Wednesday, May 9, 2012

Why is the US a Net Importer?

When looking at the US trade situation, there is often a great deal of consternation about the US being a net importer.  However, this is really a function of math.  Let's start with this chart:

In the 1Q12, the US consumed $3.438 trillion of durable and non-durable goods. These are seasonally adjusted, annual rates.   That market -- in and of itself as -- is larger than all total world economies save three -- Japan ($5.4 trillion), China ($5.8 trillion) and the EU region ($12.4 trillion).

In addition, the US has one of the highest standards of living.  This has important implications from a production perspective.  An economy in this position is not going to produce many low-end products; it simply costs too must to do that here.  There are other countries that have lower standards of living which are far better suited for this type of production.  This gives them a better absolute advantage, which an economist defines as:
This is the simplest yardstick of economic performance. If one person, firm or country can produce more of something with the same amount of effort and resources, they have an absolute advantage over other producers. Being the best at something does not mean that doing that thing is the best way to use your scarce economic resources. The question of what to specialise in--and how to maximise the benefits from international trade--is best decided according to comparative advantage. Both absolute and comparative advantage may change significantly over time.
 Finally, in using the terms "standard of living," I'm not making a value judgment, but a simple economic explanation of why countries like China and Vietnam are becoming manufacturing net exporters (much the same way that Taiwan and South Korea did before). 

There is also the issue that we are the world's largest oil consumer.  In 2009, the US consumed 18.6 million bbl/day.  The second largest consumer was China, whose total was 8.2 million bbl/day -- less than half our consumption.  Here's a chart from Calculated Risk that shows the trend in imports with oil as a separate category.

The red line shows the effects of being a net oil importer; that's the trade deficit without oil. 

So -- there are three fundamental factors that make the US an overall net importer:

1.) The sheer size of out consumer market, which, on a seasonally adjusted annual basis is larger than all but the largest economies in the world.

2.) The fact we have a higher standard of living, making it inefficient to produce a fairly large number of goods here, and

3.) The fact we're a net oil importer, which accounts for a large amount of our overall trade deficit.