Competitiveness and the Trade Deficit

U.S. International Trade in 2014

“For 2014, the goods and services deficit was $ 505.0 billion, up $ 28.7 billion from $ 476.4 billion in 2013.”

“The 2014 increases in the goods and services deficit reflected an increase in the goods deficit of $ 35.2 billion (5.0%) to $ 736.8 billion and an increase in the services surplus of $ 6.5 billion (2.9%) to $ 231.8 billion.” [1]

Capture - Trade Deficit 3 These two charts present the same data two different ways. As you can see from the upper chart, export of goods from the U.S. continues to grow. Imports of goods, however, are growing faster, even though imports of petroleum (crude oil) are declining.

The lower chart expresses the same data as the ratio of imports to exports. For example, “150%” means that $1.50 worth of goods are imported into the U.S. for every $1.00 worth of goods exported from the U.S.

 

The Trade Deficit – So What?

Last year, the U.S. exported $ 736.8 billion worth of goods less than it imported. That’s a net of $ 736.8 billion worth of the U.S. domestic market for goods that U.S. producers did not supply.

But wait, it gets worse. Petroleum is “goods” and the U.S. imports a lot of petroleum. However, in 2014, U.S. domestic production of petroleum soared and the global price of petroleum dropped. The deficit in petroleum products decreased by $ 43.7 billion, compared to the 2013 figures. Factoring out the petroleum reveals that the deficit in manufactured goods increased by $ 76.8 billion (a whopping 17.2%) to $ 524.2 billion![2]

So what? A net of $ 524.2 billion worth of the U.S. domestic market for manufactured goods was lost to overseas producers last year. Robert Scott of the Economic Policy Institute writes: “Growing trade deficits in manufactured products have been a primary driver in the displacement of U.S. manufacturing jobs since 2000. Trade deficits in manufactured products, which have increased over the past five years, remain a substantial threat to the recovery of U.S. manufacturing employment and production.” [3]

Ambushed by the Obvious?

Trade deficit in manufactured products? The first thing that comes to mind is China. And the U.S. trade deficit with China is huge – last year, the U.S, imported $3.76 worth of goods from China for every $1.00 worth of goods the U.S. exported to China. Yeah, low labor costs, unfair this, unfair that – all probably true.

Capture - Trade Deficit Table

But wait, the U.S. is running trades deficits in goods with a lot of other countries too. The European Union shipped $1.51 worth of goods to the U.S. for every $1.00 worth the U.S. shipped to them. Germany alone shipped $1.67 worth of goods to the U.S. for every $1.00 worth that the U.S. shipped to them. The dollar value of goods imported from Japan last year were almost exactly twice the value of the goods shipped from the U.S. to Japan. Don’t be ambushed by the obvious — the problem isn’t just China, and it isn’t just labor costs.

U.S. manufacturing, as an industry, obviously has a competitiveness problem. But it isn’t a simple, “one fix cures all” sort of problem. After all, U.S. producers did export over $ 1.6 Trillion dollars worth of goods in 2014. And certain sectors, notably transportation, primary metals and fabricated metal products, did quite well.

Government policy changes can certainly help. [5] But, there is also a lot that individual firms can do to help themselves. Pareto’s law does apply. About 20% of the firms in any given sector are going to make about 80% of the profits – domestically and globally.

The Performance Curve

Take the manufacturing facilities in the United States and measure the performance of each. Then rank them, from best performing to worst performing: Capture - The Performance Curve

“Performance” refers to the ability to compete. The relative performance of manufacturing firms roughly follows Pareto’s principle: the familiar 80 / 20 rule. The performance of the best firms is as different from that of the rest as the performance of the best professional athletes is, compared to everybody else.

Viewing manufacturing performance in this way helps explain why so many manufacturing firms are fighting for survival, while a few others prosper. The high performing firms on the left side of the Performance Curve are different in kind from those on the right. It isn’t simply a matter of degree.

This difference in kind reflects the passing of a paradigm. The Industrial Era paradigm — the system of thinking that the Industrial Era embodied – is in the throes of being replaced. Manufacturers who embrace new ways of thinking can improve their performance and move toward the left side of the Performance Curve. [6] Those that don’t change can expect to continue to be squeezed toward the right.

Chuck - Sedona 2014Thoughtful comments and experience reports are always appreciated.

…  Chuck Harrington (Chuck@JeraSustainableDevelopment.com)

P.S: Contact me when your organization is serious about thriving in the globalized 21st century … CH

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published weekly.


[1] Source: U.S. International Trade in Goods and Services December 2014, U.S. Census Bureau Press release 5 February 2015. http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf

[2] Balance of Trade, Petroleum’s contribution data source: https://www.census.gov/foreign-trade/Press-Release/current_press_release/exh9.pdf

[3] Source: http://www.epi.org/publication/increased-u-s-trade-deficit-in-2014-warns-against-signing-trade-deal-without-currency-manipulation-protections/

[4] CY Trade Deficit (Goods) data source:  https://www.census.gov/foreign-trade/balance/c0004.html. Note:  International trade figures sometimes combine goods and services. Some report on a calendar year basis, others report on a government fiscal year. In international trade, manufactured goods constitute about 85% of trade in goods.

[5] The Information Technology and Innovation Foundation has much to say on government’s role. Start with A. Nager and R. Atkinson, The Myth of America’s Manufacturing Renaissance: The Real State of U.S. Manufacturing, Information Technology and Innovation Foundation, 12 January 2015   http://www.itif.org/publications/myth-america-smanufacturing-renaissance-real-state-us-manufacturing (Note: The Information Technology and Innovation Foundation is a non-partisan think-tank in Washington D.C.)

[6] Improving your firm’s competitive position is a primary theme to many of the essays posted to this blog. One good place to start is with Three Modes of Innovation, http://jerasustainabledevelopment.com/2014/11/29/three-modes-of-innovation/