Skyrocketing Trade Deficit Signals Trouble Ahead For Proponents Of Free Trade

There are two basic ways you can look at the $50 billion trade deficit that America managed to accumulate in June. Either the U.S. economy has ceased being competitive in the items that consumers most want, or our trading partners are not playing fairly. Either way, the fact that the trade imbalance is growing rapidly during a period of economic weakness signals it is getting harder and harder for proponents of free trade to convince voters economic globalization is good for their jobs or their families.

The huge gap between U.S. imports and exports is enough to force a recalculation of the annualized growth rate in the 2nd quarter downward from an already anemic 2.4 percent to 1 percent, according to the Action Economics advisory firm. While rising oil imports were a significant contributor to the increased deficit, the main culprit in June as in previous months was manufactured goods. According to the Wall Street Journal, imports of Asian electronic products contributed heavily to the rising imbalance in June, as U.S. consumers showed a preference for gadgets like the I-Pad over items like home furnishings that are more likely to be made in America. The United States has largely lost its consumer electronics industry over the last 30 years as manufacturers sent factories offshore or flocked to the more secure margins of military production.

As I illustrated in my blog posting yesterday about the trials of owning a General Motors vehicle, there is plenty of evidence to suggest America has lost its edge in manufacturing. Even if you were determined to buy an America laptop computer or camera, where would you find one? Products like the I-Pad and the Kindle E-reader consist mainly of foreign parts assembled in Asian factories. And while much of the research and design innovation for such products still resides in America, those skills too are gradually migrating to the offshore sites where most consumer electronics are now assembled.

Of course, China will be blamed for much of the trade deficit, because it is running a surplus in its current account nearly identical in size to the U.S. deficit, and the items it is exporting in greatest quantity are the items America is importing in greatest quantity. This will lead to renewed complaints about how China manages its currency, but let’s be realistic: how much better off are American workers likely to be if a rising yuan results in electronics production shifting from China to Vietnam? Not much. There’s a legitimate question to be posed about why policymakers have allowed the U.S. to become so dependent on China for electronics if that country really is the growing security threat the Pentagon claims, but that doesn’t speak to the question of how to fix America’s waning ability to manufacture products the world wants. The simple truth is that much of the reason China has done so well recently is because its people are prepared to make sacrifices and accept conditions that Americans are not.

So America needs to have a broader policy debate about what has gone wrong with its economy. It’s pretty clear that Republican nostrums about unleashing the full potential of the economy through tax cuts, free trade and deregulation have failed miserably. If conservatives had succeeded in blocking the bailout of the domestic auto industry, our trade problems would have grown far worse (Ford, the one Detroit automaker that wasn’t bailed out, said it probably would have foundered as key domestic suppliers failed). Democrats appear to be more in touch with the needs of workers in the manufacturing sector, but that’s not the same thing as knowing how to stop the offshore migration of jobs. In fact, many of the Democratic Party’s past efforts to help manufacturing workers may have accelerated the decline of domestic competitiveness leading to further loss of jobs.

There are still some manufacturing companies in America that are world-class commercial competitors, such as Boeing and Caterpillar. But you need look no further than the Pentagon’s foolish decision to allow Boeing’s subsidized European competitor into the Air Force tanker competition to see how dis-integrated the government’s policies are for reviving U.S. manufacturing. Washington simply isn’t set up to provide or compete with the kind of single-minded commitment to industrial success seen in places like Beijing and Seoul. Thus, the nation’s manufacturing sector is likely to continue sliding, along with its trade balance, until the two national political parties set aside their failed economic ideas and start paying attention to what the evidence says will work.