Trade Picture Worsens in August

Posted by: Michael Mandel on October 09

Yes, the headline number on this morning’s trade report improved. But that was misleading. In fact, the non-oil trade deficit widened for the second straight month (19.8 billion in June, 23.6 billion in July, 24.3 billion in August).

That’s not a good thing. It means that the fundamental imbalances in the global economy are reasserting themselves.

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What’s worse, our trade deficit in advanced technology products is actually worse than it was a year ago, before the crisis hit. That’s a sign of a fundamental problem in what should be a U.S. strength.

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Reader Comments

econguy

October 9, 2009 03:02 PM

Have no fear, we will focus on health care reform, Afghans, and millions of new (and subsidized) alt energy jobs in place of key sectors. Yes, those are the same key sectors that were supposed to take the place of millions of uncompetitive mfg jobs. Congress can just increase ear marks, extend unemployment benefits, and the minimum wage to take care of all this if it does bubble up to the level of main street concerns. I suppose we can buy some time with tariffs to get through the next elections.

CompEng

October 9, 2009 03:44 PM

Why would anything change on a structural level? High-value goods and service production capacity on a global level are pretty sticky, and certainly nothing has changed to bring commodity production to the US. The only difference is consumers are starting to spend just a smidgen more.

New "knowledge-based" goods and services, conventional wisdom aside, aren't going to overwhelmingly favor the US because we still don't have the largest, best educated, and most motivated pool of the brilliant and unemployed. What's more, the greatest asset for innovation is risk tolerance, and native-born Americans now tend more towards risk aversion: this is why so many start-ups are generated by immigrants.

SteveM

October 9, 2009 04:22 PM

I love your blog, Michael. Always a unique and insightful point of view.

Ajay

October 9, 2009 05:24 PM

Nonsense, trade deficits are irrelevant. You could equally well calculate California's trade deficit with the rest of the US, demonstrating how dumb the concept is. As for tech, take a look at profits, they're invariably here. There's no Google, Microsoft, or Apple in China or Europe, whatever the reason.

CompEng, if commodity production were so sticky, how would it have left the US so fast? ;) You're right the US is not the best "educated" but since it's more free market, it encourages risk-taking and innovation much more and that turns out to be the most important factor, since education is universally a joke, even more idiotically so abroad than in the US. US stability from its free market is why all the Chinese exported their savings here, while Americans didn't save at all till recently, as opposed to investing in higher-growth stuff like stocks. Obviously knowlege work will go global much faster but it will take those countries time to free up their markets. However, a period of intense competition for lighter regulation is about to start. When I can do telecommuting knowledge work from anywhere on the planet, where am I going to settle and work remotely from: Europe with its high taxes or Florida or Texas with their relatively lower taxes? Of course, countries like the US with tough immigration restrictions lose out on this particular trend. As for native-born americans ("now" more risk averse?) vs immigrants, what does it matter who starts the companies as long as they're incorporated here? To the extent that companies are increasingly using a telecommuting global workforce, incorporating here is really all you can ask for. Besides what is your goal, having more startups started by natives? Don't be silly, your nativism is crescendoing to ridiculous levels in that case. This country was built on immigrants who were more willing to embrace risk and work hard, nothing has changed in that regard.

Mike Mandel

October 9, 2009 06:33 PM

Ajay,

I used to argue that trade deficits were not that important. But in the wake of a financial crisis driven by debt, anything that adds to that debt is not a good thing.

Ajay

October 9, 2009 09:19 PM

Mike, a trade deficit of $400 bil/year is fairly small compared to overall net worth and debt. Besides, debt is not the problem, it's bad investment decisions using that debt. Americans borrowed money to spend on stupid investments like real estate, flat screen TVs, SUVs, and marble countertops. You weren't saying anything about those idiotic decisions when times were good and those decisions were being made, but that's what the real problem is. These down times simply show those people that there are consequences to their bad decisions, unless moron politicians sell them on the easy evasion that it's not their fault, that the Chinese are stealing their jobs and they didn't do anything wrong. The flip side to the easy investment climate of booms is the current financial paralysis of busts. The worst thing we can do today is overreact to that paralysis and put in govt programs that are bound to make things worse, as Hoover and FDR did in the 30s and Obozo the clown is trying to repeat today. Anyway, what we say or what politicians do is not that important, entrepreneurs are out there figuring out new stuff to sell that will power the next boom.

