23 December 2011

Is Foreign Trade a Big Deal?

Hale and Hobijn find that the vast majority of goods and services sold in the United States are produced here. In 2010, total imports were about 16 percent of U.S. gross domestic product, and of that, 2.5 percent came from China. A total of 88.5 percent of U.S. consumer spending is on items made in the United States, the bulk of which are domestically produced services – such as medical care, housing, transportation, etc. – which make up about two-thirds of spending. Chinese goods account for 2.7 percent of U.S. personal consumption expenditures, about one-quarter of the 11.5 percent foreign share. Chinese imported goods consist mainly of furniture and household equipment; other durables; and clothing and shoes. In the clothing and shoes category, 35.6 percent of U.S. consumer purchases in 2010 were items with the "Made in China" label.

Foreign trade sound much less important when discussed as a percentage of GDP instead dollars.  16% sounds like a relatively small amount, but once you put that in dollar terms it becomes $2.24 trillion dollars.*  Obviously, this is a significant chunk of change, roughly equal to the mandatory spending of 2010 federal budget (and equivalent to roughly two-thirds of the total federal budget).  Given that unemployment wavered between 16.5% and 17.1% that year (and was likely higher, given how the government manipulates those statistics), it seems reasonable to conclude that it having even half of those imports produced at home would have had a pretty positive impact on unemployment.**

Much of what China sells us has considerable "local content." Hale and Hobijn give the example of sneakers that might sell for $70. They point out that most of that price goes for transportation in the U.S., rent for the store where they are sold, profits for shareholders of the U.S. retailer, and marketing costs, which include the salaries, wages and benefits paid to the U.S. workers and managers responsible for getting sneakers to consumers. On average, 55 cents of every dollar spent on goods made in China goes for marketing services produced in the U.S.

But why not have, if possible, one hundred cent of dollars be paid to Americans?  Saying that the effects of foreign trade aren’t that bad is little consolation to those who are unemployed.

Going hand in hand with today's trade demagoguery is talk about decline in U.S. manufacturing. For the year 2008, the Federal Reserve estimated that the value of U.S. manufacturing output was about $3.7 trillion. If the U.S. manufacturing sector were a separate economy – with its own GDP – it would be tied with Germany as the world's fourth-richest economy. Today's manufacturing worker is so productive that the value of his average output is $234,220, three times higher than it was in 1980 and twice as high as it was in 1990. That means more can be produced with fewer workers, resulting in a precipitous fall in manufacturing jobs, from 19.5 million jobs in 1979 to a little more than 10 million today.

The problem with the technology argument is that it fails to account for the impact of governmental interference.  Of course, it is impossible to tell with any degree of certainty how much the government, by its interference, has encouraged manufacturers to pull forward their demand for machines to replace workers.  It also fails to account for foregone manufacturing in light of a) regime uncertainty, b) the regulatory thicket that is the federal code, and c) the monstrosity that is the corporate tax code.  Basically, there is no reason to assume that manufacturing would be as automated if there was actually a free market, nor is there any reason to assume that there would be as few manufacturing jobs if there were no federal regulations.

Now, as has been mentioned at this blog many times before, federal policy has been directly responsible for the current economic malaise.  The federal government has hamstrung domestic businesses while simultaneously giving foreign businesses a free pass for trade.  The direct effect of this schizophrenic policy has been to subsidize foreign businesses at the expense of domestic businesses.  This has also contributed to a high unemployment rate.  While free trade is the undoubtedly preferable state of being, it makes no sense to allow this while simultaneously hamstringing domestic businesses.  The government must level the playing field, most preferably by deregulating domestic businesses.  In the event this cannot be accomplished, the government should ensure that foreign businesses adhere to same labor and environmental regulations faced by domestic businesses or at least pay the difference.

As Walter Williams states:

The bottom line is that we Americans are allowing ourselves to be suckered into believing that China is the source of our unemployment problems when the true culprit is Congress and the White House.

* The GDP of the united states for 2010 was approximately $14 trillion; 16% of this is $2.24 trillion.

** Keep in mind that, during 2010, the welfare/unemployment budget was nearly $600 billion.  Half of the imports would have been $1.12 trillion, nearly double the welfare budget.  I’ll let you draw your own conclusions from this.

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