Abnormal Interests

Let me start with one observation, Bill is more certain that a trade deficit is bad than I am. You'll see what I mean as we go along. Here is what Bill wrote in his email.

The US Commerce Department recently released the January International Trade Figures: $101 B in US exports and $159 B in imports for a deficit of $58 Billion. They also noted it was the second largest monthly deficit in history, just behind the November 2004 numbers which were exacerbated by the Christmas season and increasing oil prices. I think most Americans feel the US trade deficit is sort of like the weather... everyone talks about it, but no one can do much to change it. I hope that's not the case, so I did a little research to understand the situation.

These figures can be confirmed at the Department of Commerce Web Site. It comes in the form of an Excel spreadsheet that has in many ways more data than you want and in others less. If you're really interested in this subject you'll download the spread sheet and rack your brain over it. Bill is certainly correct that most of us feel that little can be done abut the trade deficit. My questions are two. First, is the deficient good or bad or something between good and bad? Bill thinks it is bad. Second, if something should be done, can it be done without a significant change in our way of looking at ourselves and the rest of the world? Do we need to change our values radically and not just our day to day decisions? Later on Bill offers some suggestions about what, in his opinion, should be done. I'm more interested in what can be done, if doing something needs to be done at all.

I realized a one month snapshot could be misleading due to seasonal patterns such as increased petroleum usage, new car model year introductions, and consumer buying habits. So I looked at the 2004 data: $1,147 B in exports and $1,764 in imports for a deficit of $617 B. More than a half a trillion dollars is obviously a lot of money, but how does it compare to our overall economy? The most commonly used measure for our economy is the Gross Domestic Product, GDP, or the total consumption of goods and services, government spending, and investments within the US (less the balance of trade deficit). In 2004, our GDP was $11.7 Trillion, so the balance of trade deficit was about 5.3% of the US economy. The balance of trade has been negative since the seventies, and it grew to about 3% of the GDP in the mid-eighties. It dropped to about 1% of the GDP during the 1991-92 recession, then it grew steadily throughout the nineties. The 2004 the deficit was the largest total dollar amount and the largest percentage of our GDP. So, is 5% a big deal? That's a judgment call, but a half a trillion dollars IS A LOT OF MONEY.

Looking at the historical numbers and taking into account what Bill says about the balance of trade shrinking in the 1991-92 recession, there appears to be a loose, positive, correlation between the strength of the US economy and the balance of trade.

In the chart above, I have plotted the trade deficit as a percentage of the real (as opposed to nominal) GDP for 1998 to 2003. Note the "improvement" in 2001. I'm not claiming that they are causally related. Although I think they may well be. I got the GDP numbers from the Economic History Services.

Is $617B a lot of money? For example, the total public debt was 62.4% of GDP in 2003. The per capita GDP was $37,790 in 2003 and the per capita trade deficient was $1,800 per person living in the US in July of 2003. The 2004 number would be about the same or very slightly higher. Put this way it doesn't seem like that much money depending on what we get for it. Of course, a negative cash flow is never good but it may not be very bad if everyone gets an advantage in the end. Obviously, at some point there must be equilibrium or we run out of money. But as long as our economy grows, we may be able to out run it. Note also, that inflation tends to reduce the effective impact of the all deficients but at a terrible burden to some segments of the population.

Our trade activity is initially divided into the categories of Goods and Services. In 2004, we exported $339 B in services such as travel and passenger fairs, and we imported $291 B, for a surplus of $48 B. The tourism business is alive and well in the US. But we exported $807 B in Goods and imported $1,473 B, for a deficit of $666 B! The Goods are divided into the categories of Food, Feed & Beverages, Automotive, Industrial Goods (including Petroleum), Capital Goods, Consumer Goods, and Other. The deficit for Automotive was $140 B; for Petroleum, $164 B; and for Consumer Goods, $271B. That's a total of $575 B or 92% of the total US balance of trade deficit. Now we are starting to understand the situation.

All the above is none controversial. Bill now offers his ideas on improving the trade imbalance by attacking the biggest contributors.

The Automotive deficit solution is obvious. Unlike the weather, if you really want to reduce the balance of trade deficit, you can do something about it. Buy an American car. If the big US auto makers don't build the kind of cars you want, tell them. That is exactly what happened with the quality and fuel economy issues of the 70s and 80s. The US didn't have what Americans wanted, so we bought foreign cars, and then the US automakers woke up. Now, fuel economy will again become important, and US car buyers want a conformable luxury car that holds its value and is a little smaller than a than a tank (except the lunatic Hummer fringe).

