If Trump wants GM to re-open Lordstown, here’s what he needs to do.

March 19, 2019

https://www.usatoday.com/story/money/2019/03/17/president-trump-attacks-gm-uaw-over-plans-close-lordstown-plant/3195729002/

The above-linked article is just one of many stories about Trump’s anger directed toward General Motors over its decision to end production at the Lordstown, OH assembly plant.  He’s wasting his time.  GM isn’t going to operate a plant building cars that aren’t selling.  Why wasn’t the Chevy Cruze selling?  It’s not that it isn’t a really nice small car.  The problem is two-fold:  the market has shifted away from cars to SUVs and, more importantly, the market is absolutely saturated with foreign brands.

I recently heard an automotive industry analyst sum up the situation this way:  “GM has fourteen plants, but only needs twelve to meet demand.”  (I may not be remembering those numbers exactly right.)  More history was in order.  He should have said that “GM once had dozens of plants and is now down to fourteen, thanks to imports, needs to shrink further to twelve and, if nothing is done, will eventually have none.”  That’s a more thorough description of what the domestic auto industry has faced.

Trump needs to stop wasting his time chastising Mary Barra, GM’s CEO, and do the one thing that GM fears the most – impose a 25% tariff on all auto and parts imports.  Soon GM would find itself in need of restarting production at Lordstown and, beyond that, begin building many more assembly and parts plants around the U.S.

Then why does GM fear such a move, one that would likely double its sales volume in the U.S.?  Because China might retaliate by kicking U.S. automakers out of China, depriving them of access to that market.  With 1.2 billion people, four times the population of the U.S., GM and other global corporations think China is a market with the potential to be four times the size of the U.S.  It’s currently nowhere near that big and never will be, thanks to gross over-crowding in China, but GM doesn’t understand that just yet.  So they’re willing to cede a large portion of the U.S. market (and with it, U.S. manufacturing jobs) to foreign competition in order to preserve their access to the Chinese market.

Trump has been threatening to pull the trigger on auto tariffs for some time now.  What’s he waiting for?  The “Make America Great Again” initiative will remain stalled and more auto plants will close as long as he fails to act.


Economist Ivanovitch Calls for China to “Get Out of its Huge U.S. Trade Problem”

March 18, 2019

https://www.cnbc.com/2019/03/18/china-should-quickly-get-out-of-its-huge-us-trade-problem-commentary.html

In the above-linked opinion piece, economist Dr. Michael Ivanovitch calls for China to “get out of its huge U.S. trade problem.”  It’s significant that economists of Dr. Ivanovitch’s ilk, a former economist for both the OECD (Organization for Economic Cooperation and Development) and the New York Federal Reserve, are beginning to recognize the unsustainability of China’s reliance on its massive trade surplus with the U.S. and the threat it could ulitmately pose to peace between the two nations.

Ivanovitch argues that China’s surplus with the U.S. is unsustainable and the longer it attempts to sustain it with endless talks and negotiations, the more it runs the risk of the U.S. seeing China as an existential threat for which it must prepare militarily.

Like all excesses, this one too can badly backfire on China. And it’s not clear what China’s economic and political interests are served as Beijing keeps deliberately pushing the U.S.-China trade relationship into a growing and unsustainable imbalance.

No, China should know that, at some point, the abused party wants out — sometimes violently.

It’s great that economists are beginning to see a danger here, but what they fail to understand is that reducing its surplus with the U.S. isn’t a choice China can make without devastating its economy.  China is no different than other badly overpopulated nations – like Japan, Germany, South Korea and many others – in that they either depend on manufacturing for export in order to sustain their bloated labor forces, or they are doomed to abject poverty.  Economists don’t recognize the inverse relationship between population density and per capita consumption, and the role it plays in driving up unemployment and poverty.  They don’t recognize it because they refuse to even ponder the ramifications of human population growth out of fear of being labeled “Malthusians,” a virtual death sentence for an economist’s career.

China may not understand it either, but they do understand how heavily dependent they are on the export market – especially the U.S. – and they understand that, for reasons that may escape them, it’s proving impossible to transform to an economy driven more by growth in their own domestic consumption.

