How did We Get Here?-Economic Webs of US Trade

Introduction

Background. Mass production allowed the feudal system of Western Society to revolutionize production and shifted the requirement of labor in the sustainment of larger populations. These efficiencies of Western Society displaced the work force whose new found cultural freedoms stemmed from the innovative revolutions in the Printing Press, the Renaissance and Reformation. Workers moved toward opportunities created by the first corporate entities chartered in trading companies and powered the engine that became the industrial revolution where mass production, refrigeration and its developments in medicine, steam, coal, and every other aspect of life and improved the quality of life for many who had access to these mass-produced goods. As economic areas of transportation, communications, commerce, production, and resources expanded beyond national and local boundaries, this integration of systems began to accelerate development for the human race toward the late 19th century and continued into modern times. Clinton Mentor and American historian and theorist Quigley commented on this path when he summarized this time line of events in Tragedy and Hope. He noted, “It appeared as the Agricultural Revolution about 1725 and as the Industrial Revolution about 1775, but it did not get started as a great burst of expansion until after 1820. Once started, it moved forward with an impetus such as the world had never seen before, and it looked as if Western Civilization might cover the whole globe,” (Quigley 1966). This was the rise of globalism (Ambrose 2010).

Scottish Historian Niall Ferguson credited the British people for brining globalism as civilization to the rest of the world (Ferguson 2012). Following British dominance of the world, the rise and influence in the subtleties of American Empire often brought commerce and credit rather than colonization as the force of social change to all corners of the world (D’Souza 2002). This saw the expansion of roads, rail, telephone lines, sewage systems and power grids across much of the developing world. American power dominated the reorganization of Western Society away from royal governance toward constitutional democracies from outcomes of World War I and the further directed the realignment of competitive collectivist political ideologies with the outcomes of World War II.

The shifting politico-economic ideologies saw feudalism become mercantilism. This mercantilism evolved into laissez-faire capitalism and then morphed into transnational economic structures of a multinational corporatocracy we see in global companies branded as development in emerging states today. These entities function often beyond nationalism but in order to conduct business with in a political economy must engage the nation state to facilitate commerce. It is this perspective that allows us to view how a multi-national can trade with multiple countries rather than a country trading with a country.

The US economy roared into beginning of the twentieth century. From 1869 to 1879, the it grew at a rate of 6.8% for real GDP and 4.5% for real GDP per capita (Murthy 2013). In 1900 the US dollar was backed by gold (Elwell 2011). In 1916, the US overtook the UK as the world’s largest economy by becoming the world’s largest creditor (Frum 2014). The Federal Reserve Central Bank was established in 1913 following secretive meetings and years of significant resistance of the American people to a central bank (Mullins 2008; Griffin 2010). In June of 1933, the US abandoned the Gold Standard (“FDR Takes United States off Gold Standard” 2015) and in the years following the US central bank nationalized gold and devalued the currency some 40%. In 1944 the US entered with other developed countries into the Bretton Woods Agreement where gold played a diminutive role in the convertibility of these currencies but most central banks of the world pegged the value of their fiat specie against the dollar and not a commodity such as a precious metal (Cohen 2013).

Things for the US would change forever at this point. In what is known as the Nixon Shock, The US abandoned the Gold Standard completely in 1971 (Benko 2011) which followed a period of stagflation in the late 1970’s and early 1980’s (McConnell and Brue 1996). In 1985 the US became the world’s largest debtor nation (The Los Angeles Times 1986). In 2001 the US entered into a war following the attacks on September 11 that would strap future taxpayers with trillions of dollars of debt (Herb 2013). In 2008 the US central bank bailed out several large financial institutions deemed, “too big to fail” that were associated with shady real estate derivatives trades (Sorkin 2010). Economist Simon Black reported that the US dollar had lost 97% of its adjusted value only 100 years after the establishment of the Federal Reserve (Black 2014). This number was furthered substantiated by the Tea Party of Virginia in 2010 and then Presidential Candidate, Ron Paul in a CNBC 2010 Squawk Box interview where both noted the US Dollar had lost about 95% of its purchasing power because of paper monetary political policies (Wes Hester 2010; Roach 2012). A 2011 audit of the Federal Reserve noted there were trillions in secret bailouts (Cardinale 2011) with a separate Congressional Budget Office report noting there were more than $128 trillion in unfunded liabilities (Kessler 2013). Most of that money was owed to China (Forbes 2011). As China imported more than 2000 tons of gold in 2013 (Durden 2013) it passed the US as the World’s largest economy in 2015 (Halbert 2015). During this time, China called for an alternative to the reserve status of the US Dollar (Puzzanghera 2013) and this view was seconded by Vice President’s chief economic advisor Jared Bernstein (Bernstein 2014).

