The US Census Bureau released advanced October trade deficit numbers on Friday, signaling a 9.6% increase in the International Trade imbalance. Similarly, both wholesale and retail inventories declined by 0.4% month over month. (Seeking Alpha:
International Trade.)
Historically, a trade deficit is not necessarily a problem, and economists have split over the years on the actual impact of a trade imbalance either way. Traditionally, countries with strong, growing economies achieve a trade deficit as compared to countries with stagnant or declining economies. We see this today when we compare the trade deficits between the US and Japan, for example. This makes sense in the context of healthy economies placing higher demand for goods and services than can be satisfied internally, thus the imbalance on imports. Similarly, a country in recession cannot afford to import, thus their imbalance on the side of exports.
The other positive aspect of the trade imbalance comes in the form of investment. Typically, the nation with the trade deficit has the healthier economy and thus enjoys an influx of investments from foreign sources. These investments boost the Treasury bond markets, corporate and municipal bonds, equities, and Forex. It's most obvious when there is negative news overseas and the US markets experience a surge in Treasury bond and Utilities Sector investments as foreign traders seek a flight to safety.
Beginning in the mid-1980s, however, there was a subtle but not insignificant shift in the causes and impacts of the trade deficit as viewed from the US side of the ledger. With the relaxation of trade restrictions with China, Russia, and other Eastern Bloc nations came a wave of technology exports that, initially, were extremely beneficial to numerous US industrial sectors. This was followed by a slew of increasingly permissive free trade agreements intended to further lubricate the flow of goods and services in both directions.
What the latter actually created, however, was a means by which entire industries could circumvent US labor, environmental, and safety laws. The results were goods that could be produced in third world countries at a fraction of the cost of that same production in the US since those third world countries bore none of the financial burdens imposed by US regulations and US labor requirements. Little has changed in that regard, today.
With the restrictions on technology trade lifted, these same third world countries were able to improve the quality of the product they produced to the point where they were either en par or surpassed the quality of the same product produced in the US. No longer was "Made in Japan" a symbol of "junk" but rather it became a symbol of high quality as evidenced by the dominance in the 1990s of brand names such as Sony or Toyota. We see the same surge coming out of the Korean peninsula today with the rise of Samsung (current problems notwithstanding) and Hyundai.
The situation on the service side is equally grim. US customer service and call centers now abound in the Philippines, Costa Rica, and India. The reason is simple: labor costs. High paid technology resources - resources that would command a $150,000 per year salary (plus another 30% in benefits) in the US - are now outsourced to companies in India, Bangladesh, Costa Rica, the Philippines, and a host of former Soviet Bloc nations simply because they can be paid less than 1/3 that salary and not receive benefits. In many companies the mantra is clear - if it can be off-shored, then it will be off-shored.
The regulatory imbalances and the labor law imbalances remain, however. The developed world is effectively turning a blind eye towards sweatshop labor and environmental disaster, provided the third world continues to ship inexpensive yet high quality products. This is coming at a severe economic cost.
On top of this loss of critical jobs to overseas subsidiaries, there is also the rapid march towards automation. Self-service checkout lines, unattended gas stations, self-service airline check-in, and even the full automation of large warehouses such as those run by Amazon are all adding to significant job loss across the nation.
(Bloomberg: How Amazon Triggered a Robot Arms Race.)
The October 2016 Labor Force Participation Rate as reported by the U.S. Bureau of Labor Statistics was 62.8%. This rate measures the number of people that have jobs in the US aged 16 to 65 that are not students, disabled, in the military, or officially retired, and, in my view, is the truest measure of the employment situation we have. What this shows is that 37.2% of the population eligible to work is not working. That's 95 million Americans that should be working but do not have jobs. This doesn't factor in all those that are underemployed, having part-time jobs where they want full time, or having lower skilled jobs due to jobs in their areas of proficiency being unavailable.
This is the hidden dynamic behind the trade deficit put into context in the 21st century. While we don't recommend an immediate repeal of international trade deals - the impact of that would be economically catastrophic - we do need to increase the profitability of bringing service, technology, and manufacturing jobs back into the US. This doesn't mean the imposition of tariffs. All trade tariffs are immediately passed on to the consumer, so a trade tariff is simply another sales tax that the consumer will ultimately pay. Rather, the objective - and it's a very long term objective for it to be achievable - is to raise the labor standards and environmental standards in third world countries. For US companies with overseas facilities, we can certainly consider the delta between US costs and their overseas costs to be taxable income. The objective must be to incrementally raise the costs of the overseas holdings to the point where it's more economical to return those services to the US. That cannot be achieved in the short term, however, and requires the cooperation of other industrial nations, cooperation that will be difficult to achieve, at best. Still, the path we are on right now is one that leads to a very lengthy economic decline and a resetting of the standard of living we've come to enjoy in this nation. That may still be a generation or two away, but without taking action on securing our own industrial and service viability, that destination is inevitable.