CompEng

October 9, 2009 10:20 PM

Ajay,

Saying trade deficits are not important is equivalent to saying debt is not important, which is absurd. And that's true for families, businesses, towns, states, nations, or any level of abstraction you care to name. Unless your point is that geological groups make no sense, which I also disagree with. But, as you point out to Mike, it's ok to carry deficits or debts as long as they are sufficiently small compared to net worth, especially if they are made to finance smart investments. I think our trade deficits are worth noting, even if they're not catastrophic.

> CompEng, if commodity production were so sticky, how would it have left the US so fast? ;)
It took decades to set up the trend, which is still fairly slow by most people's timetables.

"while Americans didn't save at all till recently, as opposed to investing in higher-growth stuff like stocks"
I thought I remembered Mike delving into these numbers and pointing out that a lot of 401K investments and equity didn't get factored in to the numbers, but you're basically right.

"However, a period of intense competition for lighter regulation is about to start. "
I agree. I think it's already happening, although it will intensify.

"Besides what is your goal, having more startups started by natives? Don't be silly, your nativism is crescendoing to ridiculous levels in that case."
Actually, that's not really my goal. I've argued enough for H1Bs on this forum to back that up. :) I was more pointing out facts than complaining about them.

"This country was built on immigrants who were more willing to embrace risk and work hard, nothing has changed in that regard."
Agreed, but I've become a little sensitive to the idea that native-born Americans "can't do". Some of us sure as hell can.

Bill

October 9, 2009 11:24 PM

Actually, international trade, and not just the trade deficit, is in far worse condition and will impede a recovery. Krugman and other economists have noted that international trade has fallen off the cliff--imports as well as exports. You can capture some of the technical discussion here: http://www.econbrowser.com/archives/2009/10/trade_procyclic.html

What bothers me is that the description of imports in this article is non-oil imports. What we don't realize is how big oil imports are of total imports, and how this in 2008 contributed to the crisis. We are not helpless here; if we can conserve more and become more efficient in the use of energy we can reduce our import deficit quite smartly--both because we would be using less and because reduced demand should depress price. For those who decry the current account deficit, I say turn off an extra light at home.

Bill

October 9, 2009 11:24 PM

Actually, international trade, and not just the trade deficit, is in far worse condition and will impede a recovery. Krugman and other economists have noted that international trade has fallen off the cliff--imports as well as exports. You can capture some of the technical discussion here: http://www.econbrowser.com/archives/2009/10/trade_procyclic.html

What bothers me is that the description of imports in this article is non-oil imports. What we don't realize is how big oil imports are of total imports, and how this in 2008 contributed to the crisis. We are not helpless here; if we can conserve more and become more efficient in the use of energy we can reduce our import deficit quite smartly--both because we would be using less and because reduced demand should depress price. For those who decry the current account deficit, I say turn off an extra light at home.

Ajay

October 10, 2009 12:06 AM

CompEng, so it's absurd to say that a small amount of debt is unimportant? Save your protestations for something worthwhile. And yes, debt itself is relatively unimportant, as I already pointed out that what really matters is how it's spent. When you take on a loan to invest, you're gambling on that investment with other people's money. It is laughable for you to then focus on the borrowing when what really mattered is how that money was misspent. Yes, the underlying point is that geographical groups are a mistaken abstraction, what's called the fallacy of composition. I don't much care if some homeowner in Los Angeles borrowed more money to buy SUVs and a vacation house or if some idiot banker at Bear Stearns financed it with foreign money and lost his shirt. Any attempt to make people care is merely pretext to govt action, dumb moves that EconGuy has exemplified above.

