Umair Haque / Bubblegeneration
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Design principles for 21st century companies, markets, and economies. Foreword by Gary Hamel. Coming January 4th. Pre-order at Amazon.

Tuesday, November 30, 2010

The Worst Trade in the World

It's often said that America's an uncompetitive economy--unable to produce stuff that satisfies global demand. Hence, a yawning current account deficit.

I'd say the reality's harsher. America's caught in a toxic, self-destructive relationship with the globe's second most significant economy. In short, it's making the worst trade in the world.

The worst trade in the world is this: America doesn't export the stuff you might think a bellwether of the 21st century would--cutting edge assets, that power the global growth of emerging markets. Mostly, it exports industrial age raw materials and machines: literally plain old commodities. China finishes them up and "processes" them--and exports "consumer goods" right back to America. They're the trinkets and toys that are piled high on the bleak exurban shelves in super sizes--and America's pawned it's future for them.

Consider America's top exports to China. Leaving aside aircraft and soybeans (neither a sustainable basis for national advantage), America's sole export of note is semiconductors. The rest? Plastics, steel, pulp, chemicals, copper, aluminum, engines, cotton--literally commodities. It's hypercommoditized raw materials, of the lowest of value--literally just stuff, far from higher value goods or services. It's not the picture of an economy humming with innovation, meaning, purpose--it's the picture of a junkyard.

Consider, conversely, America's top imports from China. Here (apart from one trade of enduring worth--America exports semiconductors, and imports back computers, creating and capturing the lion's share of returns from a single high-value industry), the picture's even bleaker. "Other--household goods", toys, computer peripherals, apparel, footwear, TV's. America put itself in hock for disposable, rapidly commoditizing, self-destructive, depreciating stuff, discount-rack junk--literally the lowest of low-grade "consumer goods". Not assets that yield multiplying, long-run returns--the foundation of enduring, resilient, smart growth. It's not the picture of an economy that's investing in tomorrow: it's the picture of Black Friday in a big-box store.

Together, here's what I suggest these two pictures show. It's the portrait of a doddering, faltering economy on it's last legs--one that's managing barely to eke out a living largely from the exorbitant privilege of yesterday's reserve currency (which lets it essentially leverage itself to the hilt). Instead of making awesome stuff the world beats down the door for--it literally lives on exporting hypercommoditized raw materials, and importing back the disposable, transient, depreciating junk mass-produced from them at the lowest cost incurred, and smallest value added. It's a portrait of an economy which adds little or no value to, well, much--and is, instead, surviving by emptying out the last dregs in yesterday's rusting industrial age cup.

It is the worst trade in the world--and rebooting global prosperity depends on creating the institutions that underpin a better one.

NB--All data's from the US Census Bureau (tables are mine).

-- umair // 12:21 AM // 21 comments


What impact to Indonesia & Asean countries for next years?
// Anonymous Anonymous // 3:41 AM

Could you contrast this with data from a stronger European economy (perhaps Germany?). A reference to the UK would also be useful (both data sets would help ground my understanding).
// Anonymous Ian Ozsvald // 10:34 AM

I see your point and I basically agree, but... A pretty solid proportion of the items manufactured for those American companies are still designed in the States. Most American-owned electronics companies, including Apple and Dell, do all their own design work, and just farm out the actual building to China and Taiwan. Does that change the picture? What does everyone think?
// Anonymous Josh // 5:02 PM

I'm not sure your conclusion is supported by the evidence. Raw materials are, as I recall, what most countries are exporting to China; finished goods are, I think, what most countries are importing from China. Why does that imply something only about America's economy, and conversely why does it not imply anything about the economy of other developed nations that trade with China? Seems to me the virtues and vices of the American economy (or that of any other nation) depend on all its inputs and outputs, and on internal production and consumption as well as that dependent on trade. Aren't you skipping a lot of that?

And why are you writing off American agriculture (source of the top export to China in your list, soybeans)? Agricultural products, not to mention other basics and raw materials, don't cease to be important to a country when it becomes industrialized, or post-industrialized.
// Blogger JBranch // 5:42 PM

This only takes physical goods into account. The US is a large exporter of services, intellectual property, and digital media.
// Anonymous Anonymous // 5:54 PM

hey ian,

i'll try to expand the comparison next wk, if time permits.


that's a good pt, but i'd suggest that since america still has a yawning trade imbalance, that stuff's worth less than we think.


to say that "everyone's doing it" makes it neither smart, advisable, nor sustainable.

that said, america, of course, is a special case--because american consumption powers the global economy. so i'd suggest it's vital for us to understand it.

if you think it's possible to build a 21st century economy on soybeans, please think again. yes, they're natural and nice. but they're also commodities that cannot underpin any kind of advantage--especially a sustainable one.

thx for the comments folks.

please note--anonymous comments are usually disallowed here. if you have something to say, please let us know who you are. if you can't, email me and let me know the score.
// Blogger umair // 6:03 PM

Another issue: you discussed the current account but neglected capital and financial accounts. I'm not sure myself how to define these things or state their importance, but it's my impression that factors such as Chinese purchases of U.S. treasury bonds matter too. There's certainly a relationship between asset purchases and trade, although economists seem to disagree on the nature of that relationship. It may be that America can afford its current-account deficit as long as China keeps buying our Treasuries.
// Blogger JBranch // 6:07 PM

Hear, hear.
This reminds me of a conversation I had with someone in 1979...
It was a guy who I knew who was just graduating from my high school...
He told me some probably-apocryphal anecdote:
Some Russian citizen, a woman, was here in the U.S. for some reason...
She was being shown things...
She kept saying "Oh in Russia we have better".
Then they took her to a store where there was a whole huge selection of washing machines...
ANd she broke down crying.
The point being because our consumer splendor puts Russian to shame.
And I remember thinking:
Washing machines? Really?
That's what you want to base your sense of superiority on?
// Anonymous Kurt Larson - San Francisco // 7:06 PM

