Huge Opportunities in the New Post-China Environment

May 9, 2019

https://www.reuters.com/article/us-usa-trade-china-consumer-analysis/trumps-tariff-push-squeezes-businesses-and-consumers-idUSKCN1SD09Z

There’s plenty of news stories like the above-linked Reuters piece with all kinds of dire warnings about rising prices for businesses and consumers alike when tariffs rise on Chinese imports.  Not mentioned in any of them are the huge opportunities that this creates for other suppliers, including established companies and entrepreneurs right here in the U.S.  So that’s the focus of this post.

Yeah, prices for products made in China are going to rise substantially.  No surprise there, and it’s exactly what we want to happen when we slap tariffs on imports.  The purpose is not to tax consumers but to provide incentive to make products domestically.  If you’re a business owner, what do you do if your competitor suddenly finds it necessary to raise his prices?  You start licking your chops because you know that you suddenly have a big competitive advantage and that you’re going to make a killing.

What do you do if you’re an aspiring entrepreneur?  You see an opening to start a business and start supplying a product where cheap imports had previously shut you out of the market.   Let’s look at the example cited in the article – Samsonite luggage that’s currently made in China and is now subject to a 25% tariff.  Maybe you’re a company that makes thermo-formed parts for someone – perhaps interior parts for the auto industry.  Here’s an opportunity to diversify and provide thermo-formed luggage “clam shells” for Samsonite, a customer that you didn’t have a chance with previously.  Or maybe you’re a company that makes small casters for other applications, and now you have a chance to supply Samsonite with casters.  Heck, maybe you’re an even smaller company that just makes little injection-molded parts.  Now you have an opportunity to supply that caster-maker with the little polyurethane injection-molded wheels used in those casters.

Steven Smith, owner of Luggage & Leather Depot in Bethesda, Maryland, said a jump in tariffs to 25 percent “would absolutely kill our business.” He said his sales are off as much as 20 percent after he raised prices to reflect the higher costs.

The fact is that every retailer of Samsonite luggage (and other brands made in China) are faced with the same issue, and people still need to buy luggage somewhere.  Those businesses that don’t adapt and gain a competitive advantage by finding new, cheaper sources, will likely be “killed.”  The others, the ones who immediately start looking for new suppliers and different brands that won’t be subject to the tariffs on Chinese imports, will be the ones who thrive.

This same story applies to thousands of products currently sourced from China.  The opportunities created for domestic manufacturers are suddenly almost limitless.  It was easy for everyone to move their production to new suppliers in China.  It won’t be that hard to now source them from somewhere else.  Those with the drive and imagination to adapt will be big winners in this new post-China environment.

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Trump Threatens China with More Tariffs

May 7, 2019

https://www.fidelity.com/news/article/top-news/201905060845RTRSNEWSCOMBINED_KCN1SC0MF-OUSBS_1

As reported in the above-linked article, Trump has suddenly taken a more harsh tone with China, apparently frustrated with the slow progress in the trade talks with China.

It’s difficult to know what’s really going on here.  Last December, at a G20 meeting in Argentina, Trump announced that he was holding off on ratcheting up tariffs on Chinese imports which had been set to go into effect on January 1st until at least March 1st, pending the outcome of a new round of trade negotiations with China.  March 1st came and went as the trade talks dragged on endlessly, as they always do, which is precisely what communist dictator Xi wanted in the first place when he worked his charm on Trump at the G20 meeting.  He couldn’t care less about an agreement – something they’d never abide by.  All he wanted was more American inaction.

It seemed to be working.  But something has happened.  Reportedly, China back-tracked on some things they had agreed to earlier in the negotiations, perhaps calculating that it would result in more time wasted renegotiating what had already been negotiated.  Again, that’s all China wants – more wasted time and more American inaction.  One can only hope that, this time, they’ve miscalculated.

“What is of vital importance is that we still hope the United States can work hard with China to meet each other half way, and strive to reach a mutually beneficial, win-win agreement on the basis of mutual respect,” Geng said.

