No More Trade Deals, No More WTO

February 29, 2020

https://www.reuters.com/article/us-usa-trade/ustr-vows-to-push-for-trade-deals-with-britain-eu-seeks-reforms-at-wto-idUSKCN20M3BN

As reported in the above-linked article, the Trump administration continues to pursue more trade deals, with Britain, the European Union and now Kenya.  With his background in wheeling and dealing on real estate, Trump sees deal-making as the way to dig the U.S. out of the deep trade deficit pit it has fallen into.  Yes, I know, “digging” isn’t the way to escape from a hole.  It only makes the hole deeper.  That’s kind of the point I’m trying to make.  Trade deals are what got us into our trade mess in the first place, including the worst deal of all – the deal with the rest of the world to set up the World Trade Organization to oversee the whole process.

The whole point of a trade deal is to coerce another country into concessions (things they don’t like), using concessions of our own (things we don’t like) as the motivation.  Then what happens?  Being the global “nice guys,” we live up to our promises – the concessions we made – while the other side doesn’t.  We cajole them about their failures to live up to their side of the bargain.  They promise to re-double their efforts.  Months go by.  Still nothing happens.  Months turn into years.  The trade deal that was initially hailed as a “big win for American workers” instead yields a massive, persistent trade deficit and the dismantling of the manufacturing sector of our economy.

Why do we need trade deals?  Just tell us what you have for sale.  We’ll then decide if we want to buy it and how much we’ll buy.  We’ll reciprocate.  Here’s what we have for sale and here’s the price.  Buy it if you want.  But if you don’t buy from us as much as we buy from you, we’ll use tariffs to assure that a balance is maintained.

You want to sell us avocados?  Or coffee?  Fine.  We won’t put any tariff on them because we’re not able to grow them ourselves.  But you want to sell us a car?  We already have companies making and selling cars – more than we know what to do with.  So we’ll put a high tariff on your cars, unless you’re able to buy just as many from us.  That kind of seems pointless though, doesn’t it?

And we certainly don’t need a “World Trade Organization” setting rules to advance their own agenda.  The Trump administration is pushing the WTO to reform and end its practice of protecting developing countries like China at the expense of the U.S., and stubbornly insisting on “free” trade with other developed countries like those of the EU – countries whose gross overpopulation assures a trade deficit for the U.S. – even after decades of proof that a massive, destabilizing trade imbalance is inevitable.  Why bother?  We don’t need the WTO.  What can they do if they don’t like our tariffs?  They can authorize other countries to raise tariffs of their own, which is what they may or may not do anyway, regardless of whether or not the WTO even exists.  So the WTO really serves no purpose whatsoever, other than to suck funding from the American economy to support its endless meetings – meetings whose only purpose is to invent new ways to divide up the American market for the benefit of other countries.

Case in point:  Trump was having great success in cutting our trade deficit with China through the use of tariffs until he signed the “Phase 1” trade deal with them last month – a deal that had essentially been in place for months already, just awaiting the formality of the signing.  As a result, all of the momentum toward restoring a balance of trade with China has been lost.  The trade deficit status quo with China has been restored, albeit at a slightly lower level, and for what?  Chinese promises  – the same promises they’ve reneged on for years.  We’ve once again ceded control of the trade situation to China.

Another example:  the “USMCA” agreement with Mexico and Canada – supposedly an improvement over the NAFTA deal that devastated American manufacturing almost as badly as our trade situation with China.  What’s been the result?  Since Trump was elected, our trade deficit with Mexico continues to spiral out of control, and it’ll be years before anyone can say definitively that the USMCA agreement didn’t work.  (Anything less than a balance of trade with Mexico is a failure.)  The USMCA agreement eliminated the threat of tariffs on Mexico and put Mexico back in the driver’s seat of the trade relationship.

Throughout all of this deal-making for the past three years, the trade deficit declined slightly in 2019, and that decline was thanks to tariffs and not any deals.  The trade deficit remains enormous, leaving the manufacturing sector on life support and leaving us more vulnerable to recession and supply disruptions, something that’s becoming painfully obvious as the coronavirus problem worsens and we discover that we’re dependent on China for our supply of protective clothing and for pharmaceuticals to combat it.

