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Jan-June 2010 Trade Deficit Reveals Disturbing Trends
Alan Tonelson
Monday, August 23, 2010
Photo of Alan Tonelson
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).
As bad as the latest monthly U.S. trade figures looked at first glance (for June, the latest month available) – and they looked terrible – the details are far worse.  And they’re especially disturbing given America’s inescapable need to produce and manufacture its way out of a crisis caused by too much borrowing, consuming, and debt.  (This critical need to produce seems to go completely unnoticed by the Obama administration, incidentally.)

The macroeconomic trends for the first half of this year are virtually all discouraging.  As widely noted, the 18.84 percent rise in the overall trade deficit in June boosted that month’s trade gap to $49.90 billion.  That’s the highest monthly level reported since November, 2008 – right after Lehman Brothers went bust and Great Recession began deepening with a vengeance.  The June figure also pushed the overall deficit for 2010's first six months 44.81 percent higher than for the corresponding figure in 2009.

Significantly, oil was a major culprit, with the nation’s petroleum deficit up 55.30 percent on a year-on-year basis through June.  But the non-oil deficit grew 22.34 percent – and it is 1.3 times bigger than the oil deficit.

Not that President Obama’s export initiative can legitimately claim any credit – it’s not really in place yet, but U.S. overseas sales are 17.12 percent higher through the mid-point of this year than they were from January through June, 2009.  Imports, however – which the President and his team seem determined to ignore – rose 22.71 percent.  

So here’s the take-away: following a brief recession-induced spell when imports fell even faster than exports and a shrinking trade deficit contributed to U.S. growth on net (at least in a bookkeeping sense), America’s trade flows have resumed undermining growth and unemployment.  And since other recent major sources of American economic expansion like housing and credit bubbles can no longer be counted on, the trade drag is now a towering obstacle to U.S. recovery.

Mouthing pro-manufacturing platitudes is becoming the rage in Washington (see my last column, “House Democratic Leadership Falls Short in Aiding US Manufacturing,” AmericanEconomicAlert.org,  July 30, 2010, http://americaneconomicalert.org/view_art.asp?Prod_ID=3637). But the manufacturing trade performance revealed by the latest government figures shows that words and legislative tinkering alone won’t spur America’s necessary re-industrialization.  

U.S. manufactures exports increased 2.45 percent in June on a monthly basis, but imports shot up 10.62 percent.  Consequently, the June manufacturing deficit soared by 24.68 percent – faster than the overall deficit.  Year on year, the 2010 manufacturing trade deficit has grown faster still – by 28.33 percent over 2009 levels, as the 19.34 percent export rise trailed the 22.51 percent import increase.  This persistent gap shows vividly why the President’s export-only approach to trade policy is so sorely inadequate.

And what about high-tech products, the darlings of America’s globalization cheerleaders?  June was a certified disaster, with a 44.95 percent explosion of the nation’s chronic deficit in these goods, to levels ($8.41 billion) not seen since January, 2008.  U.S. overseas sales of high tech goods rose by a healthy 6.49 percent, but the greater import volume zoomed up more three times faster – hammering another nail into the coffin of the President’s export-mania.

As a result, the U.S. high tech trade deficit is running fully 68.51 percent higher this year than last year’s six-month total, and looks headed toward an all-time annual record – despite America’s slowing economy.  The clear implication: U.S.-based high tech producers are hemorrhaging market share here at home.    

But the most disturbing message sent by the January-June, 2010 trade figures is that American industrial competitiveness keeps falling.  At least that’s the conclusion indicated by the two-century old theory of comparative advantage, which has shaped (unfortunately only) the Anglo-American world’s understanding of international commerce.  

After all, this theory holds that the more successfully a country trades a product, the more successfully it will make that product – and vice versa.  So sectors in which the United States is registering the biggest or fastest-growing trade surpluses are the nation’s industries of the future, according to comparative advantage.  Sectors with the biggest or fastest-growing deficits are the economic equivalent of dead meat.  And sectors in between can be similarly classified depending on their place along this spectrum.

As of mid-year 2010, comparative advantage theory is telling Americans loudly and clearly that their industries of the future are not exactly dominated by advanced manufactures.  Of the sectors in the U.S. economy with the ten fastest-growing trade surpluses (selected out of the 100 most traded products, in order to eliminate the effects of the law of small numbers), only five could reasonably be considered advanced manufactures – semiconductor production equipment, plastics and rubber-making machinery, soldering and welding equipment, motor homes, and optical instruments and lenses.  

The sectors on this list with the next ten fastest-rising surpluses also feature only five advanced manufacturing industries – semiconductors themselves, industrial trucks, motor vehicle stampings, flat glass, and boats.  Just as numerous on both lists were sectors like ethyl alcohols, miscellaneous grains, tobacco, and iron foundry products.

By contrast, advanced manufactures are more common on the lists of the ten and 20 fastest-growing deficit industries – sectors where a domestic American presence ostensibly is headed for the ash heap of history.  Specialty steels, surgical appliances and supplies, printed circuit assemblies, and several automotive categories (including transmission and power train parts) can be found among the ten worst, and computers, relays and industrial controls, motor vehicle engines, and electronic and electrical equipment appear among the next ten.  

Overall, then, in the first six months of this year, U.S. trade flows drained nearly $250 billion in real, private-sector-led growth out of an economy that’s slowing despite massive government stimulus.  And although sustainable U.S. recovery depends heavily on boosting domestic production of advanced manufactured goods, trade keeps making the country more reliant on foreign supplies of these products.  If these developments aren’t proof positive that the United States desperately needs an entirely new trade and industrial strategy – and fast – what is?


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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