Auto Tariffs on the Table

November 14, 2018

https://www.reuters.com/article/us-usa-trade-autos/white-house-to-consider-commerce-department-auto-tariff-recommendations-officials-idUSKCN1NH2JP

There’s a lot in the above-linked article, reporting on the Trump administration’s consideration of tariffs on imported autos, that I can’t let pass without comment.  In short, the Commerce Department has submitted recommendations to the White House on whether and how to proceed with tariffs on imported autos and parts, based on its determination of whether auto imports pose a national security risk, something allowed under “Section 232” of the World Trade Organization rules.  The administration may hold off on implementation of tariffs, pending progress in talks with Europe and Japan aimed at restoring a balance of trade in autos and parts.

You may ask how auto imports pose a “national security risk.”  Good question.  I don’t know the administration’s rationale for it.  Imported cars themselves are surely not a risk.  It’s not as thought Toyota and VW and Honda and Mercedes and Hyundai and BMW have secretly planted bombs inside the cars.  The cars aren’t a risk.  However, what is definitely a national security risk is the enormous trade deficit in autos and parts.  There is no greater threat to the long-term viability of our economy than a big, sustained trade deficit that drives our budget deficit and national debt ever further out of control.  And we’ve now run a huge trade deficit for forty-three consecutive years.

The only mystery here is why the administration hasn’t acted already.  It’s becoming clear that the remaining globalists in Trump’s cabinet, like Larry Kudlow, Director of Trump’s Economic Council, and John Kelly, Trump’s Chief of Staff, have the upper hand over trade hawks like Trump’s trade advisor, Peter Navarro.  As a result, Trump is being sucked into the kind of endless “trade negotiations” that have paralyzed U.S. trade policy for decades.

But having the Commerce report ready for action would underscore a consistent threat from President Donald Trump – that he would impose tariffs on autos and auto parts unless the EU and Japan make trade concessions including lowering the EU’s 10 percent tariff on imported vehicles and cutting non-tariff barriers.

… Last month, the administration said it would open formal trade talks with the EU and Japan in early 2019 after the 90-day required congressional notification period ends.

Such talks are a complete waste of time.  Lowering barriers in the EU and Japan will make absolutely no difference in the trade deficit.  Europeans and Japanese don’t buy imported American cars because their countries are so crowded that their per capita consumption of vehicles is a fraction of that of Americans.  They don’t buy them because there’s no place to park cars and their roads are so crowded that they can’t make practical use of cars.  The only way to achieve a balance of trade in autos and parts is to keep their imports out.  Tariffs are the most effective method of doing that.

Of course, stories such as this are never complete until the free trade advocates have their chance to scare you with dire predictions.

The Alliance of Automobile Manufacturers, whose members include General Motors Co (GM.N), Volkswagen AG (VOWG_p.DE) and Toyota Motor Corp (7203.T), warned the price of an imported car would increase nearly $6,000, while the price of a U.S.-built car would increase by $2,000.

A study released by a U.S. auto dealer group warned the tariffs could cut U.S. auto sales by 2 million vehicles annually and cost more than 117,000 auto dealer jobs, or about 10 percent of the workforce.

If the price of imports goes up by $6,000 while the price of domestically-manufactured cars goes up by only $2,000, which are you more likely to buy?  The answer is obvious, but the above-mentioned groups only want you to focus on the fact that the cost of all autos will increase.  They want you to think that you won’t be able to afford a car any more.  They hope that you’re too dumb to realize that shifting manufacturing back to the U.S. will create hundreds of thousands of new jobs and will drive a demand for labor that will also drive wages higher – more than enough to offset any price increase.  U.S. auto sales won’t fall by 2 million vehicles annually.  They’ll actually increase as rising wages make cars more affordable.  And regarding the loss of auto dealer jobs (117,000 estimated in the article), you can bet that dealer jobs will be lost at the imports’ dealers if the foreign companies aren’t smart enough to begin building their cars in the U.S., but those folks will quickly find new work at GM, Ford and Chrysler.