Thanks, Umair, for your response to my 1st comment. Re soybeans, though, I did say what I meant: "agricultural products don't cease to be important..." Any country with human citizens (which means all of them, until humans are replaced by machines) has to feed its people. If it can grow its own food, good; if it can grow its own and export some too, even better. America happens to do the latter, exporting a good deal of wheat and I think rice along with soybeans. Agriculture accounts for only 1.2% of American GDP (Economist Pocket World in Figures, 2010 Ed.), and food & beverage exports are a smaller proportion of exports than 4 other broad categories (capital goods, industrial supplies, consumer goods, and vehicles). Yes, agriculture won't do as the foundation of the U.S. economy, but I wasn't suggesting that.

By the way, while I'm quoting facts and figures, that same source shows that the U.S. exported more to Canada and Mexico than to China (5.6% of total), though China was the top source of imports (17.4% of total). These figures don't mean much, but they may suggest that the China situation, which is a current fetish with many Americans, isn't exactly the central fact about our economy. I'm not sure there is a single central fact about our economy.
// Blogger JBranch // 7:14 PM

Who's making the -profit- on the retail tat? I'm guessing it's Japanese, Korean, and American companies whose names are on the crap.

I'm sure the factory in South China making the iPod is making a relative killing, but not nearly as much a killing as Apple is.
// Anonymous Duane // 1:20 AM

@ Josh

There's truth to that. The problem is that so-called "knowledge industries" like that only benefit a country so much. 1. They don't employ very many people, so they really only enrich those who can get those few jobs and stockholders. 2. It's very easy for them to evade paying taxes since their tried can be plied digitally. See Google's "Double Irish" scheme that leaves them paying a corporate tax rate of 2.4%
// Anonymous Ezra Dunhill // 5:03 PM

And the largest US non-govt employer? Walmart, of course -- to sell all that stuff.
// Anonymous Dan Oestreich // 11:54 PM

I think America's last, best hope is in producing the most truly creative and worthwhile ideas.
// Anonymous Mark Trueblood // 11:57 PM

Eh, intellectual and creative capital? We export far more than just basic commodities. Most of the high tech innovative products you're referring to were designed here in the US. Cell phones, Ipod, Iphones, software, microprocessors, the list goes on. China on the other hand still has tons of cheap labor they can use or enslave to build it cheaper than most everyone else. As long as there are cheaper labor markets for something, it will be made there. Sure, China and India are catching up, but so is the total inflationary interdependence. For how much longer will Chinese intelligentsia put up with cheaper wages, when they can make more overseas?
// Blogger Paul // 7:29 AM

Awesome post!
// Blogger James // 6:12 PM

It's seems that I've read a good many commenters convinced that as long as we innovate and create we'll be just fine. I wonder If some have forgotten how some of our new tech industries got their starts, especially during the industrial revolution. Some, if not many, were learned, stolen or bought and leveraged into very innovative and companies and world dominating industries. Am I missing something or is this not also a possibility, even a remote one, vis-a-vis USA and China?
// Anonymous Anonymous // 5:05 AM

Apple makes a lot more money than the Chinese manufacturer, but isn't that money spent (by Apple employees and other benefittig from Apple's success) and more usueless widgets from China?

Even Apple's and Google's well-paid employees tend to spend more then they make, so the money circulates around in the US and finally ends up in China.

Not sure we Europeans are really better.
// Anonymous Eric // 6:25 PM

Imports & exports don't show the whole picture of the competitiveness of the US economy. Products that keep the US near the top of the tree are designed and built in the US therefore don't show in your analysis.

My question would be, why would you want US workers screwing together all those low grade goods? Prices would rise, sales would drop, profits would drop, tax receipts drop.
// Blogger Borf // 8:48 PM

Why would all of our blue collar workers want those factory jobs? Hmmmm, let's see, my father worked in a factory for 30 years and sent two of 5 kids to college, kept us in a decent home, and had good insurance for us all the entire time. My other three siblings, work for Wal-Mart, stock shelves for a grocery store, and carry drugs from the pharmacy to nurses stations at a hospital because those factory jobs no longer exist. In addition, two decades after my father retired, none of those 3 siblings makes even close to the money my father did and none of them will ever own a home. Please, no insolent conservative response like my siblings were lazy. The world is much more complicated than that. The last time I heard the statistic as to how many folks in the U.S. have bachelor's degrees it was something like 25%. That means that 75% of us depend upon jobs that don't require a bachelor's degree.
// Anonymous Mark // 8:29 PM

This is a short and sweet comment on capitalism. You know why Iceland failed its' economy? Ireland? Hungary?? Money is chasing state capitalist cos even American money themselves. Just google up Morgan Stanley for a recent example. "Here Morgan... fetch! Chase!! Here's you fresh meal Fetch!! They have made themselves the lap-dogs of state sponsored that also do thrive in free markets. You might have have to thank American Corporations those multinationals that might have stoked up the idea of Pax Sinica just for their market to sell their stuff in/to...

They are desperately looking for an answer now. We more than a few huge elephants in the room. Housing. Foreign policy. Where it all begins... w/o it Sorry America you will have to learn the hard way.
// Anonymous Anonymous // 1:41 AM

"imports and exports don't show the competitiveness of the economy"

really? what else do you suggest does--transfer payments, taxes, unicorns?
// Anonymous Anonymous // 5:07 PM
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