I do not know much… but I know this… when we buy manufactured goods abroad, we get the goods and the foreigner gets the money. When we buy the manufactured goods at home, we get both the goods and the money.

~Abraham Lincoln

Countries like China, Japan, and Mexico are waging a trade war against America.

China and Japan manipulate their currencies so as to steal our industries, and Mexico uses NAFTA like a straw to suck away our jobs. And we’re not even fighting back.

We can, and I’ll tell you how. But first, what’s going on?

America’s Trade Deficit Is Big

America’s running a giant trade deficit, which means that we’re buying more stuff from foreigners than we’re selling them.

How giant?

In 2015, the deficit was over $736 billion—$4,845 per working American. That’s bigger than economies like the Netherlands, South Africa, or the Philippines.

And it keeps getting bigger. Just look at China, over the last twenty years the deficit grew from $30 billion to over $365 billion. Or look at Mexico. Since Bill Clinton signed NAFTA in 1994, trade with our southern neighbor tanked from a modest surplus of $1.3 billion, to a massive deficit of nearly $60 billion last year.

The deficit is big, and getting bigger.

Why Is A Trade Deficit Bad?

The deficit’s big, but how does it harm America?

It costs us jobs and economic growth.

Think of it this way: everything we import replaces something we would otherwise make.

For example, if American needs 10 million spoons, we can either make them, import them, or make some and import some.

So, if we imported 8 million spoons, we would only need to make 2 million spoons (the imports replace our production, not our consumption of spoons).

This is how the trade deficit works: imports replace our production, not our consumption of stuff. Therefore, the deficit is the value of America’s offshored production.

Here’s how offshoring works:

If you want a more detailed explanation, read this article.

How Offshoring Causes Job Loss

In 2015, America’s trade deficit was $736 billion, or 4% of our GDP. Since GDP is simply the total output made by America’s working population, and since 4% of America’s GDP is imported, then it follows that 4% of America’s workers are displaced by these imports.

This means roughly 6 million workers are replaced by imports.

Worse yet, this probably lowballs the actual numbers, because labor-intensive jobs are more likely to be offshored.

…”it costs America millions of jobs”

Looking specifically at manufacturing paints a grimmer picture.

American manufacturing contributes $2.2 trillion dollars to our economy. And since 78% of our trade deficit is in manufactured goods, this means that we’ve offshored $573 billion worth of production. That’s one-third of our manufacturing industry.

Finally, since manufacturing employs 12.3 million Americans, then we know that roughly 4 million more are displaced by imports. But it’s higher than that.

Manufacturing brings wealth into a region, and therefore supports local services and supply chains. For example, a car factory supports hairdressers and accountants, but not the other way around. This “job multiplier” has been studied extensively.

As it turns out, each manufacturing job usually supports 1.58 other service jobs. This means that since 4 million manufacturing jobs are displaced by imports, then about 6 million service jobs were also lost.

According to this method, the trade deficit costs America at least 10 million jobs.

This makes sense, especially when you consider how many Americans are truly unemployed.

It’s Not Because Of Automation

You’re probably thinking: “the reason we lost manufacturing jobs is because of automation and technology, not the trade deficit.”

That’s where you’re wrong.

Employment is a balance between output (how much is made) and productivity (how efficiently it’s made). If output increases, more workers are needed. If productivity increases, fewer workers are needed.

This means that better technology will indeed shed jobs (by raising productivity), but only if our economic growth (increases in output) doesn’t keep pace.

Between 1950 and 1979, manufacturing employment increased because output grew faster than productivity. This was great for America: wages were high, the middle class was healthy, economic inequality was decreasing—the rising tide raised all boats.

However, this trend reversed, and by the year 2000 American manufacturing was in freefall. Productivity grew by 3.7% per year (it grew that fast since the 1950s), but output only grew by 0.4% per year.

Why? Because we moved our factories to China. We moved them to Mexico. We abandoned our workers in Michigan and Pennsylvania, and threw them to the wolves.

In the process, we’ve lost 7 million good jobs.

How To End Offshoring & The Trade Deficit

The trade deficit costs us jobs.

How do we fix it? By balancing the books, and prioritizing our economy above others. National preference has always been the winning formula.

What do we need to do, specifically?

1. Reconsider Global Free Trade

We must renegotiate, or scrap, the manifestly unfair “free trade” deals that currently hobble our economy. This would help. Just look at NAFTA. Clinton said it would create jobs for America. Instead, the deficit with Mexico has grown by double digits every year since it was signed, and it’s cost us 850,000 jobs.

This always happens.

Obama told us that KORUS (the trade agreement with S. Korea) would help American workers. It did the opposite. So far, it’s cost us 75,000 jobs. He’s saying the same thing about TPP (a Pacific-wide free trade agreement)—why will this be any different?

