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The Other Deficit

Trade is the hidden crisis four decades in the making, and President Biden will have to do something about it.

For those who lived through it, the U.S. economic crisis of the early 1970s was a memorable experience. It was precipitated mainly by a worrying deterioration in America’s international trade figures. In his efforts to reverse the trend, President Richard Nixon felt it necessary to introduce a stiff package of emergency measures that included a devaluation of the dollar and a wall of temporary surcharge tariffs to cut the nation’s imports. This package, which quickly became known as the “Nixon Shock,” made banner headlines around the world and was generally presented as a major embarrassment for the United States. 

The embarrassment was short-lived, however, as the package quickly returned U.S. trade to the black. In 1974, the year Nixon resigned, the annual current account surplus, at $7.1 billion, was one of the largest in U.S. history.

Consider how all this appears from the vantage point of 2021. Although the Washington and New York elites have done a superb job of keeping the story out of the press, it is a fact that America’s trade position today is horrendously worse than it was a half-century ago. On the International Monetary Fund’s figures, America is headed this year for a current account deficit of more than $590 billion. This would be one of the worst deficits in American history and the latest in a pattern of huge and generally rising trade deficits stretching back to the 1980s. The worst annual deficit of the Nixon era, recorded in 1973, was a mere $5.8 billion. Even adjusted for inflation, the 1973 figure counts as little more than one-twentieth of the prospective 2021 one.

The scale of the current year’s deficit is all the more surprising given that Donald Trump was the first president since Nixon to have taken trade truly seriously. Trump appointed as U.S. trade representative Robert Lighthizer, an exceptionally tough and resourceful trade lawyer whose appointment met with general approval among American economic nationalists. In the view of Alan Tonelson, an expert on America’s trade problems, Lighthizer managed to make some serious progress, notably in reining in Mexico’s automotive exports and China’s exports of steel and aluminum. 

But others sensed that Lighthizer was overwhelmed by the task and that a single presidential term was far too short to make any real impact on the problem—a problem that, after all, has been relentlessly building for nearly half a century. At the end of the day, the current account deficits on Trump’s watch averaged more than $490 billion a year and were considerably up over the Obama average.

Given the banner headlines that the Nixon-era trade crisis generated, what explains the mainstream media’s almost total silence on the trade story in more recent times? 

The more closely one looks at the press’s behavior, the more remiss it seems. There is virtually no coverage of the quarterly trade statistics. By contrast, in the Nixon era, each new set of trade statistics was played as an important item in the American news cycle. This reflected a widely shared consensus on both sides of the political aisle. It was a Democrat, John F. Kennedy, who put the concern most memorably when he commented, to general approval, that the two things he most feared were nuclear war and a deficit in America’s trade account. 

In a moment, we will take a closer look at today’s crisis and what to do about it. But first let’s consider how America got into this pickle in the first place.

In its early years, the United States was a developing country whose exports consisted mainly of low-grade commodities such as lumber, cotton, furs, and tobacco. Beginning about the middle of the 19th century, American manufacturers began to surge ahead. By the time of the famous World’s Columbian Exposition in Chicago in 1893, they had visibly established leadership in several technologically advanced products such as typewriters, rotary newspaper presses, sewing machines, and railroad equipment.

The two world wars provided a huge opportunity for American manufacturers to leap ahead in both scale and efficiency. By the late 1940s, America bestrode the world as an unchallenged exporting colossus. Most visibly it led in such exciting and fast-growing consumer products as autos, radio receivers, gramophones, and television sets. America also led in various important capital goods industries ranging from medical equipment to nuclear power stations. Many factors contributed to this success, but one of the most important has long been almost entirely forgotten: protectionism. At its zenith in the middle of the 20th century, the United States vigorously protected its markets behind a wall of high tariffs. It was not until the 1980s that those tariffs began seriously to be reduced.

After Nixon’s departure, the trade balances swung for several years between surplus and deficit before plunging decisively and permanently into deficit in 1982. Measured on a current account basis, the deficits averaged $78 billion a year in the 1980s and $107 billion a year in the 1990s. Then, reflecting the financial strains of George W. Bush’s wars, they rocketed up to average a truly outrageous $579 billion a year in the 2000s. In the 2010s, the annual average fell, slightly, to $411 billion. 

Why do the media ignore such shocking numbers? The question is all the more pertinent for the fact that the trade disaster’s human consequences have been painfully obvious for so long in the shuttered factories and ruined lives of the once-great industrial cities of the Midwest. 

The press’s silence seems to stem in large measure from an inability of reporters and editors to think for themselves. They have long considered economics a mystical discipline beyond the comprehension of ordinary mortals. The task of reading the tea leaves has been left more and more to a special priesthood. Whereas in the Nixon era, the priesthood generally espoused the commonsense view that maintaining a nation’s jobs base was an important policy consideration, increasingly in the 1980s a cynical new breed took the lead in shaping media coverage of the economy. These talking heads travel under the rubric of analysts or economists, although in many cases their only real work seems to be to chat to the press. Certainly they seem to be available 24/7 to talk up the supposed wonderful benefits of globalism.