China will never willingly cede any of its surplus with the U.S.  If the U.S. wants to move toward a balance of trade with China, it must take matters into its own hands, and the use of tariffs is the only tool at its disposal.  It’s time for Trump to stop being suckered by China’s willingness to engage in talks that drag out forever.  Lay down the law, slap 25% tariffs on all Chinese imports, and tell China they will only be reduced when a balance of trade has been established, and even then by just enough to assure that such a balance is maintained.


How did unemployment fall in February?

March 13, 2019

On Friday, the Labor Department reported that the economy added only 20,000 jobs in February.  In spite of that number being significantly lower than what’s needed to keep pace with growth in the labor force, unemployment fell – not by just 0.1%, but by 0.2% – to 3.8%.  How can that happen?

It happened in large part because of some really good news – a piece of data that isn’t even a part of the unemployment report.  The official explanation is that the labor force actually shrank a little in February, while the employment level, as measured by the household survey portion of the report, actually grew by 253,000 workers.

But you have to look beyond the employment report to find the really good news that made this happen.  The employment report depends a great deal on the population estimate determined by the Census Bureau.  And in December, the Census Bureau adjusted it’s estimate downward by nearly 1.2 million people – an unusually large adjustment.  Why?  A combination of factors that include the birth rate, death rate and, probably most importantly, the growth in the immigrant population, whether through legal or illegal immigration.  It’s evidence that Trump’s crackdown on both categories of immigration is beginning to have an effect.

As a result, per capita employment has now grown for six consecutive months – something that has happened only  three times in at least the past twelve years.  (The longest such streak was July, 2011 through March, 2012 which occurred as the U.S. emerged from the “Great Recession” of 2008.)  Here’s a chart of per capita employment since November, 2007:  Per Capita Employment.

In addition, the Labor Department reported that hourly wages rose by an annual rate of 3.4%, the fastest pace of increase in quite a long time.

The point of all of this is that, in spite of the rate of growth in the U.S. population slowing and contrary to assertions by economists that population growth is vital to economic growth, there’s been absolutely no negative impact on workers or on the economy.  Per capita employment is rising, along with wages.  It’s evidence that the scheme of using high rates of immigration to suppress wages is beginning to unravel.


More Evidence that Tariffs are Working

March 8, 2019

https://www.reuters.com/article/us-trade-emerson/as-trade-wars-rage-emerson-plots-new-u-s-expansion-idUSKCN1QP0IQ

Here’s more evidence that the tariffs on Chinese imports are working.  As reported in the above-linked article, Emerson Electric now plans to move manufacturing back to the U.S.  It’s a complete reversal from their strategy of only ten years ago.

In 2009, the chief executive of Emerson Electric Co. bluntly told investors at a Chicago conference what many of his counterparts at other manufacturing firms would only say privately.  “I’m not going to hire anybody in the United States. I’m moving,” David Farr said as he blasted U.S. taxes and regulations and called it an easy decision to expand in India and China.

A decade later, Farr has made a stunning reversal: Emerson now plans to build at least three new U.S. plants and is already expanding existing domestic operations. Farr saw a new era of U.S. protectionism coming before Trump’s election – and started planning accordingly, he said in an interview with Reuters at the company’s sprawling headquarters near St. Louis, Missouri.

“For the first time now, I’m looking for best-cost U.S. locations” to build factories, he said.

Trump’s election, Farr said, accelerated a political shift against free trade policy that is now transforming many U.S. firms’ domestic investment strategy. Protectionist policies — especially toward China — are now a rare point on which many Democrats and Trump agree, relegating formerly bold Republican free traders to the sidelines.

The article goes on to provide some details of Emerson’s plans, particularly to spend $425 million on capital projects in the U.S., including $250 million for new manufacturing facilities.

And it’s not just Emerson:

Farr’s new take on U.S. investment reflects a broader questioning of overseas expansions, especially in China, for both political and operational reasons. A survey of top managers at 500 U.S. companies conducted in December by investment bank UBS AG found that 31 percent have moved or are moving production facilities to avoid tariffs. Fifty-eight percent said they expect tariffs to “have a positive impact on domestic investment.”

It’s not just the tariffs.  Farr seems to be disillusioned with manufacturing in China.

Forces beyond politics are pushing manufacturers like Emerson to reconsider investments in China, including rising labor and logistics costs there …

… Emerson’s renewed commitment to U.S. manufacturing is also part of a larger move by global manufacturers to produce more goods in the regions where they are consumed to save on transportation costs.