To the extent that there's been a dropoff in manufacturing jobs this decade, it actually fell fairly fast, which you can see in a big dropoff in the jobs numbers a couple years ago in the charts I linked to before. It certainly sounds like you're complaining about immigrant founders doing so well. Besides, nobody made your fabricated counter-claim that natives can't do: Bill Gates and Warren Buffett are true-blue Americans. The truth is that affluence inevitably breeds complacency, which immigration and a free market can and do countervail.

CompEng

October 10, 2009 09:50 AM

Ajay,

I said deficits in abstract matter: I didn't say small deficits necessarily matter. Why are you putting words in my mouth? Do you just like to argue? And I would say, despite the success of people like Donald Trump, that large debts matter even if you're a good investor: because no one is a perfect investor and Murphy's Law applies.

"It certainly sounds like you're complaining about immigrant founders doing so well."
Ummm, no.

"Besides, nobody made your fabricated counter-claim that natives can't do"
Nobody on this board made the comment. I've certainly encountered it.

"The truth is that affluence inevitably breeds complacency, which immigration and a free market can and do countervail."
That I will certainly second.


CompEng

October 10, 2009 10:10 AM

Ajay,

Of course you are right that a lot of jobs disappeared very quickly in the US in the last decade (although I maintain a lot of this had been in the pipe for much longer than was visible: it takes years to plan, pilot, decide, build contacts, and then finally move). But my original point was that the high-end was sticky: I thought previously you had been arguing that most of the manufacturing leaving the US was in worthless commodities?

Beezer

October 10, 2009 12:28 PM

It's been explained to me that a trade deficit is akin to a tire leak: The more you pump into it, the quicker it leaks out. Trade deficits and what are causing them matter very much. Currency manipulation and capital controls have been used successfully for centuries by nation's wanting to boost exports. We've simply ignored that historical fact and are sustaining the inevitable consequences. No surprise there.

To me it seems that as a policy, balanced trade is a worthwhile goal. Warren Buffett's import certificate idea should be considered.

As for our dependence on fossil fuels, of course we should be doing everything possible to develop sustainable, native sources. Shipping our wealth overseas in oil container sized amounts is suicidal.

Entreprenurial activity can always be encouraged, and success enhanced, by intelligent government protection and support. To ignore the role of government activity in our track record of achievement is to ignore history.

Rycoka

October 10, 2009 06:20 PM

Ajay,
You are making a lot of really good points and I strongly suspect you are in the vanguard of thinking about where society should be heading. The Anglo-American tradition of individual property rights (freedom) seems to be a successful model for rapid adaptation and rapid adaptation is increasingly necessary as population pressure increases - we need to innovate to survive.
I tend to think that it is no accident, however, that freedom has been fostered in cultures which are at least nominally Christian - with its fundamental premises of equality and individual human worth. Individual freedom without an acknowledgement of the worth of others is anarchy.
How does this link to trade imbalances? Probably only in so far as international finance underpins globalisation, which will tend to drop US standards of living (fewer granite counter tops, SUVs and flat screen TVs, relatively more expensive food and energy costs). Ajay's innovation drive is the only thing that is likely to succeed in making this transition painless for Americans.
This needs to be done without losing focus on the importance of others. Programs which help everyone achieve their potential (education and health services) create more cohesive and functional societies and make countries attractive for high value immigrants. While your President's Nobel Peace prize seems a little premature, he does have a consistent message about the worth of individuals - regardless of their current economic circumstances. I think this is a good thing.

Ajay

October 15, 2009 01:31 AM

CompEng, All I did is take your statements that saying trade deficits are unimportant is absurd and that "it's ok to carry deficits or debts as long as they are sufficiently small compared to net worth" and combine the two to show the flaw in your thinking. Why do you call that putting words in your mouth, do you just like to argue? ;) Yes, high debt-to-asset ratios matter but as Mike's periodic household net worth charts show, we're in no trouble there yet, far from it. As for manufacturing, what left was the low-end work but it left in two big spurts over the course of a couple years (http://mjperry.blogspot.com/2009/08/manufacturing-output-per-worker-hits.html). That certainly doesn't imply long planning, it implies a bunch of factories that closed abruptly because of economic conditions or because outsourcing got popular all of a sudden and the work eventually showed up abroad. Nor is the high-end sticky either, Intel has fabs all over the world and TSMC and others are credible competitors.

