Do National Trade Deficits Still Matter?

Alan Tonelson |

Wall Street Journal correspondent Paul Hannon deserves a lot of credit for reporting on new worldwide figures that shed light on how economic activity around the world has been globalized. These numbers may seem academic, but should be of intense interest to everyone curious about why U.S. economic growth, hiring, and wages have been so weak for so long, and how likely they are to improve.

As I’ve documented, the research in question – from the World Trade Organization (WTO) and the Organization for Economic Cooperation and Development (OECD – a grouping of the world’s wealthiest economies) – is anything but an objective exercise in truth-seeking. It explicitly aims to show that production, and therefore employment opportunities, have become so internationalized lately that there’s no longer any point in trying to protect factories and jobs with trade barriers.

Which makes it all the more interesting that what many of the data – which show how much of a country’s exports and imports are actually made in that same country and abroad – actually make clear that the commerce fostered by American trade agreements and related policies have stripped the United States of invaluable capacity and the knowhow it generates. Nowhere is this more apparent than in the manufacturing sector, which deserves special attention due to its economy-beating innovation levels and productivity growth as well as due to its central contribution to U.S. national security. Of course, manufacturing jobs pay better than the national average, too, though this margin has been shrinking steadily.

No one can doubt the rapid growth of global supply chains in global commerce and especially in manufacturing. And Hannon focuses on figures touted by the WTO and OECD showing that countries’ exports keep consisting of lower and lower levels of their own parts and components and materials all the time – meaning that their growth and job-creating powers can be easily exaggerated. ButI looked at some other statistics just released by the two organizations, and they produce a very different picture.

In particular, they indicate that despite the attention they’ve drawn for the last three decades from American presidents, their top advisors, and Congress, the same countries keep posing the nation with its biggest trade-related problems.

Take China. The WTO-OECD database on which Hannon based his piece tells us that between 1995 and 2011, imports as a share of the People’s Republic’s booming manufacturing markets rose from 15.02 percent to 19.54 percent. But the import penetration rate for U.S.-made manufactures in China increased from only 1.95 percent to 2.36 percent. What about the flip side of this relationship? Total imports boosted their share of American manufacturing consumption from 10.54 percent to 14.21 percent – so they’ve made smaller inroads in the United States than in China.

At the same time, it’s important to remember that the United States is a technologically advanced, capital-rich country that’s richly endowed with the kinds of raw materials that are major manufacturing inputs. China’s still the opposite in all three respects. If market forces that are widely supposed to be determining most trade flows were really in charge, American manufacturing’s import heaviness would be nowhere near China’s.

Yet look at what happened to China’s share of the U.S. manufacturing market during these years. It skyrocketed from a measly 0.88 percent to 6.81 percent. No wonder America’s manufacturing-dominated trade deficit with China hit $364 billion last year.

The data also show that, although imports keep growing their share of China’s manufacturing market, this isn’t true across the board. For example, in the critical machinery sector, imports’ share of China’s manufacturing consumption actually fell between 1995 and 2011 – from 23.96 percent to 16.99 percent. And some of the growth figures look pretty unimpressive given the media hype they’ve received. Thus for all the talk (and reality) of a China automotive boom, imported vehicles and parts still comprised only 15.77 percent of the total China market in 2011.

Moreover, the area of strongest foreign progress – information technology hardware – looks increasingly troubled for non-Chinese businesses. Beijing’s strengthening determination to reduce its dependence on tech imports (currently at 59.23 percent according to the OECD and WTO), and nourish its own national champions seem likely to result in much weaker foreign sales going forward.

Japan is another major trade trouble spot for the United States with big-time staying power. Between 1997 and 2015, foreign manufacturers overall have nearly doubled their shares of the country’s industrial markets – from 7.11 percent to 13.35 percent. That’s lower than America’s, even though Japan is an island nation woefully short of natural resources. And in key representative manufacturing sectors, Japan also remains much less import-friendly to the United States. Foreign-made machinery had captured only 11.23 percent of the Japanese market as of 2011, versus 41.25 percent in the United States. For information technology hardware, the numbers are 16.29 percent and 42.66 percent. For automotive products, its 5.09 percent versus 49.97 percent. In chemicals, by contrast, the import penetration rates for Japan and the United States are both around 25 percent.

But as resistant to manufactures imports as Japan remainse, it’s even more resistant to them when they come from the United States. America’s Japan market share in manufacturing rose only from 2.66 percent to 3.11 percent between 1995. That’s a much smaller proportionate gain than that for overall industrial imports.

These OECD-WTO databases contain any number of findings about American trade policy, but for now, let’s close with one about the North American Free Trade Agreement. In the process of building integrated North American markets, NAFTA was supposed to create major trade preferences for U.S. exports in Canadian and Mexican markets. But judging from the OECD-WTO statistics, these measures have been major flops. Between 1995 and 2011, the American share of Canada’s manufacturing consumption fell, from 35.61 percent to 28.52 percent, and U.S. manufactures exports dropped from 23.68 percent to 20.99 percent of Mexico’s industrial markets.

Nonetheless, although Canada’s share of the U.S. manufacturing market declined between 1995 and 2011 as well, from 3.47 percent to 3.16 percent, Mexico’s more than doubled – from 1.39 percent to 2.83 percent.

The WTO-OECD researchers say that their findings about all the products that are now “Made in the World” can help prevent national governments from making “misguided, and hence counter-productive, decisions” on correcting trade imbalances. But their findings also demonstrate that if U.S. leaders keep passively accepting the results of recent trade flows, “Made in America” could become an endangered species.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


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