What Caused the US Trade Deficit ?

In an earlier post, I tried to raise some doubt about the assumption that US manufacturing was in decline. The crux of the issue was that the total real volume of US manufacturing had been steadily increasing since at least 1970, and so it would be unjustifiable to hold a negative view.

Meanwhile the unemployment trend was rising from 1950 to 1980 and then started falling at the same time as a major trade deficit with China had opened. Let's repeat that: US trade with China increased and unemployment decreased. This is the opposite of what most people assume.

So now we should ask, if the total amount of US manufacturing is not falling, then what is causing the trade deficit?

The US Congressional Budget Office studied this issue and reported on it in March 2000.
Here is a quote:

"In the early 1980s, the percentage of GDP accounted for by gross saving fell rapidly and was reflected in a widening gap between the supply of saving and the
demand for domestic investment.2 The declining share of saving had broad
consequences: the economy accumulated less capital and therefore grew more slowly
and paid workers lower average wages than it would have if the share had remained
higher. Inflows of capital from abroad partially filled the gap and permitted domestic
investment to exceed saving. Those inflows also created a trade deficit.

In effect, the Budget Office concludes that a severe decline in saving is the root cause of the trade deficit.

Get the original CBO report here http://www.cbo.gov/publication/12139

Worried About How the World Will Feed Itself?

The world's population is projected to grow to 9 billion by 2050, but what about food production? Can the world feed itself or are we already destined to suffer shortages? 

Food production presents a complex mix of issues such as climate change, water supply, technology transfer, transportation and human rights, so I won't give a complete analysis here. Instead, I will provide some data to help build the context for assessing any reports you may read elsewhere (and there is quite a lot).

This data on agricultural output was sourced from the UN statistical database and is freely available on the web. It shows how much the entire world's nations produced every year since 1970, and it may be a bit surprising.

Let's start with a graph that plots 2 key parameters. First is total output, which gives you an idea of the condition of the agricultural sector by showing how much it has grown. This is encouraging, as the total annual production has increased significantly.

However, the population has also increased over the period so total output alone cannot indicate whether there was enough growth. So the second parameter is agricultural output per capita.

 

-click the graph to enlarge it-

The blue line shows that total output has more than doubled over the period, an average growth rate of 2.34% per year.

The red line shows that output per person has grown at a lower rate, 0.72% per year.

So regardless of the fact that the world's population has increased, agricultural production has grown more quickly than the population. 

A quick look at the graph also clearly indicates the effect of the Soviet collapse in 1990. World output per capita was set back about 20 years in the early 90s, recovered by 2002 and has continued growing faster than the population.

Of course recent history does not guarantee that the trend will continue, but it does prove that agriculture can increase productivity and output levels. It also shows that population pressure is not a new issue, or one that should necessarily be daunting.

I should note that in the UN classification system, agriculture includes forestry and fishing. This might cause doubt that the world's food production is rising. A second data source can be used to confirm or refute the above result. 

The UN FAO Summary of Food and Agricultural Statistics[1] reports sectoral growth rates over three decades: the 1970s, 1980s, and 1990s. World average growth in agricultural production held steady over the three decades at 2.4%, 2.4%, and 2.3% respectively. The corresponding population growth remained lower at 1.7% in the 1980s and 1.4% in the 1990s (no population data was reported for the 1970s). 

The same pattern held true for Africa and Asia, albeit by a smaller margin. By this measure, world agricultural output grew between 40% and 60% faster than population and is reconfirmed by reported growth in food availability for every region worldwide. 

Is this also confirmed by most food commodities? Food availability per capita has grown in every continent over the past four decades except for a 2.3% decline in Oceania (UNFAO report page 69). This is accompanied by a reduction in the percentage of undernourished within each continental population

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[1] Summary of Food and Agricultural Statistics 2003, Food and Agricultural Organization of the United Nations, Rome 2003

Is US Manufacturing in Decline?

America has a serious trade deficit with the rest of the world and is said to be falling behind in manufacturing.

The link between these two ideas is that as America imports more cheap goods, fewer goods are made at home. This decreases output and employment, which in turn reduces tax revenues and forms a vicious cycle.

Let's test this idea in two ways. Let's look at US manufacturing output and US total unemployment.

1) If the trade deficit is due to imported goods displacing domestic goods, then the data should show that manufacturing output is falling.

2) If imports are killing jobs, then the data should show unemployment to be rising.


1) This graph shows US output in two main industrial sectors, manufacturing and agriculture (you can see from the labels that they are combined with 2 other sub-sectors, which is standard practice in the UN system of national accounts)


It shows that US manufacturing output has been rising almost continuously since 1970, more than doubling in that period. The periods of slight decline are clear: the OPEC oil crises of 1973 and 1979; the early 90s recession; 9-11 2001.

The overall trend over the last several decades does not show a decline in manufacturing. Instead the average annual growth rate for the sector was 2.7%. This growth rate was just under the GDP growth rate of 3%, which confirms that manufacturing makes up a slightly declining share of GDP.

2) What about manufacturing employment?
Aren't imports, especially from China, killing US jobs?

This graph shows the US trade balance with China, which is also a good indicator of the total US trade balance. The shift is strong and clear: imports and exports were in balance until the early 1980s, and then the US fell into a large deficit. US exports to China grew rapidly, but imports from China grew even more.



This shift happened very soon after China was granted normalized trade relations with the US in 1980 (Most Favored Nation status).

But notice the US unemployment data in the graph. It generally fluctuates between 4% and 8%, but it also has a clear trend (dashed line). Between 1950 and 1980 trade with China was either non-existent or in balance, but the unemployment trend was rising.

Then the surprise: the trade deficit with China accelerates but unemployment falls!
It seems very unclear that importing cheap Chinese goods could cause unemployment. And in fact, the data suggest the opposite case. At the very least, it shows that cheap imports did not cause unemployment.

None of this implies that the trade deficit or cheap imports have had no effect. It is true that they displace firms and entire industries, which in turn causes localized economic decline and job loss. But over the entire US economy, output and employment in manufacturing are underestimated in the public perception.