The Brutal Trade Deficit

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The trade deficit is a powerful descriptor of what’s wrong with the U.S. economy. And now, the Census Bureau came out with a new set of ugly numbers (PDF). In August, the U.S. exported $178 billion in goods and services but imported $223 billion—for a trade deficit of $46 billion. For the first eight months of the year, the trade deficit is a hair-raising $376 billion. By year end, it will amount to half a trillion. Pure economic activity that is taking place overseas instead of in America.

During the financial crisis, consumers and businesses cut back purchases. Imports, and the trade deficit, dropped to levels not seen in years. By May 2009, the trade deficit stood at $25.5 billion. For a few days there was hope that the trend would continue and allow the U.S. to climb out of the hole. But already, the Fed was printing trillions and handing them out to its cronies. The free money cranked up consumption and imports but barely budged production and exports. And since then, the U.S. has been skidding deeper into the trade-deficit hole.

Many analysts blame imports of crude oil and other petroleum products—$253 billion year to date. But that’s only 18% of the $1.35 trillion in total goods imported over the same period. Germany and Japan, which import all of their oil and natural gas, have trade surpluses. While America, rich in natural resources, and one of the largest oil and natural gas producers in the world, still manages to run up a mind-boggling trade deficit.

And not just with the usual suspects. The trade deficit with China is a stunning $189 billion year to date. With Japan, it’s $38.5 billion; with Germany, $31.2 billion. Then the oil exporters: with Venezuela, it’s $22.6 billion; with Nigeria, $21.5 billion; and with Saudi Arabia, $21 billion. Next in line is—hold your breath—minuscule Ireland with $20.8 billion.

And there are reasons. Every time an American company invests in production facilities overseas, or outsources to entities overseas, it adds to the trade deficit. Take the trade deficit in consumer goods—$228 billion year to date. It includes iPhones and plastic combs. It also includes pharmaceutical products. Not long ago, the U.S. was a net exporter of pharmaceuticals. But big pharma invested heavily overseas to shift production of medications to cheaper countries. The surplus turned into a deficit—now a record $31 billion year to date.

Another example is a beneficiary of stimulus funds, SunPower, which is investing some of the funds in a manufacturing plant in Mexico. It’s logical, however. By definition, a company has to maximize its profits. And one way is to reduce costs by investing overseas and outsourcing production, rather than building production capacity in the U.S. and employing American workers. But if all companies follow that logic, the overall economy begins to suffer from declining investments in plant, equipment, infrastructure, technology, training, and so on. Consequence: high unemployment and dropping real wages (a trend that has persisted since the wage peak of 1999). Consumer debt can temporarily cover the hole, but over the years, as we’ve seen, it’s a dead-end. And what finally happens is that companies themselves begin to suffer as the purchasing power of the middle class erodes. That’s the state the economy is in now.

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