With the volatility of the stock market, the talking heads can’t stop droning on about tariffs. But this discussion is a distraction from the main issue: the trade imbalance.
Americans have been bent over a barrel and taking abuses for 50 years. The bloodletting needs to stop. Yes, it will be disruptive in the short term, but we need to address this issue before we implode as a nation.
Tariffs are just one tool to address this issue (in addition to currency manipulation, arbitrary regulations that burden imports, licensing fees, government incentives and subsidies, etc.). Every country uses these tools to take advantage of other countries in trade. In America, we just do it less. That’s because America believes in “free trade.” We’ve worshiped at the altar of Milton Friedman for so long that we genuinely came to believe in “free trade” no matter how one-sided that trade is.
This twisted version of “free trade” (more accurately termed “one-sided trade”) made sense after World War II. The imbalance allowed Japan and European nations to rebuild. Thereafter, a continuation of “free trade” was championed by the likes of Friedman in the 1970s and 1980s in the name of the consumer. This postwar idea of “free trade” was a significant departure from the Hamiltonian pro-tariff policies that made the U.S. the richest country in the world and the strongest and most capable manufacturing nation. These Hamiltonian policies served the U.S. well from 1790 to the 1930s.
Friedman disciples argue that trade deficits are irrelevant. Now that Trump is laser-focused on trade deficits, Democrats coincidentally use Friedman’s arguments against Trump. And neocons, who favor capital and the consumer over the U.S. worker, have naturally always favored open borders and “free trade.” But critical thinking requires that we now venture beyond the theoretical and outdated arguments in favor of free trade and that we reanalyze the issue based on the facts on the ground, which have changed significantly. We must ask: Can the United States continue sustaining persistent annual trade deficits over $1 trillion, particularly in light of a debt crisis?
Full disclosure: I love Milton Friedman, but I disagree with the idea that unrestricted trade is always and everywhere a great idea. It may have been a net benefit for much of the last 70 years, but it is now arguably a net negative. There is one overarching reason for the change: the U.S. dollar. The status and use of the U.S. dollar has changed significantly since the 1944 Bretton Woods agreement. When Friedman analyzed these issues nearly 50 years ago, he did not discuss trade in the context of a fiat currency that is in its end stages.
For 50 years (since 1975), the U.S. has run trade deficits. This was a natural result of, on the one hand, the U.S. having the world reserve currency that can be printed effortlessly, and on the other hand, a desperate need internationally for U.S. dollars. The U.S. dollar has become our most important export. The majority of international trade is settled in U.S. dollars, including for the most important commodity of all: oil. This arrangement is a carry-over from Bretton Woods and a result of the U.S.’s continued strong encouragement in the form of military and economic incentives. This dynamic naturally led to a persistent and ever-increasing trade imbalance.
Having the dominant world reserve currency obviously has its benefits. Who wouldn’t want to effortlessly print some paper to obtain expensive munitions and other high-valued goods? But it all comes at a price. The most obvious price is the offshoring of manufacturing. At some point, the detriments outweigh the benefits. World reserve currencies typically last less than 100 years. Unless we change course, the current “free trade” arrangement will inevitably result in the U.S. being unable to manufacture its essentials while demand for the U.S. dollar evaporates. This (obviously) would put the U.S. in a dangerous and vulnerable position.
We need to start with the fundamental question. Are trade deficits bad? The short answer is that trade deficits are a normal part of trade, and they are not bad when they are irregular. But persistent trade deficits are dangerous. Ultimately, persistent trade deficits can destroy a nation. The four points below illustrate:
1. It is a wealth transfer (roughly equivalent to the trade deficit). Yes, the U.S. has the privilege of buying goods with effortlessly printed paper, but that printed paper has real value. Foreigners take that paper and buy U.S. assets: U.S. bonds, ownership of U.S. companies (equities), U.S. intellectual property (if they haven’t already stolen it when they granted us limited access to their markets), U.S. real estate, gold and crypto-currency, and whatever else they can get their hands on. Whereas the foreigners end up with cash, the U.S. ends up with debt — lots of it.
2. It destroys the middle class. MIT economics professor David Autor describes in his research papers how there were 19.9 million manufacturing jobs in 1979, and by 2007, the total was 14.2 million. So the number of manufacturing jobs decreased by 30% while the U.S. population increased by 30% (roughly a 40% decrease in manufacturing jobs in light of population growth).
We’ve all heard stories of the hundreds of communities throughout the United States that were devastated by the offshoring of manufacturing (see Hillbilly Elegy). With the loss of these high-paying jobs, the men could not support their families, and many men spiraled into drug abuse and ultimately suicide. Many settled for service jobs. Manufacturing jobs are in the top third of salaries in terms of pay. Most service jobs are in the bottom third. Economists Autor (MIT), David Dorn (University of Zurich), and Gordon Hanson (Harvard) published multiple papers discussing these consequences. These papers are often referenced by Treasury secretary Scott Bessent as the “China Shock” papers. The traumatic consequences from losing these jobs — on entire families and arguably on generations — are not quantifiable.
3. It dramatically exacerbates wealth disparities within the U.S. We have had persistent trade imbalances since 1975. Not coincidentally, this was shortly after the U.S. went off the gold standard. The U.S. has sustained these massive wealth transfers because it prints the currency. The result is that we are now over $36 trillion in debt (unfunded liabilities are estimated at another hundred trillion dollars), and our debt-to-GDP ratio exceeds 120%, which puts us on the verge of a debt death spiral.
The ones who have benefited the most from these trade imbalances are those closest to the printing press: Washington, D.C. and the financial industries (the top 1%). Most Americans live paycheck to paycheck (they live off their employment as opposed to the income from assets). Main Street Americans have benefited with cheaper goods, but cheap junk doesn’t offset the harms associated with the inflation and loss of gainful employment. Forty years ago, a family could survive comfortably on Dad’s income. Now Mom and Dad (both working) struggle to pay the bills while their children are raised in daycare. Men have become emasculated in the process. The psychological harms are unquantifiable.
4. Our manufacturing capabilities are hollowed out. Prior to the modern era of “free trade,” the U.S. was the manufacturing power of the world. We supplied the Allies with the munitions that won the war. We built engineering masterpieces like the Golden Gate Bridge. Now we pay China to build the Bay Bridge. We rely on China and other countries for our computer chips — even though the technology originated in the U.S. During COVID, we begged China to give us the basic medical supplies we needed. The Ukraine war showed us how China and Russia run circles around us in terms of manufacturing munitions. Meanwhile, we rely heavily on China for the components necessary for our own munitions — not a good strategy. We no longer build the ships needed for war in the U.S.
We have an ever-increasing reliance on other nations to manufacture the things we need for our survival. That may seem fine in the moment, while demand for U.S. dollars is in an invisibly slow decline. But the inevitable outcome was best expressed by Ernest Hemmingway in The Sun Also Rises: How did you go bankrupt? Slowly, and then suddenly.
At its core, this is a modern story of the U.S. dollar. But it is also a story as old as time. Whether countries are defeated by civil war or by other nations, or whether those countries simply fall into economic ruin and irrelevancy, there is always a predominant underlying cause: unsustainable debt. The trade imbalances are inextricably tied to this debt issue. If we fail to address it, then we certainly fail as a nation. If we attempt to address it (accepting the short term pain and disruption), then we at least have a chance of putting the U.S. back on a sustainable path.
Image: Sally V via Wikimedia Commons, CC BY-SA 4.0.
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