President Trump, please, no more trade deals.  Kiss the WTO goodbye and put the U.S. Trade Representative’s office to work setting an managing tariffs.

 


“Phase 1” Trade Deal with China a Major Disappointment

December 17, 2019

https://www.reuters.com/article/us-usa-trade-china-details-factbox/whats-in-the-u-s-china-phase-one-trade-deal-idUSKBN1YH2IL

On Friday, the Trump administration announced that it had reached a “Phase 1” agreement with China that cancels a new round of tariffs that were to have taken effect Sunday, and rolls back some other tariffs, in exchange for … well, nothing really, except some empty promises by the Chinese.  (The above-linked article details what’s included in the deal.)  This is a huge disappointment.  It sends a message to manufacturers that waiting out the tariffs was the right move, as opposed to repatriating their manufacturing operations, and it’s now “business as usual” with China.

Trump clearly got suckered on this one.  China has a long history of reneging on their promises and this will be no different.  Actually, it’s worse than that.  Even if most of these promises are kept, it’ll have no impact on America’s economy.  Why?  Let’s go through the items in the deal as listed in the above-linked article, and see why.

China canceled its retaliatory tariffs due to take effect that same day, including a 25% tariff on U.S.-made autos.

China scarcely imports any U.S. autos anyway, and that’s not going to change regardless of whether or not they’ve placed tariffs on them.  China is awash in auto manufacturing capacity and isn’t about to put their auto workers out of business in order to import cars from the U.S.  So this concession is of zero value to the U.S.

U.S. officials say China agreed to increase purchases of American products and services by at least $200 billion over the next two years, with an expectation that the higher purchases will continue after that period.

Note that it’s “U.S. officials” making this claim.  China hasn’t actually agreed to this and they would never do it.  They have no capacity to absorb such imports.  Mark my word, U.S. exports will scarcely rise at all in the next two years.

China has committed to increase purchases of U.S. agriculture products by $32 billion over two years. That would average an annual total of about $40 billion, compared to a baseline of $24 billion in 2017 before the trade war started. … China agreed to make its best efforts to increase its purchases by another $5 billion annually to get close $50 billion.

They might actually increase their imports of U.S. agriculture products some, but so what?  If they do, Europe will return to buying theirs from South America (where the Chinese have been sourcing theirs), so the increase in Chinese imports will be offset by a loss of other exports.  The impact on American farmers will be zilch.  Regarding that last statement, “China agreed to make its best efforts …”  That’s their way of saying they won’t.

China has committed to reduce non-tariff barriers to agricultural products such as poultry, seafood and feed additives as well as approval of biotechnology products.

For the reasons I just stated, this commitment is meaningless.  Shifting American exports from other markets to the Chinese market accomplishes nothing.

The deal includes stronger Chinese legal protections for patents, trademarks, copyrights, including improved criminal and civil procedures to combat online infringement, pirated and counterfeit goods.

The deal contains commitments by China to follow through on previous pledges to eliminate any pressure for foreign companies to transfer technology to Chinese firms as a condition of market access, licensing or administrative approvals and to eliminate any government advantages for such transfers.

China also agreed to refrain from directly supporting outbound investment aimed at acquiring foreign technology to meet its industrial plans — transactions already restricted by stronger U.S. security reviews.

They’ve agreed to these same things many times in the past.  When it doesn’t happen and an American company complains, China will brush it off as an isolated incident that they’re addressing.

The currency agreement contains pledges by China to refrain from competitive currency devaluations and to not target its exchange rate for a trade advantage — language that China has accepted for years as part of its commitments to the Group of 20 major economies.

So here’s another agreement that the Reuters article correctly identifies as nothing new.  Besides, as I’ve explained many times in other posts, currency values have absolutely nothing to do with trade imbalances.

Under dispute resolution is an arrangement allowing parties to resolve differences over how the deal is implemented through bilateral consultations, starting at the working level and escalating to top-level officials. If these consultations do not resolve disputes, there is a process for imposing tariffs or other penalties.

