The United States Trade Deficit and The Movement of Wealth

The United States is a net importer of goods and a net exporter of services. The trade deficit is around 500 billion dollars, the import is 2.7 trillion dollars and the export is 2.2 trillion dollars. Around 66% of our exports are goods while 80% of our imports are goods, while services account for 34% of exports and 20% of imports. We run our biggest deficit with China, which produces a large amount of our goods. The United States mainly imports consumer electronics, clothing and machinery from China.The United States exported 750 billion dollars in services and imported 502 billion dollars. Our largest service is the ownership of intellectual property, which claims 78 billion dollars in profit, followed closely by travel and transport at 74 billion dollars, and the third is financial and insurance at 40 billion dollars. [1] [2] [3]

The trade deficit has far-reaching effects on the economy. The United States is a net importer of goods. These goods tend to come from countries where they are cheaper to produce, because of the lower wages. This can be shown by China, which is where about 70% of our goods trade deficit comes from. The United States has an average salary of $44,148 a year, while China with its longer work weeks was around $4755 on average in 2012. These cheaper goods caused by lower wages make it much harder for companies in areas with higher wages to compete. This increases inequality between both the rich and poor countries and the rich and the workers in these countries, which will end up affecting the spending ability of the working class in the home country. This overall leads to a slowdown of economic growth, a loss of jobs, and then stagnation. [4] [5] [6] [7] [8]

The nature of the trade deficit is different than the perception of it, company profit makes up large amounts of it. Measuring imports and exports uses the market value. That usually works when intellectual “property” or monopolies are involved. Apple’s Ipads are one example. Around 32% of the market value of an Ipad sold in 2011 went to Apple and other US based companies as profit, and an additional 15% went to businesses in other countries. Adding in the cost of design and distribution, over 50% of the price of an Ipad stays in the US, while the cheapest Apple products keep just above 30% of the sales price in the US. The pattern is repeated throughout other large companies that export to the United States. [9] [16]

The companies are able to maintain these massive profit margins through the use of “super-profits”, which are achieved in this case by buying/producing objects of exchange cheaply in one country and selling them for large profits in another as a form of unequal exchange. The only way to lower the production cost of an object is to lower the human labor involved or the cost of that human labor, whether that labor goes to producing raw resources, machines, or the actual production of the good. The average yearly pay in the private sector of China is less than one tenth that in the United States and they work longer hours, so it's easy to see why that’s a cheap option. The vast majority of profit from name-brand products, including apple’s, goes to distributors. There are no distributors in China so the only profit they gain is through wages, which for the Ipad was only about 2% of the final price. Although, it still added the full price to the deficit.[10]

Many businesses do not directly own property in the third world. This means the companies do not directly own the cheap labor in third world countries. Instead the businesses often go through labor contractors. These labor contractors allow the businesses to exert a high level of control without formal ownership. Labor contractors are often used to supplement a supply of more formal long-term workers. This is because the businesses are able to hire/fire workers without consequence as demand increases/decreases. That allows them to more effectively meet the level of demand. Unlike traditional workers, these workers are often unable to so much as use labor laws to protect their rights. Going back to the Ipad example, the manufacturing of the Iphone 4 cost only $29 in direct labor and retailed at $549, according to a study done by the University of California. In total only $96 of the $549 left the United States.
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Finding or making cheap labor is easily done in even developing economies. The worker must be fully dependent on their wage, they must be unable to survive even the short-term without it. Many conditions arise from this. The workers must keep their job or lose everything. This keeps the workers locked into their job with little hope of leaving. The management must take advantage of this situation, as anybody who doesn’t will lose their competitive edge. Wages will go down and working hours will go up. Since all workers need to eat, when one group will do the job even cheaper, or the workers are no longer reliant on those companies the jobs will move. This forces all of the workers to earn just enough to survive, and sometimes even less. [11]

Companies have been known to fight to keep this control. This fight is most easily won in countries that are willing to turn a blind eye to the exploitations. This is most often done in the third world, as the workers are already in poverty and in need of wages. Unions are often the greatest threat for the profits of the business, so that has lead to many assassinations of union members and leaders. Coca Cola is one example. Coca Cola hired paramilitaries to kill union leaders in Colombia and force resignation from the unions. [12]

Even though profit still accounts for a large portion of the trade deficit, the United States is still in major debt. This debt is not held by every business or individual, so as long as they have profit they can easily import. To keep that going they have two options, become indebted to/by another company within the United States, or to secure profit from outside the United States. Profit from outside of the United States comes from foreign investment. Historical cost is often used to measure foreign investment. Historical cost is a measurement of what something cost at the point of time it was bought. Values of investment can swing wildly so this is a better measurement of total resources flowing from one country to another. Foreign investment by the United States is increasing rapidly, on a historical cost basis the amount of foreign direct investment abroad has went up by more than a factor of four. In 2016 the foreign direct investment is about 5.33 trillion dollars (or around 5.6 trillion dollars in a current cost basis). The United States GDP was only about 18.7 trillion dollars in 2016. The Inward direct investment, which is where somebody outside the country directly owns something in the United States, is about 3.7 trillion dollars on a historical cost basis. That 1.6 trillion dollar difference generates massive amounts of profit. The vast majority of that profit is reinvested. In 2016, 95.8% of investment abroad was reinvested profits, 10% was equity capital, and -5.8% was intercompany debt. That means 260 billion dollars was reinvested profits, which isn’t even accounting for that which is taken out. That alone could count for over half of our trade deficit.
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There are many different factors that allow the United States deficit to exist and increase rapidly. They are all caused or are because of profit. From low wages to private ownership the capital will naturally flow towards the country with the greatest wealth and power. The trade deficit is just the result of this imbalanced trade.

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