Tonight We're Going to Party Like Its 1989

I just finished watching the South Carolina Republican debate and am left thinking two things:

1.       They didn’t spend enough time talking about unemployment and the economy

2.       When they did talk about unemployment and the economy, they missed the point

I say this because the core issues with the US economy and unemployment rate go much deeper than domestic, partisan politics.  The root of the current US economic issues lies in Cold War strategy.

During the Cold War, the US pursued a two part strategy of trying to defeat the USSR.  This strategy consisted of:

1.       Encircling the USSR with American allies to limit Soviet influence and prevent the spread of Communism.

2.       Make it impossible for the USSR to encircle the US with allies of its own.

The second of these strategies was the easiest to implement.  All North American powers are natural US trading partners.  The economies of US, Canada, and Mexico are complimentary and fit well together.  Canada’s economy is largely built around the export of raw materials such as timber, minerals, foodstuffs, and petroleum products.  Mexico’s is largely built around providing cheap, unskilled labor.  The US economy has a huge appetitive for both of these commodities, so the three economies fit well together.  This arrangement was formalized after the Cold War with the creation of NAFTA and, with the exception of the Cuban Missile crisis, made it impossible for the Soviets to get a foothold in North America.

The US pursued its first Cold War strategy by actively courting military and economic alliances in Europe (NATO), the Far East (Japan, South Korea, Taiwan, and eventually China), and the Middle East (Israel and Saudi Arabia).  It actively pursued countries in these regions that were on the Soviet periphery and enticed them to become US allies by offering them free access to the vast American consumer market.  This strategy encouraged the American allies around the world to adopt democratic, market based economies.  It also strangled the Soviet economy by denying them access to their most natural trading partners.

Now, let’s fast forward to 2012.  The USSR has collapsed and there is no longer a need to use the American consumer market to prop up other countries’ economies.  Despite the fact that the Cold War has been over for 20 years now, we continue to do just that.  Our trade imbalance in 2010 was $650B.  That just doesn’t make sense for a country whose domestic economy has access to plentiful raw materials, access to the most skilled work force in the world, and routinely produces the most innovative and popular products.  

The chart below shows the US's trade balance with its top 15 trading partners.  These partners represent 75% of the US's imports ($1.4T) and 73% of its exports ($940B).  These are the countries who have benefited the most from the US's trade imbalance.

Some will claim that this large trade imbalance is simply a byproduct of globalization and that it is natural to outsource manufacturing of American designed products to countries with lower wages.  I agree that this trade imbalance is a result of globalization, but counter that globalization was a result of the US’s Cold War strategy.  I also point out that with the exception of China, India, and Mexico, all of America’s manufacturing imports come from countries with similar income levels (Japan, Germany, South Korea, and Taiwan).

My conclusion is therefore this: the US has not properly adjusted our economic policy to reflect the new global reality.  The Cold War is over, yet the US continues to trade access to the US market for relationships with foreign countries.  I now find myself wondering if we couldn’t create a few more jobs by moving beyond the Cold War with our economic foreign policy.