Trump is wasting precious time by dithering with these worthless “trade negotiations.”  He needs to implement tariffs now and make them big enough – at least 25% – to have the desired effect, which is driving manufacturing back to the U.S.  Before the next elections in two years, Americans need to see tangible results in the form of a falling trade deficit and rising wages, or the globalists will surely regain the upper hand.

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Trade Deficit Exploding

November 5, 2018

So far, the minimal tariffs that Trump has imposed on China (10% tariffs on half of their exports) has been powerless to stop a tax cut-fueled explosion in the trade deficit.  On Friday, the Labor Department released the employment report for October and, once again, it was a strong one.  The economy added 250,000 jobs.  Unemployment held steady, and wages rose at their fastest pace in years.  The economy is doing well, at least better than it has since the U.S. granted “most favored nation” status to China in the year 2000.

However, at the same time on Friday, the Commerce Department released the trade figures for the month of September – the first month that the tariffs were in full effect – and it’s clear that much of the economic stimulus provided by the tax cut that went into effect this year is ending up in the hands of China, Japan and Germany.  The trade deficit in manufactured goods exploded to another new record – $71.6 billion (an annual rate of $859 billion) – blowing past the previous record set only one month earlier.  Look at this chart:  Manf’d Goods Balance of Trade.

This morning, I came across this commentary on CNBC:  https://www.cnbc.com/2018/11/05/us-keeps-cutting-large-checks-to-china-japan-and-germany—commentary.html.  I don’t agree with everything said here, but it’s encouraging to see that people are starting to “get it” when it comes to the trade deficit:

“Those who are sadly and incorrectly arguing that this does not matter should note that America’s trade deficits will be added to its $8.6 trillion of net foreign debt recorded at the end of the second quarter.

That large overseas transfer of American wealth is also a drag on economic growth. In the first nine months of this year, the growth of the gross domestic product was lower than the growth of domestic demand as a result of increasing U.S. trade deficits.”

Finally, someone acknowledging that the trade deficit is the driving force behind our growing national debt.

Trump is exactly right to treat the trade deficit as a national security threat and to begin imposing tariffs on that basis.  So far, however, it’s been too little.  The tariffs need to be extended to all imports from China.  They need to be raised to 25% or more.  And they need to be extended beyond China, to Germany and Japan and anyone else who attempts to prop up their economies at the expense of American workers.  When that happens – when corporations stop seeing tariffs as a fleeting ploy in trade negotiations and instead see manufacturing in the U.S. as a more profitable business model than paying high tariffs – then and only then will trade become more balanced and fair and the trade deficit will begin to decline.


Economy’s Good, Not Great. Tariffs Not Yet a Factor.

October 20, 2018

I’m back from my annual fall fishing trip up north.  Much has happened and it’s time to get caught up.

The economy’s doing quite well.  In September, the unemployment rate fell yet again to 3.7%.  Economists are wringing their hands over the tight labor market.  Every month, the Federal Reserve proclaims the economy to be at “full employment,” a condition likely to yield rising labor costs, fueling unwelcome inflation.  Yet, every month the economy adds more jobs and somehow manages to find workers to fill them.  Now we’re really at full employment, says the Fed.  Another month.  More jobs added.  “Now we’re really, really at full employment.”  And on it goes.  This supposedly tight labor market is the Fed’s chief justification for raising interest rates.

It’s almost as though there’s a conspiracy to stir up hysteria about an over-heating economy.  On Tuesday, the Fed released its “JOLTS” report of the number of job openings, noting that the number of job listings exceeded the number of people reported to be actively seeking employment.  What they don’t tell you is that that’s perfectly normal.  “Job seekers” is a figure taken from the unemployment report.  But if you’re simply changing jobs and never filed for unemployment, you’re not counted.  Many job opening listings are simply positions opened up by people who have left for other jobs, often because they have decided to simply relocate from one place to another.  It’s a weak measure of the health of the economy.  Nevertheless, ECONODAY had this to say about the report:  “Jerome Powell (head of the Federal Reserve) concedes that it’s a mystery why wages haven’t been going up very much as demand for labor grows and the supply of labor declines. Yet sooner or later, the law of supply and demand is bound to assert itself, at least this is the risk that the Fed is guarding against in its rate-hike regime.”

