Trade Deficits with America - Who is to Blame?

An interesting analysis by Brad Setser, a Senior Fellow at the Council on Foreign Relations looks at the recent trade kerfuffle between Canada and the United States and helps us put all of the Trump Administration's trade threats into perspective.  This is particularly critical given the ongoing NAFTA renegotiations that will likely see significant changes to the decades-old three country trade deal. 

First, Dr. Setser looks at overall trade in both goods and services with Canada (blue and red lines respectively) and compares the two Canadian trade factors with overall U.S. trade when both goods and services trade is measured as a share of U.S. GDP:

As you can see, when you consider the trade in both goods and services, U.S. trade with Canada is basically balanced with the positive trade balance in services balancing the negative trade balance in goods.

Dr. Setser goes on to look at a breakdown of bilateral goods and services trade balances for Canada, Japan, Europe, Mexico and China/Hong Kong, again, as a share of U.S. GDP:

Quite clearly, the tiny grey-filled area on the graph shows that a U.S. trade deficit with Canada is the least of America's problems.  The trade deficits with Japan, Europe, Mexico and especially China/Hong Kong are far higher.

As he did during the election (either deliberately or by accident), Donald Trump has repeatedly claimed that his mandate is to ensure that manufacturing jobs increase in the United States.  His recent tweet about car manufacturing...

Based on Justin’s false statements at his news conference, and the fact that Canada is charging massive Tariffs to our U.S. farmers, workers and companies, I have instructed our U.S. Reps not to endorse the Communique as we look at Tariffs on automobiles flooding the U.S. Market!

— Donald J. Trump (@realDonaldTrump) June 9, 2018

 

...being but one example.  According to Dr. Setser's analysis, the overall manufacturing sector deficit with Canada is not a problem as shown here (the dark dashed line), particularly when compared to Mexico, China/Hong Kong, Japan, South Korea/Singapore/Taiwan and the rest of the world:

Certainly, the United States has suffered from the rusting of its manufacturing belt which has resulted in this:

...however, most of the blame can be laid at the feet of China's accession to the World Trade Organization in 2001, a move that was largely pushed by the Clinton Administration as shown here:

You've got to love the fact that 1999 Bill Clinton clearly states that China will have no new access for their exports to American markets beyond what they already have.

Dr. Setser notes one area where the United States really benefits from Canada; oil.  Canada's oil production is primarily sources from Saskatchewan, Alberta and British Columbia and very little of it is exported to world markets outside of the United States (at least until the TransMountain pipeline is built and Canadian oil is exported to Asia).  As shown on this graph, a very significant portion of Canadian oil is sold to the United States for prices that are far below world prices (West Texas Intermediate), directly benefitting the United States consumers and overall economy:

Funny how Donald Trump seems to never mention that, isn't it?

Let's close with this final U.S. goods trade tally for 2017 from the Bureau of Economic Analysis.  Here is a list of nations/regions with which the United States has a positive goods trade balance (surplus) in billions of dollars:

South and Central America - $34.3

Hong Kong - $32.5

Netherlands - $24.5

Belgium - $14.8

Australia - $14.6

The United States had negative goods trade balances (deficits) with the following nations, again, in billions of dollars:

China - $375.2

European Union - $151.4

Mexico - $71.1

Japan - $68.8

Germany - $64.3

Ireland - $38.1

Italy - $31.6

Malaysia - $24.6

India - $22.9

South Korea - $22.9

Thailand - $20.4

Canada - $17.6

Taiwan - $16.7

France - $15.3

Switzerland - $14.3

Indonesia - $13.3

OPEC - $13.0

So, why not pick on Malaysia, Italy or Ireland, all three of which have goods trade surpluses that are far in excess of what Canada has with the United States?  The biggest problem is trade with China; in 2017, the trade deficit with China increase by $28.2 billion on a year-over-year basis with American exports to China increasing by only $14.8 billion to $130.4 billion and imports from China to the United States increasing by a very substantial $43 billion to $505.6 billion.

Picking on Canada over international trade is, however, like shooting fish in a barrel.  It's easy to do but is really not that much fun in the long run.  While Canada may contribute a small amount to the U.S. trade deficit issue, it's contribution pales into insignificance compared to that of other advanced and less advanced economies.

The Impact of Trade with Japan on U.S. Employment

Governments always like to have us believe that trade deals are good for the economy.  From research done by Robert E. Scott at the Economic Policy Institute (EPI), we can quite clearly see that this is most definitely not the case for nearly 900,000 American workers.

As shown on this table, Japan is one of America's largest trading partners:

In 2013, imports from Japan made up 6.1 percent of all imports into the United States and exports to Japan made up 4.1 percent of all goods and services exported from the United States.  The top five imports from Japan were vehicles, machinery, electrical machinery, optic and medical instruments and aircraft.  The top five exports to Japan were optic and medical instruments, aircraft, machinery, electrical machinery and meat (pork and beef).

In 2012, the United States goods trade deficit with Japan was $76.3 billion, up $13.1 billion from 2011.  The goods trade deficit rose to $78.3 billion in 2013, reducing the U.S. GDP by $125.3 billion or 0.75 percent.     