In the 1960’s a Belgian born economist named Triffin observed a challenge concerning the world’s reserve currency and the ability of the US as this world reserve currency to trade with other nations. Triffin observed a fundamental incompatibility between the attainment of global economic stability and having a single national currency perform the role of the world’s reserve currency (Canavan 2015). This currency would be able to sustain significant trade deficits because other central banks would be required to maintain that currency in large amounts to exchange with other central banks in the execution of trade. In what is known as the Triffin Dilemma he argued that such persistent deficits would eventually put pressure on the dollar and eventually lead to the demise of the Bretton Woods System of international exchange (Smaghi 2011). Canavan reported the significance of this when he stated, “The US soon understood that reserve currency status allowed them to run large deficits. The deficits were ‘paid’ for by issuing dollars. When the excess dollars began showing up in global central banks, they began converting their dollars into gold. This lowered the value of the US dollar in relation to gold,” (Canavan 2015).

To maintain this trade deficit the US replaced the Bretton Woods System with the Petro-Dollar System where countries of the world bought their oil from the OPEC countries where oil was a nationalized commodity and they had to purchase their oil in dollars (Robinson 2015). This caused nations of the world running their economies on oil to keep large reserves of dollars on hand and created a similar situation where the dollar remained the world’s reserve currency (Crooke 2014). Recently, erosion in this standard with the Chinese Yuan has caused many countries to maintain large quantities of China’s currency on hand (Leverett and Leverett 2014). Where that currency becomes stronger so likely will go also the Triffin Dilemma even in China.

A recent New York Times article discussed the phenomenon of the relationship involving monetary policy and trade deficits. Notably when the value of the dollar was high against other currencies, the US exports decreased and people around the world bought fewer goods made in the US (The New York Times 2015). National Public Radio reported in 2011 on the strength of US export markets when the dollar was weak when they noted that more people around the globe could afford US goods and services. A weak dollar would decrease the trade deficit in the US by increasing exports (National Public Radio 2011). Additionally, increased demand for US goods and services would increase domestic employment (Goldstein 2011).

In the recent tides of shifting monetary policy, currency supremacy like other economic issues falls into a multiplicity of economic factors to consider. Following years of praise for the Euro-zone, recent corrections in Greece, Spain, Italy, Portugal, and Cyprus have signalled a failure of the Euro to replace the dollar as the world’s reserve currency and potentially the end of the Euro (Rodrik 2015). Others have advocated a Greek exit from the Euro-zone would signal the end of this currency’s reserve status (Duncan 2015). Recently reports of a major correction in China have claimed that a stock bubble is bursting (Belvedere 2015). Only a few years ago economist Snyder predicted that China would bring down the entire US financial system (Snyder 2013). Noting that only 40% of Chinese stocks can be bought and sold on the open market the Chinese market was down 28% from its peak and lost $3 trillion in value in a month long slide in July of 2015 (Larsen 2015). Noland explains the devolution of these economies in the following manner when he noted in August of 2015:

For pinned – directly and indirectly – by concerted efforts of the world’s central bankers. Trillions of newly minted government finances have been validating tens of Trillions more of private-sector obligations and asset prices. Now, faith in the almighty power of central bank Credit and fiscal deficits, unquestioned for far too long, has begun to dim. The unfolding global crisis of confidence expanded and accelerated this week (Noland 2015).

In this perspective of competitive global monetary policy, the specifics of the US trade deficit will be explored. Who is this trade with and why? Who controls most of this trade with the United States? The US Bureau of economic analysis reported those average exports of goods and services increased $0.2 billion to $189.1 billion in June and that average imports of goods and services decreased $2.1 billion to $230.9 billion in June (Bogen et al. 2015).

Thesis Statement. The US trade deficit is financed by the dollars status as the world reserve world currency.

Purpose. The focus of this paper will address and will explain what the leading U.S. exports and imports in terms of value, which trading partners are most important to the United States, and which countries have the largest trade deficits and trade surpluses with the United States?

Analysis and Findings

Aspects of imports and exports will be explored to include dollar values and with whom these items are traded. Leading categories will be noted and finally the US as a lender nation will be explored.

