America’s Trade Deficit with China, Explained

As of August 2017, the U.S.’s trade deficit with China was just over $239 million[1]. America exported approximately $80.2 million[2] to China while China imported over $319 million[3] to the U.S. There are numerous reasons for this imbalance, but being in deficit may hurt the U.S. economy in the long run.

The reason why the U.S. receives goods from China (mainly consumer electronics and clothing) is because China can produce goods at lower costs than the U.S. can. The benefits are felt in the pockets of Americans every day. China’s competitive pricing is the result of two factors:

  1. China has a lower standard of living. Therefore, companies pay lower wages to their employees.
  2. The Chinese yuan is partially fixed to the U.S. dollar. Also known as ‘pegging’, it is the act of a country or government’s exchange-rate policy attaching the central bank’s rate of exchange to another country’s currency[4]. It stabilizes the exchange rate between China and the U.S., which is advantageous for large importers like China.

However, in 2016, China began relaxing its “pegging” in an attempt to gain traction from market forces to increase the value of the yuan. As a result of this action, the dollar to yuan conversion has been volatile and China’s influence on the dollar remains high.

How exactly does China hold power over the U.S. dollar? Chinese companies receive dollars as payments for exports to the U.S. These companies deposit the dollars into the banks in exchange for yuan to pay employees. The banks then send the dollars to China’s central bank. It stockpiles them in its reserves. This reduces the supply of dollars available for trade. Therefore, it puts upward pressure on the dollar’s value, thus, lowering the yuan’s value. This cycle could potentially give China leverage over U.S. fiscal policy.

Another major reason why an ongoing trade deficit with China could be detrimental to the U.S. economy is because its financed with debt. What if China decided to call in its loans?

China also helps keep U.S. interest rates low by buying Treasurys. If China stopped buying Treasurys, interests would rise and potentially throw the U.S. and the world into recession.

The deficit puts a heavy burden on the manufacturing industry, as well. For U.S. companies to compete with China, they must either lower their costs (this could potentially put them out of business) or outsource jobs to China, but this option hinders U.S. job creation.

 

 

 

 

 

 

 

 

 

 

President Trump has promised to lower the trade deficit with China by imposing duties on Chinese imports. However, many Chinese imports are made up of raw materials sent from the U.S. Trump’s tariffs would reduce profits for these American companies who ship material to China, resulting in price raises of the products shipped back to the U.S. China might retaliate and raise its tariffs on imports from U.S. companies. If this is the case, Trump might be the biggest factor to hurt the economy.

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References

[1] https://www.census.gov/foreign-trade/balance/c5700.html

[2] https://www.census.gov/foreign-trade/balance/c5700.html

[3] https://www.census.gov/foreign-trade/balance/c5700.html

[4] http://www.investopedia.com/terms/c/currency-peg.asp

 

Proposed immigration reform to grow U.S. economy, or not?

On February 13, U.S. Senator for Arkansas, Tom Cotton, introduced the RAISE (Reforming American Immigration for Strong Employment) Act to the Senate. The RAISE Act seeks to amend the Immigration and Nationality Act to create a merit-based immigration system and replace the diversity immigrant visa program. The bill’s overall aim is to protect American taxpayer workers, taxpayers, and the economy.

The RAISE Act reduces overall immigration numbers to limit low-skilled and unskilled labor entering the U.S. Immigration reform is important now more than ever; America’s economy and future is dependent on it. The main cause for concern is the aging population. The U.S. population is aging rapidly as baby boomers enter old age and retirement.

The Population Reference Bureau reported the number of Americans aged 65 years and older is projected to more than double from 46 million today, to over 98 million by 2060. The 65 years and older group share of the total population will rise to nearly 24 percent from 15 percent.

An aging population has a direct impact on the labor force. This will result in a dependence on immigrants to replace current workers and fill new jobs. However, a surge in unskilled immigration over the past few decades has been blamed for depressing wages, according to President Donald Trump.

Since 1979, Americans with a high school diploma or less have seen their hourly wage decline, according to The White House. American workers without a high school diploma have seen their real hourly wages fall by 17 percent, in a press release quoting President Trump.

Twenty-nine percent of adult immigrants in the U.S. don’t hold a high school diploma, in contrast to seven percent native-born. However, native- and foreign-born adults hold bachelor’s degrees at similar rates, 32 percent for those born in the U.S. and 30 percent for those born outside the U.S.

