New Deal for U.S. Manufacturers

In July, our trade deficit hit yet another all-time record, $68 billion, an annual rate of $816 billion. Imports surged to $188 billion for the month, as our dependency on foreigners for the vital necessities of our national life ever deepens.

China's trade surplus with us was $19.6 billion for July alone, moving toward an all-time record of $235 billion for 2006 -- the largest trade deficit one country has ever run with another. Our deficit with Mexico is running at an annual rate of $60 billion. With Canada, it is $70 billion. So much for NAFTA. With the European Union, it is running at $160 billion.

America as the most self-sufficient republic in history is history. For decades, U.S. factories have been closing. Three million manufacturing jobs have disappeared since Bush arrived. Ford and GM are fighting for their lives.

Bushites boast of all the new jobs created, but Business Week tells the inconvenient truth: "Since 2001, 1.7 million new jobs have been created in the health care sector. ... Meanwhile, the number of private sector jobs outside of health care is no higher than it was five years ago."

"Perhaps most surprising," writes BW, "information technology, the great electronic promise of the 1990s, has turned into one of the biggest job-growth disappointments of all time. ... (B)usinesses at the core of the information economy -- software, semiconductors, telecom and the whole gamut of Web companies -- have lost more than 1.1 million jobs in the past five years. Those business employ fewer Americans than they did in 1998, when the Internet economy kicked into high gear."

Where did the high-tech go? China. Beijing's No. 1 export to the United States in 2005, $50 billion worth, was computers and electronics.

If Americans are the most efficient workers on earth and work longer hours than almost any other advanced nation, why are we getting our clocks cleaned? Answer: While American workers are world-class, our elites are mentally challenged. So rhapsodic are they about the Global Economy they have forgotten their own country. Europeans, Japanese, Canadians and Chinese sell us so much more than they buy from us, because they have rigged the rules of world trade.

While the United States has a corporate income tax, our trade rivals use a value-added tax. At each level of production, a tax is imposed on the value added to the product. Under the rules of global trade, nations may rebate VAT levies on exports, and impose the equivalent of a VAT on imports.

Assume a VAT that adds up to 15 percent of the cost of a new car in Japan. If Toyota ships 1 million cars to the United States valued at $20,000 each, $20 billion worth of Toyotas, they can claim a rebate of the VAT of $3,000 on each car, or $3 billion -- a powerful incentive to export. But each U.S. car arriving at the Yokohama docks will have 15 percent added to its sticker price to make up for Japan's VAT.

This amounts to a foreign subsidy on exports to the United States and a foreign tax on imports from America. Uncle Sam gets hit coming and going. It is as though, after firing a round of 66 in the Masters, Tiger Woods has five strokes added to his score for a 71, and five strokes are subtracted from the scores of his rivals. Even Tiger would bring home few trophies with those kind of ground rules.

The total tax disadvantage to U.S. producers -- of VAT rebates and VAT equivalents imposed on U.S. products -- is estimated at $294 billion.

Exported U.S services face the same double whammy. A VAT equivalent is imposed on them, while the exported services of foreign providers get the VAT rebate. Disadvantage to U.S. services: $85 billion annually.

First, ignorance of how world trade works. Second, ideology. These robotic free-traders recoil from any suggestion that they aid U.S. producers against unfair foreign tactics as interfering with Adam Smith's "invisible hand," which they equate with the hand of the Almighty.

Third, they are hauling water for transnational companies that want to move production overseas and shed their U.S. workers.

How could we level the playing field? Simple. Impose an "equalizing fee" on imports equal to the rebates. Take the billions raised, and cut taxes on U.S. companies, especially in production. Create a level playing field for U.S. goods and services in foreign markets, and increase the competitiveness of U.S. companies in our own home market by reducing their tax load.

U.S. trade deficits would shrivel overnight. And jobs and factories lately sent abroad would start coming home.

Now compare that to GDP growth in the same time, you will find that manufacturing is falling way behind growth in the service sector a fact born out in looking at our growing dependence on foreign manufacture to support our consumptive lifestyles.

A long term healthy economy requires a strong manufacturing base that supports the services sector not one that is falling behind transferring more resources to services and away from manufactureing.

Growth in absolute numbers merely reflect inflationary & population growth effects on the statistics, it is growth in relation to the whole that is the true measure of a healthy economy.

There is alot more going on than your simplistic view to preserve your sense of security in the world allows. I would suggest you get out and look around instead of poking your head in the sand to avoid what you prefer not to recognize.

http://mwhodges.home.att.net/reserves_a.htm

TRADE DEPENDENCE OF US ECONOMY - - up, up and away !!
26% of our economy depends on foreign trade
3 times higher than before - - with trend straight-up !!

