Today I want to discuss our everlasting trade deficit and why we need to reverse this trend.
A trade deficit is simply when the value of imports exceeds the value of exports. In the United States, our trade deficit really spiked in 1994 with the signing of NAFTA (North American Free Trade Agreement), with Canada and Mexico. I’ll discuss NAFTA more later in the article.
Let’s get back to why trade deficits are bad. Here are three reasons:
(1) Trade deficits are bad for the American worker. We continue to see more and more white-collar jobs shipped overseas as companies look to reduce expenses. Now proponents of this are going to argue that these reduced costs are beneficial for us because we get lower prices. But what we save in spending, we sacrifice in quality. Also, trade deficits hurt real wages. Workers who should be working these manufacturing jobs or other quality jobs are being relegated to low paying jobs like fast food. Also, another thing is that as overseas companies cut foreign wages, to boost whatever goods we are importing, American companies are forced to lower American wages to compete.
Piggybacking on this, trade deficits hurt small businesses and entrepreneurship as well. Many large companies source items overseas and employ foreign workers, and hence are able to benefit much more from employing foreign workers. Their reduced costs make it harder for small business to compete. In addition, large multinational corporations are able to get away with generating revenue and either paying little tax or even none. So, we can expect as result of this, it doesn’t allow small businesses to compete in many industries. Small business growth is the engine that drives our economy. We need more innovation and competition coming from small business, not larger corporations squeezing out every bit of profit possible. We need quality products and not a product that’s going to break in 6 months.
(2) There is also a big national security risk in relying on other countries. This is swept under the rug too often and ignored by many. We’ve already seen the last few years critical supplies for the United States, such as medicine and chips, are imported. There are several reasons we should not rely on other countries for critical items. The first, is that if there is supply chain disruption, it can constrain the supply of goods. We saw this quite a bit during COVID, but even in 2024 we have seen these issues continue.
Moreover, there’s no telling what could happen in another country, and this poses a security risk for the United States. For example, we rely on south Korea for semiconductors, but if China were to invade, they could theoretically cut off our supply. Many banks also outsource huge portions of their risk staff to countries like the Philippines and India. So, we have financial institutions outsourcing critical white-collar jobs that could hurt the American Financial system.
(3) Trade deficits allow you to consume more than you produce. And we’ve seen this definitely for a long time. There’s more consumption from ever. Now proponents of trade deficits argue that the deficits protect us as it protects us from shortages- meaning we are not able to produce enough of a certain good. But it’s riskier for us to rely on international partners than producing at home. We might have a small shortfall if producing at home, whereas if issues arise overseas the shortfall could be catastrophic. It’s important to know, since we consume more than we produce that the deficit has to be made up some way. One way is direct foreign investment, such as other countries purchasing our land or other real assets. We have seen countries like China buying land, not much, but interesting near military compunds? Now foreign investments, in small numbers could be helpful and with the right projects. If there are projects that can boost productivity and economic growth, I’m for it. For instance, in the 1800’s foreign investment helped fund the railroads, create jobs and ultimately led to economic growth in the country.
Now coming back to NAFTA in the 90’s. NAFTA drastically increased the trade deficit. With NAFTA, from 1994 until 2010, almost 700,000 jobs went down south and about 80% of these were in manufacturing. Wages were hurt by this as unions lost power. Mexico was hurt as well. They had previously put tariffs on food from foreign countries. Once this was removed, the farmers couldn’t compete, and many went bankrupt. In 2017, the United States Mexico Canada agreement was negotiated, and this was put in place in 2020. One thing it did, it required 75% of car components to be assembled within one of the three countries (US, Mexico or Canada). It was a good first step, but more must be done to lower the deficit.
In sum, I strongly feel that we need to lower the US trade deficit in the United States. It’s not our most pressing need, but it is a National Security risk and hurts the average American worker.
