Trade Deficits and Trade Mechanisms: The power of Currency
If
ever there was a demonstration of the Fallacy of Composition it would be with
the way we look at trade. This term, "Fallacy of Composition" is a condition where part of something that is true is mistakenly assumed to be true for the whole of something. In this case, it is to assume that a trade deficit is indicative of our competitiveness abroad and our economy in general. The way we are assessing the
trade deficit leaves the public (and politicians) in fear of being overtaken by
other countries. Outsourcing and
manufacturing by American companies to countries where labor is extremely cheap
by our standards leaves many feeling threatened by the perception of an inevitable
shriveling of our job market while developing nations grow in our stead. With these concerns in mind, the purpose of this article is to explain the mechanisms of trade at work, including what
the public sees but does not understand; and a myriad of things they do not
see—indeed, are never shown—that, were they seen and understood, would alleviate
unjustified fears of an America with diminishing returns on export investment versus
import spending. Additionally, this article
will discuss the health of America’s trade dynamics by looking at the
operations of an American global company.
Double
vision
Let’s start with what is seen. When
we talk publicly of the trade deficit, we are typically shown two totals with
which to assess our position in the global market. One is the total of what we
spend overseas and the other is the total of what others spend for our goods. The difference between the two is either a trade surplus--we sell more abroad, or a deficit--we buy more, simplistically speaking. The latest figures for income and outgo of
trade were published May 1, 2013. USA
Today reports, “Exports fell 0.9% to $184.3 billion as sales of
machinery, autos and farm products declined. Imports fell 2.8% to $223.1
billion, led by a 4.4% drop in foreign petroleum.” The conclusion made in the article, based
upon this small shrinkage in the deficit gap, is that Americans will have more money in their pockets to spend on stuff. It appears
that there is also a general assumption that we are losing money when our
imports exceed our exports (deficit). The article continues,
U.S. exports
to Europe are down 8% compared with the same period in 2012, reflecting the
impact of a recession in the 17 European Union countries that use the euro.
The European Central Bank
announced Thursday that it was cutting its benchmark interest rate to a new
record low in an effort to stimulate growth in the 17 countries that use the
euro currency. The 27-nation European Union is the USA's largest trading
partner.
The conclusions are wrong-headed for several reasons. It would be hasty to jump to conclusions how the European
economy has shrunk or why. But, based
upon the last sentence, it is implied, whether by the writer or by the ECB,
that the drop in our exports is caused by the European recession. He draws a
correlation that while our drop in exports could have an affect, it is not necessarily so. He does not consider that both
markets could be changing independently of each other due to internal
fluctuations in their respective economies.
To understand: The Balance of Trade is simply a circular flow of currencies. It is separate and different from each country's economics. Balance
of trade is not the comparison between exports and imports (income and outgo of cash--receipts and
payments). Those are not on opposite sides
of the balance sheet. They are on the same side of the balance sheet. Together they represent
the current of payments for imports and exports. The other side of the balance sheet is Capital
assets, what we and our trade partners get from each other. Capital assets account
for our investment in foreign goods,
bonds, securities and so forth; and likewise foreign investments in ours. Herein lays the balance of trade. It follows the
algebraic equation, which is the cardinal theory of accounting: What is done to
one side must be done to the other because they both exist and their ratio to each other must be maintained.
If not manufacturing, then what?
In
truth, though it is not readily seen, our manufacturing industry has stayed remarkably
consistent for over 80 years.
What have not stayed consistent are our population and our efficiency in
production. Population and production have outpaced creation of—and need for—more
manufacturing jobs. Thus, we think we see manufacturing jobs disappearing. It
is true that this causes a net decrease in the percentage of manufacturing jobs. But our output has soared since
1959—nearly quadrupling. Purchasing power derived from productivity,
not trade or a deficit, is the measure of economic prowess. In fact, the deficit shows
our ability to buy more stuff than anyone
else. It also shows our ability to borrow for it. But it does not represent
jobs. They are unrelated. In fact, a
trade surplus might indicate others want to borrow our money but it may well signal
that our dollar in ratio to foreign currency is undervalued, or that we have
lost purchasing power due to domestic unproductivity, or by poor policy. And while the total number of manufacturing
jobs has declined (percentage wise), it does not follow that the total number
of jobs has declined respectively. By creative destruction jobs have developed
in other sectors beyond manufacturing.
It’s
important to understand unseen advantages we have over other countries. We earn
more and our cost of living is moderately less than other industrialized
nations.
We do not see that real income (not nominal income) has dramatically increased since
the better part of the last century. To the question of where our jobs are if
not in manufacturing: We actually do create manufacturing jobs. For every one
of our jobs, we create four other less skilled but important jobs in
manufacturing, which combined equal the income of our one. We mostly outsource
those to other nations.