Imports. The US Department of Commerce reported that, “The Nation’s international trade deficit in goods and services increased to $43.8 billion in June from $40.9 billion in May (revised), as exports decreased and imports increased.” (“U.S. International Trade in Goods and Services” 2015). Specifically imports increased 2.7 billion from May to June to $232.4. Reuters reported that as a result of these findings that “Prices for U.S. Treasuries rose after the data, while U.S. stock index futures were unchanged. The dollar gained against a basket of currencies,” (Lange 2015). The top five countries the US imports from are: China (22%), Mexico (14%), Canada (9.8%), Japan (7.8%), and Germany (6.0) (Simoes 2015). In 2012, when the US national debt topped $16 trillion dollars, most of the debt was owed to China who had purchased a significant amount of US bonds (Wilson 2012). Alan Uke during this time noted that our top seven trading partners account for just over half of our annual trade deficit (Uke 2012). The US imports many of these goods and services because they can be had at a price point that exceeds the US ability to produce the product at a quality and quantity that would remain domestically competitive.

Exports. The Untied States imports approximately $1.8 trillion worth of goods and services from the world economy. Of all these five leading imports of the US are: cars (8.3%), computers (5.4%), crude petroleum (5.3%), packaged medicines (2.6%), and broadcasting equipment (2.5%) (Simoes 2015). These account for approximately $433.8 billion or 24.1% of the 1.8 trillion in imports. This is only a single measure of the total of US trade. Foreign Affairs offered a different perspective regarding these numbers noting that in 1998 noting U.S. foreign-affiliate sales topped a staggering $2.4 trillion, while “U.S. exports — the common but spurious yardsticks of U.S. global sales — totalled just $933 billion, or less than 40 percent of sales,” (Quinlan and Chandler 2001). This number isn’t reported by the US Census Bureau but it is noted that the second leading exports of petroleum had stalled with shale and liquefied natural gas exports have stalled as oil prices have fallen (Berman 2015). Berman reported a 5% drop in the month of June over May (Berman 2015). Noting the top five countries the US exports to are: Canada (13%), Mexico (11%), China (9.3%), Japan (5.5), and Germany (4.95) (Simoes 2015). Similarly, these trade partners find value in the exchange either because they cannot produce a similar technology or quality at home or the US produced product comes at a price point that adds the best value to their business model over comparative products. Similarly as above, these trade partners find value in the exchange either because they cannot produce a similar technology or quality at home or the US produced product comes at a price point that adds the best value to their business model over comparative products.

Deficits With the US. The rest of the world owes the United States almost as much as the United States owes the rest of the world. A McKinsey 2011 Report that mapped global markets noted, “The US has a gross foreign debt of $18.4 trillion and a net foreign debt of over $3 trillion for 2010, where net foreign debt is defined as the country’s borrowing from the rest of the world, less the country’s lending to the rest of the world. The US has lent the world $15.3 trillion in the years when it was the sole economic superpower,” (F. World 2011) Additionally, many people believe that the US is at a disadvantage with the People’s Republic of China (PRC) given the trillions of debts owed to China by the taxpayers of the US. However, the PRC has refused to pay American bond holders who helped refinance the communist government of china following the rise of communism in the country. If US credit agencies rated China differently because of a selective default on these bonds, it would cost the PRC significantly more money to repay their debts or to access credit on the open markets and currently the PRC owes about $750 billion to approximately 20,000 US bond holders (Unruh 2012).

This is the most under reported aspect of the US Economy and is conjoining with the US dollar as the world’s reserve currency. A New York Times best-selling author, John Perkins wrote memoirs of a thesis that involves US multinationals corporations going throughout the world and selling US goods and services to governments and then using the financial instruments of the US, lending them the money via the International Monetary Fund (Perkins 2005). While the products and services are sold at a competitive market value, the real profit is made from the interest on the loans and the taxpayers of these countries are left on the hook for large sums of money (Perkins 2007). Perkins notes that when these countries can’t pay up, these multinationals move in to acquire economic interests at fire sale prices to address their sovereign debt. A recent example of this can be found in Greece where the US sold massive infrastructure projects to Greece in the 1980’s and 1990’s to build roads, airports, power plants, water purification resources and more with loans from the International Monetary Fund (IMF). Unable to repay this heavy debt burden the Greeks defaulted on their IMF payments in 2015 (Laura Wright 2015).

