Economic Security from Reshoring
Globalization is Bleeding “US” (double entendre) Dry
The United States imports over a trillion dollars more per year than it exports. Economists have discussed this topic for decades, but the position of HermitCrab aligns with the notion that our economic security and global leadership position suffers a steady decline for every year we experience these large trading deficits. This is a topic that is worthy of a PhD thesis, but we will keep our thoughts to under five pages. The figure below shows the top fifteen trading partners with the US. The dark arrow is our exports to other nations, the red arrow is imports from our partners.
Figure 1: Top 15 Global Trade Partners, Imports and Exports(1)
Within North America, the US is fairly even with our bordering trade partners, Canada and Mexico, but suffers the largest imbalance with China & Asian Rim countries and has a sizeable deficit with the European Union as a whole. The table below summarizes the gaps.
Table 1: Top 10 Global Trade Partners, Imports and Exports (2)
This table is grim on its face, but if you consider the level of activity on a per capita basis (see Exp/Cap* Column), you see that China has been a terrible trading partner in terms of imports from the US with respect to their population, importing only $107 per person. Only India is worse at $28 per person, but India is not trying to take over the world – at least not yet.
When presented as a chart, the gap is worse – China’s trade deficit with the US is over three times larger than the next closest trading partner (Mexico) and greater than the next five trading partners combined. This is not an accident.
Figure 2: China’s Massive Balance of Trade Gap(2)
Remember all the shouting about how we need to let China into the WTO to “open their markets” to US-made products? History has proven that to be a colossal failure, arguably the greatest modern economic blunder in the history of the world. Let’s look into the WTO and China’s ascension next.
WTO Turned China into Our Largest Adversary
China was your normal run-of-the-mill communist nation in the 70’s and 80’s, a closed country that distrusted the West and kept to itself. As the torch passed from Mao and his successors to a new generation of leadership, China decided (as a matter of policy), that controlled capitalism was the best way to grow its influence on the world stage. They had a plan, and they executed it aggressively.
In the nineties, Western policymakers had the great idea to allow China, no friend of the West, to enter the World Trade Organization. This finally occurred in 2001. China’s emergence as a superpower and geopolitical bully could not have occurred without this policy fumble, and the WTO has struggled to keep China in compliance with WTO standards ever since. After years of negotiations, China agreed to “play by the rules” to join WTO. Once they were granted entry, they burned the Rule Book.
China’s dubious practices on the world stage includes:
Intellectual Property Theft from Companies Doing Business in China: China often requires foreign companies to share sensitive technologies as a condition for market access, leading to widespread IP theft and significant economic losses for businesses.
Closed Market and Economy: Despite pledging openness, China maintains significant barriers to foreign investment, protecting domestic industries while disadvantaging foreign competitors and undermining fair trade principles.
World’s Largest Polluter and Growing: China is the world’s largest emitter of greenhouse gases, contributing significantly to global climate change while struggling with domestic pollution controls and international environmental commitments. In fact, China and India, the two largest populations (35% of world total), are exempt from the Paris Climate Accords.
Spying (at Scale) and Corruption: China engages in extensive espionage, targeting foreign governments and corporations, and faces rampant corruption which undermines economic stability and governance. Here in the US, we have congressmen dating known China spies in public, yet there is no outcry on this scandal.
Worker Rights: Labor practices in China often violate international standards, with poor working conditions, low wages, and limited rights for workers being commonplace, attracting global criticism.
Forced Repatriation of Nationals: China forcibly repatriates its nationals from abroad, often targeting dissidents and activists, which raises serious human rights concerns and international condemnation.
Product Dumping to Force US Companies Under: China exports goods at below-market prices, undermining US companies, destabilizing markets, and prompting trade tensions and tariffs from affected nations.
Intellectual Property Gathering at Universities and Think Tanks: Chinese entities systematically target academic institutions and research facilities to acquire cutting-edge technologies and innovations, compromising global intellectual property.
Global Bully (not Just Taiwan & Hong Kong): China's aggressive foreign policy extends beyond Taiwan and Hong Kong, encompassing broader regional and global dominance efforts, straining international relations.
Belt and Road Initiative and Takeover of Raw Materials: Through its Belt and Road Initiative, China invests in developing countries' infrastructure, gaining strategic control over global trade routes and access to critical raw materials, often bribing leaders in the countries where the contracts are signed.
China’s ascension and the United States’ general decline over the last four decades is well-documented in an excellent report by Ray Dalio, called “The Great Powers Index – 2024”. Mr. Dalio deserves acknowledgement for the massive amount of data and intuitive observations made in the report, but his conclusion about US-China relations should have all of us worried about our economic security.