Yesterday, commenting about the weak report of existing home sales, ECONODAY had this to say: “The lack of wage gains, however, is a negative for home buyers not to mention a great mystery of the 2018 economy given the increasing scarcity of available labor. And another great mystery of this year’s economy is the lack of interest in home ownership.”

Is it a lack of interest in home ownership, or a lack of the wherewithal to buy a home in the face of rising interest rates (driven by the Fed) combined with the “great mystery” of a “lack of wage gains?”  People don’t just lose interest in owning a home.  Everybody wants a place they can call their own.  The problem is that not everyone can afford it.

There’s really no mystery here.  Anyone who has followed this blog or has cast a cynical eye on the employment statistics ever since the “Great Recession” knows that the unemployment rate is completely bogus, driven down artificially by the Labor Department claiming that people have dropped out of the labor force.  During the Obama administration, 6.4 million workers mysteriously vanished.  Since Trump took office, that figure has shrunk by over a million workers, but an honest tally of the unemployed still stands at 11 million workers (including those who were unemployed before the “Great Recession”) and unemployment is actually at 6.6% instead of 3.7% – a rate nowhere near low enough to begin driving wages higher.  Per capita employment remains exactly 1% below the level it was at before the onset of the “Great Recession” – a figure that was already depressed.

So the economy is doing well – better than it has done in the past ten years – but that’s not saying a lot.  The tax cut that went into effect this year gets the credit, but that will only carry the economy so far.  To keep it going – to accelerate the economy even further – we need progress toward cutting the trade deficit, especially the deficit in manufactured goods.  The Trump administration has made a lot of moves in that direction, imposing 10% tariffs on steel and aluminum, tariffs on $25 billion of Chinese imports, followed by 25% tariffs on an additional $225 billion of their imports, the renegotiation of the North American Free Trade Agreement (NAFTA) and threats to impose tariffs on all auto imports.

But there’s no evidence of any improvement in our trade situation, at least not yet.  The most recent trade data show that the rapid erosion of American manufacturing continues, yielding a trade deficit of $70 billion in manufactured goods in August – a new record – with new record trade deficits with China and Mexico.

That’s not an indication that Trump’s tariffs are a failure.  Aside from the small tariffs on aluminum and steel, none of the above-mentioned initiatives have taken effect yet.  The biggest chunk of the tariffs on China went into effect in September, so the effect on trade with China won’t show up until new trade data is released next month.  The “USMCA” agreement – the replacement for NAFTA – hasn’t been enacted yet.  And the trade deficit with China was artificially swollen by a rush to beat the tariffs.

It’s going to take a lot of patience to realize the real benefits of Trump’s trade policy.  The purpose of tariffs is to provide an incentive to manufacture products domestically.  The immediate effect will be to raise prices for American consumers, just as economists have warned.  Longer term,  companies will begin to realize that they can improve profits by manufacturing in the U.S., thus avoiding the tariffs.  It’s going to take time for that realization to sink in, and time for companies to implement plans to build factory capacity in the U.S.  Ultimately, when that capacity comes on line, we’ll see a real boom in the demand for labor and a corresponding rise in wages, more than offsetting any increase in prices.

Hopefully, the Federal Reserve won’t torpedo the economy in the meantime.  It can’t have any impact on price increases driven by tariffs, so it would be pointless to even try.  All they can do is drive the economy into recession with their high interest rates, raising doubts about the president’s economic policies, and increasing the chances that America will shrink back into its role as host in the global host-parasite trade relationship.  That would be a disaster.

Again, it’s going to take time and patience.  It took seven decades of globalism (beginning with the signing of the Global Agreement on Tariffs and Trade – GATT – in 1947) to get us into the fix we’re in.  It’s going to take more than a year or two to get us out.


Trade Deficit in Manufactured Goods Hits Another Record in July

September 6, 2018

Yesterday the Commerce Department announced that the overall trade deficit rose to $50.1 billion in July – bad, but still in the $37-55 billion range where it has hovered for years.  Only by doing a deep dive in the data – removing services, food and oil – can you arrive at the really bad news in the report – that the trade deficit in manufactured goods shot to yet another all-time high in July of $69.3 billion, beating the previous record of $68.4 billion set in February earlier this year.  Here’s the chart:  Manf’d Goods Balance of Trade.

