories left behind or newly built, yes. But the inefficiencies wrought by rising US worker costs saved by offshoring to countries with almost no "worker cost" at all is where the big gains are. And there has been no "shift in consumption toward services and away from goods". Services cost more these days. Professional fees (doctors, lawyers, accountants) utilities (energy, communications), university and tech-school tuitions, and even visiting a national park is more expensive. Construction (a service industry) has boomed building hotels, casinos, and second-homes (even while the contruction materials like lumber and steel have been imported) has grown domestically. These service costs have risen far more than have costs of domestic or imported goods risen.
Hence when measured in current nominal dollars (and don't get me started on hedonics and "real dollars") the appearance is a shift, but that is a statistical consequence of the unit of measure (dollars spent, not items consumed).
Then there is also the shifting demographic: the aging baby-boomers having already bought most of their materiel assets aquired during earlier life, are now buying services (home care, maintenance, travel, leisure, dining, etc). That is why the only real job growth in the US is in "service industries" that can't be offshored, i.e. serving aging baby-boomers who still live in the US (i.e. haven't died yet). And what goods they do buy are often higher-priced, upscale imported items (luxury cars, electronics, clothing, rarewood furniture, china, crystal, silverware, artwork, etc.), stuff not made by joe six-pack in the factory across town.
There is no mystery as to why services appear to be consumed more than goods.
FIE's production is geared to exports with the foreign partners providing ``both distribution systems abroad and product design for export markets,'' they say.Yes, another area where globalization has left the US worker behind. New, modern plant construction in China (for example) has all the benefits of modern methods (robotics for example) and didn't have to pay for the learning curve in the US over the last 50 years. And the US distributions systems provide a ready- made customer base and intellectual property (product design and manufacturing know-how) which again the Chinese didn't have to go out and find and or reinvent. It was handed to them.
It doesn't seem likely that revaluation of the yuan in any reasonable measure would disturb this entrenched arrangement.It is entrenched not because of the value of the Yuan but because of the relatively "worthless" value of a Chinese worker compared to the "overpriced" value of a US worker.And their respective governments are to blame. Not productivity, not exchange rates, not savings rates; just simple government malfeasance and indifference compounded over decades by taking the easy way out and kicking the can down the road.
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