I’m sure the Chinese love this one.  “Dispute resolution” is something they’ve used for decades to forestall any meaningful retaliation when they violate or fail to live up to their agreements.

U.S. officials said the deal includes improved access to China’s financial services market for U.S. companies, including in banking, insurance, securities and credit rating services.

When China was given “most favored nation” trading status by Clinton in the late ’90s, it was clear that the manufacturing factor sector of our economy was about to be destroyed.  The free trade globalists promised that America would be transformed into a services powerhouse economy.  It never happened.  Such services are nothing more than computer transactions and create few jobs.  The inclusion of a promise of more access to the Chinese economy would mean virtually nothing to the American economy, even if it did happen, which it likely will not.

All of the emphasis in this trade deal is on exports to China, with no emphasis on the reduction of imports.  It’s as though Trump has taken a page from Obama’s playbook when Obama promised in 2010 to re-balance trade by doubling exports in five years.  How did that work out?  Five years later, exports of manufactured goods were up by only 9% – not even keeping pace with inflation, which means that exports actually fell.  By the time Obama left office, exports were even lower.  Obama’s failure to do anything meaningful to re-balance trade during his two-term tenure was a major factor in Trump’s victory over Hillary Clinton.

So that’s it.  Trump’s trade agenda has been not just stalled, but rolled back to some degree, for nothing more than promises that won’t be kept.  The emphasis on boosting farm exports is a blatant pandering to Trump’s electoral base.  It seems as though, with this trade deal, Trump believes that the U.S. will be better off if it returns to being an agrarian society.  If we were a country of 100 million people, like in the late 19th century, that might be true.  With a population of 330 million people, we can’t have a viable economy without an industrial base.  The de-industrialization of America has got to stop.  When dealing with a badly overpopulated nation like China, it’s impossible to export your way out of a trade deficit.  They have no capacity to boost their imports because their per capita consumption, emaciated by overcrowding, prohibits them from even absorbing their own domestic industrial capacity.

So what would a better deal look like?  No deal at all.  No overpopulated nation like China will ever deal away the manufacturing for export that is so vital to their economy, and wouldn’t comply with any deal that threatened it.  The only way to restore a balance of trade with China is to levy heavy tariffs to make their products noncompetitive with American-made goods.  If it ultimately leads to a cessation of trade with China altogether, the American economy would enjoy a $450 billion/year boost.  The American economy would actually be far better off if China fell off the map.

The Trump administration needs to stop seeing tariffs as negotiating leverage, and start seeing them as the only way to maintain a balance of trade.  Trump is frittering away his opportunity to truly “Make America Great Again,” something he can’t legitimately claim has happened until America is restored to the industrial powerhouse that it once was.

 

 

 


WTO Gutted by Trump Administration

December 11, 2019

https://www.reuters.com/article/us-trade-wto/u-s-trade-offensive-takes-out-wto-as-global-arbiter-idUSKBN1YE0YE

Here’s a perfect example of what I’m talking about when I say that the media slants its coverage of Trump, ignoring accomplishments and anything that puts the Trump administration in a positive light.  At the same time, it’s also an example of my complaint that Trump isn’t an effective communicator.

The above-linked article reports on one of the most significant milestones of the Trump administration.  As of yesterday, the World Trade Organization, or “WTO,” has been effectively gutted by the Trump administration’s blocking of appointments to its “Appellate Body,” rendering it unable to rule on trade disputes.

It’s impossible to overstate the significance of this milestone.  The WTO was founded in 1995, but its roots go back much further, to the signing of the Global Agreement on Tariffs and Trade (or “GATT”) in 1947.  Its mission has been to advance the cause of undeveloped and underdeveloped countries through the transfer of industry and wealth from the United States.  As a result, the U.S. has run a trade deficit every year since 1976, a deficit that set a new record in 2018, reached a cumulative total of over $16 trillion and is responsible for 80% of our national debt.  It has shifted millions of high-paying manufacturing jobs overseas and left many millions of Americans unable to afford health care or to save for retirement.  Decades of mush-headed presidents, Democrat and Republican alike, have stood idly by while “economists,” bought-and-paid-for by global corporations, assured them that such “free trade” was in our best interest.

