A New (Unfortunate) Record: Advanced Technology Trade Deficit

The advanced technology trade deficit hit an all-time record of $8.3 billion in November, handily beating the previous record of $7.7 billion, set in October 2007, at the peak of the boom.  That’s the gap between exports and imports for high-tech goods such as aerospace, advanced materials, information technology, and biotech.

On one level, that’s not a surprise. The U.S. has  run a  trade deficit in advanced technology products in every month since June 2002.  On another level,  it’s intensely disturbing that the financial crisis seems to have done nothing to break the longterm trend.

Comments

  1. Yes, but the trend only makes sense when the government has long pushed C over I, especially in the years since 2002. The problem with this segment of the current account is that it is not likely to benefit the U.S. in the form of a capital surplus and foreign investment in the future. That capital has proven to be more productive elsewhere.

  2. Not really too surprising, given global economic weakness, and (I believe) a weakening dollar in the run up to holiday gadget imported inventory purchases.

    As for software, I often wonder whether it is tracked in any sensible way. If a master copy is moved to a foreign partner or distributor web site, or a copy is downloaded from a U.S. site by a foreign customer, does the government really know what happened or what it means with regard to exports/imports? Does anyone assign import value to software written in India or Hungary for integration or implementation in the U.S.? Somehow I doubt that we have a grip on what is really going on in information technology.

  3. Production in the rest of the world is just so cheap and so subsidized, especially in Asia, that there’s just no perceived ROI in producing most advanced technology components domestically. And to the extent that we can, selling for final consumption abroad is still very much an uphill battle.
    I just don’t see how this trend changes unless we get much poorer or our trade partners get much richer.

  4. Our enormous trade deficit is rightly of growing concern to Americans. Since leading the global drive toward trade liberalization by signing the Global Agreement on Tariffs and Trade in 1947, America has been transformed from the wealthiest nation on earth – its preeminent industrial power – into a skid row bum, literally begging the rest of the world for cash to keep us afloat. It’s a disgusting spectacle. Our cumulative trade deficit since 1976, financed by a sell-off of American assets, exceeds $9.5 trillion. What will happen when those assets are depleted? Today’s recession is the answer.

    Why? The American work force is the most productive on earth. Our product quality, though it may have fallen short at one time, is now on a par with the Japanese. Our workers have labored tirelessly to improve our competitiveness. Yet our deficit continues to grow. Our median wages and net worth have declined for decades. Our debt has soared.

    Clearly, there is something amiss with “free trade.” The concept of free trade is rooted in Ricardo’s principle of comparative advantage. In 1817 Ricardo hypothesized that every nation benefits when it trades what it makes best for products made best by other nations. On the surface, it seems to make sense. But is it possible that this theory is flawed in some way? Is there something that Ricardo didn’t consider?

    At this point, I should introduce myself. I am author of a book titled “Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America.” My theory is that, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.

    This theory has huge ramifications for U.S. policy toward population management (especially immigration policy) and trade. The implications for population policy may be obvious, but why trade? It’s because these effects of an excessive population density – rising unemployment and poverty – are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.

    One need look no further than the U.S.’s trade data for proof of this effect. Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!

    Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable – nineteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. My point is not that our deficit with China isn’t a problem, but rather that it’s exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one fifth of the world’s population.

    Ricardo’s principle of comparative advantage is overly simplistic and flawed because it does not take into consideration this population density effect and what happens when two nations grossly disparate in population density attempt to trade freely in manufactured goods. While free trade in natural resources and free trade in manufactured goods between nations of roughly equal population density is indeed beneficial, just as Ricardo predicts, it’s a sure-fire loser when attempting to trade freely in manufactured goods with a nation with an excessive population density.

    If you‘re interested in learning more about this important new economic theory, then I invite you to visit my web site at http://PeteMurphy.wordpress.com.

    Pete Murphy
    Author, “Five Short Blasts”

  5. CompEng: Offshore work is sure cheap by the hour, but is anybody quantifying other costs (delays in communication, lack of transparency of what is going on in remote offices, reduced effectiveness or burnout of personnel involved in late night/early morning phone conferences, associated travel costs, etc.)? I’m not talking about the kind of work where somebody operates a machine by a process that can be comprehensively described in a manual.

    On a related note, I suspect that a good number of offshoring stories doesn’t really work out, but it’s papered over because decision makers are concerned over loss of face, and/or the nomenclatura of market analysts etc. is not yet ready to accept failures. In other words, nobody wants to be the first messenger to be shot.

    But maybe I’m looking at this from the wrong side, perhaps things are all swell in the board rooms and the executive suites (keyword executive/board comp packages).

    BTW I have also commented in the previous few threads, if you want to check them out.

  6. CM,

    From my experience, most people look at low cost as the opportunity and quality the challenge that must be managed within that opportunity. That framework says start from low cost and work a little bit up the chain if you have to. So what you do is you go ahead and offshore a portion of the job and keep hiring MBAs until you can make it work. At least, that seems to be the prevailing attitude. If you take that approach, your original failures are just the expected bumps along the way.

    I’ll take a look. ;)

    • Sounds plausible (and to an extent familiar – I don’t see the MBAs, but I do see the keeping-at-it part). But it again all seems to hinge on the definition of “works”. The only thing that probably counts in the end (from a corporate perspective) is whether the customers keep paying, and revenue minus cost is in an acceptable range. In many cases that seems to be so.

      As to how this relates to “advanced technology” per the title of the post, it seems that a lot of advanced tech has reached maturity over the past decades, and what is offshored is mostly standard tasks and maintenance. Or is it the other way around, that offshoring and cost cutting has stopped innovation?

