Trade Deficit Continues to Decline

posted by Nima

April 9, 2009 · Posted in Global Economics 

Today’s BEA report shows that the US trade deficit continued its decline in February:

The U.S. Census Bureau and the U.S. Bureau of Economic Analysis, through the
Department of Commerce, announced today that total February exports of $126.8
billion and imports of $152.7 billion resulted in a goods and services deficit
of $26.0 billion, down from $36.2 billion in January, revised. February exports
were $2.0 billion more than January exports of $124.7 billion. February imports
were $8.2 billion less than January imports of $160.9 billion.

This it The End of Consumerism in action. Imports to the US will continue their decline until balance is restored.

More on US trade relations in the US Current Account Deficit and in US on the Hook for Chinese Investments.

In the latter one I already wrote:

The outcome of all this is pre-ordained: The massive current account deficit will be reduced because people in the US consume less. Americans have begun to save more. There is no way this trend will stop anytime soon. China will need to export less and begin investing more domestically, while at the same time importing and buying more goods from or in the US. This will happen, whether the US government likes it or not. The End of Consumerism is in full swing. But the government’s reckless borrowing, spending and bailouts assure that this correction will take a very long time. I don’t think it is unreasonable to assume that it will take until 2020 or so until an approximate trade balance between the US and China is restored.

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3 Responses to “Trade Deficit Continues to Decline”

  1. Pete Murphy on April 10th, 2009 7:02 am

    Our enormous trade deficit is rightly of growing concern to Americans. Since leading the global drive toward trade liberalization by signing the Global Agreement on Tariffs and Trade in 1947, America has been transformed from the wealthiest nation on earth – its preeminent industrial power – into a skid row bum, literally begging the rest of the world for cash to keep us afloat. It’s a disgusting spectacle. Our cumulative trade deficit since 1976, financed by a sell-off of American assets, exceeds $9.2 trillion. What will happen when those assets are depleted? Today’s recession is the answer.

    Why? The American work force is the most productive on earth. Our product quality, though it may have fallen short at one time, is now on a par with the Japanese. Our workers have labored tirelessly to improve our competitiveness. Yet our deficit continues to grow. Our median wages and net worth have declined for decades. Our debt has soared.

    Clearly, there is something amiss with “free trade.” The concept of free trade is rooted in Ricardo’s principle of comparative advantage. In 1817 Ricardo hypothesized that every nation benefits when it trades what it makes best for products made best by other nations. On the surface, it seems to make sense. But is it possible that this theory is flawed in some way? Is there something that Ricardo didn’t consider?

    At this point, I should introduce myself. I am author of a book titled “Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America.” My theory is that, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.

    This theory has huge ramifications for U.S. policy toward population management (especially immigration policy) and trade. The implications for population policy may be obvious, but why trade? It’s because these effects of an excessive population density – rising unemployment and poverty – are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.

    One need look no further than the U.S.’s trade data for proof of this effect. Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!

    Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable – nineteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. My point is not that our deficit with China isn’t a problem, but rather that it’s exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one fifth of the world’s population.

    Ricardo’s principle of comparative advantage is overly simplistic and flawed because it does not take into consideration this population density effect and what happens when two nations grossly disparate in population density attempt to trade freely in manufactured goods. While free trade in natural resources and free trade in manufactured goods between nations of roughly equal population density is indeed beneficial, just as Ricardo predicts, it’s a sure-fire loser when attempting to trade freely in manufactured goods with a nation with an excessive population density.

    If you‘re interested in learning more about this important new economic theory, then I invite you to visit either of my web sites at OpenWindowPublishingCo.com or PeteMurphy.wordpress.com where you can read the preface, join in the blog discussion and, of course, buy the book if you like. (It’s also available at Amazon.com.)

    Please forgive me for the somewhat spammish nature of the previous paragraph, but I don’t know how else to inject this new theory into the debate about trade without drawing attention to the book that explains the theory.

    Pete Murphy
    Author, “Five Short Blasts”

  2. Nima on April 10th, 2009 11:23 am

    Thanks for the input. My 2 cents about what Pete wrote above:

    Pete Murphy’s explanation is an incomplete attempt to explain a complex phenomenon. Nowhere does he mention the root cause of the US trade deficit as I explained it in http://www.economicsjunkie.com/the-us-current-account-deficit. No mention of the inevitable consequences of a monetary policy that pursues credit expansion.

    Unfortunately he seems to think that our current global system is one of free trade, ignoring the fact that during the past 100 years we have had more import taxes, customs fees, and trade wars than ever in the history of mankind.

    He tries to attack Ricardo’s theory of comparative advantage but doesn’t say which part of it exactly he believes to be false. Nowhere does the theory state that we should ignore a so called population density effect. If he wants to refute the theory he has to point out which part of it exactly is supposed to be wrong: http://www.economicsjunkie.com/praxeology/economics/economics-of-voluntary-action/the-market/comparative-advantage/

  3. alec on May 15th, 2010 6:48 am

    Please see our petition at
    http://www.CitizensForEqualTrade.org
    learn y the trade deficit is unconstitutional & unethical

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