The solution to the Petroleum problem is also obvious in my opinion, but it is a little more controversial. First, when you think of petroleum, don't just think of gasoline. It's true that about two-thirds of our 20 million barrels per day of petroleum consumption goes for transportation, and we do need to work on fuel efficiency and non-petroleum based transportation. But we import about 60% of our petroleum, so if we work on the one-third that doesn't go for transportation, we can significantly help the situation.

I can not help but think that the automotive import problem, if it is one, and the petroleum problem are related. If there was a real attempt at the governmental level to require deep cuts in average fuel consumption or if there was greater demand for it from consumers and it the US manufactures took the lead, then that would cut into both the automotive and the trade deficient. Unfortunately, the US manufactures seem very slow to react, even with gasoline prices hovering near 2.50 per gallon. But some have, see below. It appears to me that the Japanese are, again taking the lead. If I had to choose between a foreign car with improved gas mileage over an American built car with worse gas mileage, I would take the foreign car. It is my self-interest and the interest of the environment. I am not alone in this decision. Of course, I could have the best of a foreign car and an American built car and buy an Ohio build Honda. I export the profit and import some of the parts. An increased investment in public transportation could well lower deficents from imported cars and imported fuel.

Three other points need be considered. First, with crude oil prices in the general neighborhood of $50.00 per barrel rather than the not so long ago $30.00 per barrel neighborhood, about one third of the current trade deficient due to oil can be thought of as being in price alone. The price increase goes directly to end users in increased cost at the gas pump. This fact provides negative feedback that is already resulting in changes in behavior. I have recently heard commercials for cars that talked about their improved gas mileage.

Second, the US has a significant strategic oil reserve. Our government is buying oil as you read this post. This protects us from a major catastrophe in the crude oil market. It also gives us some negotiating advantage if we ever want to use it. While not too effective in the past, such tactics may be helpful if things get beyond manageable levels; whatever they may be.

Third, even seemingly irrelevant things may be working. Fareed Zakaria has a piece in this week's Newsweek (April 15, 2005) entitled, How We Drive our Jobs Away (p.43). He begins with this; "Which part of North America makes the most cars? . . . Last year the Canadian province of Ontario surpassed Michigan in car production." Why? Because General Motors, Ford, and Daimler-Chrysler are expanding their operations there. And why are they doing that? In part, because of health insurance costs!

Think of energy, not just gasoline. We import 45% of our total energy needs of 100 quadrillion BTUs per year. We can fix that problem with NUCLEAR ENERGY. With all due respect to my friends, geothermal, wind, and solar energy conversion methods are, and always will be, insignificant to the overall situation. We produce only 7% of our total energy needs by nuclear reactors (20% of our electricity). Many people are surprised it's that high, but in France, their 56 reactors produce 76% of their total electricity needs. In France! In the US, we are converting our polluting coal burning electric pants to natural gas and oil, and we are reactivating old polluting oil plants like the one in Huntington Beach, CA, to meet increased power demand. The move towards electric and hybrid means of transportation will do no good if we use petroleum power plants to charge their batteries. So, if you really want to reduce the balance of trade deficit, support nuclear energy.

Bill is exactly right that one must consider the total energy mix. While I am not CAPITAL LETTER enthusiastic about it, I do believe that it is time to begin to look carefully at nuclear energy again. I am more optimistic about solar energy than Bill is. There are a lot of roofs and streets awaiting a cost effective solar energy solution. As energy prices go up many solutions will become cost effective. He is, in my judgment, correct about wind and geothermal. However, the first and fasted way to reduce the energy component of the balance of trade is to use a lot less energy. More fuel efficient methods must be explored everywhere, including more efficient ways to make fertilizer. While hybrid cars do require fossil fuel energy to charge their batteries, they use less total fuel than standard internal combustion engines to go the same distance. I am appalled that our government is doing next to nothing to foster conservation. We, as a group, will not do it on our own because our limited self-interests conflict with the greater good.

Now for the naked truth.

The $666 B Consumer Goods problem is biggest and has no obvious solution. I'm afraid we lost that war when we failed to see the need and lost the will for low cost manufacturing in the US. Of course, that's a glittering generality, but I think you understand my point. At least on the technology front, thanks to Intel and others, we had a surplus in Semiconductors, and we also had surpluses in Laboratory Testing Equipment, Measuring and Control Equipment, and Commercial Aircraft. However, between Medical Instruments, Computers and their Accessories, and Telecommunications Equipment, we had an overall $37 B deficit (these are actually listed as Advanced Technology Products in the Capital Goods category). We are the world technology leader, but much of that technology is being manufactured offshore and imported back into the US.