When we speak of competing in a global economy,
this chart shows how much more dependent are we on foreign trade,
than ever before. In fact, 3 times more dependent on others.

The left chart shows the trend of the sum of imports & exports of goods (excl. military), as a share of our economy (national income measure).[services trade is a minor number and is left out of this plot and military transactions distort the data]. Combined trade in 2005 was $2.6 trillion ($892 billion exports, $1.7 trillion imports).

This chart shows combined exports + imports zoomed from 8% of the economy in the 1960s, to a 26% net national income. Note the upward zoom is nearly straight up, meaning U.S. foreign dependence is accelerating.

With more trade dependence one should next ask, Are we paying our way? Answer: - NO !! We are going deeper into debt.

As America's economy depends more on trade it is more and more at the mercy of others than prior generations - - which implies serious economic and national security issues looking forward.

The next chart breaks down the above chart into its import and export components.

export vs import trend Notice imports (red curve) of goods - - zooming higher, as a share of our economy,
from 3% to 17% of the economy (as measured by national income),
and, therefore, our economy depends on imports produced by others 6 times more than before - - and still pointing straight up. 2005 goods imports totaled $1.7 trillion. Note rising ratio in 2004-5 despite major decline of the U.S. dollar's exchange rate.

(America, with less than 5% of the world's population, consumed nearly 20% of world imports in 2000, according to Morgan Stanley Economist Joe Quinlan - - meaning much of the rest of the world over-depends on America's debt-driven over-consumption of goods produced by others).

Now look at exports (black curve) of goods. After rising 2.5 times faster than national income in the 21 years prior to 1980, proving America's competitiveness, the export ratio came to a screeching halt - - now declining. 2005 goods exports totaled $890 billion.

U.S. exports have not had an upward impact on our economy's national income for 20 years, proving U.S.-produced goods are less competitive and less of interest to foreigners than before - - and/or we are too busy consuming to produce. A comparison > Germany's export ratio of 35% of GDP is 8 times higher than America's ratio.

Notice the widening gap between the two curves - - that's the exploding trade deficit, as we import faster and faster than exporting to others. Prior to the 1970s there was a net balance in our favor (exports higher than imports), but not any longer.

NOTE: Exports lagged imports despite the reduction in the international value of the dollar between the 1970s and mid 1990s (and 2001-2004) which reduced our wages relative to others. So, a weaker dollar does not guarantee a trade surplus - - perhaps the opposite, as imports become more expensive. This suggests that if the U.S. dollar should fall in its international value the U.S. will not become more competitive - - which further suggests the reason is both our declining manufacturing base (chart below) as well as the fact we do not produce (or want to produce) enough goods to meet our needs, let alone produce those desired by others.

This is clear evidence that we are competing less well than before, and trends are in the wrong direction by far. Perhaps Americans are too interested in consumption and piling up debt and in speculation, instead of production and savings - - too interested in financial paper instead of producing goods. This chart shows exports at about 8% of the US economy. This compares to exports being about one-third of the Euro-region's economy, indicative of that region's relative manufacturing base strength compared to the US.

goods-pct-gdp.gif (2820 bytes) BECAUSE AMERICA PRODUCES LESS and LESS of Needed GOODS,
the PENETRATION of IMPORTS INCREASED 7x to make-up the short-fall as America becomes less and less self-sufficient.

The left chart looks at imports of goods, as a percentage of total goods in our GDP. America's Gross Domestic Product (GDP) is made up of 3 components: goods, services and structures. Here we look at the goods portion of GDP, and the percentage of same represented by imports.
1. In 2005, goods imports represented 42% of all the goods used in the U.S. (up 3 points over prior year)
2. That's 7 times higher than the 6% import ratio in 1959.

This means > > whereas in 1959 the U.S. produced 94% of the goods it needed (just 6% were imported),
TODAY we produce just 58% of our needs for goods (importing 42%). This chart demonstrates that import penetration increased - - dramatically.

data note: in 2005, total GDP was $12.4 trillion. Of this, its goods portion was $4 trillion, or 33% of total GDP. The non-goods portion of GDP was 67% of total GDP (58% for services, balance for structures). In that year, goods imports were $1.7 trillion, or 42% of total GDP goods - - as shown in the chart. - source: Dept. of Commerce (BEA), table B-8, etc. of the 2006 Economic report of President.

Percent of consumer good purhcases that are imported Consumer goods are more and more fueled by imports, not local production.

