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Originally Published on American Economic Alert
Read the original article on Amercian Economic Alert.
Alan Tonelson
The details of the final 2009 trade figures hold two important lessons for both supporters and many opponents of current U.S. trade policies. The first: However critically important trade deficit reduction is, it’s just as important to do it right. Better trade numbers produced by an historic recession and enfeebled domestic demand don’t qualify as progress. Deficit reduction, and the strengthened national finances that will result, must be combined with programs to boost growth and employment.
The second lesson is one that’s supremely important for a President aiming for a doubling of exports in five years that will “support two million jobs in America.” The lesson is that continued global economic uncertainty simply won’t permit enough new U.S. sales to overseas markets. Net exports obviously must rise – the flip side of trade deficit reduction. But the vast majority of the gains will have to come on the import side. In other words, U.S. economic and trade policy needs to focus on massively replacing imports with domestically produced output. Otherwise, too much American public and private spending will boost growth and employment overseas, rather boosting demand for home-grown goods and services – and the workers required to turn them out.
Even the headline numbers in the 2009 trade report make glaringly obvious the limited possibilities for gross export growth. The trade deficit last year shrank by more than 45 percent, from $707.8 billion to $390.1 billion. But the net improvement came entirely on the import side, as America’s purchases of foreign goods and services sank by more than 23 percent. Exports shrank, too – by just under 15 percent. But because their fall-off was smaller, the deficit narrowed.
Moreover, nearly 62 percent of the improvement in the trade deficit came from the crude oil and natural gas sectors (including liquid natural gas) – where U.S. imports nosedived in 2009. These sectors employed only 160,500 total workers at the start of 2010 – all of 0.15 percent of the nation’s total private sector workers.
Of course, when politicians and economists talk about economic growth – and the trade balance’s impact on growth – they emphasize inflation-adjusted growth. And accounting for inflation, the story is much the same. Real imports of goods and services decreased faster than real exports – by 14.17 percent to 9.86 percent.
Although inflation-adjusted numbers aren’t available at the needed level of detail, looking more deeply into the current-dollar numbers greatly reenforces the message about inadequate export prospects. The most revealing figures are yielded by what economists call the six-digit level of the North American Industry Classification System. The NAICS has become the U.S. government’s most widely used system for slicing and dicing the U.S. economy, and the six-digit level matters because that’s the one that begins to produce numbers for the parts and components of products, as well as the final products themselves. Different sets of data for these different kinds of products is critical at a time when so much manufacturing production has been broken down into numerous steps and stages that are often performed in many different countries.
Few economists literally count categories, but the results speak volumes. The U.S. International Trade Commission’s interactive trade database is the single most useful on-line tool for analyzing America’s trade performance in detail, and it presents figures for 454 NAICS-6 categories of goods. No such service trade data is readily available, but because goods comprised more than 67 percent of American exports in 2009 and nearly 81 percent of imports, goods data is more than satisfactory.
Of these 454 goods categories, only 74, or 16.30 percent, registered any export growth at all in 2009. These export-growers generated even less than their proportionate share of total goods exports – 15.29 percent. One reason no doubt is that fully ten of the 74 saw their exports increase by less than one percent.
Matters become more curious – and less encouraging for the export enthusiasts – when the make-up of U.S. exports is considered. Mainly, of the 74 NAICS-6 sectors of the economy that saw any export growth in 2009, only 43 came from the productive heart of the U.S. economy – manufacturing. At 58.11 percent of the export-growers, that figure may sound impressive. But manufacturing industries represent 84.58 percent of the total NAICS-6 goods sectors. So that’s one sign that manufacturing exports are punching considerably below their weight.
Here’s another: Manufacturing exports in 2009 comprised only 47.93 percent of total U.S. goods and services exports. Going back to the early 1990s, that marked only the second time that manufactures represented less than half of total U.S. exports. The other time was 2008. During the late 1990s, this figure approached 60 percent. By contrast, manufactures imports totaled more than 61 percent of total U.S. imports last year.
More detailed measures of exports reflect poorly on manufacturing’s performance, too. The 2009 list of America’s biggest exports contains names familiar enough to students of trade flow: Aircraft, semiconductors, pharmaceuticals, construction equipment, plastics and resins, organic chemicals, and turbines are all present. (The breakdown between aircraft and aircraft parts – including engines – is no longer available from Washington at the aerospace industry’s request. The sector’s leading firms worried that the data made too much company-specific data public.) All these sectors are capital- and/or technology-intensive sectors with long records of creating high-wage jobs.
The list of the major export sectors where overseas sales grew fastest is very different – and economically less impressive. Six of the top ten, for example, are raw materials sectors – ranging from uranium to farmed shellfish to sheep and wool. Moreover, two of the manufacturing sectors present are in apparel, and one is in processed food. These industries are not only low-paying; they would make no one’s list of products holding the key to America’s economic future. The next ten include more manufactures, but apparel, textile, and processed food names are prominent here, too.
A roughly similar picture emerges upon looking at the major sectors with the biggest trade surpluses. Number one is waste and scrap material, and only eleven of the top 20 are manufactures (lumping aircraft, their parts, and related aerospace products into one category, as the only available figures make necessary). All of these, however, would be considered capital- and/or technology-intensive.
As for the 20 major sectors with the biggest trade deficits, 17 are manufacturing industries, and 10 would be considered capital- and/or technology-intensive. .
