Who’s afraid of Biden? Certainly not China.

April 20, 2021

At least that what the trade data for February, Biden’s first full month as president, suggests.

In January of 2020, China signed a new trade deal with the U.S. – the “Phase 1” deal – committing to specific and significant increases in its imports of American goods in exchange for the U.S. delaying its application of 25% tariffs to the remaining half of Chinese goods. (The U.S. had already levied a 25% tariff on half of all Chinese imports.)

In 2020, China fell woefully short of its commitment – 31% less than the required imports of American manufactured products and 27% below its commitment for agricultural products. In February of this year, China not only failed to meet its commitments under the Phase 1 deal, it didn’t even meet the 2017 baseline in a single category – not in manufactured goods, nor agricultural goods, nor energy products, nor total goods. Already lagging its commitments in January, Its imports collapsed in February, falling by 27%. So far, year-to-date for 2021, China is now 46% behind its commitments.

Why should China live up to its trade commitments? So far, Biden hasn’t acknowledged that the trade deal even exists, never mentioning it. But he’s talked of getting tough with China in general. This is a golden opportunity to show that he means business – that he’s willing to stand up for American workers and farmers. How can any world leader take him seriously when he won’t even enforce a signed-and-sealed trade deal that has clear commitments and clear consequences for failure to meet them?

Recently, Biden called the level of gun violence in the U.S. a “national embarrassment.” You know what’s really a national embarrassment? A president who doesn’t have the courage to stand up for American workers and enforce commitments that other nations have made! (And make no mistake, Biden’s not the first such president.) To use a couple of Biden’s own favorite expressions, “C’mon, man! Do something, for God’s sake!”

Just Use Tariffs

April 16, 2021


The above-linked article is an interesting case study of the challenges involved in bringing manufacturing back to the U.S. The product in question is a semiconductor – a “chip” – that is in such short supply that it has forced the shutdown of some auto production in the U.S. The Biden administration is looking at ways to break our dependence on imported semiconductors.

Oddly, the article begins with what seems to be an American manufacturer – On Semiconductor – supplying chips to to Hyundai in South Korea, perhaps because the Reuters author, Hyunjoo Jin, is herself Korean. You’d think that Reuters could find some American to write about the actual subject of the article – the challenges Biden faces in bringing chip manufacturing back to the states – but apparently they couldn’t. Maybe we first need to begin by bringing news reporting back to the U.S.? But I digress.

Never mind all that. The point of the article is the complex supply chain engaged in delivering a semiconductor chip to an auto manufacturer that could just as easily be General Motors in Detroit as Hyundai in South Korea. The author chronicles the myriad of steps that begins in Italy and makes its way through Taiwan, Singapore and China, just to name a few. So it’s not just a matter of building a chip factory here. It would require a daisy-chain of factories to turn silicon wafers into the actual semiconductor chips. So the Biden administration is faced with subsidizing a whole array of industries to entice them to move manufacturing to the U.S. It’s enough to make your head spin. The article concludes with “Simply throwing money at this does not solve the problem. It is a more complex problem.”

Moving that supply chain back to the U.S. is certainly a very complex problem. Negotiating subsidies with a dozen or more companies to entice them to make such a move would be difficult enough, not to mention expensive for American taxpayers, if that’s the approach that the government is considering. But there’s another much simpler solution – one so simple that it would require little more than the stroke of Biden’s pen. All he has to do is sign an executive order to levy tariffs on all manufactured products from the countries responsible for our twenty largest trade deficits. Each of the countries mentioned in this article as being involved in this supply chain – China, Taiwan, Singapore (a small city-state located in Malaysia) and Italy – are on that list, responsible for our largest, ninth largest, tenth largest and eleventh largest trade deficits respectively.

Here’s what would happen. Eager to mitigate the tariff, GM (for example) would soon move the final step in that process, the manufacturing of the chip, to a new plant in the U.S., perhaps as a subsidiary. Other potential suppliers like Japan, Vietnam, Mexico or others wouldn’t be viable options since they too are on the tariff list.

Next, that new GM chip-making subsidiary, eager to avoid tariffs on its supplies from Taiwan, would soon implement plans to develop a supplier in the U.S. Once established, that company in turn would soon make plans to source its silicon wafers from a new plant in the U.S. instead of from Italy.