      When all kinds of tech companies have emaciated or altogether dismantled their R&D labs, was this because companies didn’t want to pay for the research/innovation, or was it in acknowledgement that they didn’t deliver innovation?

      Probably there is no clear cause and effect, but co-evolving developments.

  7. There’s an assumption being made here that our trade deficit in advanced technology is with nations with low labor costs – perhaps China – and that low labor cost is the driving force behind trade deficits. That’s a misconception.

    In 2006, of our top twenty per capita trade deficits in manufactured goods, only seven were with relatively poor nations. However, eighteen of those twenty deficits were with nations much more densely populated than the U.S. China was one of them, but they barely made the list. When expressed in per capita terms (which factors in the population of the nation in question), our deficits with nations like Japan, Germany, Korea and others – all prosperous nations – was much worse.

    Global trade imbalances are driven by disparities in population density, much more so than low cost labor. The problem with our trade deficit in advanced technology is due to trade with very densely populated nations who consume far less advanced technology than we do.

  8. Yes. They consume less on a per capita basis and, since they have fewer “capitas” than we do, their total consumption is dramatically lower.

    • I hope you have the data to back it. Japan, I feel, could never have achieved the national energy reductions they tout given the near disregard they’ve shown for efficiency in much of the electronics they sell to the U.S. — unless they consume little of it at home. The mere existence of Tokyo’s Akihabura — Electric Town — belies this notion of indifference to consumer gadgetry, but the larger view tends to suggest that you are right. On the ground impressions of Germany also lend credence to the image of a populace that would rather trek across the fields or chat for a couple of hours over a leisurely dinner than veg out in front of a giant TV, but anecdotal evidence is not proof.

      • Given what I’ve seen when my parents lived in Japan, I also find this hard to swallow. Less consumption per capita is easy to believe, but less in high tech is more difficult based only on anecdotal evidence, whether the measure is focused on end-consumer spending or not.

    • Perhaps I misread you. I thought you meant far-less-advanced tech, not far less advanced-tech. Even so, it doesn’t sound plausible unless you include in-car entertainment, generally more fully featured cars, multiple TVs/entertainment centers per household, kitchen “power tools” etc. But in all those categories and maybe more I would expect a higher US per household consumption, which probably translates to per capita.

  9. CompEng: Looks like one cannot respond beyond level 2. This is in response to the “per capita advanced tech” thread.

    I would hazard a guess that total resource consumption roughly correlates with pollution (you can clean up only so much, or ship only so much waste elsewhere), and the “Western (First) World” has already maxed out its tolerance for domestic pollution. Whatever pollution (and hence consumption) limits apply probably scale roughly with area, so a higher population density implies lower per capita consumption, assuming similar per-area consumption limits – keyword “OECD norms”.

    As for the qualitative sophistication of consumer products and lifestyles, I would respectfully suggest that the US population, fed by US corporate media, may have too high an estimation of the difference between its own living standard and that of Europe or “Westernized” Asia.

    Neither of these are of course meant to refute anything you said. Pete Murphy may still have a point in terms of sheer quantity if not quality (but I think his argument was about quantity).

    • I don’t think I was arguing the point on quality, personally. I’m honestly not sure how most Americans think Europeans live: people seem to have wildly differing ideas on the topic, so it’s tough to construct a norm.

      An awful lot of the things I see “consumed” in America are disposable goods of limited and specialized utility. Definitely the price of storage (which correlates strongly to population density) would limit spending on those items. Pollution could also have an effect, but in America that’s still largely an externality. I’m not sure about Europe and Asia: how much it costs to throw away junk. Anecdotal evidence from Japan indicates that’s not a real limiter in terms of, say, electronics sold, while the storage costs are a huge limiter.

      Also, while with currently technology there’s a real limit to the level of refuse you can dispose of, recyclable construction and low-pollution manufacturing are really still in their infancy. This is to be expected, because in a low tech world pretty much everything is naturally renewable or recyclable. The introduction of man-made materials into manufacturing still hasn’t been quite comprehended at a societal level. But I have a lot of hope in these areas.

  10. Chris Mitchell says:

    Plotting inflation-adjusted business R&D and exports over the past 50 years suggests a series of alternating booms (and busts).

    1958-68: R&D cycle (mainframe computing)
    1969-1976: Export cycle
    1977-1985: R&D cycle (personal computing)
    1986-1995: Export cycle
    1996-2002: R&D cycle (internet)
    2003-present: Export cycle

    R&D and exports are modestly correlated (.23), but if you look at 4 yr moving averages the alternating nature of the two pops out. When long-term R&D investment is tepid, exports tend to be doing quite well, and vice versa.

    http://wurm.laughingsquid.net/econ/rd_export_cycles.png

    We’re in the latter (bust) stages of the latest export cycle and presumably moving into another R&D boom. A record trade deficit in advanced technology products may represent early investment in research equipment, along with tepid exports given that the last wave of product innovation is basically exhausted.

    In summary, I wouldn’t worry too much about export figures. If investment steams forward over the next few years, exports will take care of themselves later.

    I like to watch the turnover in strip malls as a leading indicator. Over the years the less desirable slots have turned over from mom-and-pop computer shops to small ISPs to title companies. Of course the title companies are now long gone and lately I’m seeing various green energy services start to fill those spots. These entrepreneurs and franchisees aren’t particularly influential, but they are nimble and tend to head in a pack to where the trend is. So I like Cleantech as the next boom. There are loads of doubters, which combined with the observed activity is a great contrarian sign.

    PS – thanks Mike for pointing out the BEA Innovation Account in one of your Economics Unbound posts.

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