Charles Skelley: Trade Deficit data 1991-2006 shows a rapid collapse of US competitveness

Trade Deficit data from Wikipedia:

Trade deficits have often been associated with a loss of international competitiveness, or unsustainable ‘booms’ in domestic demand. Similarly, trade surpluses have been associated with policies that inefficiently bias a country’s economic activity towards external demand, resulting in lower living standards.

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…..Large imbalances may sometimes be a sign of underlying economic problems or rigidities. An example would be a situation where exchange rates have been fixed or pegged for political reasons at levels impeding a correction of a trade imbalance.

The above chart shows that the most recent two US Presidents each presided over roughly equal amounts of collapse for US international competitiveness. So blame for this problem rests equally on the Democratic Party and on the Republican Party.

Democratic President Clinton watched the trade deficit spike upwards from a level of $50 Billion in 1992 when he first became President, growing to a $375 Billion deficit when Clinton left the office in 2000.

But then a Republican President Bush watched the trade deficit rise from $375 Billion in 2001 when he first became President, to $717 Billion in 2005 and $764 Billion in 2006.

A severe structural trade imbalance exists today between China and the USA.

For the year 2007, the US will have a trade deficit close to $250 Billion with China, compared to $232 Billion in 2006. This is by far the largest trade imbalance by any two countries, anywhere in the world.

Our US politicians should not hide behind the banner of free-trade as the best-and-only solution to every issue in economics. A myopic free-trade mentality is what has caused the current massive trade imbalance between the US and China.

Chinese workers today are able to live comfortably on average incomes of $1 per hour, out of which they pay for food, clothing, shelter, and healthcare, while retaining a substantial fraction (perhaps 25%) of their income as savings. By contrast, unit labor costs for employers in the USA average close to $20 per hour (including some hidden fringe benefits such as social security fees, medical and dental insurance, paid vacation and holidays, pollution control, etc.)

Under conditions such as these, it is natural that “productive jobs” and factories in the USA are rapidly disappearing, and being replaced by jobs and Working Capital in China. A structural problem exists which simply cannot be mitigated by blindly advocating “free trade”.

The cost of health care alone is so high in the US that even if an employee could be reduced to no take home pay at all (i.e. if he received only pre-paid medical insurance), the US employer would still lose money if he is competing with a product made in China.