OPINION: U.S. Trade Policy and Its Impact on Urban Economies

The United States has consistently run a trade deficit since the 1980s. In 2013, the trade deficit averaged a staggering $40 billion per month. While much of this deficit has to do with oil imports (which will be offset in coming years), the nature of the U.S. trade deficit is astounding.

The nations with whom the United States runs trade deficits, and in which products it runs them, defeats common sense and makes one severely question what, if any, trade strategy the United States is pursuing.

Take the United States’ trade relations with Mexico. Although the United States has a highly developed economy at the forefront of industrialized nations, America ran an almost $64 billion trade deficit with Mexico in 2012, and has consistently run a trade deficit with Mexico since 1995.

Looking closer is even more eye-opening. The three most-imported products from Mexico include electrical equipment, vehicles, and machinery. While our most-exported products to Mexico include machinery, electrical equipment, and mineral fuels – with vehicles in fourth – the U.S. still runs a deficit in every one of those products. The value of vehicles exported to the U.S. from Mexico ($54 billion) is more than double what the United States sends in vehicles to Mexico ($20 billion).

Of America’s 15 largest trading partners, the United States runs a trade deficit with all but two. Even if you remove states from which America’s trade deficit is skewed by oil imports (Canada, Saudi Arabia, Venezuela), the vast majority of trading partners enjoy a trade surplus in their relationship with the United States.

Overall, America runs trade deficits in peculiar industries such as machinery, electrical equipment, mineral fuels, vehicles (excluding rail), pharmaceutical products, and steel. In fact, some of the few heavy industries in which the United States runs surpluses are in aircraft and plastics.

Heavily industrialized and mature economies like that of the United States should be successful in the export of heavy manufactured items like those stated above. While competition with other industrialized nations like Germany is understandable, large trade deficits in manufactured products with economies much less-developed than America’s is perplexing, at best.

For cities with a history and a base in heavy manufacturing, like Chicago, Cincinnati and St. Louis, policies like these only continue to chip away at the economic health of large sectors of these urban areas.

While it is imperative for industrial cities like these to diversify, unnecessary degradation of well-paying, already-established industries is detrimental to the creation of metropolitan economies steeped not only in new-age tech industries but also in a healthy industrial sector.

  • Esteban

    The idea that the US can compete with lower cost producers on traditional manufacturing is questionable; pursuing this strategy as a long-term solution is unlikely to succeed. Policies must be directed at the places where this country can have a competitive advantage, and wages is not it. The industries named as peculiar in this post all have something in common: they rely heavily on relatively unskilled labor (which is fixed) and in capital investments (which is mobile). Consider production of cars in Mexico. Workers there make $26 per day or $4 per hour; Ford’s US employees cost the company $55 per hour. All major US car companies have large operations in Mexico. These are mostly assembly operations, where complex components made in the US are shipped to Mexico, assembled there, and return as final products to the US market.

    Highly skilled manufacturing and producer services all have high value add and can use the skills and infrastructure available in this country. Training those who are losing their jobs in more traditional productive sectors is the challenge. The trade deficit as an accounting identity and simply means that Americans are consuming more than what they produce: is this bad? Maybe if it results in negative national income.

    But this is not the case, as can be grasped when comparing national GDP (15.68 trillion in 2012) to national GNI (15.89 trillion in 2012). The positive (210 billion) difference between gross national product (GDP) and gross national income (GNI) means that the US actually receives net income from abroad. As is expressed by Piketty “in other words, the inflow of profits, interest, dividends, rent, and so on…… [in wealthy countries] is generally slightly positive” (K in the 20th cent, pg. 44).

    So overall the US receives income from abroad, even in the presence of a trade deficit. Going back to car production in Mexico. The savings achieved by US car companies when moving production to low wage areas return to the US in the form of higher earnings, dividends, and wages (at least for executives). Since the GNI reflects returns to capital, it can be argued that the gains are kept by those with capital to invest… so at the end of the day the problem, even here, is inequality.

  • EDG

    NAFTA

  • Chuck Wickenhofer

    When our economy grows at a faster rate than our trading partners, we are able to buy their goods at a higher rate than they can buy our goods due to the relative purchasing power of each entity. It’s the principle of supply and demand – wealth creates demand – thus the resulting trade deficit (which hasn’t stopped the United States from maintaining its status as the number one economy in the world since we began running trade deficits in the 1970s). There really isn’t anything “perplexing” about it.