OK, Geng, let’s meet each other half way.  We’ll buy from you as much as you buy from us.  Nothing more.  Nothing less.  A balance of trade.  That’s all the U.S. is asking for.  That’s fair.  That’s real “trade” versus the mercantile relationship that you’ve enjoyed at Americans’ expense.

That’s not really what you want though, is it?  You want the U.S. to agree to a few token concessions in exchange for maintaining the host-parasite relationship that you currently enjoy, sucking the life out of the American economy while fattening your own.

We can only hope that Trump stands tall this time and puts the new tariffs in place, ratcheting up the existing tariffs and slapping 25% tariffs on the remainder of Chinese imports.  What’s at stake here is more than low prices for American consumers.  We can work through the short-term pain of that.  It’s not an exaggeration to say that America’s very existence – and perhaps even the future of mankind – is at stake.  It’s become clear that China is using its trade-fueled wealth to build itself into the world’s preeminent power – not just economically but also militarily – bent on world domination.  What’s at stake is mankind’s future as a free people vs. living under the thumb of a totalitarian communist regime.

All of the dire warnings about a U.S. – China trade war doing irreparable damage to the global economy is a bunch of baloney.  China is actually a drag on the global economy, sapping the life out of the manufacturing sector of economies around the world to sustain a labor force bloated by gross overpopulation and to stave off the civil unrest and potential collapse of its communist regime that would likely result without it.

End the negotiations.  A balance of trade with a badly overpopulated nation like China is something that can’t be achieved through negotiations because it would never agree to give up the huge trade surplus it needs for its very existence.  On the other hand, a huge trade deficit is something the U.S. can no longer endure if it wants to assure its own continued existence.  Maintaining tariffs sufficient to assure a balance of trade is absoutely crucial.


Trump, tariffs are not “unfair.”

April 25, 2019

https://www.fidelity.com/news/article/top-news/201904230802RTRSNEWSCOMBINED_KCN1RZ144-OUSBS_1

As reported in the above-linked article, President Trump complains that EU (European Union) tariffs on Harley Davidson motorcycles are “unfair.”  I disagree.  Tariffs are neither “fair” nor “unfair.”  They’re simply a tool used by nations to manage foreign access to their economy.  Every nation should be free to use them as they see necessary for their own best interest.  In this case, the EU has decided that it doesn’t want Harley Davidson infringing on their domestic motorcycle industry.  That’s fine.  That’s their right.

We should do the same.  Is it acceptable for EU motorcycle imports to infringe on our motorcycle industry?  If we see value in having a vibrant motorcycle manufacturing industry, then the answer is no, and the U.S. should impose its own tariffs on EU motorcycle imports.  Both sides win.  The EU protects its motorcycle industry and the U.S. does likewise.  Otherwise, if we don’t really care if we have any motorcycle industry in the U.S., then there’s no need for tariffs.

It’s as simple as that.  It’s pointless to try to threaten the EU into dropping their tariffs.  They’ve already decided that they need them, in spite of the potential ramifications that they surely considered when they imposed them.  So stop putting our trade policy in the hands of our competitors and seize control of the situation by taking actions that are within our control – not theirs.

Beyond the motorcycle industry, Trump needs to consider a whole range of imports from the EU that impact our economy.  For example, is it in the best interest of our domestic auto industry and our labor force to cede a large percentage of auto sales to EU imports?  Of course not.  But that’s exactly what we’re doing.  We have an enormous trade deficit in automobiles with the EU.  It’s long past time to impose tariffs that will restore balance to trade in automobiles.  We should buy no more from them than they buy from us.  Imposing large enough tariffs on EU auto imports is the only way to make that happen.

Come on, Mr. President, it’s time to stop playing the victim, as your predecessors have done for decades, and take meaningful action to restore a balance of trade with the EU.

 


A Trump Report Card

April 23, 2019

It’s been a while since I’ve posted anything, and thought it’d be a good time to give President Trump a sort of mid-term report card, albeit a little late.  I’ll grade him in two subjects only – immigration and trade policy – since these two areas address the economic effects of population growth, both actual growth the effect of growth imported through trade with overpopulated nations, the focus of this blog.  Beyond these, little else matters.  What about environmental policy?  Without a focus on stabilizing our population (and virtually all of America’s population growth is driven by immigration), all other environmental policies are doomed to failure.  What about foreign policy?  It’s impossible to project strength in the world if you’re weak on trade.