Some of the trade problems which have impeded trade with Japan include:

1.) Automotive: A wide variety of barriers have impeded access to Japan's automotive market which has kept the sales of U.S. made vehicles and automotive parts at low levels.  

2.) Medical Devices and Pharmaceuticals: While Japan is one of the most important markets for U.S. medical devices and pharmaceutical exports, U.S. made products have frequently been adopted by other nations long before they are available in Japan (device lag).  As well, some American medical devices and pharmaceuticals are not available at all (device gap).

3.) Nutritional Supplements: Japan places burdensome restrictions on the health claims made by nutritional supplement manufacturers, creating market barriers.

4.) Access to Japanese Ports:  The U.S. government has longstanding concerns about the barriers to and lack of competitiveness in Japanese ports which have limited the ability of foreign shipping companies to use Japanese ports.

One of the biggest issues that has led to a growing trade deficit with Japan has been Japan's use of currency manipulation to control the value of the yen.  Japan is the world's second largest currency manipulator behind China.  By purchasing and holding assets denominated in foreign currencies, the Bank of Japan and the Government Pension Investment Fund (GPIF), Japan is able to adjust the value of the yen to suit Japan's macroeconomic goals.  Between 2000 and November 2014, Japan's holdings of foreign reserves nearly quadrupled, rising from $347 billion to $1.208 trillion.  The GPIF recently announced that it would increase its holdings of foreign stocks and bonds from 23 percent of its total of $1.2 trillion in 2013 to 40 percent in the near future.  When, through these actions, Japan keeps the value of the yen to dollar exchange rate at low levels, it makes Japanese goods cheaper for its trading partners and makes goods imported into Japan from its trading partners more expensive, making it cheaper for Japan's domestic consumers to "buy local".   It is important to note that this is far different than using monetary policies like quantitative easing to impact a nation's domestic economy since these monetary mechanisms use local currencies.

Here is a figure showing how Japan's foreign exchange reserves and foreign assets have grown since 2000:

As a share of GDP, Japan's total foreign assets rose from 7.6 percent in 2000 to 35.4 percent in 2014.    

Here is a chart showing what has happened to the yen to dollar exchange rate over the past five years:

In late 2011, it took around 77 yen to buy one U.S. dollar.  Today, it takes just under 120 yen to buy one U.S. dollar.  That makes goods (and services) imported from the United States far more expensive for Japanese consumers. 

According to the research by EPI, the manipulation of Japan's currency displaced 896,600 American jobs in 2013, with job losses in every state.  Here is a map showing the impact on the percentage of jobs displaced by the U.S. trade deficit with Japan on a state-by-state level:

The biggest impact has been on states located in the (former) industrial heartland of the United States.  Job losses were greatest in Michigan where the 56,200 jobs lost constituted 1.34 percent of the state's total employment.  The next most negatively impacted states were Ohio (loss of 50,900 jobs), Illinois (loss of 45,500 jobs) and Indiana (loss of 33,700 jobs).

The jobs eliminated included 148,400 direct jobs in commodity and manufacturing industries that competed with imports from Japan.  It also included an addition 412,000 indirect jobs in industries that would supply the aforementioned commodity and manufacturing industries and an additional 336,200 "respending jobs", jobs that would have been supported by the wages of workers that were displaced by trade with Japan.

Total job losses (direct, indirect and respending) include 446,000 manufacturing jobs with the greatest losses in the motor vehicles and parts industries losing 118,800 jobs.  Machinery manufacturing saw the loss of 96,600 jobs, fabricated metal parts manufacturing lost 80,800 jobs and computers and electronics manufacturing lost 66,100 jobs.

The impact of the U.S. - Japan trade deficit goes beyond the loss of jobs.  According to the author, the deficit resulted in reduced tax revenues and increased social safety net expenditures in 2013, which increased the federal budget deficit by $46.4 billion.  It also reduced net state and local resources by $17.5 billion in 2013. 

The Obama Administration is currently negotiating an expansion of its trading partnerships through the Trans-Pacific Partnership (TPP) with nations bordering the Pacific Ocean, including Canada, Japan, Mexico, Chile, Malaysia, Australia, New Zealand, Peru, Singapore, Brunei Darussalam and the United States.  The nine nations are attempting to negotiate a "landmark, 21st-century trade agreement" that will set "a new standard from global trade and incorporate next-generation issues that will boost the competitiveness of the TPP countries in the global economy."  Through the implementation of the TPP, the participating nations will "create jobs, raise living standards, improve welfare and promote sustainable growth". 

Here is a screen capture of the headline page for the TPP from the website for the Office of the United States Trade Representative:

As is typical of trade deal promotions, there are only glowing statements about what the deal will accomplish and no mention of the potential downside.  What should be of concern is the growing trade deficit from the nations in the TPP; the trade deficit with the nations involved in the negotiations grew from $110.3 billion in 1997 to $261.7 billion in 2014.

Japan's persistent currency manipulation and its impact on trade with the United States should serve as a warning to the negotiators of the Trans-Pacific Partnership.  The agreement should include binding resolutions that prohibit currency manipulation by all nations; without such agreement, the United States could be locked into another trade agreement that proves to be detrimental to American workers.