The world has a global economy. It’s no longer possible to survive as an isolationist. Macroeconomics will tell you that it is most efficient to have each country produce what it can produce cheapest so that all may prosper due to lower-cost goods and increased production.
Not surprisingly, the U.S. is the world’s largest importer and also it is no surprise that we import a lot of stuff from China. According to the U.S. Census bureau, in 2018, we imported $539,675.6 Billion worth of goods from China while only exporting $120,148.1 Billion to China for a total trade of $659,823.7. So, in many ways Canada is actually a better trading partner than China since although we imported $318,824.2 billion from Canada we Exported almost as much i.e. $299,768.5 Billion to Canada for a total trade of $618,592.7 with Canada. Mexico is another excellent trading partner as we imported $346,100.6 Billion from Mexico and Exported $265,442.8 Billion to Mexico for a total trade of $611,543.4 with Mexico.
Up until recently, our total trade with Canada was actually larger than total trade with China. The U.S. is the world’s second-largest exporter selling mostly high-tech things like Jet engines, generators, and pharmaceuticals. The U.S. also exports intellectual property like movies and computer programs. And agricultural commodities like corn and cotton.
Just as a person can’t buy more than he earns, a country can’t continue to import more than it exports. So, we look at “Net Exports” which is just Total Exports minus Total Imports. If a country exports more than it imports, it has a “Trade Surplus” but if it imports more than it exports it has a “Trade Deficit”.
In 2018, the U.S. imported $2.54 Trillion while only Exporting $1.66 Trillion resulting in a net trade deficit of $88 Billion.
Trade with Top 15 Trading Partners in 2018
Trade in Billions
As you can see from the above table there are very few of our top 15 trade partners where we are running a trade surplus. The majority of the countries are selling us more stuff than we are buying.
It doesn’t make sense to make everything on your own if you can trade with other countries that have a comparative advantage. However, you can’t continue to spend more than you receive either.
North American Free Trade Association (NAFTA) 1994
NAFTA Dropped trade barriers between Canada, the US and Mexico. It actually increased US trade deficits and decreased manufacturing jobs in the U.S. Presidential candidate Ross Perot at the time said it would “create a giant sucking sound” as jobs were sucked out of the U.S. at the time he was widely criticized by the media. Although manufacturing jobs did go to Mexico costs decreased for American consumers allowing them to spend more on other items, possibly creating more service jobs in the U.S. But the jobs created were possibly lower-paying jobs than the ones that were lost.
United States–Mexico–Canada Agreement (USMCA) 2018
During the 2016 Presidential Campaign, one of Trump’s major contentions was that NAFTA was actually unfair to the U.S. and he vowed to renegotiate the agreement which resulted in the 2018 United States-Mexico-Canada agreement which the Democrat led house refused to ratify until pressured to do so by the Unions in 2019.
Compared to NAFTA, USMCA increases environmental and labor regulations, and incentivizes more domestic production of cars and trucks. The agreement also provides updated intellectual property protections. Provisions of the agreement cover a wide range, including agricultural produce, manufactured products, labor conditions, digital trade, among others.
Some of the more prominent aspects of the agreement include giving US dairy farmers greater access to the Canadian market, and guidelines to have a higher proportion of automobiles manufactured amongst the three nations rather than imported from elsewhere. It also establishes currency and macroeconomic transparency requirements and a dispute settlement mechanism. Plus, it implements a minimum wage of $16/hr. for Mexican Auto workers along with improved collective bargaining capabilities of Mexican labor unions.
Balance of Payments
The balance of payments (BoP), of a country is all economic transactions between the residents of the country and the rest of the world. These are all transactions made by individuals, companies, and the government. The balance of payments provides detailed information concerning the demand and supply of a country’s currency. If a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counterbalanced in other ways – such as by funds earned from its foreign investments, by running down currency reserves or by receiving loans from other countries.
In the case of the U.S. and China for instance, China sends us cheap goods and receives Dollars and then spends those dollars on U.S. financial assets such as stock, bonds (both Corporate and Government) and it spends a small portion on U.S. goods. So, in the long run, China could end up owning most of the U.S. companies. Some financial analysts have said that the U.S. will end up trading all of its productive assets for a pile of cheap toys.
Protectionism – Placing high tariffs on imports and limiting the number of foreign goods to protect local businesses. Limited by the WTO or World Trade Organization.
Exchange rate – how much your currency is worth when you trade it for another country’s currency.
Currency appreciation – An increase in the value of one currency in terms of another.
Currency depreciation – A decrease in the level of a currency in a floating exchange rate system due to market forces. Foreign imports get more expensive, which makes them fall. Exports to other countries get cheaper, which makes them rise.
Floating exchange rates – they change based on supply and demand.
Balance of payments – accounting statement that records all International transactions in a country. It’s made up of two sub-accounts, the current account and the financial account.
Current account – records the sale and purchase of goods and services, investment income earned abroad, and other transfers like donations and foreign aid.
Financial account – records the purchase and sale of financial assets like stocks and bonds.
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