But the trade deficit is worth thinking about. We are in essence buying foreign goods with a credit card. As long as there's a demand for dollars overseas, we can pay the bill.
Puget Sound-area residents generally know that trade matters. One has only to look at Boeing and Microsoft to know that our local economy hinges, in part, upon making products destined for markets around the world.
So it might be a little more difficult to convince people that they needn’t worry about trade quite so much. While valuing cheap clothes and gadgets from China, many people worry that trade will mean all of our jobs leave for foreign lands.
Even people who think trade is a good thing sometimes talk as though it was the biggest part of the economy.
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One in four jobs in Washington state depends on international trade, the highest percentage in the nation. As Seattle economist Dick Conway has pointed out, each trade-related job produces enough income to generate 2.6 jobs elsewhere in the economy. You wouldn’t want to see those jobs just disappear.
On the other hand, if 25 percent of our jobs depend on trade, 75 percent do not. Most of what gets produced in the United States stays in the United States. And despite all the hand-wringing and hoo-ha about foreign trade, it has changed little, growing from 20 percent of the nation’s economy in 1980 to 23 percent in 2003, the most recent year for which numbers are available.
People sometimes get confused by this because if you look at the raw numbers for volume of trade (total imports and exports) — $574.6 billion in 1980 (in inflation-adjusted dollars) to almost $2.6 trillion in 2003 — you can get the impression that trade is the whole economic story.
What people forget is that the whole U.S. economy has grown, from $2.8 trillion in 1980 to nearly $11 trillion in 2003.
Numbers in context
While it’s true that the U.S. has been importing more than we’re exporting for the past 25 years, this also gets overstated in terms of its importance.
It’s true that the 2003 trade deficit of $495 billion was a record, but it was only 4.5 percent of the total size of the economy.
That’s hardly a cataclysm in the making. But the trade deficit is worth thinking about.
We are in essence buying foreign goods with a credit card.
As long as there’s a demand for dollars overseas, we can pay the credit-card bill.
If foreign investors and governments get tired of holding dollars, the value of the dollar will fall (simple supply and demand) and imported goods will become more expensive in the U.S.; we’ll need more dollars to buy the same amount of foreign-made goods.
The role of interest rates
Consumers experience this as inflation, which gets the Federal Reserve Board all worked up.
The Fed usually responds by raising interest rates to stave off inflation. Higher interest rates cool the economy by making credit and borrowing more expensive.
Higher interest rates also make dollars more attractive overseas because the dollar is worth more.
Foreign suppliers and nations are more likely to want to hold dollars when U.S. interest rates are higher, and imports become cheaper for U.S. consumers because the dollar buys more.
A slower economy at home and a more valuable dollar worldwide mean inflation subsides.
On the other hand, a more valuable dollar makes it harder to sell U.S. goods overseas; foreign consumers experience inflation in the price of U.S.-made goods when it takes more euros or yen to buy the same number of Washington apples. Either way you look at it, there are some trade-offs in whether we have a stronger or weaker dollar.
In addition to the larger trade picture, Americans tend to get very concerned about relations with particular nations.
China is currently getting most of the attention among our trading partners.
Many Americans seem to see China as the Wal-Mart of world trade — they flood your neighborhood with cheap goods and put everybody else out of business. If we had a better collective memory, we’d recognize that people said the same thing about the Soviet Union (in the 1950s) and Japan (in the 1980s).
It’s the invasion of the job snatchers — foreigners with a different system who will buy the Statue of Liberty and melt it down for trinkets.
China is now our No. 3 trading partner in terms of total imports and exports (No. 2 in exports to the U.S.) after Canada and Mexico.
The Canadian connection
Canada is No. 1, eh? Nearly 20 percent of all of our trade is with Canada. In 2004, we sold Canada $189 billion worth of goods and bought $256 billion.
And here is another myth about trade — that it largely involves forcing expensive goods and low wages on impoverished nations so corporate execs can ski Vail every winter.
In fact, most trade happens between rich nations, involving goods of a very similar nature.
Last year, Canada sold us around $11 billion worth of food, and we sold them about $10 billion.
They sold us almost $15 billion worth of lumber and wood products and we sold them $7.4 billion worth of chemicals and $14.8 billion worth of agricultural and industrial machinery. And what do we trade the most?
Canada sells us $63 billion worth of cars and automobile parts and we sell them $50 billion of the same.
Here comes China
What gets most everybody’s knickers in a twist about China is that in 2004, we bought $196 billion worth of their goods and they bought only $34 billion of ours.
The numbers are not as important as the trend.
Since China began to liberalize its economy in the 1980s, exports from China to the U.S. have gone from almost nothing to our third-biggest trading partnership.
Given that China has 46 times more people than Canada, it’s not hard to imagine that China will someday surpass our neighbor to the north as our biggest trading partner. Exchange rates are one of the reasons we don’t sell more stuff in China.
The Chinese leadership, walking a tightrope between trying to be capitalist (socialism with Chinese characteristics, as they call it) and keeping the nation from imploding, lives in fear of monetary chaos. So they have pegged the Chinese yuan at around 8 to the dollar.
If it floated on the world market like the U.S. dollar — and it should — massive Chinese exports and minimal Chinese imports will mean a yuan that rises in value, making Chinese products more expensive but lowering the cost of imported goods for Chinese consumers.
As it is, anything imported into China is likely to be expensive. Anybody here who pays more than $50 for a DVD player isn’t paying attention; the same item costs $200 in China.
The second and perhaps more difficult issue remains piracy. In any city in China you can buy movies on DVD for about $1, often before the movie has even been released in the West. And more than 90 percent of software used in China is presumed to be pirated.
That’s a trickier issue because while the Chinese government can decide to let the yuan float, changing people’s behavior will take more time.
When decisions are still made based on who’s paying off whom, products and processes are not improved.
And wages are rising rapidly, further eroding China’s advantage as a producer of goods. The U.S. needs to continue to move carefully through established channels to encourage the Chinese to observe such niceties as intellectual property rights. If we want China to become a nation of laws — and we do — then we have to be one, too.
So, trade matters. Losing a quarter of the economy would be catastrophic.
But that’s not going to happen. What also shouldn’t happen is that we overreact to numbers that can confuse us if we’re not careful.
T.M. Sell, Ph.D., is professor of political economy at Highline Community College.