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May 20, 2005
The Twin Deficits
The twin deficits—the trade deficit and the federal government’s—are major problems for the U.S. economy that require a foreign-affairs approach to fix them.
We have had some good news on the trade deficit lately—it was than expected this March—but it’s not enough good news to make the twin-deficit crisis go away.
And with cut-and-spend Republicans running the place, the federal deficit isn’t going away either.
So Democrats—the sober, responsible, grown-up party, the one that doesn’t throw hissy fits and nuclear options when it doesn’t get its way—need to find a way to address the deficit that doesn’t require being in power.
Fortunately, there is one: unions. The union movement, along with civil rights and capitalism, is one of the best things ever to happen to America. But sadly, just like civil rights and capitalism, too many other countries don’t have it.
This is out problem: American labor costs more than Third World labor. It is one of the underlying causes of the trade deficit. American goods cannot easily be bought by an average Chinese factory worker because they cost too much for him. The Chinese worker makes too little. But Chinese goods can easily be bought by the average American worker because it’s so cheap for us. After all, American workers make a lot more than Chinese workers do. Small wonder our biggest bilateral trade deficit ($ -12.9 billion in March) is with China.
Until workers in our major-but-poor trading partners have the income to buy American products, we’ll never get rid of our trade deficit. Two countries stand out: China and Mexico (fifth-largest trade deficit, $ -4.3 billion in March).
(We also maintain a multi-billion-dollar monthly deficit with Saudi Arabia. But I’ve made my position on Saudi oil clear elsewhere.)
Admittedly, this approach is less likely to work with Canada, Japan, and Germany, with which we maintain our second-, third- and fourth-largest trade deficits. These countries are already well-developed and unionized.
But it's a start. $13 billion a month ain't chump change.
(As for the federal deficit, besides cutting tax cuts or cutting spending, the best policy is to raise the minimum wage, thus increasing taxable income. Of course, Republicans will warm to that like an ice cube in winter.)
The trade deficit problem is currently half-addressed. By permitting freer trade, The WTO and the Doha round of trade negotiations aim to bring Third World wages and living standards up to First World ones gradually. The United States already offers some poor countries open access to its markets, hoping to encourage business (and thereby create jobs and raise wages). This was, after all, part of the logic behind letting Mexico in NAFTA in the first place.
But the problem is that while companies go overseas to take advantage of all the nifty, lower trade-barriers, unions don’t.
So Mexican and Chinese wages can easily end up in a downward spiral rather than an upward one. A Mexican factory owner’s fear (real or not) that American buyers will place their next order in China unless his own costs are kept down can prevent Mexican industry from raising wages. It can even force Mexican wages down.
The only way to stop this is to encourage the growth of unions in both Mexico and China.
Unions can stop the downward spiral. Take Laos. As the New York Times recently reported (sorry, it's a pay-link), it already has a strong trade union movement. Its garment industry has escaped the pressure to lower wages because American companies prefer buying Laotian–made clothes. Why? Because, with the strong Laotian union movement, they’re clearly not made in sweatshops. U.S. companies don’t have to worry about their reputations when they buy there.
But Laos and its trade unions are only a small part of the Third World garment industry. And while Laos has managed to unionize on its own, America can’t afford to wait for the rest of the world to follow. Nor can America afford to wait until the Republicans running the country see the good of the union movement. (Again: ice cube in winter.)
So we must move ahead in a way that doesn’t require passing laws or writing executive orders. We have only one choice: The Democratic Party and its biggest union partners must send forth their foot soldiers and help to unionize China and Mexico.
Of course, that’s a tall order. I’ll break down how in a few more posts.
Posted by James Fichter at May 20, 2005 12:13 PM