The lack of lesser skilled
manufacturing jobs here pushes our working sector to develop higher skills. This
creative destruction is sorely overlooked.
Our focus in the production cycle is on invention, creation and
service. Those skill-sets provide us far
more income and are actually more productive than the jobs we outsource. Without even seeing it, we are expanding
creative destruction here and abroad.
In other words, we are no longer domestic inventors of gadgets but global inventors of products and jobs for others around the world to grow into.
From shoes to autos: 69 is a powerful number.
In
1996, Viet Nam opened its economy to free market enterprise. Within a year of five Nike plant openings, tension
and consequent scrutiny arose from factories in Ho Chi Minh City, especially.
To understand, NIKE,Inc. has mastered the system of outsourcing via
subcontractors, meaning that plants are independently owned; and produce Nike
products by contract. When NIKE,Inc.
moved into the labor force of Ho Chi Minh City, the minimum wage was $42
monthly. Today it is $112.60. That is unbelievable poverty by our standards.
But it is a 300% increase in income in 16 years,
more than a 17% increase per annum, and nearly double the hefty national
inflation rate.
But
Ho Chi Minh became a hotbed of controversy. Expose΄ after expose΄ detailed the
atrocities of the factories. Everything from paying below the minimum wage, 12
hour days up to 7 days per week, physical, emotional and sexual abuse, to child
labor were incessantly arising from investigations. Still, Phil Knight, President,
CEO and Founder of Nike took a hands-off approach to the problems. The root of the
problems lay with Vietnamese culture which had been practicing these behaviors as an
agrarian (rice) farming society.
Western European societies saw the behavior as wholly unacceptable and they
demanded Nike do something about it. Nike, by then a hugely successful
global entity, ignored the outcry and boycotts.
That is, until its revenues plummeted by 69%. Sixty-nine is a powerful number: Seeing his
corporation in a tailspin got Knight’s attention. He not only changed his philosophy
on enforcement of the (until then, mostly ceremonial) Code of Conduct, he
created a global mentorship for countries around the world.
The
critical point here is that neither foreign manufacturing jobs nor a trade
deficit caused the near collapse of Nike. Politics did. Today, NIKE, Inc. owns
nearly half the world’s shoe market, plus over 900,000 products—most produced
outside the US. Nike contracts with over
600 plants around the globe, of which more than a third are in Third World
counties. Not seen, however, are the results of their
global footprint.
As
manufacturing goes, shoe making is on the lower end of production skills,
utilizing mostly assembly line tooling. High skill sets for production include invention
and manufacturing technology and automation such as electronics and cars. A few years ago, South Korea thanked Nike for
its pivotal role in advancing its labor force skills and asked them leave. As their
president put it, the nation had reached its goal of skilled laborers (of
shoes) and wanted to advance their workforce skills further. Because of improved knowledge about how to
operate manufacturing the country expanded it placement in the high tech world.
Their
skill level has advanced to the point that the 2013 Hyundai Elantra
is out-pacing demand by competitors including the perennial favorite, Toyota
Corolla.There is no evidence that
their advancement has created a burden upon our country. In fact, what can be
seen is the positive relationship between rising countries and already
developed ones. When emerging markets elevate their standard of living, boosting
their purchasing power, it elevates ours as well. It goes largely unseen that international
trade is an asset to our economic success. Nike philanthropy in Third World
communities in health, education, sports, and leadership programs for the
rising generation, especially, is not indicative of trade and trade deficits as
destructive.
Moreover,
Nike’s business model includes hands-on training for over 50 countries producing
Nike products. Four expatriates per
factory assist in oversight and training to insure proper working conditions. Leadership
training held at the global headquarters in Oregon provides classroom
instruction. Subcontractors from 47 countries attended the conference in 2012.
NIKE,Inc. has more than 1 million employees in the US and around the globe.
If
trade has any impact upon the American economy, it must be seen as a highly
profitable one that improves the entire global economy and their societies, despite the inability to
understand the bottom line of the double ledger.
[This article was originally a memo I wrote for a class on ethical economics culminating from research and long standing principles of economics. The class was part of a project under the direction of Dr. Jim Granato, Dir. of the Hobby Center for Public Policy, University of Houston.]
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Armed Forces Day, always the third Saturday in May notes the
combined duty and mission of the branches of American military in defending our
liberties. Prior to 1949, each branch of
the military was honored on separate days.
But in August of that year, all but one branch agreed to combine their
honorary days into one. The first year
of Armed Forces Day,
three branches of the military united leagues, the Army, Navy, and Air Force.
Today, Armed Forces Day includes those three, plus, the Marine Corp and Coast
Guard leagues..jpg&container=blogger&gadget=a&rewriteMime=image%2F*)
