A trade deficit is an amount by which the cost of a country’s imports exceeds the value of its exports.

In 2001 China joined the World Trade Organization and began flooding America with illegally subsidized exports. Over the next ten years, the US would shut down over 60,000 factories, lose more than 5 million manufacturing jobs and see it’s historical annual rate of GDP growth cut by two-thirds.

As a result of China joining the WTO, structural problems hit the US, Europe, and other major economies like Japan and South Korea.

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If a country like the US runs a trade deficit, this directly subtract’s from its GDP growth. From that observation, you can see what the two most important structure drags on growth for many developed nations like the US have been.

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The first has been the drag of the large trade deficits. The second has been the drag on lower domestic investment growth, as multinational corporations like Caterpillar, General Electric, and General Motors, have built more plants in other countries and fewer plants in the US.

Where have most of the offshoring of productions gone? The answer is China.

It’s no accident that the start of America’s era of slow growth in 2001 coincided with China joining the World Trade Organization or WTO, which gave China full access to American markets.

Contrary to the rules of the WTO, China began to flood the US with cheap, often illegally subsidized exports, and over the next decade and a half; the US would see the loss of over 60,000 factories and more than 5,000,000 manufacturing jobs.

The Emergence of Structural Trade Imbalances

During this time the economies of Europe, India, Brazil, among others, would likewise begin to have significant growth-sapping trade deficits with China and this would reduce global growth below what it would otherwise be.

The result would be the structural emergence of a growth-sapping global trade imbalance, as illustrated in the following set of figures.

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Here, we see chronic annual trade deficits on the order of 200 to 400 billion dollars annually, with the heavily exported China.

By the year 2012, these deficits would help slow growth dramatically in both Europe and the US, and as a result, China’s two biggest customers would thereby be too weak to sustain China’s export-dependent growth.

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In a ripple effect, slow growth in China, in turn, would lead to slower growth in so-called commodity countries like Australia, Brazil, and Canada, whose economies depend heavily on the sale of natural resources like coal, iron ore, and soybeans to China. More broadly, these structural trade relationships would lead to a new type of butterfly effect the world had not yet seen.

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Here, we see that weak demand for Chinese exports from Europe and the US leads to weak import demand from China for commodities and other natural resources. In this way, chronic trade imbalances between China and other countries around the world would make it very difficult for a robust, global economic recovery.

Why Keynesian Stimulus Failed

From this butterfly effect, you can see why expansionary, Keynesian fiscal and monetary stimulus in the US and Europe, did not have the full effects anticipated. Indeed, this short-run Keynesian approach did nothing to address the underlying, chronic, long-term structural trade imbalances, acting as a drag on both the U.S. and European economies and by extension, much of the rest of the world.

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