Trading the gdp away…2008

Stormy wrote in 2008 a narrative for the last few decades on trade…still relevent:

Trade means jobs; trade brings money into plants; trade surpluses ripple through the economy, providing not only wealth to employers and employees alike but also moneys into public coffers. Consider it “outside money” flowing into a town, county, state, or country.

Since the late 1970’s, that kind of “outside money” has not been flowing into public coffers or into the hands of the average worker, dramatically so in the last decade. Recently, our trade deficit has grown almost exponentially.

This trend is coincidental not only with the rise of public and private debt but also with NAFTA and China’s entry into the WTO. That the trade deficit is coincident with globalization itself is no accident. During the last ten years, trade as a percentage of GDP has become sharply and dangerously negative.

The following post examines graphically what has happened since 1960. The four following graphs, based on the Bureau of Economic Research’s “U.S. International Transaction Data” tell a story that is not pleasant. [See here.] In addition to the aforementioned data, I used the Bureau’s GDP data. [See here.]

Along with Trade, I look at the sum of three other items in the Current Account section of the Transaction Data: Royalties and License Fees, Income of U.S-owned Assets Abroad, and Transfers under Military Agency Sales. While the trade deficit blossomed, the sum of these last rose dramatically. Unfortunately, they are not offsetting, not by a long shot; but they do tell us a great deal about our priorities.

I have divided the discussion into five parts. Each of the first four includes a graph and discussion of the data. In the fifth, I place that data into the expanding crisis in which we find ourselves.

Net Trade: Exports and Imports of Goods and Services

As the following graph reveals, between 1960 and 1980, the U.S. had a stable balance of trade. After a sharp dip and subsequent rise in the ‘80’s, the trade deficit began its steep downward descent around 1996. NAFTA passed in 1993; China entered the WTO in 2001. Fast track trade rose in importance. The engine of globalization had left the station. Full steam ahead!

Net Trade as Percentage of GDP

The next graph looks at Net Trade (exports + imports) as a percentage of GDP. Again the tale is dramatic.

Prior to 1975, net trade was an important positive contributor to GDP. After a roller coaster ride in the 1980’s, trade became an increasing drag on GDP. That dragged gain impetus from 1996 onwards. In short, beginning in 1983, the trade balances no longer contributed positively to GDP.

Beginning around 1993 net trade as a percentage of GDP began its precipitous descent.

The “outside money” that I mentioned in the first paragraph no longer flowed into public coffers, jobs, and pensions. We had begun our spending spree, spending our accumulated wealth and going deeper and deeper into debt.

Additionally, we were inflating our GDP with the housing bubble. (Real estate comprises maybe ten percent of GDP.) If we could have properly accounted for the housing bubble, we would have made two salient observations:

1. Net Trade as a Percentage of GDP had declined even more precipitously than we thought.
2. GDP growth during this period may well have been illusory.

But we were happy that we could pay less for goods. Cheaper imported goods helped keep inflation down. Our economic focus was consumer based. Adding jobs to health care and government while losing jobs in manufacturing caused some concern. Stocks were up, however. Everything looked rosy.

Look closely at the difference between 1975 and 2006: Almost 7 percentage points.

Transfers/Royalties/Assets Abroad

The next graph reveals some of the items that played a positive role in net trade, i.e., they are considered part of our exports.

1. Transfers under U.S. military agency sales contracts
2. Royalties and license fees
3. Income receipts on U.S.-owned assets abroad.

From 1972 onward, we see a steady climb in these items; in 2002, they climb sharply upward. All three of these items played a positive role in GDP. Other than military hardware, none of them contribute to well-paying jobs. Surprisingly, royalties and license fees moved from 837 million in 1960 to 5,885 million in 1978, to 30,029 in 1995, and to 82,614 in 2007. That companies have seen this item as a cash cow that can be milked is the reason it has played such a prominent role in trade discussions. This kind of income plays well in corporate headquarters and those lucky ones that have a share in patents.

It could be argued that royalties and licensing fees do buttress job security, but I wonder just how many American jobs are being helped here, especially when we consider Net Trade itself.

Not so surprisingly, receipts from abroad moved from 4,416 million in 1960 to 25,231 million in 1975 to 208,065 million 1995 to 804,807 million in 2007!

Balance on Current Account as a Percentage of GDP

The last and final graph displays the Current Account as a percentage of GDP. (The Current Account includes all export and import categories as well as other items.

The Balance on Current Accounts mirrors Net Trade.

Final Thoughts

Some will argue that net trade is relatively unimportant, but every time it blips upward, we hear the bright blaring of trumpets, as if the upward rise were somehow important. A positive trade balance is important. That the balance has been negative for almost thirty years should be of great national concern. Yet it has not been.