Over the past few months, we’ve heard a lot about the Trump administration’s “trade war” with the rest of the world in an effort to restore a balance of trade.  But so far, there’s no evidence of any positive results to be found in the trade data.  What’s going on here?

Several things.  First of all, it’s important to note that, for all the talk we’ve heard about this issue, so far it’s been mostly talk.  There’s been talk of slapping tariffs on another $200 billion of imports from China.  More recently, that’s escalated to include all $500-some  billion of their imports.  There’s been talk of imposing tariffs on all auto imports from the European Union.  There’s been a lot of talk about tough negotiations to revise the North American Free Trade Agreement with Mexico and Canada.  But the reality is that, so far, the Trump administration has imposed small tariffs on aluminum and steel imports and on about $50 billion of Chinese imports.  That’s a small drop in the bucket compared to the $3 trillion of imports from around the world.  In essence, the trade war really hasn’t started yet.  The U.S. and the rest of the world have simply been exchanging steely stares across the battlefield.  The only shots fired have come from BB-guns.

If anything, other Trump economic policies may actually have exacerbated the deficit.  The tax cut that went into effect this year has boosted the economy by as much as 4% (according to the most recent GDP data), but the trade deficit in manufactured goods has worsened by 18% since the tax cut went into effect.  It’s clear that much of the tax cut has been spent by Americans on more imports.  It’s actually boosted the global economy much more than the U.S. economy.

However, all that may soon change.  The tariffs on an additional $200 billion of Chinese imports has been on hold during a public comment period.  That period actually ends today.  So the tariffs may very soon be implemented.  The Chinese will begin feeling the pain and, admittedly, so too will American consumers.  They’ll feel that pain until manufacturing begins to return to the U.S. and drive up wages.

The talk of tariffs has so far had little effect on corporate supply-chain strategies.  Corporate leaders still think it’s all a bunch of bluster by Trump, and that all will return to normal if he manages to win some token concessions from other countries.  They’re not going to revise their sourcing strategies and investments in foreign countries until they really start to feel pain from the tariffs.  But there is evidence that it’s beginning to happen.  Earlier this week, Ford announced that it was cancelling plans to begin importing a car model from China, explaining that the expected tariffs on those cars would wipe out what was already a thin profit margin.  GM already imports the Buick Envision model from China.  If Ford sees importing cars from China as a losing proposition, surely GM is considering similar action.

Then there’s the new trade deal between the U.S. and Mexico which promises to shift some car and parts production back to the U.S.  It’s not a signed deal yet, but it’s coming.

So the message here is to be patient.  But at the same time, the Trump administration needs to feel some sense of urgency to start producing results.  The tax cut will only carry the economy so far and for so long.  Real economic reform is totally dependent on a re-balancing of trade that hasn’t actually begun yet.


Red China’s Finance Minister All but Admits U.S. Will Win Trade War

August 24, 2018

https://www.reuters.com/article/us-usa-trade-china-finmin/exclusive-china-to-keep-hitting-back-at-u-s-over-trade-to-boost-government-spending-finance-minister-idUSKCN1L90HF

In the above-linked interview with Reuters yesterday,  Red China’s finance minister, Liu Kun, all but admitted that China is losing the trade war with the U.S., and the losses are expected to worsen.

For now the impact of the China-U.S. “trade frictions” on the Chinese economy has been small, but he is concerned about potential job losses and lost livelihoods …

… the Chinese government will increase its spending to support workers and the unemployed who are hurt by the trade conflict, and also predicted bond issuance by local governments to support infrastructure investment this year will pickup and blow past 1 trillion yuan ($145.48 billion) by the end of the current quarter.

So far, China has either imposed or proposed tariffs on $110 billion of U.S. goods, representing most of its imports of American products. Crude oil and large aircraft are key U.S. goods that are still not targeted for penalties.

