Economy and Manufacturing & Technology

BULLS & BEARS: Fuss over our trade deficit is much ado about nothing

August 21, 2006

I'll preface this column by telling you I am not an economist, just an observer.

How many times have you heard a sobering news report on the trade deficit?

The gist of these reports is that the deficit will weaken the dollar, cause all kinds of job losses, and be the ruin of our economy.

The typical deficit TV news report begins with a picture of some old, rusty U.S. factory. It closes with video clips of construction cranes building gleaming office towers in China.

In the first half of this year, we have a trade imbalance with China of over $200 billion!

Back in June, this eye-popping number prompted Washington lawmakers to consider an onerous tariff on Chinese goods.

Luckily, after then-Federal Reserve chief Alan Greenspan told them it was a dumb idea, they backed off the tariff talk-for now, anyway.

If you don't remember your history, Google the words Smoot-Hawley. You'll see we tried the big tariff route back in 1930 and it didn't work out so well.

A big fib we all believe is that countries with trade deficits must be losing jobs to countries that run trade surpluses.

We believe it because we run a chronic deficit and, according to the Bureau of Labor Statistics, since 1992 we have lost 4 million manufacturing jobs (rusty factory picture)-a drop of 16 percent.

But two major countries that consistently run trade surpluses lost even more.

Germany and Japan year after year run trade surpluses, but they lost 24 percent and 27 percent, respectively, of their manufacturing jobs. The whole factory job picture looks bleak until you flip the page and read that, even though our factory jobs declined, about 25 million other jobs were created here. A big trade deficit also makes us think we must be making and selling less "stuff" and the folks with a surplus must be increasingly making and selling more "stuff." In that same 14-year period when 4 million manufacturing jobs went poof, our industrial production ("stuff" made and sold) grew 60 percent. Fewer workers, but way more "stuff"! That's called productivity. How about the surplus running Germany's and Japan's industrial production? It grew only 19 percent and 12 percent, respectively. You may have noticed I have mentioned only the United States, Germany and Japan in the comparisons. According to the World Bank, the annual GDP of the 50 biggest economies is $40 trillion. The United States is about 13 of those trillions, Japan is around five, and Germany tallies up about three. I have focused on them because those three countries are bigger than the next 47 countries combined. No. 4 is China, at just over $2 trillion. In the last five years, China's GDP has more than doubled, but has still grown just more than $1 trillion. The United States has grown only 33 percent, but that's more than $3 trillion-three times China's growth. Back in December 2003, Forbes had an article titled "Trade Deficit? So What?" I think I have to agree.



Gilreath is co-owner of Indianapolis-based Sheaff Brock Investment Advisors, money management firm. Views expressed are his own. He can be reached at 705-5700 or daveg@sheaffbrock.com.
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