An Example of Why Tariffs Can’t be Piecemeal

January 17, 2019

https://www.fidelity.com/news/article/top-news/201901170104RTRSNEWSCOMBINED_KCN1PB0CB-OUSBS_1

The above-linked article is a good example of why tariffs can’t be applied piecemeal to only specific products.  A Michigan auto parts supplier is shifting the manufacturing of some components from Michigan to Israel to skirt the tariffs on steel.  Israel gets steel tariff-free and the parts they manufacture no longer count as “steel,” so they can export them to the U.S. free of tariffs.

I give Trump a lot of credit for implementing tariffs and hope he goes much further but, in order to avoid situations such as the one reported on in this article, tariffs must be targeted at nations – densely populated nations – not products, and must cover every product from such nations – not just specific products.

If Trump had applied the tariff structure I recommended in Five Short Blasts, a structure indexed to population density, the RoMan manufacturing company would never dream of outsourcing components to Israel, since all imports from Israel would be subject to a 40% tariff.  It’s worth noting here that, in 2017, our third worst trade deficit in per capita terms was with Israel, one of the most badly over-populated nations on earth – three times as densely populated as China.  In per capita terms, our trade deficit with Israel is four times worse than our deficit with China.

The Trump administration sees tariffs as a tool to force concessions from nations that continue to maintain trade barriers (like tariffs) against American products.  It believes that if it can get Europe, for example, to drop its 10% tariff on American cars, then American manufacturers will begin exporting a lot more cars to Europe.  But they won’t, at least not nearly in the quantity needed to offset the number of cars imported from Europe.  The problem isn’t the tariff, it’s the inability of Europeans to consume even their own domestic capacity because their dense population (nearly equal to China’s population density) makes car ownership impractical.

Tariffs aren’t negotiating tactics.  They’re absolutely imperative to maintain a balance of trade with densely populated nations.

 

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America’s Top 20 Per Capita Trade Deficits in 2009

January 3, 2011

How do our trade deficits with Japan and Thailand compare to each other?  How do they compare to China or Germany or Taiwan?  Of course our trade deficit with China is enormous.  They are a very large country.  Would it be sensible to focus all of our trade policy efforts on China when, if size were factored out of the equation, our deficit with them was no worse than with other nations?  The only way to properly assess the impact of U.S. trade policy on a nation-by-nation basis is to express it in per capita terms, factoring out the relative size of each. 

Table 7-2 of Five Short Blasts listed America’s top 20 per capita trade deficits in manufactured goods for 2006.  It’s time to take a look at the list for 2009.  (Trade data for 2010 won’t be complete until February.)  The following document displays table 7-2 again at the top, followed by the new listing for 2009:

top 20

The list is little changed, with some nations moving up a little and others moving down.  A couple of them dropped off altogether –  Brunei and Jordan – to be replaced by Costa Rica and Cambodia.  Trinidad and Tobaggo fell the furthest, dropping from third to seventeenth.  Some additional observations are in order:

  1. As in 2006, the list is dominated by very densely populated nations.  Only one nation in the top ten – Sweden, at ninth place – is less densely populated than the U.S.  The only other nation in the top twenty less densely populated than the U.S. is Finland.  Eight are more than five times as densely populated.  The average population density of the top twenty is 470 people per square mile, more than 5-1/2 times the population density of the U.S.
  2. By contrast, only one nation in the top ten has purchasing power parity (PPP, a good approximation of income) of less than $21,800 per year (which represents the top quartile among all nations).  These are quite wealthy nations, debunking the myth that trade deficits are caused by low wages in foreign countries.  Only four nations on the list – China, Thailand, Lesotho and Cambodia – have PPP below the world median value of $9,100. 
  3. Our per capita trade deficits in manufactured goods with the top eight nations on the list – Ireland, Israel, Switzerland, Denmark, Taiwan, Japan, Malaysia and Austria – are all at least double the deficit with China, who comes in at 16th on the list.  (In 2006, they were 19th.)  
  4. 2009 was a “down” year for world trade in general, coming on the heels of the global financial collapse.  This is why most of the per capita trade deficits in manufactured goods actually declined.  But not all.  The deficit with Israel soared from $604 to $1,019 per person.  The deficit with China rose from $172 per person to $181 in spite of the fact that, during those three years, Chinese PPP rose by 31% and the value of the yuan has increased by almost 25%.  So much for blaming our trade deficit on low wages or currency exchange rates. 

I don’t know how much more plain it can be that the disparity in population density between the U.S. and these overpopulated nations is to blame for our enormous trade deficit in manufactured goods, and the corresponding loss of millions of jobs in manufacturing.  Let’s stop blaming China and turn the focus on the real problem – our own trade policy that ignores this underlying root cause.