The Biden administration, and whatever administrations succeed it, would barely have to lift a finger to make it happen and it wouldn’t cost American taxpayers one penny in higher taxes. Would it raise the price of semiconductors and, consequently, the price of new cars? Sure, but not much. A few bucks at the most. But, in terms of your purchasing power, they’d actually be cheaper when you factor in the upward pressure on wages – your wages – as the result of the demand for labor from this whole new U.S.-based semiconductor supply chain.

There are two elements of a tariff plan that would be critical to making it effective. First of all, by targeting those twenty nations that are responsible for our biggest trade deficits, the tariffs would eliminate from consideration all those grossly overpopulated nations with bloated labor forces who prey on the American economy. When Trump enacted tariffs on Chinese products, suppliers simply moved their operations to some other such country like Vietnam or Mexico. Those wouldn’t be viable options if moving there failed to eliminate the tariffs.

Secondly, the tariffs must be applied to all manufactured products from those countries. Why? Because otherwise, making our autos more expensive would put them at a disadvantage to autos imported from those countries, but not if those imported autos are subject to the same tariffs. For example, suppose that the tariff is 50%. That tariff might raise the price of an American car by 25%, let’s say. But you’d still opt for the American car if cars from Mexico, Japan, Korea, China, Italy, etc. are priced 50% higher. Now we’re not talking about just cars, but every single manufactured product you can imagine. The manufacturing of every one of them would come back to the U.S. since American-made products would then be the cheaper option for American buyers.

By the way, there’s another factor to consider here. If you’re a globalist, you may be turned off by a proposal that seems “protectionist.” But if you are a globalist, you’re probably also a person who’s concerned about the environment. In all of the talk about fossil fuels and CO2 emissions, you never, ever hear mention of the role of the global supply chain in “fueling” the problem. Did you know that the ships that transport manufactured goods back and forth across oceans and around the globe, goods that could just as easily be made locally, burn five billion barrels of oil per year? Think about that. If the Biden administration really wants to have an impact on climate change, implementing this tariff plan is probably the best place to start.

America’s Best Trade Partners

April 9, 2021

In my last couple of posts, we’ve seen that, once again, in 2020, America’s worst trade deficits, in both absolute and in per capita terms, were with very densely populated countries. There seemed to be a clear link between population density and balance of trade. If there is such a link, then we should find the opposite effect at the other end of the spectrum. We should find that our biggest trade surpluses are with more sparsely populated countries.

Here’s the data – America’s biggest trade surpluses in manufactured goods in 2020. At first glance, the population density effect doesn’t seem as clear on this list. Half of these nations are less densely populated than the U.S. Among the other half, some are actually far more densely populated. There’s something else going on here. Note that I’ve highlighted in yellow six nations that are net oil exporters. This is important because the U.S. is virtually assured of having a trade surplus in manufactured goods with oil exporters, even if the U.S. itself imports very little oil from those nations. Why? Because all oil, worldwide, is priced in U.S. dollars. When an oil exporter like Saudi Arabia, for example, sells a barrel of oil, they’re paid in U.S. dollars. The only other place where U.S. dollars can be spent is in the United States. So Saudi Arabia then has no choice but to use those dollars to purchase American goods.

There are three very densely populated nations on the list – The Netherlands, Belgium and Guatemala – that can’t be explained away as oil exporters. The first two – The Netherlands and Belgium – are tiny adjoining nations who take advantage of their geographic advantage as the only seaport on Europe’s Atlantic coast to be ports of entry for U.S. goods for much of Europe.

Strip away the above effects of the oil trade and the role of The Netherlands and Belgium as ports of entry, and the effect of population density becomes clear once again. The average population density of this list is 265 people / square mile – high, but less than half that of the nations that comprise our twenty worst deficits. Also, the average is grossly exaggerated by the presence of very tiny nations on the list. The population density of this group of twenty nations, as a composite, is only 46 people / square mile. Compare that to the composite density of the twenty nations with whom we have our worst trade deficits – 499 people / square mile, more than ten times greater.

