Trade and GDP

Since the late 1970’s, that kind of “outside money” has not been flowing into public coffers or into the hands of the average worker, dramatically so in the last decade. Recently, our trade deficit has grown almost exponentially.

This trend is coincidental not only with the rise of public and private debt but also with NAFTA and China’s entry into the WTO. That the trade deficit is coincident with globalization itself is no accident. During the last ten years, trade as a percentage of GDP has become sharply and dangerously negative.

Along with Trade, I look at the sum of three other items in the Current Account section of the Transaction Data: Royalties and License Fees, Income of U.S-owned Assets Abroad, and Transfers under Military Agency Sales. While the trade deficit blossomed, the sum of these last rose dramatically. Unfortunately, they are not offsetting, not by a long shot; but they do tell us a great deal about our priorities.

As the following graph reveals, between 1960 and 1980, the U.S. had a stable balance of trade. After a sharp dip and subsequent rise in the ‘80’s, the trade deficit began its steep downward descent around 1996. NAFTA passed in 1993; China entered the WTO in 2001. Fast track trade rose in importance. The engine of globalization had left the station. Full steam ahead!

The next graph looks at Net Trade (exports + imports) as a percentage of GDP. Again the tale is dramatic.

Prior to 1975, net trade was an important positive contributor to GDP. After a roller coaster ride in the 1980’s, trade became an increasing drag on GDP. That dragged gain impetus from 1996 onwards. In short, beginning in 1983, the trade balances no longer contributed positively to GDP.

Beginning around 1993 net trade as a percentage of GDP began its precipitous descent.

The “outside money” that I mentioned in the first paragraph no longer flowed into public coffers, jobs, and pensions. We had begun our spending spree, spending our accumulated wealth and going deeper and deeper into debt.

It could be argued that royalties and licensing fees do buttress job security, but I wonder just how many American jobs are being helped here, especially when we consider Net Trade itself.

Not so surprisingly, receipts from abroad moved from 4,416 million in 1960 to 25,231 million in 1975 to 208,065 million 1995 to 804,807 million in 2007!

Balance on Current Account as a Percentage of GDP

The last and final graph displays the Current Account as a percentage of GDP. (The Current Account includes all export and import categories as well as other items.

Final Thoughts

Some will argue that net trade is relatively unimportant, but every time it blips upward, we hear the bright blaring of trumpets, as if the upward rise were somehow important. A positive trade balance is important. That the balance has been negative for almost thirty years should be of great national concern. Yet it has not been.

The rise in housing prices certainly accelerated GDP, as did the use of the home as an ATM machine, as did all that consumer spending—in short, all that activity that contributed to our collective and personal debt. Now the piper has arrived on our shores; he must be paid. What will our children say?

GDP will certainly fall as we go deeper and deeper into this recession, a recession that many prominent economists—Krugman, among them—claim will be worse than most of us have ever experience, worse than anything since the Great Depression. Only the real old ones know what a Depression means.

We will, of course, buy fewer goods. Imports will clearly shrink.

Each day or week brings to the fore another crisis, be it in the financial sector, in jobs, or in major corporations within the U.S. failing rapidly.

With each crisis, more and more worried doctors surround the patient, each yelling that we need this or that bailout, this or that stimulus package. The entire hospital staff now surrounds this very important personage. Various drugs are administered; powerful defibrillators are rolled in. Cash infusions are poured into financial veins. Alarm bells drown out rationality.

Each crisis compounds succeeding ones.

In the short or medium term, one thing seems almost certain: Exports will not rescue the patient.

We are now in crisis mode, focused only on short-term fixes. We do not see the big picture.

Hopefully, we will fashion the fixes intelligently enough to buy us some much needed time, fixes that will slow down our descent into the maelstrom, the awful dark hole of a real Depression.

We need time. For that reason alone I have partially supported many of the hurried rescue attempts. True, we do not have time to weigh each one carefully, time to plan them intelligently, time to gather the necessary personnel, time to set up efficient administration. True, many institutions or corporations have been poorly run.

What do we save; how do we save it; can we save it? If we cannot save it, should we try to lessen the impact of its sudden loss to the economy. Should we not give it enough life so that it can wither away more slowly, instead of sending a catastrophic earthquake through our economic life? In some cases, I would say, “Yes”

After all the debris has hit the streets and we zombies begin to gain some clarity, we will look again at Net Trade. We will honestly assess how globalization was structured. We will ignore those whose simple minds think that the only option is between free trade and protectionism.

Maybe then we will understand that globalization needs real structure, real planning, not blind belief that anything goes. Trade is the life’s blood of us all. Intelligent trade brings wealth to everyone. Some countries are (or were) far behind us in their share of the pie. I, for one, understand and sympathized with their envy and their rights. I want globalization to work, desperately; but not like this.

On the other hand, these poorer countries should not expect to be suddenly stuffed, like bloated pigs. All they will get are excruciating stomach pains. They, too, will shortly be on the floor along with the rest of us. Great leaps forward, Chinese style, have always failed.

China, for example, in becoming an export platform, has simply not digested enough of its wealth to create a substantial, vibrant middle class. Vibrant middle classes do not appear overnight, or even in a decade.

What are the leaders in Beijing going to tell their poor factory workers when the industrialized nations can no longer consume? “Sorry, our sugar daddy is going on a diet?” or “It was all the fault of those nasty financial capitalists?”

Similarly, we cannot expect to prosper if we just pump jobs overseas. We should not consume our cake, believing the next bite will be even richer and tastier.

China’s plan was just as foolish as our trade agreements, just as foolish as how the WTO has structured globalization. “Wisely and slow. They stumble who run fast,” says Friar Lawrence to the headstrong, lovesick Romeo. Romeo does not wait; does not consider. Instead, he rushes forward, sure that all will be well. We all know what happened.

Look again at those graphs. Did we plan for this kind of disequilibria? Did China or the emerging nations? Did we think we could just ignore producing? Have the emerging nations consider how fast they can wisely grow?

At the beginning of this century, many touted it as having a marvelous future. Well, here it is, barely a decade old, poised on the brink of the worst recession since the Great Depression.