“We’re responding in a precise way. Of course, the value of U.S. imports of Chinese goods isn’t the same as the value of Chinese imports of U.S. goods. We’ll take tariff measures in accordance to this situation,” … “When we take measures, we try our hardest not to harm the interests of foreign businesses in China. That’s why our tariff measures are targeted to avoid affecting them as much as we can,”

That’s a rare admission that China is already out of ammo in this war.  Although the U.S. is poised to slap tariffs on at least $200 billion of Chinese imports – still just a fraction of Chinese imports – China has targeted only half that amount because that’s all it imports from the U.S.  In a tit-for-tat trade war, Red China is already out of “tits.”

Some American businesses and industry lobbies, including the U.S. Chamber of Commerce, have criticized U.S. President Donald Trump’s imposition of punitive tariffs on Chinese goods

This statement can’t be allowed to stand without comment.  The “U.S. Chamber of Commerce” is not an “American” lobbyist.  The Chamber of Commerce is a foreign-based organization, established in France, to promote global trade regardless of its negative impact on the United States.  It opposes Trump’s trade policy because global trade will suffer as the U.S. returns to more domestic manufacturing.  The “U.S.” Chamber of Commerce is its U.S.-based branch and every local Chamber of Commerce in the U.S. is dedicated to the mission of the parent organization – promoting global trade regardless of its impact on Americans.

The U.S. tariffs have affected China’s economic growth – albeit modestly – and their impact will become even more pronounced if the trade frictions persist, Liu said.

“From my perspective, I’d pay more attention to the impact that the China-U.S. trade frictions has on jobs in China. After all, some firms will be affected, exports will be reduced and production will be cut,” …

China’s urban survey-based jobless rate rose to 5.1 percent from 4.8 percent in June. The government aims to keep the rate below 5.5 percent this year.  China plans to increase its fiscal spending to support workers or jobless hurt as higher tariffs kick in.  “We will make adequate preparations in terms of fiscal policy, and help unemployed workers find new jobs and ensure their basic social security,” Liu said.

China’s already feeling the pain.  They’re losing this trade war, and it’ll get worse for them.  In the meantime, the U.S. economy has been going gangbusters, led primarily by big gains in manufacturing, and this is only a taste of things to come if Trump continues to use tariffs to re-establish a balance of trade for the U.S.

 


Low Wages Don’t Cause Trade Deficits!

July 31, 2018

Now that we’ve established (in previous recent posts) that it’s disparities in population density between the U.S. and its trading partners that causes our enormous trade deficit, let’s take a closer look at what role low wages might play.  Judging by the data we saw in the lists of America’s best and worst trade partners, there appeared to be little difference in the “purchasing power parity,”  or “PPP,” between the lists, suggesting that low wages (which track PPP) play no role.

Let’s begin by looking at America’s balance of trade with the twenty poorest nations in the world.  Here’s the list:  20 Poorest Nations.  First of all, you’ll notice that this list is dominated by poor African nations, with a few others like North Korea and Afghanistan thrown in.  The U.S. actually has a small trade surplus of just over a million dollars (an almost perfect balance of trade) with this group.  If low wages cause trade deficits, why doesn’t the U.S. have a huge trade deficit with this group of nations?  In the interest of fairness, I should point out that all foreign aid is booked as exports from the U.S., and the nations on this list are nearly all heavy recipients of U.S. foreign aid.

Let’s move on.  At the other end of the scale we have the twenty richest nations.  Since U.S. PPP is about $50,000, the U.S. would fall somewhere in the middle of this list.  So wages shouldn’t be much of a factor with this group.  Look at the list:  20 Richest Nations.  As you can see, we have a small trade deficit of $9 billion with this group of nations – virtually insignificant when compared to our total trade deficit in manufactured goods of $724 billion.

What we need to do is divide all of the world’s nations in half according to PPP and compare our balance of trade with the poorest half of nations to the richest half.  If we do that, the results are pretty startling.  With the poorest half of nations, the U.S. has a trade deficit in manufactured goods of $60.7 billion.  But with the richest half of nations, the deficit explodes to $663.5 billion!