Rycoka, I don't see much of a connection between freedom and Christianity, other than the periodic attempts by the church to squash it. ;) But then I'm basically an anarchist, so we probably disagree at an even deeper level. Actually, globalization leads to higher US standards of living, it's the crappy public education and health systems that are holding us back. No worries, the internet is about to destroy both those markets: it'll be fun to see all the current teachers and doctors out on the streets and actually having to work for a living. :)

CompEng

October 15, 2009 09:44 AM

Ajay,

If your point is that I'm not admitting trade deficits are small, that's an interesting way to put it. My intuition is that trade deficits greater than the rate of GDP growth bear attention, but my intuition in this area is still not well trained, and I'm still operating from a lack of hard data.

"Yes, high debt-to-asset ratios matter but as Mike's periodic household net worth charts show, we're in no trouble there yet, far from it."
My concern was that baked in there was a lot of inflated equity that bursting the housing bubble would erase. The same was true for the stock markets. I know people that invested "conservatively" and still had 6-digit losses there after 2000 and the popping of the more recent bubble.

Thanks for the link. But if the leaders (Mattel, DuPont, certain auto parts manufacturers) do a pilot outsourcing program, and it works fine for a year or so, I could definitely see them immediately shifting large amounts of low-end production in another year or two. In another year or two, competitors that don't do the same get wiped out or learn. Walk back those dates to China joining the WTO. :)


"Nor is the high-end sticky either, Intel has fabs all over the world and TSMC and others are credible competitors."
Building a new fab in a different country is an enormous undertaking, costing billions of dollars and taking years to prepare and build. When Intel builds a fab in a new country, it's an event. Countries typically put up huge tax subsidies, guarantee access to water, cheap land, uninterrupted electricity, and there's an investigation to make sure there's an educated labor pool nearby. Getting rid of a fab is a big deal too. There are multiple credible competitors in the market, but I'd still call it somewhat sticky because it doesn't move fast (but it can still move). A lot of high-end manufacturing is in that category.

Ajay

October 15, 2009 05:14 PM

CompEng, My point is exactly what I said, that you first claimed that trade deficits were important and then agreed that they likely weren't because they were small. All I did is compose the two statements into one to show the illogic. Rather than trying to intuit the current financial situation, I suggest that you look at the Fed's Z1 release, that I've linked you to before and that Mike and everybody else uses as their data source. Your buddies weren't really investing "conservatively" if they had 6-figure losses, please. I'm not sure what your Mattel/DuPont example is supposed to prove, other than demonstrating my point that manufacturing can and does leave quickly. Obviously it's a giant undertaking to set up a microprocessor fab, though I doubt closing one up is that big a deal. My point is that even at the extreme planning end of the spectrum, with the giant investment and advanced technology of a microprocesser fab, it can be done in a handful of years and has been done globally for decades.

CompEng

October 15, 2009 06:04 PM

Ajay,

I sense you don't always realize when I'm agreeing with you, disagreeing with you, or simply thinking out loud. :) My mixing of the abstract and the specific also seems to be causing some communication issues.

My first statement was that it's ridiculous to consider trade deficits meaningless in abstract. My second was that deficits in abstract are not dangerous if they are sufficiently small. I added that the current trade deficits the US carries may be big enough to watch even if they are not big enough to be catastrophic. The semantics of these statements are precise and non-contradictory. You inferred a position not included in those semantics, and called my logic flawed based on that inference. I called that putting words in my mouth because it's difficult for us to both have the same discussion if we're not discussing based on the same understanding of the statements that are made.

Thank you for your interest. This blog is no longer active.

 

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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