Conclusion

A singular look at the trade deficit via the raw numbers of import and export statistics does not address the complexity of the market. US based corporations sell many products and services through their affiliates in foreign countries given the tax advantages of doing so; while economists often only look to numbers associated with a trade deficit to often portray a defensive of protectionism. The import/export statistics present with a problem that correlates the deficit and the national debt of the United States. Additionally, it appears that a major market correction is under-way and that there is a fear in the market over deflation. This fear may be misplaced. Lastly, the continued pronouncements of the dollar’s death appear to be exaggerated.

The problem with a trade deficit is that this also fuels our national debt. Many of these products, now produced in countries other than the United States, are consumer products and were previously made in the United States. Many of them are now made in China and thus we are importing them. When we’ve exported this industrial base, we have seen according to Michelle Nash-Hoff, “the loss of 5.8 million American manufacturing jobs and the closure of more than 57,000 manufacturing firms,” (Nash-Hoff 2015). When these products and services were made in the United States, they were produced by companies and workers who paid taxes to the treasury and provided revenue to the Federal, State and local governments. As a result of this shift, these governments are forced to borrow in the payment of public assistance for the unemployed and underemployed through various social programs. The Federal Government has reacted to deficits by raising taxes to increase revenue which only sends more businesses abroad as the US maintains the second highest corporate tax rate in the world (Pomerleau 2013).

Senior fellow at the Von Mises Institute, Economist Mark Thornton explored the phenomenon of apoplithorismosphobia (a fear of deflation) in the Quarterly Journal of Austrian Economics (Thornton 2003). In this discussion the phenomenon of bubble bursting corrections often resulted in falling prices in a period of deflation. Economists often view deflation adversely in economic theory because people are often unable to repay their debts (Taylor 1998; O’Sullivan, Sheffrin, and Perez 2010). Widemer, Spitzer and Wiedemer note that the dollar– in spite of a future fall– will be attractive to investors since the US will continue to be such a large economy and if the US is economically challenged so too will everyone else be (Widemer, Spitzer, Widemer p. 147).  Thornton contended one aspect of this phenomenon when he noted:

An economy that is experiencing deflation or falling prices tends to be favorable to low-income groups because low-income individuals tend to spend a high proportion of their income on goods. Wage earners also benefit because wage rates tend to be relatively stable, increasing in real terms and thus providing greater purchasing power over time in a deflationary economy. Workers and business owners do not fear declining prices, they fear unemployment and recession, and these phenomena are not systematically related to deflation (Thornton 2003).

As these markets adjust the continued critique of world currencies as they’ve also tried to hide their debt appears to leave the US as the last man standing in the currency war. The Euro-zone and Yuan seems to be in free fall as these markets correct and the diverse market of the United States seems mobile and strong enough to weather the impending correction even to the point of noting that the world owes the US almost as much money as the US owed it so the real balance sheet that is not often reported is not as disparaging as sensational paper-selling headlines would have us believe. In this context the next round in the currency war will be upon us and the hegemony of the dollar will continue another day. All of the G20 major economies central banks have relaxed their monetary policy since the beginning of the year in order to boost exports (Roubini 2015). Roubini noted, “Currency frictions can lead eventually to trade frictions, and currency wars can lead to trade wars.” In this perspective leading economists believe the central bank will start printing money again to “quantitatively ease” the economy but what is really needed as .

Widemer, Spitzer and Wiedemer declare that a breakthrough is needed in economics where economists are more than mere financial cheerleaders in boom markets (p. 242). In defining what this break through would look like, they claim that economics would become more like a science following a major Aftershock in the markets described in their award winning book by the same name. They note that economics should be more like a science (p. 248).  Widemer, Spitzer and Wiedemer advocate the implementation of this with the introduction of four elements into the discipline noting: Information Dynamics, Better Understanding of Technological Change, A Theory of Property Rights, and a New Methodology of Analysis and Prediction (p. 247-251). In implementation these ideas with scientific purpose certain methods would become validated with scientific evidence and thus improve the discipline, although some believe that accurate forecasting remains impossible.

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Wes Hester. 2010. “Virginia Tea Party Says Dollar Has Lost 98 Percent of Value under The Fed.” Politifact Virginia, November 24. http://www.politifact.com/virginia/statements/2010/nov/24/virginia-tea-party-patriots/virginia-tea-party-says-dollar-has-lost-98-percent/.

Wilson, Greg. 2012. “US Debt Tops $16 Trillion: So Who Do We Owe Most of That Money To?” Fox News.com. http://www.foxnews.com/politics/2012/09/04/who-do-owe-most-that-16-trillion-to-hint-it-isnt-china/.

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