Yesterday should have been celebrated like the end of a major war.  Yet there was little mention of it in the media and no mention of it by Trump, who should be credited with one of the biggest achievements by an American president in decades.  I was lucky to stumble across this article on Reuters where, only an hour later, it was gone from the their web site and I had to do a search to resurrect it.

No country should ever hand over its economy to any global organization that is dedicated to managing it in favor of other countries to its own detriment, but that’s exactly what the U.S. did.  As of yesterday, Trump has effectively put an end to it.


Why Population Density Drives America’s Trade Imbalance

November 21, 2019

The Problem:

In my last few posts, we’ve seen a powerful correlation between America’s trade imbalances and the population density of its trading partners.  But how does that work?  It seems odd – something that seems highly unlikely to be a factor.  And you’ve likely never heard of it before.  What you have heard about are a host of other “factors,” things like low wages, trade barriers, intellectual property theft, lax labor and environmental standards, just to name a few.  All of them seem like more plausible explanations for trade imbalances than something like “population density.”

The reason population density has such a powerful effect on trade is what it does to the per capita consumption of products.  Beyond a certain critical population density, over-crowding begins to rapidly erode people’s need for and ability to use (or “consume”) virtually every product you can think of, with the exception of food.  At first glance, you might think that’s a good thing.  Everyone lives more efficiently, reducing their environmental footprint and their demand for natural resources.  However, the real problem is that per capita employment is tied directly to per capita consumption.  Every product not bought is another worker that is out of work.  As population density continues to grow beyond that critical level, an economy is rapidly transformed from one that is self-sufficient and enjoys full employment to one with a labor force that is bloated out of proportion to its market, making it dependent on other nations to sop up its excess labor or, put another way, making it dependent on manufacturing products for export to rescue it from what would otherwise be an unemployment crisis.

Let’s consider an example.  The dwelling space of the average citizen of Japan, a nation ten times as densely populated as the U.S., is less than one third that of the average American.  It’s not hard to imagine why.  In such crowded conditions, it’s only natural that people will find it impractical to live in single-family homes in the suburbs and will instead opt for smaller apartments.  Now think of all the products that go into the construction of dwellings – lumber, concrete, steel, drywall, wiring, plumbing, carpeting – literally thousands of products.  And think of furnishings and appliances.  A person living in a dwelling that is less than one third the size of another consumes less than a third of all of those products compared to someone living in less crowded conditions.  And what about the products used to maintain the lawns and gardens of single-family homes?  Consumption of those products doesn’t just reduce – it vanishes altogether.

Consequently, per capita employment in those industries involved in building, furnishing and maintaining dwellings in Japan is less than a third of that in America.  So what are all of those unemployed Japanese to do?  Will they be put to work building cars for domestic consumption?  Hardly.  As you can imagine, the per capita consumption of vehicles by people living in such crowded conditions is impacted dramatically as most opt for mass transit.  So emaciated is the Japanese auto market that even Japanese automakers have trouble selling cars there.  So now add to the workers who aren’t employed in the home industry those workers who also aren’t employed building cars for their domestic market.

And so it goes with virtually every product you can think of.  Japan is an island nation surrounded by water.  Yet their per capita consumption of products for the boating industry is virtually zero compared to other nations, simply because it’s so crowded.  There’s only so much marina space to go around.  Put a town of 100 families next to a marina with 100 slips and it’s likely that every single family will own a boat with a motor and fishing gear.  Put a city of a million families next to that same marina and, though the marina is still full, on a “per capita” basis boat ownership has effectively fallen to zero.

Japan’s only hope for employing its badly under-utilized labor force is to use them to manufacture products for export.  This is exactly why America’s second largest trade deficit in manufactured goods is with Japan.  It’s not so much that we buy too much stuff from Japan.  The problem is that Japan buys so little from us in return.  It’s not that they don’t want to.  They can’t.  Their market is so emaciated by over-crowding that they can’t even consume their own domestic production.  Why would they buy more from us?  The same is true of nearly every major U.S. trading “partner” that is badly over-crowded.  Attempting to trade freely – without tariffs or other barriers – is tantamount to economic suicide.  It’s virtually certain to yield a huge trade deficit.