Key sectors with low-skilled workers confirm the variance in education levels between immigrants and U.S. citizens. This is highly relevant to the agriculture and accommodation sectors. The majority of immigrant workers who work in the agriculture sector are low-skilled, compared to 29 percent of native workers. In the accommodation sector, more than half of foreign-born workers lack a high school diploma, compared to 25 percent of native workers.

On top of this, more than 50 percent of all immigrant households receive welfare benefits, compared to over 30 percent of native households, according to a 2015 Center for Immigration Studies Report.

Dean and Professor of Public Interest Law and Chicano/o Studies at the University of California, Davis, Kevin Johnson argues the reason there is a high number of foreign workers in low- to medium-skilled jobs sectors like agriculture, construction and services was not due to there being too many immigrants, but due to the work conditions.

“Low-skilled jobs are low status, pay low wages, and are physically challenging,” Johnson said. “Employers often say that they cannot get U.S. citizens to fill these kinds of jobs.”

The issue seen with the U.S.’s current immigration system is that it doesn’t prioritize the most highly skilled immigrants. On average, one million immigrants are accepted into the U.S. for legal permanent residency every year. On average, one out of 15 immigrants come to the U.S. with a high skillset.

Due to low-skilled workers taking the majority of non-citizen visas, the U.S. could be losing out on foreign talent. With the proposed merit-based immigration system, the RAISE Act will prioritize immigrants based purely on the skills and knowledge they bring to the U.S. The skills-based system rewards applicants points based on individual merit. The system rewards points in areas such as higher education, English language ability, high paying jobs, and past achievements. This process is to ensure immigrants contribute positively to the country and the economy.

The RAISE Act also prioritizes immediate family members of foreign workers to live in the U.S., and ends preferences for extended family members and adult children. The new reform also limits permanent residency of refugees to 50,000 a year, which is in line with the 13-year average.

Senator Cotton ultimately wants the RAISE Act to: 1. Help American workers receive a pay rise and achieve a higher standard of living, and 2. To promote economic growth and make the U.S. a more competitive country.

The proposed merit-based immigration proposal is modeled on the current Canadian and Australian systems. Both countries successfully attract highly skilled workers and see the benefits it adds to population growth, productivity and income per capita.

The various ways that migration and population growth can be linked to Canada and Australia’s productivity and income per capita growth include, supply of labor; capital, investment; government expenditure on services and taxation; competition; natural resources, land and environmental externalities; and international trade.

Immigration is the largest contributor to population growth in Canada since the early 2000s. Canada’s permanent immigration program is divided into three main streams: economic, family and humanitarian. In 2015 to 2016, Canada admitted 271,845 permanent immigrants. Of this number, the economic stream accounted for 60 percent of migrants, family made up 24 percent, and the remaining were humanitarian migrants. These proportions have remained fairly stable over the past 15 years.

In Australia, there are two pathways for skilled migration. The first, general skilled migration, requires applicants’ occupations to appear on a skilled occupations list. Most of these occupations are in professional areas such as medicine, engineering, or trades. The list is updated regularly based on an assessment of Australia’s economic needs at the time. The second pathway is for skilled migrants with an employer sponsor. This pathway is open to migrants with a wider range of skills. Employers must demonstrate they have a skilled position available and there are no Australians willing or able to take up the position.

In 2015 to 2016, Australia accepted 189,770 permanent migrants through its skilled and family immigration streams, and settled 18,000 refugees and humanitarian migrants. Sixty-seven percent of migrants came through the skilled stream, and 30.8 percent through the family stream. These numbers add almost one percent to the Australian population each year, a much larger proportion than the U.S. admits through its migration program.

Twenty years ago, more migrants came through the family stream than the employer stream. The change in numbers is a direct result of government policy prioritizing skilled migration because of its value to the economy.

A merit-based immigration system will transform the U.S. immigration system from primarily family-based to employment-based. Under the U.S.’s current system, most employment-based immigrants are highly skilled, but make up only 14 percent of those who receive green cards. Under the RAISE Act, employment-based immigrants would make up the majority of those who receive green cards.

Deputy Dean and Director of the Public Law and Policy Research Unit at Adelaide Law School at the University of Adelaide in Australia, Alexander Reilly, said increasing skilled migration at the expense of family migration can impact on the desires for family reunion of existing U.S. citizens.

