June 20, 2017
President Donald J. Trump’s first full cabinet meeting, the new US Trade Representative Robert Lighthizer briefly encapsulated the young administration’s philosophy on international trade: “Deficits do matter, and ours are coming down.” This is not a particularly partisan view; Trump’s opponent in the 2016 presidential election, former Secretary of State Hillary Clinton, spoke out against the Trans-Pacific Partnership (TPP) during her campaign despite supporting it previously.
By Samuel Weitzman
To be sure, the United States has a perpetual trade deficit. In 2016, the country imported over $500 billion more in goods and services than it exported, and the United States has not had a surplus since 1975. Yet focusing solely on a country’s trade balance provides a sharply limited view of its economic health.
To begin with, the vast majority of economists agree that international trade results in higher economic growth, thereby producing more goods and services for people to enjoy. This increase in gross domestic product (GDP) is due to the principle of comparative advantage, which posits that some countries will be able to produce certain goods at lower opportunity costs than others. Accordingly, multinational corporations source the assembly of parts for their products from a large number of countries, with some commodities traveling back and forth across borders multiple times as intermediate goods. For example, intermediate goods comprise over 80 percent of US exports to Mexico. In turn, 40 percent of the value of the final goods that Mexico exports to the United States was added in the United States itself. These crisscrossing supply chains complicate raw trade figures. Ultimately, the improvements in efficiency translate into higher production and lower prices in the long run, independent of where the final product is completed.
Additionally, the loss of manufacturing jobs (often cited as a direct consequence of trade deficits) occurs primarily because of technological improvements in efficiency and productivity, not because of trade. Increased automation necessarily means that fewer humans are required at each step of the process, meaning that manufacturing employment will continue to shrink even as production rises. In the years to come, fewer and fewer factory jobs will be available -- whether or not the United States has a trade deficit.
However, the benefits of trade are not always dispersed equally. Low-skilled workers who previously relied upon domestic manufacturing for employment have encountered significant difficulties in finding new jobs. To redress these issues, local and federal government bodies should fund financial assistance for displaced workers with the goal of assuaging economic pain in the short run, while expanded job training and apprenticeship programs—by both public and private entities—has the potential to ensure that no one is left behind. Furthermore, as technology continues to change and evolve, providing all citizens with opportunities for lifelong learning may become essential to sustaining economic growth.
In the globalized modern economy, trade routes and financial flows link consumers and companies across oceans, deserts, and borders. Looking solely at the raw metrics of trade balances fails to account for a country’s purchasing power, a corporation’s supply chain, or any other important factors that impact the health of local, regional, national, and international economies.
To learn more about the importance of workforce development in the new US economy, please join us for Apprenticeship and Manufacturing: Connecting Work and School. The event will take place in Chicago, IL on July 6, 2017.