The Effects of Unbalanced Trade

[Joanne98]

The United States trade imbalance has long been an unresolved issue. Some claim that barriers to free trade are necessary, others that they are not only unnecessary, but harmful, and even immoral, since they would force higher prices on otherwise uninvolved consumers.

Those who claim that current trade policies are harming the US have, to our knowledge, proposed no clear mechanism. We propose one here.

We show that, while balanced free trade may be beneficial to all, or at least not harmful, when trade is not balanced, the net exporting country grows at the expense of the importing country. That is, the net importing country’s economy undergoes deflation, and erodes. The demand of the importing country’s economy is driven down, and its industry is increasingly idled. Since this affects labor, even many of those consumers enjoying the immediate benefits of lower prices, may pay a greater price, in lower wages and higher unemployment. Consumers are involved, whether they want to be or not.

We should also expect erosion of the tax base. There is, in the economy as a whole, more pain than gain. We model the mechanism.

The basic idea is that the price level in the importing country goes down, decreasing the revenue available to its industries. However, that country’s demand is ultimately equal to the revenue of its industries. That is the key relationship. The country's demand declines with the decline of the revenue of its industries. With continued imports, the price level continues to go down, as does revenue and demand, along the Aggregate Supply curve. With the continued erosion of revenue, industries are increasingly idled, and unemployment increases. The importing country is forced into a deflationary spiral.

http://anamecon.blogspot.com/2010/04/effects-of-unbalanced-trade.html

[leveymg]

1. Most jobs loss is due to U.S.-based multinational corps that have laid-off at a rate twice that of

domestic employers since the beginning of the current recession, according to the U.S. Dept of Commerce.

The crux of the problem is that the profits that result from offshoring aren't reinvested in domestic operations, but are instead either distributed to stockholders or retained in offshore corporate accounts.

Overall, the U.S. continues to have a $125 billion annual surplus in Trade in Services that helps to offset the near $600 billion deficit in Trade in Goods. Unfortunately, most of the spot-light is on the tech sector, in which the U.S. actually enjoys a surplus. This distracts from the actual problem: the offshoring of manufacturing by U.S.-based MNCs, along with the de-industrialization and Wall*Mart-ization of America, problems that no one seems to want to address.

The U.S. has no industrial policy which is the cause of imbalance in trade.