I believe there are other factors at work here too.  The domestic Chinese economy is flattening out at a far lower level than CEOs expected.  They dreamt of a nation of more than a billion people becoming western-style consumers in the mold of Americans, making China a market four times the size of America.  It hasn’t happened because gross overpopulation in China strangles their per capita consumption.  They built a lot of capacity in China to serve a market that never materialized – capacity that was then dependent on exports to make it profitable.  Along with higher wages and high shipping costs, Trump’s tariffs have eroded their profits even further.  Supplying the American market from China no longer makes sense.

This story, and the one I posted about yesterday – about BMW putting on hold its plans to export EV’s from China – are just tiny examples of the effect that tariffs have in driving manufacturing back to the U.S.  Just imagine the potential as this begins to snowball.  Imagine how many factories would have to be built and how many people would have to be hired to staff them to make all of the products you see on the shelves at the box stores today that are all sourced from China.  There would be an economic explosion in this country the likes of which haven’t been seen since the end of World War II.

The tide is turning against the failed concepts of free trade and globalization.  It’s crumbling right before our eyes.  The very fact that Reuters, a pro free trade and pro globalization publication until now, saw fit to even publish this information is evidence in itself of changing sentiment.

And kudos to Reuters for pointing out that Republicans were even more guilty than Democrats for pushing the free trade globalization agenda to the detriment of the American people, and that Trump has led the charge against it.  Nice to see that some on both sides of the aisle are getting on the bandwagon.

 


An Example of How Tariffs on China are Working

March 7, 2019

https://www.reuters.com/article/us-autoshow-geneva-bmw-trade/bmws-china-electric-car-export-plans-on-hold-amid-tariff-uncertainty-idUSKCN1QO215

The above-linked Reuters article is just one example of how the tariffs on China, and the potential for those tariffs to be raised further, is already paying dividends for the American economy.  Reuters reports that BMW has put on hold its plans to export EVs (electric vehicles) to the U.S. from China.

BMW has factories in Europe, China and the United States and plans to establish China, the world’s largest market for electric cars, as an export hub for such vehicles, given its lower labor costs and support for zero-emission cars.

But Washington and Beijing are locked in a trade dispute, with U.S. President Donald Trump threatening to increase tariffs to 25 percent from 10 percent on $200 billion of Chinese goods if the two sides can’t reach a deal.

The uncertainty is making it hard for BMW to take a decision about exports, chief executive Harald Krueger said.

Free trade globalists no doubt would cite this as an example of how the American consumer comes out the loser.  That’s nonsense.  American consumers already have two excellent choices of EVs from Tesla and Chevrolet (the Bolt), and more are on the way.  Both the Tesla and the Bolt are priced about the same, at around $35,000.  Both are struggling to be profitable, especially as government subsidies are phased out.  They need every sale in the U.S. in order to survive.  Truth be told, they actually need to sell a lot more than they’re selling now to be profitable and survive.

What would happen if a BMW EV from China were thrown into the mix?  First of all, BMW would price their EV the same as the Tesla and the Bolt in spite of it being cheaper to build in China.  Like all companies, BMW is in business to make a profit, and they’ll want as much profit as they can get.  If priced the same as the other two cars, BMW will quickly take one third of the EV market from Tesla and Chevy.  In that event, it’s likely that the Chevy Bolt would go out of production while Tesla would be bankrupted.  BMW would then have the market to itself.  Without competition, American consumers would be the losers, and approximately 50,000 Americans would be put out of work at Tesla and Chevrolet.

This is just one small example.  If Trump follows through with raising the tariffs on Chinese imports, and especially if he follows through with plans to put 25% tariffs on all auto imports, domestic auto production will explode along with employment and wages in the auto and parts industries.  American consumers of everything will be the winners when they go shopping with more money in their pockets.


Trade Deficit in Manufactured Products Explodes in December

March 6, 2019

http://www.bea.gov/system/files/2019-03/trad1218.pdf

The Commerce Department announced this morning that the U.S. trade deficit grew to $59.8 billion in December, the worst reading in ten years.  But that doesn’t begin to tell the story.  The deficit in manufactured goods exploded in December to $77.3 billion, obliterating the previous record set only two months earlier.  Look at this chart:  Manf’d Goods Balance of Trade.  Exports rose by $6.1 billion to $189.2 billion – a new record – while exports fell $1.8 billion to $111.9 billion – virtually the same reading as in March, 2012.