Why have I never heard of this before?

Few, aside from those who follow this blog or have read my book, have ever heard of this before.  Even if you have a degree in economics, you’ve never heard of it.  In fact, you were likely taught the opposite.  If you studied economics, at some point you were surely introduced to the late-18th century economist Malthus, and were warned to never give any credence to any theories that revolved around over-population, lest you be derided as a “Malthusian,” which would surely doom your career as an economist.

In 1798, Thomas Robert Malthus published his essay titled “Essay on Population” in which he warned that a growing population would outstrip our ability to meet the need for food, effectively dooming mankind to a fate of “misery and vice.”  This led to the field of economics being dubbed “the dismal science,” something that really rankled other economists.  Yet, the idea gained some traction until, that is, as years passed and improvements in farming productivity exceeded the requirements of a growing population.  The other sciences mocked the field of economics unmercifully, proclaiming that mankind is ingenious enough to overcome any and all obstacles to growth.  Economists acquiesced and vowed to never, ever again give any consideration to any concerns about overpopulation.

And so it is today that economists have a huge blind spot when it comes to the subject of population growth.  You can’t discover something that you’re not even willing to look at.  It’s not unlike the medieval Catholic Church labeling Galileo a heretic for theorizing that the earth revolved around the sun instead of vice versa.  Where would we be today if the study of astronomy ended at that point?  Where would we be if Newton was mocked for his theory of gravity and the field of physics ended at that point?  That’s what economists have done.  They’ve turned their backs on what is arguably the most dominant variable in economics.

What does this mean for trade policy?

In the wake of the Great Depression, soon followed by World War II, economists disingenuously laid blame for what had transpired on U.S. tariffs and, eager to put to the test the theory of free trade, promised that it would put an end to such wars and depressions.  So, in 1947, the U.S. signed the Global Agreement on Tariffs and Trade, taking the first step to implement the concept of free trade on a global basis.  Within three decades, the trade surplus the U.S. had enjoyed was wiped out.  In 2018, the U.S. ran its 44th consecutive annual trade deficit which, by the way, set a record in 2018 and continues to worsen.

The problem is that the concept of free trade doesn’t take into consideration the role of population density in making over-crowded nations absolutely dependent on running trade surpluses in manufactured goods, and simultaneously sapping the life from the manufacturing sector of other nations.  No amount of trade negotiations can correct this imbalance.  No nation that is dependent on manufacturing for export would ever agree to anything that would slow their exports and it’s impossible for them to increase their imports because, after all, it’s their emaciated market that has caused the trade imbalance in the first place.  The only way to restore a balance of trade is to force the issue through the use of either tariffs or import quotas.  Any trade policy that doesn’t employ those tactics when trading with badly over-crowded nations is doomed to failure and puts our overall economy at risk.

Since World War II, other presidents have tinkered with tariffs in those rare instances when the World Trade Organization has green-lighted their use to correct for some other nations’ trade transgressions.  But President Trump is the first president in seven decades to implement a significant tariff program aimed at reducing our trade imbalance with China.  But much, much more needs to be done.  There are many other nations whose trade imbalances on a per capita basis are much worse, nations like Germany, Japan, Mexico, Ireland, South Korea, Taiwan and a host of others.  While many are allies, none of them are “allies” when it comes to trade.  All are eager to sustain and even grow their trade imbalances at the expense of American workers and families.  All want the U.S. economy to bear the cost for their overpopulation.  None want to face their own problems.  The U.S. needs to put an end to pointless – even counterproductive – trade negotiations, and do the things that are within our power to force the restoration of a balance of trade.

