Balance of Trade

Economies that can weather economic cycles are ones that are in balance.  The United States has not had a balance of trade since 1975.  We borrow money to stimulate the American economy and this gives people a false sense of security.

Why do we have a trade deficit?

There are probably many reasons why we have a trade deficit.  China has a lower standard of living, which allows them to offer lower wages to their workers.  The exchange rate in China is partially set to be lower than the dollar.  However, Germany, France, and Japan do not have low wages and Germany is the #1 exporter with less than one third our population.

Many EU countries including Germany has somewhat obscure non-tariff trade barriers and include subsidies for local production, quotas, import restrictions, market access restrictions in specific service sectors, non-transparent and restrictive regulations and standards, and limited bans on products.

One issue of concern that seems to be ever increasing is the burden carried by small business in the US.  Small growing companies between $10 mil and $100 mil that want to compete internationally by exporting face daunting challenges just doing business in the US. The challenge for small business is that fast growing and constantly changing organizations don’t always have their processes fully baked.  This exposes these tadpole size organizations to nuisance lawsuits that they cannot afford to fight with internal resources.  The cost of these expenses damages innovation and job expansion.

Two examples:

Company X was generating $50 mil in sales but due to the economy only $1 mil in profit after taxes.  Five of their customers go bankrupt in bad economic times.  Two of those companies had paid the company before going bankrupt, however, the court appointed receivers of the two companies  file claims against the company for preference payments of $100,000.   Whether these claims are legitimate or not it costs the company to defend against these claims and if they don’t settle they face paying $50k to $100k in legal fees to fight a claim even if they have a 90% chance of winning.  The problem is exacerbated because most small business do not have internal resources to handle these types of claims and therefore pay a higher value for service.

Company Y which is small does what most small businesses do, hire and promote from within.  Because they either don’t have solid HR policies, don’t follow them or limited HR resources they find themselves more exposed to experienced litigants who file false claims through such vehicles as the EEOC.  In this second scenario a new hire calls the regional manager and mentions an incident of concern and possible discrimination, the untrained regional manager asks if that person would like the manager to contact HR to report the issue, the new hire says no.  If that manager does not report it, he or she is exposing the company to huge legal liabilities which could equal or exceed the value of the profit for the entire year.  Whether the incident is true, partially true, or not true at all doesn’t protect the fledgling organizations from tens of thousands in legal costs, lost productivity, and decreased corporate moral even before a judgment is rendered.

It seems that the US has priced itself out of competition for goods and services where price is weighted at a greater value than features.  Small innovative businesses are forced to slow down, reduce innovation or be acquired by larger less nimble businesses.

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