We need to revoke these “deals”.

2. Impose Tariffs

We need a tariff (tax) on imports.

Right now, American companies have no choice but to leave, because it’s just so much cheaper to build their factories in China. This is not only because China is nominally cheaper than America, it’s also because it manipulates its currency, artificially lowers labor costs, and provides subsidies to companies specializing in exports—all of which makes China a dirt cheap place to do business.

American companies don’t have a chance. They just can’t compete with state-backed Chinese companies without relocating to China.

Sometimes, free trade just doesn’t work.

A tariff will level the playing field, and it will make it profitable for American companies to come home again.

Putting Reality Before Ideology

I know what some of you are thinking: tariffs are government control. “They’re basically communist”.

Wrong. Stop being an intellectually-vacuous ideologue.

Tariffs were the conservative approach to economics for hundreds of years.

They are a way of managing the economy, and supporting “the little guy” without large welfare schemes.

Remember, republican heroes such as Abraham Lincoln and Teddy Roosevelt made tariffs a central part of their platforms:

I do not know much… but I know this… when we buy manufactured goods abroad, we get the goods and the foreigner gets the money. When we buy the manufactured goods at home, we get both the goods and the money.

~Abraham Lincoln

Our past experience shows that great prosperity in this country has always come under a protective tariff.

~Theodore Roosevelt

In fact, America’s revolution was (partly) fought to end its trade deficit with Britain.

If we don’t get the trade deficit under control, America’s economy will continue its inexorable decline.

Time to get serious.

Goods Will Still Be Cheap

Finally, some people think that relocating production back to America will make goods prohibitively expensive.

They’re wrong, here’s why.

1. There are two sides to the equation: consumption and production. Although offshoring may result in hypothetically cheaper goods, it’s equally true that many people either:

(i) lost their jobs (either directly, like factory workers, or indirectly, like the barber who relied on the factory workers) or

(ii) found new, but worse jobs (the average wage cut for a displaced factory worker was 17.5%—waiting tables doesn’t pay as good as building cars, go figure).

At the end of the day, the benefits aren’t as big as you think (if they exist at all).

2. The nominal cost of goods is irrelevant—what matters is the cost of goods relative to wages (the real cost). Since 1973, nominal wages and the cost of goods (as per the Consumer Price Index) have increased at the same rate. This means that offshoring hasn’t yielded cheaper goods in real terms, because it undermines income to an equal degree.

3. This logic doesn’t include something called the Okun Gap, which is essentially the opportunity cost of mothballing capital equipment, and skilled labor when an industry is offshored. Just look at all the abandoned factories and warehouses strewn throughout Michigan. When this is accounted for, the hypothetical “gains” of offshoring are fairly minimal.

4. In the long run, goods are made cheaper by improving technology—any gains made by moving production to a nominally cheaper jurisdiction are a one-off. However, they also reduce the incentive to invest in better (more efficient) technology, because wages are lower.

This actually undermines technological advancement, and therefore real economic growth.

It also has the perverse effect of causing highly efficient American factories to be replaced with inefficient (but cheap) factories in China. This is bad for the world as a whole (because it allocates resources inefficiently), and it’s bad for us in the future (because we lose some of our highest-growth industries).

Select Sources:

Bureau of Labor Statistics. “Civilian labor force participation rate by age, gender, race, and ethnicity.” Accessed June 5, 2016. https://www.bls.gov/emp/ep_table_303.htm

Federal Reserve Bank of St. Louis, “All Employees, Manufacturing.” Accessed Nov 20, 2016. https://fred.stlouisfed.org/series/MANEMP

Lincoln, Abraham. “Fragments from a Tariff Discussion 1847.” in the Collected Works of Abraham Lincoln Volume 1, 1809-1865.

Maddison, Angus. The World Economy: Historical Statistics. Paris, OECD Publishing, 2003.

Muro, Mark, et al. “America’s Advanced Industries: what are they, where are they, and why they matter.” Brooking’s Institute, 2015.

Nosbuch, Keith D. and John A Bernaden. “The Multiplier Effect.” Manufacturing Executive Leadership Journal (2012).

Roosevelt, Theodore. “State of the Union Address, 1902.” Accessed July 4, 2016. https://www.theodore-roosevelt.com/trspeeches.html

United States Census Bureau, “Trade in Goods, 1985-2016.” Accessed May 20, 2016. https://www.census.gov/foreign-trade/balance/c5700.html

World Bank, “GDP by PPP Statistics.” Accessed May 15. https://knoema.com/mhrzolg/gdp-statistics-from-the-world-bank?country=United%20States