How can we explain that?  First of all, to be honest, even the richest half of nations is made up almost entirely of nations that are poorer than the U.S.  Only about a dozen nations are richer than the U.S.  So one could argue that the low wage theory still holds.  Not true.  If it did, then it should be the poorest half of nations that we have the biggest trade deficit with, not the opposite.

The real explanation is that there is a relationship between trade and wages, but the cause and effect are quite the opposite of the “low wage theory.”  Low wages don’t cause trade deficits.  Instead, large trade surpluses like China, Germany and Japan have with the U.S., cause higher wages.  Manufacturing for export sops up excess labor supply and drives wages higher.

When the U.S. trades with poor but sparsely populated nations, they become wealthier but soon run out of labor.  Their now-wealthier populace becomes good customers for American products and trade levels off in a state of balance, more or less.

But when the U.S. trades with poor, badly overpopulated nations, wages rise but their overcrowded conditions leave them unable to consume products at anywhere near the rate needed to become customers for imported products.  Their oversupply of labor persists and a trade deficit with such a nation grows steadily worse.

America’s trade imbalance can never be resolved as long as it pursues policies that don’t target the real problem – disparities in population density.


EU Scared to Death by Trump’s Tariff Threat

July 5, 2018

Precisely as I recommended he do in response to EU (European Union) tariffs on Harley-Davidson motorcycles, President Trump has threatened to impose stiff tariffs on European auto imports.  In return, the EU responded much like the cartoon cockroaches in the RAID insect killer commercials – full blown panic.  The end of the world is at hand!  Their world, for sure, but they want you to believe it’ll be the end of yours too.  Prices will rise, they say.  Sales will decline.  So too will GDP (gross domestic product), a measure of the overall U.S. economy.

Perhaps their most interesting warning was in regards to BMW production at their Spartanburg, SC plant that produces their SUV models.  (They call them “SAVs”, or “Sports Activity Vehicles.”)  They claim that most of the cars made there are exported, and it’s true.  As other nations respond with their own tariffs on American cars, they say, exports of those American-made BMW SUVs will decline and production will be cut, costing jobs.

Let’s look at the facts.  That Spartanburg BMW plant does export about 75% of the vehicles it builds, with those exports having a value of about $10 billion.  Is it really the loss of those BMW exports the EU is worried about, or is it something else?

Here are some more facts.  In 2017, Germany exported approximately $30 billion worth of cars and parts to the U.S., while importing only about $10 billion from the U.S., resulting in a $20 billion surplus for Germany.  The EU as a whole enjoyed a surplus of $44.1 billion in cars and parts with the U.S.

So what is the EU worried about most?  The American economy and BMW’s $10 billion in exports, or their $44.1 billion surplus?  The answer is obvious.  They’re making a killing in the U.S. market, and Trump’s tariffs threaten to put an end to it,

And it’s not just the EU.  Other globalist organizations have used similar scare tactics.  General Motors made similar warnings, but are they more worried about domestic auto sales or their China operations?

Every day, the news is filled with stories about how trade war fears are weighing on global markets.

Will car prices go up?  Probably.  But they didn’t mention to you that your wages will rise faster.  Will car sales decline?  No, the opposite will happen.  Sales of American-made models will rise faster than the decline in sales of EU cars as Americans grow more prosperous and opt for the less expensive American cars over the tariff-laden EU imports.

So don’t fall for the Chicken Little scare tactics.  It’s impossible for the U.S. to do anything but win a trade war, since a trade deficit is what defines a loser in global trade and the U.S. has the biggest deficit by far.  Anything that reduces that deficit makes America the winner.

If raising tariffs on imports were going to hurt the U.S. economy, then how do you explain that the economy is on a tear, putting up the best numbers in a long time – especially in the manufacturing sector of the economy?  Investors seem to understand.  While foreign markets – especially in Asia – have been taking a beating in the past few months, American markets are holding just below their record highs.  Like the saying goes – money talks and BS walks.  The big money knows that Trump’s tariff plan is good news for the American economy.

 

https://www.cnbc.com/2018/07/04/eu-considering-international-talks-to-cut-car-tariffs-report-says.html