Depending on where you sit politically, foreign trade is either demonized or lauded. There are those who claim the US is being robbed of its jobs and faces financial ruin, others claim that trade is a mixed bag for all nations with, on balance, no winners or losers.
For starters, look at an area where foreign trade benefits us even if we’re running a trade deficit. By importing more goods than we export, we incur a trade deficit. This means that our trading partners have more dollars from our purchases then they are intending to use to purchase goods or services from us. These excess dollars are deposited in a reserve account at the Fed. Since reserve account balances earn no interest, our trading partners use their trade surplus dollars to purchase interest-bearing government securities.
The benefit to us is that we get back the very dollars we used to buy goods and services from them in the first place. It’s true we are in debt to our trade partners, but, when the bonds are redeemed, we’ll pay them back with their own money, the dollars they gave us when they purchased government securities. In the mean time, we can their dollars a second time for whatever purpose the government determines. As we can see, from a financial perspective, foreign trade deficits and the debts they incur, pose no threat to our nation.
The financial sector is only one half of our economy, the other half is what economists refer to as the real sector, the sector that produces goods and services. It’s here that we see both the positive and negative effects of foreign trade.
On the plus side, trade deficits are synonymous with an economy that is blessed with an abundance of goods, goods that are sold at low prices. For those of us born in the US, the quantity of “stuff” in our stores seems normal. Regardless of whether we are aware of this, the presence of these low-cost goods means that our real income (the buying power of our income) is higher than it otherwise would be. This boost to our real incomes is an unequivocal benefit to the nation.
On the negative side, trade deficits (all other things being equal) are synonymous with lower levels of employment. It’s easy to see that buying more foreign products (ones actually produced in a foreign nation) results in fewer domestically produced products. Purchase enough of these foreign products and the result is lower sales and lower employment levels in the US. The Economic Policy Institute estimates that trade with China, between 2001 and 2011, has resulted in a net loss of 2.7 million jobs.
Competition between firms, and the attention consumers pay to price, explains the shifting of manufacturing locations. If consumers purchased only “Made in America” products, we would have no trade deficits, but that’s not the world we live in. Consumers focus on price, and if firms want to survive they produce in where costs are the low. For goods that cannot be traded internationally, that means looking for non-union, right to work states. For goods traded internationally, that means looking to produce overseas.
We have chronic unemployment in the US because we accept it as an economic fact that we think we cannot alter. But WWII taught us that if government demand is strong enough we can reduce unemployment from virtually any level to less than 2 percent. But to accomplish this, the government must commit itself to be the guarantor of jobs, or in other words, the employer of last resort.
Today the nation has a long list of unmet needs, with most if not all of these jobs being state or local in nature. What’s preventing them from being met is a lack of funding. This is where the federal government comes into play. Operating through state and local governments, the federal government can employ as many people as they desire and subject only to the limitation of local needs and the threat of inflation caused by reaching the nation’s capacity to produce. We obviously can’t produce more than the nation is capable of, but we shouldn’t accept producing less. What is the full employment in the US? No one really knows, hence we should let the appearance of inflation be our guide.
In the end, it’s important to remember that nations engage in foreign trade only if there is a benefit to them, and that there are no studies showing that trade has ever been detrimental to the US economy. Yes, some sectors have been harmed by trade, but that just highlights the need for policies designed to help workers, financially and educationally, adjust to changes in economic conditions.