 


Population Density Effect on Trade Imbalance Intensified in 2018

November 18, 2019

In previous posts, we’ve noted the apparent role of population density at both ends of the spectrum of our trade imbalances – the top deficits and surpluses in manufactured goods.  Now let’s look at the world as a whole.  Let’s include all 165 nations in the study and let’s divide those nations equally around the median population density (which is 192 people per square mile), such that there are 82 nations with densities above the median and 83 nations below the median.  Look at this chart:  Deficits Above & Below Median Pop Density.

With the half of nations with population densities above the median we had a deficit of $815 billion in manufactured goods in 2018.  With the other half of nations we had a deficit of only $0.5 billion (the first deficit with that group of nations since 2005).  $815 billion vs. $0.5 billion.  Same number of nations.  How much more obvious can it be that population density is, by far and away, the single biggest force in driving trade imbalances?  How much more evidence do you need?

More?  “That’s not a fair comparison,” you might say.  “The half of nations that are more densely populated have a lot more people than the other half.  There needs to be the same number of people included in each group.”  OK, fair enough.  Let’s divide the world in half by population.  Half of the world’s population lives in more densely populated conditions, and half lives in less densely populated conditions.  In order to divide the world that way, however, the dividing line falls on China.  Not surprising since that country has one fifth of the world’s population.  So to make the populations of the two halves equal, almost 40% of China’s population – a nation with a population density four times that of the U.S. – must be included with the half of people living in “less densely populated” conditions.  Nevertheless, if we do that, and if we allocate 40% of our trade deficit with China to the less densely populated half, the result is that we still have a trade deficit (in manufactured goods) of $557 billion with the half of people living in more densely populated conditions and a trade deficit of $259 billion with the less densely populated half of the world’s population.  The trade imbalance is still more than double with the more densely populated half.

If we include all of China in the more densely populated half of people, then the split of people is 4.15 billion vs. 3 billion.  If we do that, the deficit with the more densely populated “half” of people is $730 billion vs. $86 billion for the less densely populated “half” – 8-1/2 time bigger.

I would argue that an even better comparison is to divide the world in half by land area:  the half of the world that is more densely populated vs. the half that is less densely populated.  If we factor out Antarctica and the United States (because we are evaluating our trade partners), the world’s land surface area is 47.3 million square miles.  If we divide that in half by population density, we find that 6.66 of the 7.15 billion people occupy the more densely-populated half of the world’s surface area while the other half of the world holds only 0.49 billion people.  With that more densely-populated half of the word we have a trade deficit in manufactured goods of $923 billion and a trade surplus of $107 billion with the less densely populated half.  That’s a difference of over one trillion dollars in trade with the more densely populated half of the world vs. the less densely populated half.

Finally, let’s look at one more split – probably the most relevant:  the nations more densely populated than the U.S. vs. the less densely populated nations.  The U.S. has a population density of approximately 92 people per square mile.  114 of our trading partners are more densely populated and 41 are less densely populated.  With those more densely populated we have a trade deficit in manufactured goods of $934 billion vs. a surplus of $119 billion with those less densely populated.  Again, that’s a difference of over one trillion dollars!

Clearly, any trade policy that doesn’t take population density into account is virtually guaranteed to yield absolutely horrible results, yet that’s exactly what the U.S. does.  It completely ignores population density and attempts to trade freely with everyone regardless of population density.  And in a few decades it’s transformed the U.S. from the world’s preeminent industrial power and the wealthiest nation on earth into a virtual skid row bum, plunging us into $20 trillion of debt.

But why is population density such a factor?  I could write a book on the subject.  Actually I already did.  It’s what this blog is all about.  But I’ll summarize it for you in the next post.  Stay tuned!


“Slow-Turkey” Trade Policy

July 8, 2019

Like the animated “slow turkey” we’ve all seen on the TV ads for a quit-smoking medication, Trump’s trade policy is also taking the “slow turkey” approach.

As announced by the Commerce Department on Wednesday, the trade deficit jumped back up in May to $55.2 billion from $51.2 billion in April, but this was still below the peak of $60.8 billion in December.  (Here’s the full release from the Commerce Department:  https://www.bea.gov/system/files/2019-07/trad0519.pdf.)

