How to Solve the Trade Deficit – Part I

I received a question from a reader named Adam, who asked about the threat the United States trade deficit poses to our long-term financial health. It was an excellent, intelligent, well-articulated question that happened to arrive at the precise moment I was in the mood to talk about such an issue. The result is a five-part essay called How to Solve the Trade Deficit that explains what the trade deficit is, why the trade deficit threatens our safety, and why the loss of manufacturing jobs, although true, is mostly a ruse to cover up the real source of our trade imbalance.

How to Solve the Trade Deficit – The Short Answer

All this talk about the manufacturing base disappearing and cheap imports from Wal-Mart being responsible for the trade deficit has some truth but it is mostly a carefully crafted lie put out by a few of the most powerful special interest groups on the planet.

I’m not kidding.  We could destroy the trade deficit tomorrow if we fixed one item: Imported petroleum products such as oil.

We Need to Import at Least 14 Million Barrels of Oil a Day to Operate

To keep the lights on, the United States needs roughly 21 million barrels of oil per day, yet our own domestic production only generates 7 million barrels of oil each day.  That means we have to import 14 million barrels of oil every 24 hours just to make America run when we turn on a light switch, get in our car, or watch a movie.

This means the trade deficit is directly, and powerfully, influenced by the current price of crude oil and other petroleum products.  To simplify, if oil is at $50 per barrel, our total shortfall, or imports, for that day are $700 million.  If oil is $100 per barrel, we need to import $1.4 billion every 24 hours .  If oil is at $125 a barrel, as it has been in the past, we need to borrow $1.75 billion per day from the rest of the world just to cover the short fall.  Most of that money is going to countries and governments that hate us and our way of life.

When there is a recession, the price of oil collapses and the total oil consumed falls, too, which is why the United States trade deficit fell by more than 50% between 2008, when the recession began, and 2009, when the recession was full-blown raging.

In 2009, the United States had a trade deficit of $380.7 billion because we imported $1.9 trillion and exported $1.5 trillion.  In effect, it meant that we consumed more than we produced and so we transferred $380.7 billion of our national wealth to foreigners to pay them for stuff we wanted to buy.  They used those dollars to buy assets in the United States, meaning they are now collecting dividends, interest and rents on property within our borders that formerly belonged to fellow citizens.

In 2009, we imported almost $254 billion worth of petroleum products from the rest of the world.  That means that if we were to become energy independent tomorrow, the trade deficit would have fallen by a staggering 66.7%.  It literally solves 2/3rds of the trade deficit, which as you pointed out, Warren Buffett has called a far greater threat to our long-term financial well-being than the current budget deficits.

Politicians that tell you energy independence isn’t possible are either stupid or bought by the lobbies (perhaps both).  We built the Eisenhower highway system when people thought it couldn’t be done.  If America set her mind to it, we would be running on internally generated power sources within 10 years.  Not only would we have the financial benefit of such a move, keeping our money within the American “family”, we also enjoy a national security benefit because we wouldn’t rely on countries halfway around the globe to power our infrastructure.

What about the other 32.3% of the trade deficit, you ask?  It is covered almost entirely by passenger automobiles.

To make it as plain as possible: The trade deficit is a problem of petroleum and cars.  Everything else is a tiny drop in the bucket when you look at the trade figures.  The thing is, the energy companies don’t want anyone to realize this because they are literally larger, more powerful, and richer than all but a handful of the governments on Earth.

Problems like imported steel and outsourcing are, in many ways, dwarfed by the entrenched trade deficit caused by our addiction to crude.  Special interest groups and unions make a point to blame all of their woes on cheap imported goods from China, when the real problem they are facing but are still in denial about – as I will discuss later – is software, automation and computer processing advancement.  These forces are making manual work extinct.

Continue to How to Solve the Trade Deficit – Part II …

Related posts:

1. How to Solve the Trade Deficit – A Five-Part Essay on the American Trade Imbalance
2. How to Solve the Trade Deficit – Part II
3. How to Solve the Trade Deficit – Part V
4. How to Solve the Trade Deficit – Part IV
5. How to Solve the Trade Deficit – Part III
6. A Reader Question About the Trade Deficit
7. Free Trade Isn’t Always Fair Trade
8. China Targeted in Bill on Currency Manipulation
9. My Thoughts on New Jersey Governor Chris Christie on Solving the New Jersey Budget Deficit
10. Unemployment Is Only 4.8% … If You Are a College Graduate