“In Australia, parent migration is very difficult,” Reilly said. “It may be that partner and child migration, which is currently considered a matter of right here, will have quotas or waiting lists imposed.”

A problem Reilly sees in Australia with independent skilled migration is that migrants find it hard to get jobs in their area of expertise and end up unemployed.

“Skilled migrants’ success is better if they have family support, so merit-based migration definitely needs a strong family component.”

In the proposed points system for the U.S., applicants would earn points for meeting criteria to do with age (preference for persons between ages 26 and 30) and having a degree. Extra points would be awarded for degrees earned in the U.S. and in a STEM (science, technology, engineering and mathematics) field. Nobel Prize winners, professional athletes and English language speakers would also receive extra points.

Johnson said that while the Australia and Canada case studies were worth reviewing, the U.S. has its own history and political, social and economic forces that contribute to immigration pressures and flows that may not exist in Canada or Australia.

“Australia and Canada don’t operate in the same context as the U.S., so those main factors must be considered in any reform of U.S. immigration law,” Johnson said.

Johnson believes a merit-based immigration system that halves the number of legal immigrants entering the country will unintentionally increase the number of undocumented immigrants.

“The goal of the U.S. government is to reduce legal immigration from one million a year to 500,000 a year, and this reduction will be seen in family immigrant visas,” Johnson said. “With the current limits on legal immigration, this has bought in roughly 11 million undocumented immigrants to the U.S.”

“Making legal immigration even more restrictive will increase the likelihood that those who want to immigrate lawfully will resort to doing so illegally.”

When asked if the RAISE Act will reduce poverty, increase wages and save taxpayers millions of dollars, as stated by President Trump, Johnson replied, “There is no empirical evidence to support this claim.”

References

Camarota, S. A. (2015, September 10). Welfare Use by Immigrant and Native Households: An Analysis of Medicaid, Cash, Food, and Housing Programs (Report.). Center for Immigration Studies. Retrieved October 4, 2017, from Center for Immigration Studies website: https://cis.org/Report/Welfare-Use-Immigrant-and-Native-Households

Infographic: Annual average growth rate, natural increase and migratory increase per intercensal period, Canada, 1851 to 2056. (2017, March 30). Government of Canada. Retrieved October 04, 2017, from http://www.statcan.gc.ca/daily-quotidien/170208/g-a001-eng.htm

Mather, M. (2016, January). Fact Sheet: Aging in the United States. Population Reference Bureau. Retrieved October 04, 2017, from http://www.prb.org/Publications/Media-Guides/2016/aging-unitedstates-fact-sheet.aspx

Reilly, A., Paquet, M., & Johnson, K. (2017, September 17). RAISE Act: Global panel of scholars explains ‘merit-based’ immigration. The Conversation. Retrieved October 04, 2017, from http://theconversation.com/raise-act-global-panel-of-scholars-explains-merit-based-immigration-82062

Salerian, J. (2006, May 17). Economic Impacts of Migration and Population Growth (Report.). Retrieved October 4, 2017, from the Australian Government, Productivity Commission website: https://www.pc.gov.au/inquiries/completed/migration-population/report

Singer, A. (2016, August 02). Immigrant Workers in the U.S. Labor Force. The Brookings Institution. Retrieved October 04, 2017, from https://www.brookings.edu/research/immigrant-workers-in-the-u-s-labor-force/

The White House, Office of the Press Secretary. (2017, August 2). President Donald J. Trump Backs RAISE Act [Press release]. Retrieved October 4, 2017, from President Donald J. Trump Backs RAISE Act

U.S. Congress, Senate – Judiciary. (2017, February 13). Congress.gov (T. Cotton Sen., Author) [Cong. S.354 from 115th Cong., 1st sess.]. Retrieved October 4, 2017, from https://www.congress.gov/bill/115th-congress/senate-bill/354/text

Venezuela – What happened?

Once a wealthy country in the 1970s, Venezuela is now experiencing political turmoil and its citizens are living in poverty. With over 298 barrels of proven oil reserves, why is Venezuela, the country with the largest oil reserve in the world, the poorest performer in terms of GDP growth per capita? What happened to one of the richest countries in Latin America?

  1. It’s ongoing economic crisis

Venezuela is now in its fourth year of recession. With the economy shrinking, the price of goods keep increasing. The price for a dozen eggs is equivalent to US$150. So, this means devaluation of their currency, the Bolivar. To put it into perspective, one U.S. dollar was 100 bolivars in 2014. In 2016, one dollar got you 1,262 bolivars. On top of this, years of the excessive government spending and poorly managed government programs led Venezuela to experience its worst economic crisis in history.