More importantly, the deficit in manufactured goods also rebounded in May to $71.1 billion, up from $67.9 billion in April.  It too, however, was below the all-time record of $76.5 billion set in December.  Here’s a chart of the deficit in manufactured goods:  Manf’d Goods Balance of Trade.

Based upon these figures, it’s difficult to see that Trump’s policy of using tariffs to bring manufacturing jobs back to the U.S. is having any effect.  Look more closely, though, and you’ll find that things are starting to happen.  The deficit with China rose again in May, but to “only” $30.2 billion, from $26.9 billion in April and $20.7 billion in March.  But this rise follows a seasonal pattern.  The fact is that the deficit with China has been down from the same month in 2018 every single month so far this year.  The year-to-date deficit with China is $137.1 billion through May, compared to $152.2 billion for the same period in 2018.  And let’s not forget that the U.S. is now collecting a lot of revenue from half of Chinese imports – approximately $5 billion in May – an annualized rate of $60 billion.  If and when Trump imposes a 25% tariff on the other half of Chinese imports, that revenue figure will double to $120 billion per year and will further cut our deficit with China.

Yes, China is retaliating with tariffs of their own, and exports to China have dropped slightly, but imports from China have fallen much more – the net result being a lower trade deficit, which is a boost to the U.S. economy.  What about the stories about how bad America’s farmers are being hurt by this trade war?  Baloney.  Look at page 19 of the report.  Exports of “foods, feeds, and beverages” year-to-date is running almost dead even with last year.  Exports of soybeans, which get so much attention, are running 7% ahead of last year.  And overall exports are up by $2 billion from last year.

Recently, Trump announced in the wake of his G20 meeting with Red China’s dictator Xi that he is holding off the implementation of the 25% tariff on the remainder of Chinese imports that he has threatened, pending a new round of trade negotiations with China.  We can see a pattern emerging in Trump’s style of trade policy.  He’s all warm and fuzzy when meeting with global leaders like Xi, then takes the tough action when the lower-level negotiations don’t measure up.  Maybe it’s a smart approach, effectively inoculating the business world against the Chicken Little, “the sky is falling” dire warnings of trade war consequences.  The unfounded fears dissipate when the trade war is rolled out slowly and nothing bad happens.  The free trade fear mongers are losing credibility.  Each new round of tariffs gets more of a ho-hum response.

Who’s been the biggest beneficiary of the tariffs on China so far?  Mexico.  While the trade deficit with others like Germany and Japan is either stagnant or declining (South Korea), the deficit with Mexico is growing rapidly as manufacturers who have been leaving China in droves (a few examples of which are reported here:  https://www.reuters.com/article/us-china-strategy-tech/hp-dell-other-tech-firms-plan-to-shift-production-out-of-china-nikkei-idUSKCN1TY14G) look for their next best (low cost) solution.  Some manufacturing is coming back to the U.S., but a lot is going to Mexico.

Under current NAFTA (North American Free Trade Agreement) rules, that may look like a smart move.  But that landscape is changing too – in “slow turkey” fashion.  A new agreement has been negotiated and is pending approval by Congress, and Trump has repeatedly threatened tariffs on Mexico imports, most recently in his effort to force Mexico to take a tougher stand against Central American immigrants.  Those companies moving to Mexico now may be throwing good money after bad and regret not facing the inevitable – that America’s tolerance of perpetual, huge trade imbalances has reached the end of the line.

This “slow turkey” approach to trade policy is frustrating for a “cold turkey” like me.  The “cold turkey” approach would already be yielding bigger benefits for American workers.  But I’ll concede that a “slow turkey” approach may be more sustainable in an environment where free trade globalists still command the attention of the media and are influential in what happens in global stock markets.  The benefits for workers may not be sustainable if investors are taking it on the chin.

It looks like the “slow turkey” approach is just beginning to show positive results.  The American economy, including the manufacturing sector, is doing well while others are faltering.  If this approach de-fangs the critics as their trade war hysteria falls flat, and the political climate becomes favorable for an 8-year “slow turkey” transformation of trade policy instead of a 4-year “cold turkey” that ultimately yields nothing more than a lame duck dead turkey, then I’m all for it.

