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 Richmans' Trade and Taxes Blog

German and Chinese Surpluses and Growth; PIIGS and the U.S. Deficits and No Growth
Raymond Richman, 3/15/2011

The enormous chronic trade deficits that the U.S. has been experiencing during the past decade have eliminated millions of U.S. manufacturing jobs. If we were to succeed in bringing our trade into reasonable balance, many of those jobs would be performed in the U.S. and the recession would be over. The U.S. has allowed these deficits because of its foolish ideology embraced by its economists of Free Trade, which has prevented the U.S. from dealing with its terrible consequences. It was exacerbated by other foolish domestic policies to be sure. Other nations contributed to our deficits by their mercantilist policies which have advanced their industries and the welfare of their workers at the expense of U.S. industry and American workers. The Financial Times reported (14 March 2011) that China has overtaken the U.S. as the World’s biggest goods producer. According to research conducted by consultancy IHS Global Insight, China accounted for 19.8% of world manufacturing output in 2010, edging ahead of the US which accounted for 19.4%.

The reaction of the overwhelming majority of U.S. economists is to ignore China’s growth as an industrial power, the result of the huge trade deficits between China and the U.S. A typical view of American economists is illustrated by a comment of an American economist that it  “shows the need for the US to compete in the future not on the basis of commodity manufacturing but on innovation and new kinds of services that are driven by production industries,” said Deborah Wince-Smith, head of the Washington D.C.-based Council on Competitiveness. No mention of the trade deficits! This kind of passive acceptance of trade deficits will ultimately destroy the U.S. as an industrial power. Most of the consumer goods the U.S. imports from China are designed and produced by U.S. and other foreign firms which have outsourced their production to Chinese affiliates. Included are many of our largest and most respected corporations. It has been reported that Apple, HP, Dell, and many other high tech firms have ten times as many employees in China as they have in the U.S.

Just as the U.S. trade deficits adversely affected the U.S. economy, the trade deficits that Portugal, Italy, Ireland, Greece and Spain ( the so-called PIIGS) have been experiencing have resulted in a shortage of Euros among those countries and a surplus of Euros in Germany. Oh, how wonderful it is to have a positive trade balance like China and Germany. 

The following table shows the trade balances of a selected group of eurozone countries plua rhw U.S., Japan, and China for the first three quarters of 2010 in millions of US dollars converted from Euros at an unknown exchange rate:         

          Area or Country                      Trade Balance ($ million, converted)                 

          OECD  Europe                                   69,690

          OECD Total                                      -71,623

          Germany                                         120,470

          Ireland                                             -2,669  

          Greece                                              -9,703

          Spain                                               -25,125

          France                                             -39,340

          Italy                                                -51,250

          Portugal                                           -16,419

          United Kingdom                                -37,861

          U.S.                                               -359,599

          Japan                                             142,533

          China                    1st Quarter          234,390

________________

Source: OECD

The shortage of Euros produced by their trade deficits has created difficulties for the PIIGS to manage their debts which are payable in Euros. The Europeans adopted a temporary solution called the European Stability Mechanism with a capital of €500 billion beginning in 2013. Currently, it has €250 billion. Greece has been bailed out. In May, 2010, it received the first tranche of €20 billion of a €110 billion loan to overcome its debt crisis. In return for the loan, Greece agreed to pursue austerity measures which led to protests in the streets of Athens.

 Ireland in November, 2010 received a €685 billion loan to bailout its banks. In February, 2011, the European Central Bank purchased some of Portugal’s outstanding debt. Unless their trade deficits are brought into a reasonable balance, the bail-outs will have to continue ad infinitum. Just as the purchase by Japan of a trillion dollars of U.S. government debt and other U.S. financial assets enabled the U.S. to endure the trade deficits, PIIGS, will be enabled to continue buying German and non-European goods.

 With Germany pursuing policies to maintain its trade surpluses with the PIIGS and the U.S., the Eurozone will not survive. True, these countries will have to bring their fiscal policies in order. There is no automatic mechanism that will balance their trade. They need the ability to impose tariffs very much like the single country scaled tariffs we have urged the U.S. to impose on imports from China.  But under terms of their membership in the European Community, they are unable to do this. To pursue fiscal policies of austerity and deflation will require them to forego any growth while the disparity in incomes between Germany and the rest of the community will continue to grow.

 That is what the U.S. is doomed to experience, little or no growth until the dollar collapses when foreign governments no longer buy its debt.  China will become dominant and the U.S. like one of the PIIGS.

Comment by Miklos, 3/18/2011:

Those figures are wrong. The french trade deficit in 2010 was around 50 billion euros. The UK deficit is even larger. And the italian trade deficit is 100% due to energy: they have a 88% dependence on foreign energy, while Germany and France have a 50-60% dependence. Italy had a 40 billion euros trade surplus in the manufacturing sector (the fifth world largest), and a 60 billion deficit in energy.

Response to this comment by Raymond L. Richman, 3/18/2011:
In checking my source of the data, I came across a table whose source was the OECD. I don't kinow why I chose to use Http://epp.eurostate.ec. europa.eu. and failed to include the source. I found the following data with the indicated source, the OECD for the first three quarters of 2010. The data is millions of US dollars, converted presumably from Euros: Germany 120470; France -39340, Greece -25125, Ireland -2669, Italy -51250, Portugal -16419, Spain, -55159, OECD-Europe 69690, OECD-total -171623, US -359599 . The data supports my argument. Thanks for your comment which forced me to check my data.  

Comment by pmp, 4/27/2011:

for the time beeing china has accumulated 3 trillion of usa dollars.

fiat money serve their lord printer

Comment by Daniel Mann P.E. retired, 8/7/2012:

In regard to the reduction of our negative balance of trade, I hear the argument that our items will cost more.  As I see it, we have the choice between higher cost of items, mostly not absolutely necessary, and the bankruptsy of the US.  In any event, we must endure a lower standard of living, and it will be much worse the longer we put it off.  Putting the inevitable off is irresponsible and all congressmen opposing this effort now rather than later should be voted out of office.

Comment by jvc receiver, 8/24/2012:

With Germany pursuing policies to maintain its trade surpluses with the PIIGS and the U.S., the Eurozone will not survive. True, these countries will have to bring their fiscal policies in order. There is no automatic mechanism that will balance their trade. They need the ability to impose tariffs very much like thesingle country scaled tariffs we have urged the U.S. to impose on imports from China.  But under terms of their membership in the European Community, they are unable to do this. To pursue fiscal policies of austerity and deflation will require them to forego any growth while the disparity in incomes between Germany and the rest of the community will continue to grow.

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