Capital- and technology-intensive sectors dominate the list of the 20 sectors that in 2009 saw the greatest improvement in their trade balances in absolute terms. But exports grew in only two of these top 20 sectors – games and toys, and smelted copper. And the growth in both cases was less than one-tenth of one percent. The other 18 sectors on the list improved their trade balances solely because the recession drove down imports.
More troubling news comes from the list of industries that saw the biggest deterioration in their trade balances. The top 20 includes all aerospace products (No. 1), semiconductors (No. 2), computers (No. 5), oil and gas field machinery (No. 6), semiconductor production equipment (No. 12), and construction equipment (No. 13).
Mainstream economists are taught not to value any particular part of the economy over any other, and will surely treat manufacturing’s lagging trade performance with indifference. So will the know-nothing pundits and talking heads who rely on them. But the trade theory they revere also holds that the goods and services that countries trade most successfully – those with the biggest trade surpluses and the fastest rates of export growth – tend to become the products they make most successfully. Conversely, those sectors with the worst trade performances will tend to migrate overseas.
So even though manufacturing leads the nation in productivity and innovation, and has a matchless historical record of high-wage job creation, the 2009 trade figures say loudly and clearly that its role in the U.S. economy will keep waning. And unless U.S. trade policy undergoes much more drastic change than President Obama is considering, so will the nation’s hopes for a genuine economic recovery and future as a first-world economy.
2009 TRADE GAP EXPOSES GAPING HOLE IN OBAMA RECOVERY PLAN;
OIL LEADS 2009 DEFICIT FALL-OFF; MANUFACTURING IMPROVEMENT LAGS
USBIC’s Tonelson: “Last year’s $380-plus billion trade deficit wiped out nearly half the effects of President Obama’s $787 billion stimulus package. Every dollar that this deficit channeled overseas was a dollar that wasn’t promoting growth and job creation in the United States.”
WASHINGTON, February 10 – The Great Recession that slashed U.S. import demand by more than 23 percent helped drive down the overall U.S. trade deficit more than 45 percent in 2009. Still, the deficit’s $380.66 billion offset nearly half the effect of President Obama’s economic stimulus package. Thus its combination of tax cuts and spending increases created almost as many jobs and as much growth overseas as it did at home.
In addition, the trade deficit’s 10.41 percent increase in December, from a downward adjusted $36.39 billion to $40.18 billion, underscored the U.S. economy’s difficulty in generating growth without piling on more debt. The December rise represented the third straight monthly increase in the trade deficit.
According to USBIC Research Fellow Alan Tonelson, “Last year’s $380-plus billion trade deficit wiped out nearly half the effects of President Obama’s $787 billion stimulus package. Every dollar that this deficit channeled overseas was a dollar that wasn’t promoting growth and job creation in the United States.”
Tonelson continued, “No wonder the U.S. economy’s recovery has been so sluggish, even with record life-support from Washington. And no wonder American employers keep eliminating jobs.”
Tonelson added that the outsized contribution to deficit reduction made by plummeting imports spotlighted a major oversight in the President’s export-dominated trade strategy. “The President insists that the U.S. economy can add millions of new jobs by selling more to foreign markets,” Tonelson observed. “But the import fall-off and ongoing uncertainties about growth overseas indicate that the biggest potential growth and job gains are right here at home. The President’s biggest challenge, therefore, is reducing the trade deficit further while maintaining and expanding the economy’s overall demand levels. This goal is possible only by substituting domestically produced goods and services for imports – and therefore restricting what the nation buys from abroad.”
Moreover, nearly 58 percent of the 2009 trade deficit improvement came from a 47.08 percent drop in the oil deficit. The deficit in non-oil goods, which generates far more American growth and many more jobs, decreased by a much smaller 30.90 percent
Overall U.S. exports fell off in 2009 as well – by 14.97 percent, further underscoring the difficulties of achieving the President’s goals through boosting overseas sales. The trade deficit in goods shrank by 38.47 percent in 2009, from $840.25 billion to $516.97 billion, while the longstanding but much smaller surplus in services trade fell by 5.54 percent, from $144.32 billion to $136.31 billion.
Goods exports fell by 18.04 percent in 2009 while services exports declined by 7.66 percent. Goods imports nosedived by 26.19 percent in 2009, and services imports sank by 8.42 percent.
The latest monthly trade figures showed that total U.S. exports rose for the eighth straight month, increasing 3.34 percent in December, to $142.07 billion. But total imports rose for the fourth straight month, increasing by 4.82 percent in December, to $182.88 billion.
The latest monthly manufacturing figures were a small bright spot in the overall trade picture. The manufacturing deficit decreased in December by 11.79 percent, to $40.19 billion, as exports increased by 6.40 percent and imports dipped by 1.15 percent.
Year on year, however, the manufacturing trade deficit fell even more slowly, to $441.17 billion, than the overall goods deficit – by 23.67 percent versus 30.90 percent. Manufactures exports dropped by 18.48 percent last year, while imports were off 20.45 percent.
The U.S. goods trade deficit with China narrowed even more slowly than the manufacturing deficit in 2009 – by only 15.37 percent, to $226.83 billion. In December, this deficit fell 10.29 percent, to $18.14 billion.
Alan Tonelson is a Research Fellow at the U.S. Business & Industry Educational Foundation and the author of The Race to the Bottom: Why a Worldwide Worker Surplus and Uncontrolled Free Trade are Sinking American Living Standards (Westview Press).
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