Figure 3: United State and China Likelihood of Conflict(3)
China Dominates, but They are Not Alone
China is clearly the geopolitical and manufacturing adversary of the US, but plenty of other countries have no problem taking our lunch money either, including:
Brazil: Once Brazil emerged as one of the top global economies, corruption, unfair trade practices, and regulatory compliance issues have been topics of complaints by U.S. companies attempting to do business in Brazil. Brazil also imposed significant taxes and tariffs on countries who wish to access their market, although with mixed results.
France: France has enjoyed steadily increasing regional influence by maintaining solid demographics and unabashed patriotism and protectionism, all while under the cover of NATO protection from outside adversaries. France has had a very good deal since World War II and has always maintained a general condescension towards Americans. It’s a recipe for contention.
Saudi Arabia (Middle East): Saudi Arabia, and the Middle East at large, has seen a decline in the interdependence of relationships with the United States, primarily due to the decrease in dependence on middle eastern oil exports by the US. Add to that the increasing disinterest on the part of the US to patrol the Persian Gulf with its Navy, and you see that most Middle Eastern countries are looking to establish trading relationships with other partners.
India: Except for the possibility of China, no country has come so far, so fast, as India. After emerging from colonialism under the United Kingdom, India enjoyed a running start towards capitalism and leveraging its culture of hard work and cooperation to literally take over the technology services space over the last 35 years, resulting in the displacement of millions of US technology workers (replaced by H1B Visa Indian workers by profit-seeking corporations). While they are definitely a dependable friend of the US, India does not go out of their way to support the US on geopolitical matters.
BRICS: BRICS is a geopolitical group of countries that have formed an alliance to blunt US influence in the world economy and seek to reduce the power of the US Dollar as the primary global reserve currency. Brazil, Russia, India, China, and South Africa are the founding members, but other smaller nations have joined in as well. With 30% of the earth’s land mass, and 45% of the world’s population, BRICS presents a straight-on challenge to US global economic leadership.
As a matter of our economic security and long-term prosperity, the United States must adopt new measures to address these non-subtle threats to our manufacturing base and our way of life.
Four Ways to Address Economic Insecurity
Ray Dalio’s work is a look into the future, and changing the trajectory of that future will take years, if not decades, to accomplish. It needs to start “somewhere and everywhere” at the same time. HermitCrab recommends at least four large strategies to combat the decline in economic security at the hands of our geopolitical foes and/or trading partners:
Changes in Corporate and Personal Buying Habits (Buy and Source American): Encouraging both corporations and individuals to prioritize American-made products can bolster domestic manufacturing. This approach fosters national pride while supporting local economies and job creation. HermitCrab seeks this cooperation from the corporations first, by allowing HermitCrab to reshore manufacturing of key products used by these corporations at scale.
Full Taxpayer Investment in ALL Industries: Broad taxpayer-funded investments in infrastructure, technology, and manufacturing can drive innovation and competitiveness. This holistic approach ensures that various sectors are equipped to thrive in a global market, not just the shiny object industries like EV, Solar, Chips and Military. How is it possible that anti-biotics and protective masks are once again being sourced from China?
Foreign Direct Investment Acceleration: If you can’t beat them, invite them in until you can beat them. Attracting more foreign direct investments through favorable policies can invigorate the US manufacturing landscape. Increased capital inflow can lead to new partnerships, technological advancements, and job opportunities.
Federal and State Policy Changes to Bring Manufacturing Back to the US: Comprehensive policy reforms at both federal and state levels can create a conducive environment for reshoring. These changes might include tax incentives, regulatory adjustments, and support for small and medium-sized enterprises (SMEs). This is NOT a call for tariffs! That’s the lazy way out of this mess – we need a comprehensive change in policies across the board that reward the risk-takers who will bring manufacturing back home, regardless of what the product is.
Conclusion
This was the most difficult class to create so far. The more we dug into the details, the worse the outlook for America’s economic security looks like. Any politician, economist, commentator, or lobbyist that says otherwise is simply not telling the truth. America is in retreat and the weakness is accelerating. The comeback is not even on the drawing board yet, and the outcome of the election will have serious implications on the direction of our nation for the next several decades.
Thank you for Reading!
This is the longest class yet, but we encourage anyone who wants to understand the scale of this challenge to read Ray Dalio’s Power Index for 2024 – it’s free and full of impactful insights. Come back tomorrow for Day 10: Environmental Impact: The ecological benefits of reshoring. An ESG Dream. This is the single best new lever we have to justify reshoring in our lifetimes.
Thanks for reading,
The HermitCrab Team
Footnotes:
(1) Tony Cohen - Own work, CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=22679181
(2) https://en.wikipedia.org/wiki/List_of_the_largest_trading_partners_of_the_United_States
(3) Ray Dalio Power Index https://economicprinciples.org/downloads/DalioRay_Power_Index_Appendix.pdf
