Why?

Posted on: April 16, 2024 at 11:50:38 CT

Here are reasons from an economist:

https://www.epi.org/publication/trade-deficits-consequences-policy-implications/

Trade deficits have harmed the domestic economy in at least three direct ways. First, the steady growth in our trade deficits over the past two decades has eliminated millions of U.S. manufacturing jobs. Between 1979 and 1994, trade eliminated 2.4 million jobs in the U.S. Growing trade deficits were responsible for most of these job losses, which were concentrated in manufacturing, because most trade involves the sale of manufactured goods. NAFTA added to the flow of jobs out of the U.S. by encouraging firms to move production to Mexico and Canada. Our trade deficit with both countries increased from $16 billion in 1993 to $48 billion in 1996 (in constant 1987 dollars). The U.S. lost 395,000 jobs as a result of the NAFTA deficits.

The Asia financial crises are expected to increase the trade deficit by $100 billion or more over the next two years. Deficits are already growing with Korea and with Japan. The Japanese economy is contracting sharply as a result of the crisis, and U.S. exports to both countries have fallen sharply. The expected increase in the U.S. trade deficit could eliminate an additional 1 million jobs in the U.S. over the next 18 months if the Fed does not act quickly to lower interest rates and keep unemployment here from rising. Even if the Fed does lower interest rates enough to keep unemployment constant, 600,000 jobs will shift from the high-wage manufacturing to lower-paying service sector.

Second, trade deficits have also had a depressing effect on wages, in several ways. The jobs lost through trade do not raise the unemployment rate in the long-run. Macroeconomic policies such as interest rates and government spending have much greater influence on the total level of employment and output than does trade. But trade does effect the composition of employment. Workers not employed in manufacturing find jobs elsewhere in the long run, usually in service industries where wages are much lower.

The growth in imports, especially from low-wage countries, also puts downward pressure on the wages of U.S. workers. If the prices of these products fall, then this puts downward pressure on prices in the U.S. Domestic firms are then forced to cut wages or otherwise reduce their own labor costs in response.

For the past two decades, our living standards have stagnated, and the level of income inequality in our society has increased dramatically. As a result, the real wages of production and supervisory workers have declined steadily since 1979.

Many economists who are proponents of free trade have now concluded that trade is responsible for 20 to 25 percent of the increase in income inequality over the past two decades. Our own research suggests that trade is responsible for 15% to 25% of the increase in income inequality that occurred between 1979 and 1994. However, existing research can only explain about half of the change in income inequality. Therefore, trade is responsible for about 40% of the explainable share of increased income inequality.

There are several other ways in which trade and trade deficits depress wages that are not included in the preceding estimates. One of the most important is through foreign direct investment. When U.S. firms move plants to low-wage countries, as they have done at an increasing rate in recent years, they clearly eliminate good jobs and increase the trade deficit. These moves also have a chilling effect on the labor market. The mere threat of plant closure is often enough to extract wage cuts from workers. This tactic has also been used with increasing frequency in the 1990s and is effective even when plants don’t move.

The third problem with trade deficits is their corrosive effect on our long-term trade competitiveness. When the U.S. dollar and our trade deficit soared in the early 1980s, many domestic firms and industries in sectors such as steel and semiconductors were decimated. Once closed, many plants in such industries failed to re-open, even after the dollar depreciated later in the 1980s.

Dr. Peter Morici, in an important new study for the Economic Strategy Institute, has identified another major reason why deficits have such corrosive, permanent effects on our competitiveness. Morici found that eliminating the U.S. trade deficit would increase U.S. spending on R&D by an estimated 3 percent. This would in turn increase productivity growth by about “0.5 to 0.6 percentage points per year.” This single shift alone would have a massive impact on U.S. living standards, by allowing firms to raise wages for all workers.

To summarize, trade deficits have eliminated millions of high-wage U.S. manufacturing jobs. They have also put downward pressure on the wages of production workers, not only by eliminating good jobs but also by pushing down the prices of domestic products and by decreasing labor’s bargaining power with multinational firms. Finally, trade deficits have reduced investment in research and development, thereby undermining productivity growth and contributing to the stagnation of incomes that has plagued our economy since the 1970s.

There is also another way in which trade deficits could destabilize our domestic economy at some point in the future, causing an economic collapse even deeper than the downturns that have resulted from the Asian financial crisis. Over the past two decades the U.S. has accumulated over $2 trillion in trade deficits. We have used foreign capital inflows to finance these deficits. As a result, we have now become the world’s largest debtor nation. In a forthcoming report from the Center for Economic Policy Analysis at the New School for Social Research, Dr. Robert Blecker of EPI predicts that the net indebtedness of the U.S. will exceed $2.1 trillion within four years.

Our trade deficit and foreign debt have yet to reach critical levels. However, the U.S. current account deficit is expected to increase by $100 billion or more as a result of the Asian crisis within the next two years. If the crisis deepens, perhaps triggered by further devaluations by China or Japan, then the current account deficit could reach $350 billion or more.

At $350 billion, the deficit will come perilously close to 5 percent of GDP, a widely accepted trigger point for currency instability. A deficit of this size could trigger concern among foreign investors about our ability to borrow sufficient funds to finance this level of spending. A sharp outflow of short-term capital would result, causing the dollar to collapse, at a minimum. Short-term interest rates could also increase dramatically, as they have throughout Asia, pushing the economy into a deep recession, or worse.
As long as foreigners are willing to hold an ever-increasing supply of dollars, then we can avoid this “hard landing” scenario. However, structural changes in the not-to-distant future (such as the successful creation of the euro) could weaken dollar demand and lead to a crisis, if our trade problems persist and deepen in the future.

Persistent trade (current account) deficits are a fundamental risk factor in this potential shock to our economy. Lester Thurow has referred to the U.S. deficits as the key “fault line” in the international economy. In his view, the Asian financial crises are only a mild precursor to the devastation that will result if the U.S. deficits are reduced through a financial crisis. In the long run, the only way to avoid such a collapse is to reduce the trade deficit to at least sustainable levels through some other means, such as more effective trade policies.