So, with that said, let’s begin with the good news:

Immigration Policy:  A+

Trump has done a fantastic job on both illegal and legal immigration, each of which had been contributing a million people per year to America’s population growth.  Thanks both to Trump’s zero tolerance policy for illegal immigration and dramatic cuts in legal immigration, the Census Bureau reduced its estimate of the U.S. population by 1.3 million people at the end of 2018.  He spent a lot of political capital in his efforts to get funding for a border wall and, when Congress wouldn’t agree, had the guts to declare a national emergency to obtain the funds.  “What emergency?” the media cried at first, but not for long, when their own reporters in the field began reporting on the humanitarian crisis at the border that resulted from the adminstration’s efforts to enforce the law instead of turning a blind eye to illegal immigration as previous administrations have done.  Now there’s virtually no complaints about Trump’s enforcement efforts or his emergency declaration.  His policies are likely responsible for the fact that increases at the low end of the wage scale are outpacing higher income increases.  Recently, during a trip to the southern border, Trump declared that “Our nation is full.”  Truer words were never spoken.  Ultimately, this is the biggest reason that immigration needs to be reduced.  Trump has done an absolutely fantastic job of reining in out-of-control immigration.

That’s the good news.  Now for the not-so-good:

Trade Policy:  D

Such a low grade may seem surprising and harsh, especially in light of the tariffs on metals and his seemingly tough position with China, including a 25% tariff on some items and a 10% tariff on half of all Chinese imports.  However, it’s those very actions that elevate his score to a “D” from an “F”, the score I’d give to every previous president going as far back as Franklin Roosevelt.  They’ve been a nice start, but fall far short of what we were led to expect from him in the way of trade policy.  Like all previous presidents of the modern era, Trump has been sucked into endless trade negotiations, a ploy that nations with large trade surpluses have used successfully for decades to forestall meaningful action by the U.S. – namely, tariffs.  We were promised that the North American Free Trade Agreement (NAFTA) would be torn up or promptly replaced.  Trump’s administration did negotiate a new agreement, but one that reportedly does little to shrink the enormous deficit with Mexico and it may never even be enacted, if Congress has its way.

Action on China is stalled.  Tariffs on auto and parts imports now appear to be idle threats.  Beyond China, there’s been no action on reducing the trade imbalance with other nations like Germany, Japan, South Korea, Taiwan, Vietnam and a host of others.  The trade deficit in manufactured goods has continued to explode to new record levels under Trump.  Employment in manufacturing has stalled once again.  Trump sees trade as a venue for demonstrating his deal-making prowess, and he sees tariffs as leverage to use in trade negotiations.  He doesn’t understand that favorable “deals” with overpopulated nations are impossible and a waste of time, and that tariffs are the only way to restore a balance of trade with those nations.  Regarding the ongoing trade negotiations with China, he recently declared that the U.S. will win, whether a deal is reached or not.  He’s wrong.  The Chinese have already won by sucking him into time-wasting talks that, at best, will yield a deal that the Chinese will use to continue to grow their trade surplus with the U.S.  He had them on the ropes with the tariffs and then caved in, letting them off the hook.

In summary, Trump’s trade policy is stalled and our trade deficit is getting worse, not better.  This has been a major disappointment.  He’s wasted valuable time.  As I’ve said many times, a tariff program will produce some pain in the short term as prices rise and companies are slow to build manufacturing capacity in the U.S., but will ultimately yield incredible economic growth once that capacity is in place.  Had Trump been more aggressive with tariffs, the short term pain would have given way to some major economic gains by the time of the 2020 election.  Now, that’s probably not possible and, instead, his economic program is at risk of stumbling into the election.

He’s done a terrific job on immigration but all may be lost if he doesn’t get his trade policy off dead-center.


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.