Mention jobs and you have everyone’s attention. Mention balance of trade and there are groans and a rush to exit the room. Both are important and are tightly connected. Today, the US exports less goods and services than it imports. The resulting trade deficit means we borrow dollars to finance our excess of imports over exports. The borrowing of dollars pushes the US dollar higher in international exchange rates and that in turn makes our export prices higher and buyers react by showing less interest in our exports. The reduction in exports displaces some of our workers who built the goods or provided the services. That job market impact can be enormous.
In the period 2001 through 2015, “the increase in the US–China trade deficit eliminated or displaced 3,443,300 U.S. jobs.” The US–China trade deficit may be our largest deficit (at $347 billion), but we face substantial deficits with many trading partners – including, Mexico ($63 Billion), Japan ($69 Billion), Canada ($11 Billion) and Germany ($65 Billion). Overall, the US ran a slight trade surplus with the total of all the other countries. Based on job displacement attributable to our deficit with China, the proportional job displacement due to our deficit with all trading partners is about 5.5 million jobs. That is staggering and some wish we could recover those jobs by severing trade with the rest of the world. We cannot. Our smartest action is to do what it takes to boost our exports. The displaced workers may not return to the manufacturing jobs they lost, but the economy will be willing to absorb a similar quantity of workers.
One of the causes of a trade deficit is the net cost of our exports to the international buyers. If the US puts a tax on its exports or if the trading partner puts a tariff on our exports, the net price of our exports is higher and less attractive to the foreign buyer. The controversial Border Adjustment proposal would impose no tax on our exports but it would impose a tax on imports. Supposedly, some nations already use a border adjustment mechanism as a tariff wall that protects their domestic producers. If we imposed a border adjustment, it would look like a tariff from the perspective of our exports’ buyers. The tariff amount is indistinguishable from a price hike on the exported item.
There are some examples of multiparty trade agreements that eliminate these taxes in adjustment clothing and tariffs, or at least reduce them to tolerable levels.
We had been negotiating a place in the proposed Trans Pacific Partnership (TPP). It had some flaws, but it would have given us low or no tariff access to more than two dozen trading partners. In the run up to the election we decided to abandon the TPP. The European Union has its own trading arrangement for its two dozen members. It also permits free flow of labor between EU members.
The North American Free Trade Agreement (NAFTA) is a trade agreement between Canada, USA and Mexico that permits exports and imports between the three without tariffs. Of course, the three hope to export their production to other countries as well. Mexico has been especially successful in exports because it negotiated trade agreements with 44 other countries to keep tariffs low or absent. It exports millions of cars to non-NAFTA countries and exports millions to the US and Canada.
Some see NAFTA as a drain on US jobs, especially when automotive manufacturing jobs move to Mexico. Lower labor costs do play a role in selecting Mexico for automobile production, but Mexico’s tariff arrangement with non-NAFTAs countries makes a bigger difference. When automakers build cars in the US, the cars are ineligible for the tariff-free treatment that Mexico enjoys with its other trade partners such as the EU. In total, the labor cost advantage of Mexican production is $600 per car. Logistics offset much of that but parts are $1,500 cheaper. The tariff incurred by shipping a US-made car to the EU is $2,500, so the cost penalty applying to US built cars in the EU is about $4,000.
To reduce the disadvantage of producing automobiles in the US, a zero-tariff agreement with importing countries would help, the more the better. Trade agreements can be negotiated with a block of countries, or negotiated individually. The Trump administration said it plans to take the individual agreement approach. That plan might take a long time. Meanwhile some of the 5.5 million US jobs are low hanging fruit that can be plucked through trade deals that we should have secured – years ago.