Trade deficits: the world makes, the USA takes … but perhaps not forever


Modern consumer culture has been insidious.

People used to live in self-sufficient communities.

Consumerism followed mass production, and somehow learning the tough skills wasn’t as much fun as pursuing consumeristic fun.

The old skills died out.

Now we can barely figure out how to make existing factories work, and very few people know how to make new factories, and concentrated wealth seems to be stifling the economy.

We can try to learn the difficult skills. (You’ve got some free time, right? Why don’t you get trained as a plumber? Harder than you might think, but my hat is off to you if you can actually figure out how to get real training as a plumber. My friend has been trying to learn welding for weeks and the “school” keeps giving excuses about having no staff to run the beginners’ classes.) But learning difficult skills is frustrating and carries a high risk of failure.

We can hope Trump will save the world. We can hope that Factor-E will save the world. We can try to save ourselves. And we might end up getting saved, one way or another. But it is not a straightforward as one might think.

E. Fingleton wrote:

Much American infrastructure has become embarrassingly outdated. The problem, in a nation that has long run huge fiscal deficits, is finding the money for the necessary massive upgrades. (More about financing in a moment.)

The expressways are crumbling; the railways slow and antiquated. The United States even lags in internet speeds. Then there is water purity and the quality of mains electricity (this latter is a key consideration for companies locating advanced manufacturing operations).

Meanwhile as Trump has repeatedly pointed out, many American airports are so dysfunctional and badly served by ground transport that they would not be out of place in the Third World. According to the latest annual survey by the Skytrax company of the world’s best airports, Denver placed highest among American airports – but ranked a mediocre 28 in the world. By comparison five East Asian airports, including two in Japan alone, made it into the top 10.

Infrastructure apart, far bigger problems lurk just below the surface. They are summed up in one statistic, albeit a statistic that a perennially out-to-lunch American press rarely mentions: the trade deficit.

Measured on a current account basis (which is the widest and most meaningful measure), the trade deficit last year was $463 billion. This represented a stunning 4.7 percent of gross domestic product (GDP). By comparison the worst figure in the 1970s – a decade when the United States was already seen, both at home and abroad, as losing out badly in global competition – was a mere 0.5 percent. The truth is that the United States has not run a trade surplus consistently since the 1960s, and in the last two decades the deficits have rarely fallen below 3 percent of GDP.

Why does trade matter matter? For many reasons, not least because deficits have to be financed. In practice most of the financing has come from major sovereign investors, particularly the governments of China and Japan and to a lesser extent other East Asian nations. Typically it comes in the form of massive purchases of U.S. Treasury bonds. So far, the money has kept flowing but there is evidently an implicit understanding: in return for doing their bit to keep both the U.S. dollar and U.S. financial markets on an even keel, the East Asians will brook no lectures from Washington on opening their markets to foreign trade. Hence a conspicuous silence in Washington in recent years on East Asian trade barriers. Washington has entered a Faustian bargain and it is hard to see how even Trump, with all his undoubted energy and determination, can break out of it.

He has talked about reopening shuttered factories. That is easier said than done. Once a nation loses its position in any advanced manufacturing specialty, it finds it almost impossible to get back in.

Take electronics. Trump seems to believe that by the simple expedient of imposing stiff tariffs on Chinese imports he can encourage Apple to make iPhones in America. In reality, this badly misdiagnoses the problem. Where the manufacture of sophisticated electronic consumer products is concerned, China is a much less significant player than meets the eye. The product may bear a “Made in China” label but this refers merely to the place of final assembly. Admittedly China does possess the knowhow to make some components but generally only the simpler ones such as the plastic housing for a smartphone. The serious components are made typically in high-wage nations like Japan and to a lesser extent Korea, Taiwan, and Germany. Meanwhile Japan reigns supreme as the source of many of the most important materials and production machinery used in the industry. Little noticed outside East Asia, such materials and machinery are the ultimate driver of the electronic revolution.

All this means that, as a practical matter, China’s contribution to a smartphone’s total added-value may amount to little more than a few percentage points. Thus tariffs on China alone will, with the best will in the world, create remarkably few American jobs. Moreover such jobs would be labor-intensive and therefore fundamentally unsuitable for a high-wage economy. In any case it is highly debatable whether such jobs would be created in the first instance: the point is that even if Trump succeeded in imposing massive tariffs on Chinese goods, Apple would presumably retain the right to move the work to other cheap-labor nations such as Vietnam, India, Mexico, and Brazil.

The real challenge for the United States is to create jobs in advanced manufacturing. In the electronics industry that means focusing on components, materials, production machinery, and other so-called producers’ goods. Such goods typically entail production systems that are both highly capital-intensive and knowhow-intensive. The knowhow, moreover, is of a special, quite rarefied kind in that it resides not in the minds of ordinary production workers but rather consists typically of machine settings known only to a few top engineers. Getting high-tech production machinery to achieve high yields of saleable products is a bit like tuning a piano, only much more daunting. Knowhow is acquired through years if not decades of trial-and-error and learning-by-doing, and is closely held by any company that has acquired it.

Precisely for these reasons, the entry barriers in the sort of industries that Trump might want the United States to stage a comeback in are supremely high. By the same token incumbent companies are well shielded from new competition. Deploying capital-intensive production techniques, they can well afford to pay high wages and still dominate world markets.

Japan provides many impressive examples. Take, for instance, such an important material as semiconductor-grade silicon. Each new generation of microchip requires a quantum leap in the purity of silicon wafers. Otherwise, given the degree to which circuitry has to be miniaturized, even just one atom out of place can short-circuit a chip. In the old days Monsanto provided the United States with an ample supply of home-grown silicon. But Monsanto could not keep up and dropped out as far back as the 1980s. The only other non-Japanese supplier, Wacker Chemie of Germany, soon followed. The result is that today just two Japanese companies, Shinetsu and Sumco, enjoy a quiet but crucial global duopoly in this most important of all high-tech materials.

Of course, if the Japanese – or for that matter the Germans – can establish unassailable positions in leading edge producers’ goods, there is no law of the universe that says the Americans can’t. The problem is that, given how denuded America now is of advanced industries, free markets alone will not do the trick. You can’t get blood out of a stone.

To get back into the game Trump needs to win broad support for a muscular industrial policy, in which government would lead the nation in reaching agreed industrial objectives. In this he would have to emulate the sort of tactics the Japanese and, before them, the Germans, used to propel themselves to the top of the manufacturing hierarchy in the twentieth century.

The United States has actually had considerable success in the past with various industrial policies. The most recent example was the Apollo program which put Neil Armstrong on the moon in 1969. That achievement was only possible because government and industry worked closely together to overcome countless technical challenges. The result was a huge boost to American competitiveness in a host of advanced industries, from new materials to semiconductors.

The problem for Trump ultimately is that, since the Reagan era, his own Republican party has consistently opposed any attempts at industrial policy. Can Trump change the party’s mind? Although he has repeatedly defied the odds in his electoral career so far, the Republican party is unlikely to provide him with the rock-solid support he needs to revive the American manufacturing base.

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