 


Trade Deficit “Unexpectedly”(?) Narrows

June 8, 2019

https://www.fidelity.com/news/article/top-news/201906061158RTRSNEWSCOMBINED_KCN1T71LA-OUSBS_1

As reported in the above-linked Reuters article, America’s trade deficit fell slightly to $50.8 billion in April.  More importantly, the deficit in manufactured goods fell to $68 billion, it’s lowest level since June of last year.  The decline was due to a drop of $5.9 billion in imports, partially offset by a $5.2 billion drop in exports.

The reporting in the article seems to be intentionally misleading to promote a pro-free trade, pro-globalism agenda.  First of all, the article reports that the deficit “unexpectedly narrowed.”  Why “unexpectedly?”  I, and anyone who understands how tariffs work to restore a balance of trade, have been expecting it for months.

Then there’s this:

“U.S. trade with the world is slowing dramatically and the odds are rising that the economy is going to take a big hit,” said Chris Rupkey, chief economist at MUFG in New York.

“Globalization and expanded trade between nations benefited everyone and now the reductions in trade volumes between nations are going to subtract those benefits worldwide from everyone.”

The facts are that the economy is actually doing very well, especially in the U.S.  Globalization didn’t benefit everyone.  America’s manufacturing sector was devastated, turning a nation that was an industrial powerhouse into a skid row bum, economically speaking.

And this:

The politically sensitive goods trade deficit with China surged 29.7% to $26.9 billion. The gap with Mexico fell 14.1% to $8.2 billion in April.

Well, yeah, the deficit with China rose in April from March, but March was the lowest deficit with China in five years.  The Reuters article failed to mention that the 3-month trailing average deficit with China, which factors out month-to-month volatility, fell to its lowest level since April of 2014.  The data about Mexico is also misleading.  While the gap fell with Mexico in April from March, the 3-month trailing average rose to its highest level ever as manufacturers flee China for Mexico to avoid tariffs and to reduce their high shipping costs.

The tariffs on China are working, a fact more accurately covered in this article:  https://www.reuters.com/article/us-usa-trade-mexico-manufacturers/under-tariff-threat-mexico-less-attractive-to-companies-avoiding-china-trade-war-idUSKCN1T82HB.

Take the recent experience of outsourcing firm Tecma Group, which saw a surge in interest from companies mulling a move to Mexico as Trump raised tariffs to 25% on $200 billion of Chinese goods.

Tecma, which manages some 75 factories in Mexico, had been approached “every week” by companies selling items from furniture to ink pens seeking a pathway out of China and into Mexico, according to Alan Russell, its chief executive and chairman.

…  data showing Mexico emerging as the top U.S. trading partner as China exports less to the United States, combined with anecdotal evidence, suggest a significant trend.

… “Whatever we are doing in Mexico is for our company’s long-term strategic growth … If we produce in Mexico we’ll a save a lot on freight and it will reduce the time for delivery. It’s a huge advantage,” said (Fuling Global Inc.) CFO Gilbert Lee.

… Similarly, camera maker GoPro Inc decided in early May to move most of its U.S.-bound production to Mexico from China to “insulate us against possible tariffs,” Chief Financial Officer Brian McGee told investors at the time.

… In fact, Mexico overtook both China and Canada in the first quarter of 2019 to become the U.S.’s top trading partner in goods, according to U.S. Census Bureau data.

This is proof positive that the tariffs on China are working, forcing manufacturers to flee in search of a better deal.  The fact that, for now, they’re finding a better deal in Mexico instead of returning immediately to domestic manufacturing in the U.S. isn’t all bad news.  Mexico is a nation with only one tenth of the population of China, and with a GDP (gross domestic product) per capita that’s approximately 25% higher than China’s.  That means that Mexico doesn’t have enough slack labor force to take on all of the manufacturing currently done in China.  The demand for labor will quickly drive wages that are already higher in Mexico than in China even higher, to the point where manufacturing in Mexico has no advantage over the U.S.

The data shows that the tariffs are really beginning to work.