How about economists’ claim that it’s low wages that drive trade imbalances? That theory is debunked by this list of our trade surpluses, just as it was by the list of our trade deficits. The average purchasing power parity (or “PPP”) on this list is actually about $5,000 lower the average of the nations with whom we have our worst deficits – not a big difference, but it’s actually the opposite of what the low wage theory would predict. Whether our trade partners are rich or poor has absolutely no impact on our balance of trade.

Finally, there’s data in this list that should be cause for alarm. Over the past ten years, our average surplus with these nations has shrunk by 34% while our average deficit with the twenty nations who make up our worst deficits has grown by 113%. Our manufacturing sector has been so canibalized by the densely populated nations of the world that there is increasingly little left for others to buy from us. The manufacturing sector of our economy is on the brink of collapse. This may be the greatest existential threat that our country faces. We got a taste of it during the Covid pandemic when we found ourselves at the mercy of foreign suppliers for virtually everything, including the simplest of things like face masks and gowns and more complex items like respirators. How long could we sustain ourselves in a crisis like a war when our foreign suppliers could simply cut off our supplies of virtually every manufactured product? Even as I write this our auto plants are idled by a shortage of imported semiconductors.

As we did on the deficit end of the spectrum, we’ll next look at a list of the twenty nations who, in per capita terms (man-for-man) are our best trading partners.

America’s Worst Trade Partners in 2020

April 2, 2021

In my previous post, we examined the list of America’s biggest trade deficits in 2020 and saw that most of them were with nations that are far more densely populated than the U.S. Clearly, population density was a factor, but the list included nations from around the world that were both big, like China and small, like Vitenam and Ireland just to name a couple.

Today, we’ll look at America’s balance of trade from a different perspective. Which nations, man-for-man, do the most damage to America’s economy by exporting to us more than they import from us – effectively feeding off of America’s economy at America’s expense? In other words, in per capita terms, which nations are our worst trade partners?

Here’s the list of America’s Worst Trade Partners in 2020. If you’re new to this blog, there are couple of big surprises on this list:

  1. You probably expected to see China at the head of this list. In fact, they don’t make the list at all. China ranked 22nd in 2020.
  2. At the top of the list you see Ireland and Switzerland, both of whom are more wealthy than the U.S. If low wages drive trade deficits, as we’re led to believe by economists, then how the heck did two of the world’s most wealthy nations make it to the top of this list?

To understand the reason for these surprises, take a look at the population density of these nations. Of these 20 nations, 17 are more densely populated than the U.S., which has a population density of 93 people per square mile. The average population density of these 20 nations is 526 people per square mile, more than five-and-a-half times that of the United States.

Low wages drive trade deficits? Hardly. Now look at the “purchasing power parity” (or PPP, analagous to wages) of the people of these nations. These are not poor nations. Only four of these twenty nations – Mexico, Vietnam, Thailand and Cambodia – have a PPP below $25,000, which is what the U.S. considers a poverty level for a family of four. Conversely, four of these twenty nations – Ireland, Switzerland, Denmark and Austria – are on a par with, or above, the PPP of the United States, which had a PPP of about $57,000 in 2020. The average for these 20 nations is $41,518.

Also, note that our trade deficit with 18 of these twenty nations is actually accelerating, even our deficits with the two nations at the top of the list who are wealthier than us.

In conclusion, there is a very powerful relationship between population density and the balance of trade evident in this list. Conversely, there appears to be no relationship whatsoever to wealth. This is important. Economists claim that trade deficits are driven by low wages, which is no cause for concern, as those wages will rise with time and restore a balance of trade. Thus, free trade works. But what we’ve seen in this post and the previous one is that this claim is simply not true. Free trade with densely populated nations doesn’t work because trade deficits are driven by population density and will never self-correct, no matter how high wages rise.

If trade imbalances are driven by disparities in population density between two trading partners, then we should see the opposite effect at the other end of the spectrum. We should see trade surpluses with more sparsely populated nations. We’ll take a look at that in my next post.

For an understanding of exactly how population density has such an effect on the balance of trade, read my book, Five Short Blasts, or read my series of posts begining with “Five Short Blasts” Theory Explained, Part 1.