Ed Wallace

Trade No One Talks About

By Ed Wallace

For several months now I’ve been asking new car dealers in the Metroplex what, if anything, their manufacturers are telling them about possible price increases on new vehicles stemming from the tariffs on steel and aluminum. I’ve also asked whether they believe the threat of huge tariffs on imported cars is a legitimate concern. Most dealers are stoic on the first question; the typical response is that manufacturers raise their vehicles’ prices on a regular basis anyhow. As for the fear of tariffs on imported vehicles, so far all claim the manufacturers have not raised any red flags or shown any real concern.

Yet the argument and the focus of these tariffs and threats of tariffs seem to fall mostly on the American automobile industry, both manufacturing and parts suppliers, and to a lesser degree other manufacturing concerns. Therefore it comes as a surprise to most that the output of U.S. manufacturing today is larger than the combined output of Japan, Germany, and South Korea. Even more impressive is the fact that by some estimates, including the Federal Reserve, U.S. manufacturing output has more than doubled in the past 30 years. Others, for example the Pew Research Center, put the increase at 80 percent, but either number is a huge increase. What has changed for the worse, however, is employment in that industry has fallen from 17.5 million in 1987 to 12.4 million in May of 2017. For perspective, manufacturing jobs peaked in 1979 at 19.4 million.

So our output has doubled by some estimates, while employment has fallen; and we can blame most of the job losses on technology improvements — not necessarily on the outsourcing of jobs. Think of it this way: 40 years ago the cars we purchased were welded on the assembly line by autoworkers, and today lasers guide the body panels together and the welding is done by robots. Doing that improves quality, kicks up output, and reduces the need for fallible manual labor. So one ends up with better quality at a lower price and fewer manhours to build the vehicle.

Manufactured in a Refinery

Even in today’s important discussion — the trade imbalance, or that pesky $566 billion trade deficit — the focus is solely on that number, without any real context as to how we arrived at it. So let’s dissect it. First, we will export around $2.3 trillion in goods, led by aircraft, auto parts, drugs, autos, and refined fuels; going by the nation’s current political debate, who would have guessed that auto parts and automobiles were our second and fourth highest exports? Additionally, most don’t realize just how productive our refinery industry is, or that it’s considered a manufacturing concern.

Second, we are importing around $2.9 trillion in goods and raw materials, hence the $566 billion in trade deficit. But even that doesn’t tell the entire story. We always tend to think our trade deficits stem from the trinkets and goods sold at discount centers around America and made in China or other low-labor-cost nations. But much of what we import is raw materials for manufacturing, whether the end user is the auto industry, as with the tariffed steel and aluminum, or crude oil for our refineries. And here we can start to see the reality that sometimes large trade deficits actually help increase employment in America.

Again, raw materials will end up in finished products coming out of our factories, whether they produce Boeing airliners for the world or military goods we sell overseas. Further, half of the 20.8 million barrels of oil we refined the week of August 17th came from other countries; looking at the Bureau of Labor Statistics wages for America’s oil industry, these jobs pay exceptionally well. Often over $30 an hour. Which in turn creates exceptional consumers for the retail part of America’s consumer economy.

One last point on importation of oil. Some claim we actually run a slight surplus in trade with our next-door neighbor, Canada, which made some economic analysts wonder why they were being pounded so hard in the NAFTA renegotiations. Others claim we run a slight deficit with that country; more than likely it varies year to year. But if you take all of the Canadian crude oil we buy out of the equation, we always run a surplus with that country. We are buying more oil from Canada today than we do from OPEC nations.

The Shrinking Elephant in the Room

And that takes us to how Texans have done more than their fair share to help improve the nation’s balance of trade with the world. Two and a half years ago a law passed that allowed our oil companies to start exporting U.S. crude for the first time in decades. At the time the price of West Texas Intermediate was still under $40 a barrel on the futures market, and it appeared we were headed toward having over 500 million barrels of crude oil on hand. That’s nearly two hundred million barrels more than our normal on-hand supply for refining. Moreover, due to the advent and success of fracking, much of America’s new oil would be the more desirable lighter sweet crudes — and therein was the real imbalance.

That’s part of the reason why the price of WTI oil had collapsed a few months before Congress and President Obama took action. Allowing our oil industry to export once again would have the effect of lowering our on-hand and unbalanced inventories while allowing oil operators to pump full out, and likely raise the price of West Texas Intermediate by putting it on world markets.

Did it work? Absolutely. So well, in fact, that in April of this year in just the ports of Houston and Galveston, our oil exports exceeded imports by 15,000 barrels a day. In May, according to the DOE, the difference jumped to 470,000 more barrels per day exported than imported. Overall, America exports 2 million barrels of oil every day. So much that those involved in the oil industry are having to shift their focus out of the Permian Basin to the Eagle Ford because they are pipeline constrained to get all of the oil out of West Texas they could sell in the market. (A report this week said that will soon change.) And finding truck drivers to take it out that way is difficult at best in a country with a 3.9 percent unemployment rate.

Still, here’s the figure you need to consider: Exporting 2 million barrels of our oil every day brings in around $136.8 million a day toward reducing our overseas deficits, or $49.9 billion each year. Almost 10 percent of our total trade deficit. That’s based on the futures market for WTI on the 27th of last month. That figure doesn’t include the increase in our export of refined fuels.

The Price of Success

Ironically, one of the biggest purchasers of our oil has been China. And there’s the conundrum: The more China grows economically, the more demand they have for oil to fuel their expansions, and the more crude oil and refined oil products they will need to purchase from us. Which would have the effect of reducing our trade deficit with that country.

How important is that to China? Well, we’re kind of in a trade war with them right now, but China has not struck back yet by putting a tariff on our exports of oil and fuels. On the other hand, we’re putting new sanctions on Iran; John Bolton, our national security advisor, said last week that we were going to drive Iranian oil exports down to zero. China has suggested that it may ignore that.

While Washington continues to discuss our trade deficits and wants to renegotiate apparently every trade agreement we have worldwide, politicians often keep the public’s attention focused on that narrow automotive, auto parts, and China trinkets segment. All the while they’re ignoring that the biggest reduction in our manufacturing employment has come from automation. True, some jobs have gone overseas, but not all of them, or even the majority of lost jobs.

On the other hand, most don’t realize that “manufacturing” includes refineries, and we are export pros in that area. For what it’s worth, oil production is considered mining by our government, but here too we’ve done such an incredible job that we now export double the amount we exported one year ago.

As always, American consumers have paid the price to pretend to be the winners. Oil went from under $40 to almost $70 a barrel. We all pay for that success every time we fill up our vehicles. This is why 91 percent of business economists surveyed (in a survey published by the Fiscal Times on August 21st) say the way we are going about trying to deal with world trade is already having “unfavorable consequences” for the U.S. economy.

World trade is infinitely more difficult to run than casinos in Atlantic City. Then again, according to the bankruptcy courts, they weren’t run that well anyhow.

Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, bestowed by the Anderson School of Business at UCLA, and hosts the top-rated talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF AM. Email: edwallace570@gmail.com