Imports make up 17% of all consumer goods bought in the US, or $407 billion in 1998, up from only 5.4%, or $19.2 billion, in 1970.

Since the above chart shows imports soaring after 1998 we can assume the consumer goods ratio is now higher.

In any case, this chart shows we are more than 3 times more import-dependent for consumer goods than before.

This shows much of U.S. imports are not for investment purposes to help earn national income into the future, but for consumption purposes which are gone forever. (data source: Time Magazine, 11 Oct. 1999, page 54)

global-trade-ratio.gif (4251 bytes) WORLD GROWTH DEPENDENT MORE UPON GLOBAL TRADE

The following chart shows that world GDP growth has become two times more dependent on global trade during the recent past, while those trade deficit charts above show the U.S. is becoming less and less productive/competitive regarding U.S.-produced products.

About this chart : "By our estimates global trade in goods and services now amounts to 25% of world GDP, up dramatically from the 19% share just ten years ago and an 11% portion in 1970. Over the past 17 years, 1987 to 2003, surging global trade has accounted for fully 33% of the cumulative increase in world GDP. By contrast, over the 1974-86 period, trade accounted for about 17% of the cumulative increase in world GDP. In other words, since the late 1980s there has been a virtual doubling of the role that trade has played in driving the global GDP growth dynamic. There can be no greater testament to the power of globalization.

A new and powerful global labor arbitrage has led to accelerating transfer of high-wage jobs from the developed world to lower-wage workforces in the developing world. Enabled by the Internet and the maturation of vast offshore outsourcing platforms in goods and services alike, labor has become more “fungible” than ever. In a world without pricing leverage, the unrelenting push for cost control gives a sudden urgency to this cross-border arbitrage. The outcome is a new and potentially lasting bias toward jobless recoveries in the high-wage developed world."

(Morgan Stanley Global Economic Forum, 11/24/03, Stephen Roach, chief economist http://www.morganstanley.com/GEFdata/digests/20031124-mon.html#anchor0

It is clear the U.S. must implement policies that reverse its decreasing interest to the world regarding products and services it produces of interest to others.

mfg-worker.gif (4034 bytes) Causes of Trade Deficit = manufacturing decline plus rising oil imports
PLUS > soaring debts all sectors pushing consumption (incl. imports) beyond incomes.

The left chart shows the trend of the number of manufacturing workers as a percentage of all U.S. employees (non-agriculture) - - from 26% in 1960 to 10% in 2004, a 60% drop in the manufacturing ratio.

On a GDP basis the trend is the same negative > the U.S. manufacturing base declined from 30.4% of GDP in 1953 (when we had a trade surplus) to 12.7% in 2003 - a 58% drop in the manufacturing share of GDP - and more is foreign-owned than before. (Bureau Economic Analysis table b-12, Economic Report of President, appendix table)

As shown by the merchandise trade chart above, whereas in 1960 U.S. goods manufacturing produced a $5 billion trade surplus - - 2004 merchandise trade had a $666 billion deficit. A powerful negative swing.

As America's production of goods has become a much smaller share of the economy the export share of national income stagnates and declines and the import share soars.

Bottom-line > manufacturing base shrinkage is a major negative regarding trade balance, and a major negative impact on U.S. economic and national security independence and future living standards.

Note that the down-sloping trend of this chart far pre-dates the opening of China as a major world manufacturer.
According to the Chinese Statistical Yearbook and economist Steve Roach of Morgan Stanley (4/05), the average Chinese manufacturing worker made 12,496 yuan in 2003, which translates into about US$29 per week. By contrast, average weekly earnings of US manufacturing workers amounted to $636 per week in 2003. With Chinese manufacturing wage levels only 4.5% of their US counterpart, my back-of-the envelope calculations suggest it would take about 20 years of sustained 15% annualized Chinese wage inflation to close half the wage gap with the US. Don’t kid yourself. Even with Chinese wage inflation, the economics of the labor arbitrage between the US and China remain compelling for as far as the eye can see.

Loss of price competitiveness has even affected high-technology goods, with resulting large deficits in those industries as well. Examples include office equipment and automatic data processing equipment (a 1999 deficit of $36 billion) and telecommunications equipment (a 1999 deficit of $23 billion). Source -Trade Deficit Commission.

There are zillions of items on which America depends on foreigners to supply. Most know America is dependent on foreigners for 60% of its oil. However, few realize that America is 100% dependent on foreigners (British and French) for flu vaccines needed by senior citizens. A nation that will not produce its own flu vaccines is not a very smart nation.

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Relative Shares of Economy
pre-1930	post WWII (1947)	TODAY (2004)