For low cost consumer goods, the 2004 details are not yet published. But the 2003 data is informative and probably only got worse in 2004. Of the $666 B deficit, the following list from 2003 estimates about 90% of the deficit: Household Goods and Furniture, 20%; TVs, VCRs, and Stereos, 12%; Pharmaceutical Preparations, 12%; Toys, led by Game Boy and the Sony Play Station, 7%; Gems and Jewelry, 6%; and the Apparel and Footwear industries, now totally in Asia, 32%. That situation is going to continue because of the low cost of Asian labor and their governments' willingness to develop the necessary infrastructure and provide foreign tax incentives. I doubt that even in the next century, the worldwide standards of living and the cost of labor will come to an equilibrium. Therefore, baring some national intervention, low cost manufacturing will eventually move from Asia, just like it did from the US and Japan.

There is no negative feedback here. All feedback, as far as the consumer goes, is positive.

It is here that our narrow self-interest really collides with any attempt to reduce the balance of trade. We benefit individually in a very direct way from low cost off shore manufacturing. I'm not sure what Bill means by "some national intervention." If he means high tariffs, I am against them. Even if I was for them, they will never happen. Trade restrictions are used to protect industry and there is almost no industry to protect in these consumer areas. The domestic clothing industry may be an exception but not much of one. Kerry's idea of requiring minimum wage laws of our trading partners is an interesting idea but not very practical.

Bill concludes:

The balance of trade deficit is a specific but not an isolated problem. It is related to the value of the dollar, interest rates, and foreign investments, which in turn are effected by the US budget deficit, which in turn is effected by government spending and the taxation. An expanding US economy will make everything get better unless we increase our imports of oil and cars. Fortunately, many brilliant people in positions of authority are trying to figure out these relationships and what we should to do about them. I hope our transient politicians in Washington pick the right people, listen to their advise, and act on it. In the mean time, buy a US car, support nuclear power, and encourage US technology development.

But I get the last word; after all, this is my blog.

First, I want to look at two segments that Bill did not discuss. They are not big contributors to the total deficit: food and beverages and mining. We have become net importers of food, feed, and beverages. Our monthly exports are about $4.75M per while our imports are $5.5M. At first blush, this bothers me more than all the automotive and energy and consumer issues put together. It implies that we are no longer self sustaining when it comes to food. The biggest single import in this category is fish and shellfish at about $0.7M to the negative. It looks like, with the exception of seafood, we continue to be able to feed our population. So, as long as fuel costs and requirements don't kill us we will not starve.

We are major importers of raw materials ($18.4M per month in exports and $38.1M per month in imports, not including crude oil). While some may find this troubling, it at least indicates that we are not on the verge of becoming a "banana republic." We are adding value to other's raw materials. We are also exporting environmental and depletion issues as we import raw materials. I believe hard rock mining is on the decline in the US. Miners face both a depletion problem (bad news) and increasing environmental constrains (good news). Jered Diamond's discussion of hard rock mining in Collapse is very helpful and in many ways hopeful.

Now for my additional value judgments and unqualified (mostly ignorant) opinions: One way to look at the trade deficit is as a form of foreign aid. We are helping the economies of our trading partners. I believe that if we are going to move successfully from our national economies to a true worldwide economy without devastating wars and famine, the net family income of every family of the world must reach some minimum figure. I've heard numbers from $4K per year to $10K. Some think a worldwide economy is bad. I say, it or something much worse is inevitable. So the balance of trade can be understood as a tax to make the transition to the inevitable.

If you disagree with this, you still have a problem. The easy solutions that Bill outlines are not all that easy. As I said, in many cases the solutions are against our short-term self-interests. For this reason, they do not lend themselves to a lot of better individual decisions. Jared Diamond in Collapse identifies five reasons why groups of people make bad decisions: "failure to anticipate," "failure to perceive," "rational bad behavior," "disastrous values" and "unsuccessful solutions." To some extent, every one of these touches on how we cope with the balance of trade. Not only have our individual, corporate and governmental decisions failed to anticipate the effects on the balance of trade, it may be impossible for them to do so. We do not perceive that getting the best price may well contribute to the trade deficient and if we do think of this we easily rationalize it as being a very small and justified contribution. Many of our "bad" decisions are indeed rational. As long as we continue to have the values of a consumer society that seeks the lowest cost we will increase the trade deficit. We have tried trade restrictions with negative results many times. On occasion, they have lead to war. More commonly, they cause considerable pain at unsuspected places.

If we are really committed to reducing trade imbalance, it will take a significant change in values. Several things can cause this, government policy, higher prices, or a catastrophe, among others.

I sure don't know when an imbalance is two big. For all I know it is too big now. I do know that it is not unconditionally bad. We use it to finance our consumer lifestyle. Those iPods, DVD players, HDTVs, flat panel displays, bright lights, luxurious cars full of gadgets, and cheap cloths are great.

Likewise, the balance of trade deficit finances the growth of developing economies and for the long haul that seems good also.

Bill, the comments are open.