by

Thomas Schinkel

November 22, 2009

A simple change in the way the largest retailers source their goods could have a dramatic effect on the United States’ trade imbalance with the rest of the world, and bring a host of other benefits in the bargain.

In America, we have two problems that touch the lives of every citizen, rich, poor and middle-class. These two problems are inextricably linked. The media have done, and continue to be do a poor job of explaining these problems to the American public , let alone describing solutions.

What are these two inextricably linked problems? One is the “Structural Trade Deficit”. The other is the “Triangle of Debt” (Government, Financial Services industry and Households). Here is what these two problems look like in isolation:

Structural Trade Deficit as Pct of GDP

Exhibit One of course, shows the Trade Deficit as a pct of Gross Domestic Product (GDP and highlights the changes that started to take place after the mid-1970’s. The growing services sector creates a trade surplus year after year, but it is never enough to make up the shortfall incurred by the trade imbalance in goods.

Total Debt Outstanding as a Pct of GDP

Exhibit Two shows the rising debt exposure of all sectors of the economy, but especially the household sector and the financial services industry.

How is it that these two problems are inextricably linked? In a nutshell, year after year, we have imported more goods than we had domestic currency to pay for through offsetting exports. The capital that left our country ended up in the hands of overseas governments, which used these excess dollars to create money in their own currencies. Then these governments turned around and lent the same amounts of dollar-denominated capital back to us in the form of U.S. Treasuries (financing the government debt), and other debt instruments, predominantly those issued by the major banks.

In turn, the major banks further facilitated debt accumulation by the American public. While the party lasted, it looked great, at least on paper. Now take a look at Exhibit Three:

This is the view from 35,000 feet and another way of seeing the two problems from a global perspective. For a whole generation, our leaders -domestic and international – have paid homage to this seemingly virtuous cycle. But the party came to a grinding halt when some of our overseas lenders came to the realization that the financial products they got in exchange for the money they lent us were without value. When they called us on it, a crisis of historic proportions erupted.

The only realistic way to come out of this crisis is to address both problems at the same time. At the consumer level this is happening, although not at the rate sufficient to get out of trouble within a couple of years. The banking bailout of September 2008, and the stimulus program of February 2009, have actually hugely increased the federal debt exposure, and the nation’s total debt outstanding as a pct of GDP has increased rather than decreased.

The other crisis, the “trade imbalances crisis”, must be addressed at two levels. One is through regulation and renegotiation of international trade treaties. The other is through voluntary action.

Voluntary Action and Domestic Sourcing

A large part of the trade balance is made up of imported consumer goods. Here is where companies like Walmart, Staples, Target, Office Depot, and indeed the entire retail sector comes in.

If all of the 100 largest retailers in the U.S. would voluntarily adopt a program that redirected a portion of their purchasing budgets away from overseas sourcing to domestic sourcing, and kept doing this for the next three years, it would have a positively magic effect on our trade imbalance with the rest of the world. If these influential retailers took such voluntary actions, the trade deficit would be sharply reduced, if not eliminated, within a three year time-span.

Four Benefits

What would be the benefit of such a retailing initiative? I see at least four. First of all, increased domestic sourcing would help create more jobs domestically. Second, it would result in a reduced outflow of dollars that pay for imports we cannot afford. Third, it would reduce, postpone or completely eliminate the need for draconian regulations on imports, or worse, a default-induced collapse of the dollar. The dollar’s collapse would have the same effect as draconian limits on imports, but in a manner that would be more disorderly and much more damaging to the American economy. Fourth, it would restore a sense of credibility in the global financial system, a credibility that was so severely damaged during and after the crisis of 2008.

How to get there?
The best and most effective way to kick-start such an effort in the retailing industry would be to change the reward structure for purchasing managers and others in retailing organizations who are responsible for procurement of products for resale. A meaningful percent of their bonuses could be made dependent on their ability to meet the goal of increasing the portion of their purchasing dollars directed toward products that are actually made here in the U.S.

Protectionism?

Would this be protectionism? Not really! It would not block trade from any country. It would merely help bring the amount of what we buy from other countries in balance with the amount we sell to other countries. A five percent calibration per year in monetary terms would do the trick, perhaps even less.

Self-reliance is possible

America is a very large economy that should be self-sufficient in providing for most of its needs. A couple of years of trade surpluses that were followed by a couple of years of trade deficits would be the perfect tell-tale sign that things were in order. But that is not how it has been for the last thirty years.

Over the next few years, numerous initiatives will come to the fore that will help us reduce our dependence on imported energy. Both initiatives can fix the trade imbalance and then some. Imagine the consequence if we don’t. Some pundits want us to believe that greater transparency at the Fed will trigger a run on the dollar. That is complete nonsense. What triggers a run on a currency is a structural trade deficit that remains unaddressed.

Fixing our trade imbalances is a win-win situation in return for a few Christmas seasons of belt-tightening in the realm of consumer-spending. It would be a form of voluntary restraint on the part of retailers and the consumer. Balanced Trade: good for America, good for the World!

Thomas Schinkel