  1. The currency split

Venezuela established three different exchange rate systems for the bolivar; one rate for “essential goods”, the other for “nonessential goods and another one for its citizens. The two primary rates overvalue the bolivar, and the black market values bolivar near worthless. The government has tried increasing the number of bolivars to tackle this problem, but the money in circulation isn’t enough.

  1. Venezuela is running out of cash and gold

Venezuela is struggling to pay its bills. It owes approximately US$15 billion while its central bank only has US$11.8 billion in reserves. The oil company, PDVSA (Petroleum of Venezuela), is pumping less oil and is at risk of defaulting. China used to come to Venezuela’s aid and loan it billions of dollars at a time. But even China has stopped giving out cash. Interestingly, most of Venezuela’s reserves are in the form of gold and has being making debt repayments in the form of gold bars.

  1. Its hottest commodity, oil, isn’t “hot” anymore

Venezuela has the world’s largest oil reserves, but the problem is that oil is the only commodity it has to offer. Ninety-five per cent of Venezuela’s revenue comes from exports, so if it doesn’t sell oil, the country hasn’t got much money to spend. Venezuela’s situation went downhill pretty quickly when oil prices plunged in 2014. It’s been struggling to recover ever since.

  1. Government control

The Venezuelan government enforced strict price controls on golds sold in supermarkets. It also stopped food importers to cease importing basically everything because they would have to sell their products for a major loss. In 2016, the government stopped enforcing price control. However, prices are still so high that Venezuelans can’t afford even the most basics supplies.

There are many factors that have contributed to Venezuela’s economic and political turmoil. The challenge for the country will be to escape the cycle it is stuck in, and that’s only if they can sort out the state of their government first. There won’t be a quick fix solution, it will be long and arduous journey for the country.

References:
Article 1
Article 2

What is Consumer Sentiment?

Believe it or not, your opinions count! Your views regarding the health of the economy, long-term economic growth and your personal financial situation play a role in shaping public policy, economic policy and stock markets. You are, essentially, an economic indicator, according to the University of Michigan. Feeling special now?

Consumer sentiment is a measurement of the overall health of the economy, determined by consumer opinion. It directly relates to the strength of consumer spending. The University of Michigan’s Michigan Consumer Sentiment Index (MSCI) is the most popular publications of consumer sentiment. American households are contacted randomly each month via telephone. Here, the chosen ones are asked about their financial situation and attitudes about the economy.

The Force, aka. The University of Michigan, releases the final report of the previous month on the first of the next month. Basically, the index is useful to economists because it gives a snapshot of whether consumers feel like spending. Yep, Leo… We’ve all been there at Chipotle.

Inflation and favorable employment conditions are what give consumers the urge to spend. But, current events also affect how much we spend. Things like bull and bear markets, and geopolitical events.

Why are economists dying to know what consumers are up? Because consumer spending accounts for more than two-thirds of the economy. This is, basically, real-life Gossip Girl… your one and only source into the financial activities of America’s citizenry. Where have they been? And what have they been up to? Who knows? You know you love me, xoxo… the economy. So, the more confident consumers are about their finances and the economy, the more likely they are to spend.

The MCSI is determined by subtracting the percentage of unfavorable consumer responses from the percentage of favorable ones. It is calculated based on the following five core survey questions:

  1. Compare the pair – Would you say that you are better or worse off financially than you were a year ago?
  2. After some crystal ball gazing – Do you think a year from now you will be better off financially, worse off, or about the same as now?
  3. Now, let’s get down to business – As a nation, do you think the next 12-months will be financially good or bad?
  4. Back to the future – What would you say is more likely: the country, as a whole, having a good five-years or so, or periods of widespread unemployment / depression?
  5. To spend or not to spend? Do you think it’s a good or bad time to buy major household items, such as furniture, refrigerator television etc.

After the relative scores have been worked out, and the actual equation of CSI = x1 + x2 + x3 + x4 + x5 / 6.7558 + 2.0 has been left in the school hallway for the Will Huntings of the world to work out, we have the CSI!

And there we have it – the MCSI – one of the leading indicators of consumer sentiment in the United States.

 

References

Investopedia 1

Investopedia 2

Economic Calendar