FGF E-Package
March 8, 2011

Seven Reasons Why the U.S. Has Trade Deficits
by Jon Basil Utley
fitzgerald griffin foundation

WASHINGTON, D.C. — Several writers have urged restrictions on trade with China and other protectionist measures, claiming these would produce large numbers of American jobs.

Although they make compelling arguments, they ignore key reasons for job losses that are mostly of America’s own making.

Below are seven factors to consider. The consequences of protectionism would be far more damaging to America than critics of free trade assume. Most of our trade deficits are the result of our own policies. Protectionism is a two-way street and would injure many American companies without bringing back large numbers of factory jobs—indeed, half of the profits for U.S. firms listed on the S&P 500 index are earned overseas.

American labor has always in the past competed effectively against low-wage foreign competition. Germany today has higher manufacturing wages than those in the United States, yet it has a very favorable trade balance. Obviously there must be other factors responsible for American job losses beside China’s lower wages.

1.) America’s trade deficit is primarily due to oil, which accounts for some 50 percent of imports. This imbalance could be curtailed by billions of barrels if Washington allowed new domestic drilling in Alaska and offshore in parts of the Atlantic and Pacific coasts. Such drilling would provide hundreds of thousands of solid, mostly blue-collar jobs—exactly the kind that have been lost in recent decades.

2.) Trade statistics are very misleading. Much manufacturing in China is done for American companies, which gain most of the profits. For example, the Apple iPhone adds $2 billion to the trade deficit with China, although it is entirely designed and owned by Americans and is made of parts imported from Europe and other Asian nations. China’s actual input is $6.50 out of the $178 wholesale cost, according to a Wall Street Journal analysis, “Not Really Made in China.” It explains that the actual trade deficit with China is about half of what the statistics show.

The same consideration applies to many other imports—sneakers, for example. A pair of Nike shoes may cost $3 to produce, which goes to China. The rest of the retail price is accounted for by advertising, shipping, design, raw materials, and profits, most of which revert to Americans.

China’s imports of raw materials are bought from Latin America, but their value shows as part of our trade deficit with China. Latin Americans, meanwhile, use their surpluses to buy planes and software from the United States.

3.) Large numbers of manufacturing jobs have been lost because of increases in productivity from the computer and communications revolution, not from foreign competition. Add to this the factor of labor-union work rules and spurious law suits that so damage American industry.

4.) Is the dollar too strong relative to other currencies? We already have an example of a nation raising the value of its currency, as protectionists are demanding of China, without making a dent in America’s trade imbalances. That was Japan in the 1980s. Its rising currency did not reduce Japanese trade surpluses with America. It did, however, lead to Japanese companies producing more cars here. A cheaper dollar would similarly allow China to buy up more American industry.

5.) Healthcare costs are brutally destructive of lower-wage manufacturing. We pay double the proportion of our gross national product compared to Europeans and Canadians. Health-insurance costs bankrupted two of our auto manufacturers. A worker with a family who earns $30,000 per year can easily cost his employer over $8,000 for health insurance. The high cost of healthcare is our fault, not that of our Chinese competitors.

6.) We are almost the only nation to tax its citizens working abroad. This makes it very expensive for companies to station American executives, salesmen, and engineers overseas.

7.) America’s incredibly high military budgets drain many of the best and brightest minds away from the civilian sector. Exorbitant warfare spending also begets high welfare spending—what is a few more billion for welfare when spending tens of billions for warfare?

Devaluing America’s currency or restricting imports is not the way to address job losses. Protectionists should focus on the items above rather than attacking China’s surpluses and free trade in general. Free trade has brought about the greatest degree of prosperity and development in history. Our businesses profit tremendously from it. Americans’ livelihoods depend on addressing the real sources of our problems, not devaluing our currency, reverting to protectionism, and trying to seal our economy off from the world.

Jon Basil Utley archives

This article appeared originally in The American Conservative online edition on March 3, 2011.

© Jon Basil Utley. All rights reserved.

© 2011 Fitzgerald Griffin Foundation