On an annualized basis, the December deficit in manufactured goods is $927 billion.  It’s entirely possible that the deficit in manufactured goods will exceed one trillion dollars in 2019.  The U.S. economy is headed for a train wreck if something isn’t done.  The federal government can’t sustain the level of deficit spending needed to offset the trade deficit’s drain on the economy.

President Trump has got to get serious about halting the flood of imports that’s wrecking the manufacturing sector of our economy. The token tariffs he’s enacted so far are much too small and too narrowly focused to do anything other than take a small bite out of exporters’ profits.  Trade deals don’t work.  The rest of the world isn’t going to deal away their one trillion dollar surplus.  The negotiations with China are a waste of time.  He needs to raise the tariffs on all Chinese imports to at least 25%.  He needs to put 25% tariffs on all auto, truck and parts imports.

So far Trump’s pledge to “Make America Great Again” has boiled down to nothing more than a tax cut sugar high that has boosted the economy only slightly.  Americans who voted for Trump expected more.


Why is Finland the best place to have a baby?

March 5, 2019

https://www.cbsnews.com/news/why-finland-is-consistently-ranked-one-of-the-best-places-in-the-world-to-be-a-mom/

The above-linked segment aired on “CBS This Morning” today, reporting that Finland is one of the best places in the world to have a baby because of the low infant mortality rate and the fact that, on average, the medical bill is only about $60.  Why?  The story highlights higher taxes in Finland which fund their socialized health care program.  Finns don’t seem bothered.  In the U.S., if the government raised taxes enough to fund a health care program similar to Finland’s, many Americans then couldn’t put food on the table.

I bring this up because it’s worth considering how balance of trade factors into the equation.  In 2017, Finland enjoyed a $4.4 billion surplus of trade with the U.S., which accounts for approximately 80% of its surplus of trade with the rest of the world as a whole.  That may not sound like much, but in per capita terms the surplus is almost $800 per person, or $3200 per family of four.  That’s how much money the U.S. injects into their economy through trade.  The rest of the world injects about a quarter of that, or another $800 per family of four, for a total of $4,000.

Now consider the U.S., which has a trade deficit with the rest of the world of about $720 billion.  In per capita terms, that’s a deficit of about $2,200 per person, or $8,800 per family of four.  That’s how much the trade deficit sucks out of the U.S. economy.  And that’s how much the federal government needs to inject back into the economy through deficit spending – much of which is accomplished by under-taxing its citizens.

The trade deficit makes Finn families $4,000 richer and makes American families $8,800 poorer.  It’s as simple as that.  That’s why Finland is able to afford a health care system that Americans can only dream of, or that older Americans can remember from decades ago when company-provided health care that required almost no out-of-pocket expense was a benefit that virtually all working Americans expected.

“Wait a minute,” you may be thinking.  When we talk about the trade deficit, we all think of China, and maybe Japan and Germany.  But Finland?  How do we have a deficit with Finland?  Well, for starters, in 2017 we imported $1.14 billion worth of cars from Finland.  Can you name what brand of car is imported from Finland?  I doubt it.  All of them are Mercedes-Benz’s.  Finland’s Valmet Automotive manufactures Mercedes models under contract with Mercedes.  How many cars does America export to Finland in return?  In 2017, we exported only about $32 million worth of cars.  To put that into perspective, we import 20 cars from Finland for every car that we export to them.

Our next biggest import from Finland is pharmaceuticals – about $0.7 billion worth in 2017.  How much pharmaceuticals do Finns buy from us?  About $47.8 million in 2017 – only one fifteenth of what we buy from them.  And on it goes across hundreds of categories of products.

Finland is merely one tiny example of how balance of trade matters – how a trade deficit drags down our economy and our standard of living while boosting them in other countries.  But no one ever explains it to the American people because it’s too complicated a subject to be covered in a five minute story on “CBS This Morning,” or in a 60-second story on the evening news.

I wonder how many people who complain about the sorry state of health care in America are also those eager to lambast Trump for trying to get tough with our trade partners, not understanding the connection?  Is it any wonder that we’re in such a mess?