The mantra became “trade deficits don’t matter.” This served the interests of such mercantilist nations as Japan, Germany, and China, which have continued avidly to build ever more advanced manufacturing industries and thus have generally gained mightily from the offshoring of American jobs. Because the major mercantilist nations are now by far the world’s most prolific sources of investment capital, Wall Street panders to their every need. Almost no one in the American press has questioned this, since the “sophisticated” view among media professionals has become that the United States is leading the world into a new post-industrial era of unprecedented prosperity. In the meantime, supposedly, the faster U.S. factories are shuttered, the better.

The case against post-industrialism was the theme of my book In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the Key to Future Prosperity (1999). As I pointed out there, America made a mistake in allowing thousands of factories to be shuttered before the promised new post-industrial jobs appeared. This strategy has been the economic equivalent of a skydiver jumping out of a plane first and then hoping to stitch some sort of parachute together on the way down.

When a nation imports more than it exports, someone, somewhere, has to finance the gap. In the case of the United States in recent decades, the main sources of such finance have been Japan, Germany, and China—the same nations that, by buying U.S. Treasury bonds by the truckload, have long sustained Wall Street and by extension its talking heads. In deciding to fund America’s trade deficits, these nations have determined that, on balance and in the long run, they stand to gain handsomely. In particular, they know that by developing ever more advanced manufacturing industries, they can create a torrent of high-paying, productive, secure jobs for workers of average or even below-average ability.

These foreigners hardly regard U.S. Treasuries as a particularly great investment. Rather, they choose to eat U.S. government debt mainly because otherwise the U.S. dollar’s foreign exchange value would implode. It is axiomatic that the higher the foreigners can drive the dollar, the easier it is for foreign exporters to penetrate the American market. By the same token, a high dollar hastens the demise of any remaining American producers trying to hang on.

Foreign trade lobbyists predictably deny that their governments harbor any intent to prop up the dollar (such an intent would be a breach of world trade rules). The real cause of trade imbalances, they contend, is differences in savings rates. The surpluses of nations like Japan, Germany, and China arise supposedly because of an uncontroversial and entirely legitimate tendency for millions of ordinary citizens in those nations to save more. A key point the lobby sweeps under the rug is direction of causality. While there is a direct connection between trade imbalances and savings rates, the latter don’t necessarily cause the former. Governments throughout East Asia directly suppress consumption through tight rationing of consumer credit, among other controls. This, of course, powerfully boosts the savings rate.

The question now is how President Joe Biden will deal with the trade crisis. It is fair to say that expectations are not high.

Alan Tonelson expresses particular disappointment with Biden’s choice of Janet Yellen as Treasury secretary. “She’s displayed almost no interest in trade issues during her long career in public life,” he says. “She is likely to take her cues from Biden, whose term in public service has been dominated by coddling China and making it easier for U.S. manufacturers to ship jobs abroad.”

Kevin Kearns, former president of the United States Business and Industry Council, is equally dismissive of Biden’s appointment of Katherine Tai as U.S. trade representative. “These appointments represent a return to orthodoxy,” he says. Kearns suggests that Biden should embrace an industrial policy of the sort that has long driven growth in Germany and East Asia. He points in particular to the current industrial policy in Germany—virtually never referenced in Anglophone discussions—known as Industrie 4.0. 

The problem, of course, is that with the partial exception of times of war, Americans have never cottoned to the idea of a national industrial policy. For the foreseeable future, therefore, the new administration will probably be limited to more traditional solutions.

Luckily, the model for what Biden should do is already out there: the Nixon Shock package of 1971. One of the most important and effective aspects of Nixon’s approach was that the surcharge tariff he imposed was applied uniformly to imports from all countries. Not even Canada was exempt. One benefit of this no-exemptions/no-favorites strategy was that it was easy to administer. It minimized disputes about rules of origin. Because it was applied so widely, Nixon could set the tariff at the relatively low rate of 10 percent and still bring in a lot of badly needed federal revenue. Of course, the free trade lobby will point out that a Nixon-style solution would be a breach of World Trade Organization rules. But that is beside the point. Even in its weakened manifestation, the United States remains the 800-pound gorilla of the world economy. The answer to the question of where he sits is anywhere he likes.

That said, any measures Biden takes now will necessarily be four decades too late. The scale of the problem he faces is colossal. But if he doesn’t act promptly and with considerable resolution, it is hard to see how the United States can aspire to a continuing future as a First World power.

Eamonn Fingleton is the author of In the Jaws of the Dragon: America’s Fate in the Coming Era of Chinese Hegemony.



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