May 16, Progressive Party with Sen. Schumer Get tickets

The U.S. Trade Trap

A Catch-22 of Rising Exports and Rising Trade Deficits

At first glance, the latest U.S. trade figures would seem to indicate it may be possible to shrink the nation’s massive annual trade deficits with the rest of the world and thus boost economic growth and job creation at home. After all, U.S. exports have grown strongly since the spring of 2009. The United States exported $137 billion in October 2009, the last month, for which data are available, according to the U.S. Census Bureau—the highest level of exports since November 2008 and 12.4 percent higher than at the lowest point in April 2009. U.S. exports of goods such as cars, aircraft, and computers, among others grew even faster, at a 16.9 percent clip during that same time, well behind U.S. service exports of things like patents and finance, which grew 3.8 percent over the same period.

Alas, our economy is not reaping the full benefits of more exports in terms of shrinking trade deficits and more job creation. The reason: we also import a lot more these days, in part because we have to in order to make many of the products we export to the rest of the world. Export manufacturers, like any manufacturer, need inputs to make their products. Increasingly, those inputs come from overseas. U.S. manufacturers are dependent on overseas manufacturing inputs because so much manufacturing capacity has disappeared in our country. The United States is also dependent on foreign oil inputs, in part because rising production in our economy means we need to import more oil.

This creates an economic Catch-22. We need to export to grow, but if we do, we will also import more, which means our trade deficits will increase and over the medium to long term our economic growth will suffer. The results of this Catch-22 are larger U.S. trade deficits and fewer jobs than would otherwise be the case.

The early evidence of this destabilizing trend is now before us. Imports surged in recent months, with close to 60 percent of this increase between April to October 2009 attributable to oil, intermediate goods, and capital goods imports and not to consumer goods imports. Total imports increased by 13.0 percent from April 2009 to October 2009—slightly faster than total exports. Goods imports rose by 15.4 percent, slightly less than goods exports, but imports have grown from much larger levels than exports during these six months, contributing to a widening U.S. trade deficit. The positive growth effects of the export boom are thus limited by an import surge of about equal relative size and much larger absolute size. The bottom line is this—the nascent U.S. recovery has been good to foreign producers.

There are several reasons for the surge in U.S. imports. For one, the U.S. economy is gradually coming out of a steep, two-year-long recession and so demand is beginning to grow again. Americans are starting to buy more stuff from everywhere, including overseas, which means imports rise because the United States cannot operate as an economy without them. This includes more oil imports, more intermediate goods imports, and more machinery inputs, all of which are then used for U.S. production for domestic and overseas markets.

This dependence on foreign inputs into U.S. production is a costly proposition. Not only are more and more manufacturing inputs not made in the United States any longer—with the resulting loss of jobs not created here—but U.S. importers are spending scarce dollars for increasingly costly imports. The value of the dollar is falling and thus making imports more costly. During the recent run up in exports between April and October last year, dollar fell in value by 7.2 percent, which bumped the price of imports significantly.

Let’s now examine more closely the two reasons for the surge in inputs. Part of the reason for the rise in imports is a dependence on foreign oil. Oil prices increased by 50.6 percent from the end of April to the end of October 2009 and U.S. petroleum imports grew by 27.0 percent during that period. The growth in petroleum imports, $4.9 billion, explained a little over one-fourth (26.3 percent) of the rise in U.S. goods imports, even though petroleum imports are less than one-sixth of all goods imports. This disproportionate growth of oil imports reflects higher oil prices and a greater dependence on oil imports than on other import products.

The part of the import story is a neglected U.S. manufacturing sector. Our nation’s manufacturers have seen the demand for their goods increase in world markets due to a lower dollar and increased overseas demand. Yet imports of industrial supplies and materials, which include oil imports, grew by $7.3 billion, or 21.6 percent, from April to October 2009, and U.S. imports of capital goods—excluding cars—expanded by 11.8 percent, or $3.4 billion.

U,S. manufacturers are now mostly middlemen for what the world needs rather than full-scale producers. This helps to create exports, but it also leads to more imports and limits the employment gains from more exports. The manufacturing sector is shrinking, even though manufacturers are selling a lot more stuff in world markets. During the resurgence of exports from April to October 2009, manufacturing shed 454,000 jobs, a decline of 3.7 percent. Auto manufacturing lost 12,300 jobs in those six months even as U.S. car exports grew by 36.0 percent and total car sales recovered from very low levels.

This is a by-now-familiar story: sales are up, but jobs are down. The fact that faster growth of U.S. exports benefits jobs growth overseas rests on several failed policies of the past. First, past energy policies have fostered a strong U.S. dependence on imported oil. To break that dependency, we need to reduce our imports of foreign oil by developing alternative and renewable sources of energy here at home so that future export gains are not funneled to pay for higher oil imports. In doing so, we can also boost U.S. manufacturing in the burgeoning “green energy” sector.

Because of past economic policies, we are also dependent on manufacturing imports due to the neglect of our manufacturing sector for so many years, which has contributed to an erosion of U.S. manufacturing capacity. Firms increasingly need to look to overseas suppliers for inputs to meet the rising global demand for their final products. So secondly, we need a serious investment in manufacturing capacity and competitiveness, including more green investments, to make sure that we have the wherewithal to make most of the things that we are selling to the rest of the world.

These are broadly speaking the two policy responses needed to get us out of this trade trap. If we don’t take these policy challenges seriously, we will find ourselves burdened with large, unsustainable trade deficits, foreign indebtedness to pay for these deficits, and less job growth in the near term. That won’t be good for American workers or U.S. economic prosperity in the coming decades.

Christian E. Weller is Associate Professor, Department of Public Policy and Public Affairs, University of Massachusetts-Boston, and a Senior Fellow at the Center for American Progress.