Missing from U.S. Trade Representative Katherine Tai’s recent statement on the Biden administration’s new U.S. trade policy was any mention of the country’s single most important trade problem—the annual U.S. trade deficit.
It will be well over $800 billion by the end of the year, and this will be the 45th consecutive year in which the United States has accumulated a trade deficit. The total of those accumulated deficits is now about $15 trillion, or close to 70 percent of U.S. gross domestic product. It’s important to understand that those dollars are not just pieces of paper that just get transferred from America to Europe, or Asia, or elsewhere. They’re a claim on U.S. assets, and thus a transfer of wealth from America to the governments and citizens of other countries, particularly China.
In international accounting, there’s a calculation known as national net investment position, which shows how much country A’s investors own in foreign assets compared to how much foreign investors own in country A’s assets. Until about 1990, the United States was the country with the largest net investment surplus, meaning it owned far more in foreign assets than foreign investors owned in U.S. assets. Today, the United States is by far the largest net debtor. Effectively, over the past 40 years, America has transferred an enormous portion of its wealth to foreign interests through its chronic trade deficit.
This has undermined U.S. economic and strategic power and influence substantially. By moving production of many critical goods out of the United States to Europe, Asia, and elsewhere, it has made America highly dependent on foreign suppliers and has effectively put the chief executives of many global U.S. corporations in thrall to foreign powers—especially to China and its leader Xi Jinping. Consider that the world’s most valuable corporation, Apple, makes all its products in China. Consequently, Apple CEO Tim Cook is far more concerned about what Xi has to say than about what U.S. President Joe Biden might say, despite the fact that, legally speaking, Apple is a U.S., rather than a Chinese, corporation.
Even more importantly, the movement of vast amounts of productive capacity and skills out of the United States to foreign countries has caused a sharp decline in U.S. technological, manufacturing, and inventive capabilities. For example, in 1990, U.S. producers made about 70 percent of the world’s semiconductors. Today, that number has fallen to about 12 percent, and the United States no longer produces even the most advanced semiconductors.
Not Intended or Expected
When today’s global economic system was established in the wake of World War II, the current chronically unbalanced structure was not only unanticipated but was explicitly posed as a target to be avoided. The great economist John Maynard Keynes even went so far as to call for the new International Monetary Fund to be empowered to impose punitive tariffs on the exports of countries with chronic trade surpluses in order to force them into balanced trade over the medium to long term.
Keynes’ great adversary on the role of the state in running the economy, Friedrich Hayek, agreed that balanced trade had to be the long-term objective. Indeed, he couldn’t imagine that market forces would eventually lead in any direction except that of balanced trade.
Nevertheless, the fact is that readers of The Economist today will see every week in the magazine’s Economic and Financial Indicators that the United States, the UK, Canada, and a few small developing countries consistently have trade deficits of more than 3 percent of GDP.
Causes of Trade Imbalance
The chronic imbalance is due to two primary causes. One is the fact that the U.S. dollar is the main global reserve currency. This means that virtually all countries keep the bulk of their financial reserves and do the bulk of their international business in dollars. This constant demand for dollars drives the dollar exchange rate up, resulting in a strong dollar and thus high prices for U.S. exports and low prices for imports, which results in chronic U.S. trade deficits.
The second cause is mercantilism, an economic doctrine embraced by most of the world’s major economies (Germany, China, Japan, and so on) that aims at maximum possible self-sufficiency of production and continual trade surpluses. To these ends, some countries even intervene in the currency markets to buy dollars and thereby artificially reduce the value of their currencies in order to increase their exports while slowing imports. This mercantilism is also manifested by policies that grant subsidies and various protections to promote domestic production and export-led growth in targeted industries such as semiconductors, robotics, telecommunications, and many others.
The continuation of these policies and practices will eventually ruin both the United States and the global economies. To avoid such ruin, a major shift in U.S. policies will be required. One key element of such a shift could be a market access fee to be imposed on all U.S.-bound foreign investment that isn’t aimed at constructing new factories and equipment for production in the United States (so-called green field investment). The fee could vary according to the amount of the U.S. trade deficit, but would probably range from 1 to 5 percent of the amount of inward investment.
Another important element would be the creation of a U.S. government fund to subsidize and encourage domestic investment in production facilities in key leading-edge industrial and technological production industries. Instead of “Made in China 2025,” it would be “Made in America 2030.” The investors might well be non-American, but the production would have to be done in the United States.
Finally, if it’s necessary to assure a balanced current account, the importers of goods and services into the United States would be required to bid for import rights, whose amount would exactly equal that of the U.S. current account deficit, thereby assuring not only balanced trade for the United States, but for the world at large. After all, it was the original idea at the time of the founding of the global trading system.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.