Trade is proving to be a major flashpoint for voters on the left and right.
And, it’s not something that can be examined in isolation because it’s intrinsically related to investment, capital, currencies, influence, and wealth – not to mention national and economic security.
America’s role as the world’s leading player in trade is closely connected to the dollar being the world’s reserve currency. The U.S. dollar is on one side of 90% of all global trade transactions.
It’s also the reason why we have deep and liquid financial markets enabling us to finance our budget deficits without interest rates rising.
Nevertheless, let’s dig into the rather dry 2015 trade numbers.
The Importance of Exports
To begin, world trade in 2015 exceeded $15 trillion and America’s global trade represented a third of this, or $5 trillion. America exported $2.2 trillion in trade and services and imported $2.8 trillion.
The $600 billion gap in imports-exports can largely be explained by deficits with three countries: China, Germany, and Japan. The China deficit grew to $350 billion in 2015, and Japan and Germany together accounted for another $145 billion.
Here’s another way to look at it. In the consumer goods area, we buy $400 billion more than we sell abroad. This includes items such as clothes, electronics, and appliances that Americans buy at Wal-Mart Stores Inc. (WMT), Target Corp. (TGT), and Costco Wholesale Corp. (COST).
What’s striking is how little we export to Japan and Germany. We export just $112 billion to both of these leading economic powers. We have to do much better, and we’ll need to address the gaping hole with China if for no other reason than it gives ammunition to the critics.
This brings me to the North American Free Trade Agreement (NAFTA) and the current trade pact on the table in Congress – the Trans-Pacific Partnership (TPP).
The NAFTA numbers look quite good. In 2015, America sold $280 billion of goods to Canada and imported $295 billion. We exported $236 billion to Mexico and imported $294 billion.
However, this trade imbalance of about $60 billion is overstated. Mexican exports to America contain 40% U.S. content. So, for example, 40% of the parts of a refrigerator assembled in Mexico were made in America. By comparison, our imports from China contain only 4% U.S. content.
The Trans-Pacific Partnership (TPP) will tie together America, Canada, Mexico, Peru, and Chile with seven countries in Asia, including Japan and Vietnam. It’s clearly in the national interest and is much more than a trade deal – it’s a strategic economic pact.
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This agreement writes the “rules of the road” for the Pacific century and is a prominent symbol of American leadership.
It’s a tactical move to offset China’s significant economic heft and more assertive foreign policy. It will open new markets for U.S. companies – and each $1 billion worth of exports supports 7,000 high-paying new jobs.
The TPP also strengthens intellectual protection for American technology and pharmaceutical companies. It completely eliminates tariffs on manufacturing exports and gains some trade concessions from Japan.
This pact and the case for trade needs to be more effectively framed and more forcefully promoted.
An Example to Follow
No one has done this better through acts and words than Frederick W. Smith.
Fred Smith overcame a bone disease as a young boy, did two tours as a Marine in Vietnam, founded FedEx 44 years ago, and introduced the first international priority delivery service with Asia, which was over 300% more profitable than domestic services. At age 71, he’s still at the helm.
Mr. Smith’s recent speech at the 50th reunion of the Yale class of 1966 highlighted how robust trade played a key role in the world’s tremendous spurt of progress.
He begins by sending a warning shot to protectionists. The Smoot-Hawley Act led to a devastating 66% drop in world trade from 1930-34.
He then turns on the steam to link American innovation, deregulation, and trade liberalization to a half century of tremendous economic growth and prosperity.
In 1966, world trade was only $50 billion. In 2015, it reached $15 trillion. World trade grew during this period 250% faster than economic growth, pulling more than a billion people out of poverty and putting them on a trajectory to the middle class.
In his speech, Mr. Smith highlights how America played a leading and critical role in this adventure. The invention of the shipping container and the container ship cut the cost of trade by a staggering factor of 50.
The development of fiber optic cable meant communication could circle the globe at the speed of light creating our global financial market – the engine of capital, investment, and economic growth. The U.S. deregulation of airlines, trucking, and rail all led to sharply lower logistical costs – the Boeing jumbo jet alone slashed overseas travel costs by 70%.
The decision is entirely in our hands.
If we’re going to continue to move forward, our hands must be strong, nimble, and confident, for history shows that great countries and civilizations often fail due to one or more of three shortcomings: a lack of fiscal discipline; a culture that doesn’t promote risk taking, openness, scientific innovation, or the common good; and a foreign policy not grounded in the national interest.
We could certainly use Mr. Smith in Washington right now.