The rise in housing prices certainly accelerated GDP, as did the use of the home as an ATM machine, as did all that consumer spending—in short, all that activity that contributed to our collective and personal debt. Now the piper has arrived on our shores; he must be paid. What will our children say?

GDP will certainly fall as we go deeper and deeper into this recession, a recession that many prominent economists—Krugman, among them—claim will be worse than most of us have ever experience, worse than anything since the Great Depression. Only the real old ones know what a Depression means.

We will, of course, buy fewer goods. Imports will clearly shrink.

What about exports? Those, I expect will shrink as well. The reasons are three-fold:

1. The recession will be, global, although some countries may still experience an enviable growth in GDP—China, for example. For this reason, we will find fewer and fewer markets for our own exports.
2. The dollar, paradoxically, remains strong. Without going into the reasons, we can easily deduce that a strong dollar will be a drag on our exports. (I suspect, though, just before we hit bottom, we will see the dollar plummet.)
3. Export platforms in developing countries—Asia and elsewhere—stand ready with cheap labor and plant investment to move into high gear should the global economy improve. We cannot, of course, compete with such export platforms; the above graphs clearly demonstrate we have been unable to compete in the last twenty years. We went deeper into debt and relied more and more on credit.

I am not sure how much economic activity will disappear from the U.S. economy before all this is over. Needless to say, I am profoundly worried.

Each day or week brings to the fore another crisis, be it in the financial sector, in jobs, or in major corporations within the U.S. failing rapidly.

With each crisis, more and more worried doctors surround the patient, each yelling that we need this or that bailout, this or that stimulus package. The entire hospital staff now surrounds this very important personage. Various drugs are administered; powerful defibrillators are rolled in. Cash infusions are poured into financial veins. Alarm bells drown out rationality.

Each crisis compounds succeeding ones.

In the short or medium term, one thing seems almost certain: Exports will not rescue the patient.

We are now in crisis mode, focused only on short-term fixes. We do not see the big picture.

Hopefully, we will fashion the fixes intelligently enough to buy us some much needed time, fixes that will slow down our descent into the maelstrom, the awful dark hole of a real Depression.

We need time. For that reason alone I have partially supported many of the hurried rescue attempts. True, we do not have time to weigh each one carefully, time to plan them intelligently, time to gather the necessary personnel, time to set up efficient administration. True, many institutions or corporations have been poorly run.

What do we save; how do we save it; can we save it? If we cannot save it, should we try to lessen the impact of its sudden loss to the economy. Should we not give it enough life so that it can wither away more slowly, instead of sending a catastrophic earthquake through our economic life? In some cases, I would say, “Yes”

After all the debris has hit the streets and we zombies begin to gain some clarity, we will look again at Net Trade. We will honestly assess how globalization was structured. We will ignore those whose simple minds think that the only option is between free trade and protectionism.

Maybe then we will understand that globalization needs real structure, real planning, not blind belief that anything goes. Trade is the life’s blood of us all. Intelligent trade brings wealth to everyone. Some countries are (or were) far behind us in their share of the pie. I, for one, understand and sympathized with their envy and their rights. I want globalization to work, desperately; but not like this.

On the other hand, these poorer countries should not expect to be suddenly stuffed, like bloated pigs. All they will get are excruciating stomach pains. They, too, will shortly be on the floor along with the rest of us. Great leaps forward, Chinese style, have always failed.

China, for example, in becoming an export platform, has simply not digested enough of its wealth to create a substantial, vibrant middle class. Vibrant middle classes do not appear overnight, or even in a decade.

What are the leaders in Beijing going to tell their poor factory workers when the industrialized nations can no longer consume? “Sorry, our sugar daddy is going on a diet?” or “It was all the fault of those nasty financial capitalists?”

Similarly, we cannot expect to prosper if we just pump jobs overseas. We should not consume our cake, believing the next bite will be even richer and tastier.

China’s plan was just as foolish as our trade agreements, just as foolish as how the WTO has structured globalization. “Wisely and slow. They stumble who run fast,” says Friar Lawrence to the headstrong, lovesick Romeo. Romeo does not wait; does not consider. Instead, he rushes forward, sure that all will be well. We all know what happened.

Look again at those graphs. Did we plan for this kind of disequilibria? Did China or the emerging nations? Did we think we could just ignore producing? Have the emerging nations consider how fast they can wisely grow?

At the beginning of this century, many touted it as having a marvelous future. Well, here it is, barely a decade old, poised on the brink of the worst recession since the Great Depression.

Someone out there better start thinking.