President Obama used the recent visit by China’s president to announce a new effort to revive our still moribund economy. We will do it with exports. Unfortunately he then went on to explain that he means exports of things we make, i.e. manufactured goods. Of course this sells well in those areas of the country still locked in the idea that smokestack industry is still the main motive force of America.
Let’s review the basic facts. Manufacturing accounts for about 20% of our economy and 20% of our work force. Services account for just under 80% of our economy and our work force. Amazing, agriculture accounts for only 1% of our economy and just under 1% of our work force and that includes fishing and forestry as well.
We have a huge deficit in our trade in goods, i.e. things we make. We exported about $1 trillion last year and imported about $1.8 trillion for a deficit of $800 billion. Meanwhile trade in services yields a surplus of about $200 billion.
I believe you can see my point, we are very unlikely to revive our economy by upping exports of manufactured goods. It would be a far better exercise to push our exports of services since it is the dominant part of our economy and enjoys a trade surplus.
One could go further and suggest that our trade in services means that US wages in this sector are very competitive with those in other parts of the world while our wages in manufacturing are not competitive. While tempting to draw this conclusion, it would take a really lengthy study to make this determination. However, it is easy to observe that, for whatever reason, we are more competitive in trading our services than in trading our goods.
While on this subject I should mention that for every $3 the US has invested in the rest of the world, the rest of the world has $2 invested in the USA. Much of that investment follows trade patterns. The normal cycle for an exporting company is to start by selling through an agent in the buying country, then selling through its own company in that country, and finally selling from its own production in that country. Again, General Motors is the second largest car vendor in China, which is the world’s largest car market. In fact, the latest figures show that GM sold more cars in China last year than in the USA. And all those GM cars were made in China. Okay, okay except for a few high dollar Cadillacs and SUVs.
For major US manufacturing companies the best route to a larger share of the world market will be to continue building facilities in other countries, not by trying to export from the USA. And this is not true only for the USA. The largest vendor cf cement in the USA is a Mexican company. All the major Japanese car makers have manufacturing facilities throughout the world, including in the USA.
Now I would support the president if he were to urge greater export of services. First would be to promote the USA as a tourist destination for foreign visitors. We earn more from foreign tourists visiting our country than any other country. I would welcome a flood of Chinese visitors to Disneyland. The dollar is still the main reserve currency in the world, about 65% of all reserves. We make lots of money selling financial services to other countries. We build and operate hosptials around the world and they are usually the standard setters in other countries. We are the world’s leader in logistics or transport of goods - UPS and FedEx reach every part of the globe. And all of these are services.
Services, not goods, are the best bet for lowering our trade deficit. And this has been the case since 1980.