Week 1 Done

January 28, 2017

The world is slowly awakening to a new reality.  It has profoundly changed.  And that may be an understatement.

Throughout the campaign, Trump’s “populist” rhetoric was dismissed by many – especially by those who stood to lose the most if globalization were dismantled – as exactly that, a play for votes or posturing designed to win concessions in the highly unlikely event that he would actually be elected president.  After all, this is the author of The Art of the Deal, a book about his tactics for winning in the business world.  He’s just  staking out his opening position.  Right?

During the transition, however, he doubled down on his rhetoric and stacked the cabinet mostly with people aligned with his positions.  The world grew a little more nervous.

Then came inauguration day and, I have to admit, that even I was taken aback by his speech.  It was as though he picked up a rhetorical two-by-four and began swinging at everyone who’d had a role in America’s trade mess and economic decline, and any who doubted his intentions or who stood in his way.

Now his first week in office is history, and what a week it was.  TPP (the Trans Pacific Partnership trade deal) is dead.  NAFTA (the North American Free Trade Deal) is as good as dead.  The wall on the southern border will be built.  Tariffs on Mexican imports will pay for it.  Immigration from many Middle Eastern countries has been brought to a halt.  And, in stark contrast to Obama’s visit to Mexico in the early days of presidency to discuss renegotiating NAFTA, a humiliating experience that yielded only more Mexican tariffs on American goods, Trump has put Mexico on notice.  If you can’t accept the new reality of American tariffs on Mexican imports and an all-out effort to halt illegal immigration from your country, then too bad – we have nothing to talk about.

Some seem to get it.  Some American companies have begun hedging their bets with announcements of plans to invest in American manufacturing.  Still, the world is largely in a state of denial.  Markets around the world continue to rally on optimism over the aspects of the Trump agenda that it likes – corporate tax breaks and infrastructure spending – while shrugging off the possibility that Trump means business about imposing tariffs on imports.

The world is made up of only two economies, really.  One is the economy of the more sparsely populated countries, able to gainfully employ their workers, which is dominated by the United States.  The other is the rest of the world, badly overpopulated and heavily dependent on manufacturing for export to the aforementioned countries – again, most notably, the United States.  Tariffs on imports into the U.S. will  totally alter the host-parasite relationship that exists between the two.  Those who continue to blindly invest in the economies of the latter may be making a serious mistake.

Americans have finally gotten fed up with playing the role of enabler to ever-worsening overpopulation, using immigration as a relief valve and trade to prop it up.  Trump has hastened the day when the rest of the world must face the consequences on their own.


How the Global Elite Sewed the Seeds of Trump’s Victory and Their Own Demise

November 23, 2016

With each passing day since the election I am more amazed than the day before at what I see happening as the Trump administration begins to take shape and at the reaction from world leaders, the business world and political pundits.  I have a lot of thoughts I want to share about what this all means but, before getting into all that, I thought I’d share another take on just what happened with this election – a “take” that I haven’t heard from anyone else yet.

As global corporations began the process of implementing the New World Order that had its genesis in the signing of the Global Agreement on Tariffs and Trade in 1947 – especially as the process accelerated first with the signing of the North American Free Trade Agreement, followed closely by the admission of China to the World Trade Organization, both events occurring during the Clinton administration – the painful process of passing out pink slips to American manufacturing workers got underway in earnest.

With nothing more than a small severance check and, perhaps, some “job re-training” (to do exactly what was never clear), millions of people were suddenly faced with the question, “now what do I do?”  They began with the obvious – look for another job.  When that didn’t work, more and more people tried their hands at starting their own businesses. It stimulated an interest in entrepreneurism like we hadn’t seen before.  People sought out the advice of successful entrepreneurs and began to revere the most successful among them.

The appetite for entrepreneurial advice didn’t escape television executives.  Never one to miss an opportunity, enter Donald Trump and his reality show “The Apprentice,”  which first aired in January of 2004 and has run continuously since then in various formats.  Viewers were awed by his business instincts, his ability to see through phoniness and identify those with real ambition, and his ability to win at business.  For people who had been exposed to the lies and BS that were standard fare used by corporations to justify the sacrifice of their jobs on the altar of globalism, this was refreshing.  This was someone they could admire.

What the global elite didn’t anticipate was that they were making a hero of a fabulously successful entrepreneur who didn’t need their money, one with political ambitions and one who, for whatever reason, seemed to have an affinity for the working class.  I’m reminded of the natural world where imbalances have a way of correcting themselves.  If a population of some species grows out-of-control, other forces have a way of reining it in.  In the same way, when the global elite concocted a system that helped some at the expense of others, they unwittingly sewed the seeds of that system’s own demise.

 


Ford Moving to Mexico; Trump Says He’ll Stop It

September 15, 2016

http://money.cnn.com/2016/09/15/news/companies/donald-trump-ford-ceo-mark-fields/index.html

The above link will take you to an interview conducted by CNN’s Poppy Harlow with Mark Fields, Ford CEO.  If you have the patience to watch it all the way through, it will be immediately followed by further discussion of Trump’s plans to raise tariffs and bring manufacturing jobs back to the U.S.

Trump has long predicted that Ford would be announcing its move to Mexico.  Fields responds that they are only moving its small car production – the Focus and the C-Max (both made at Ford’s Dearborn, MI plant) -to Mexico.  Other models will continue to be made in the U.S.

Ford actually sells six car models:  Fiesta, Focus, C-max, Fusion, Mustang and Taurus.  The Fiesta and the Fusion are already built in Mexico.  Ford’s announcement about the Focus and C-max leaves only two of its six car models that are still made in the U.S. – Mustang and Taurus.  The former is built at its Flat Rock, MI plant and the Taurus is built in Chicago.  Most of its SUVs and trucks are built in the U.S.  There’s a good reason for this.  The U.S. continues to maintain a 25% tariff on all imported light trucks.

The Transit Connect is an interesting exception.  Until 2013, Ford imported the Transit Connect, a vehicle it markets as a commercial van/truck, from Turkey, trimmed out as a passenger van.  It then strips out the passenger interior, removes the windows, and replaces them with metal panels, converting it into a commercial vehicle.  It did all of this to escape paying the 25% import tariff.  In 2013, the U.S. ordered Ford to stop this practice.  Ford still does it, but now it pays the tariff.  It “eats” the cost of the tariff.  It doesn’t pass it on to the consumer.

If elected, Trump has vowed to essentially tear up most trade deals – particularly NAFTA, and will raise tariffs to force companies to re-establish their manufacturing operations in the U.S.  In the case of Mexico, he has suggested a 35% tariff.  During the linked interview, Ms. Harlow asked Mark Shields directly whether he would still move manufacturing to Mexico if that were to happen.  Shields side-stepped the question.  But the answer is obvious.  Of course Ford would not move more production to Mexico if that were to happen.  Quite the opposite.  Production of the Fiesta and Fusion would also return.

Late in the interview, Shields cited the huge savings in labor costs for the move to Mexico, saying that it needed to be done to remain competitive in that segment of the market.  Ms. Harlow failed to follow up with the obvious question:  “So you’ll be reducing the price of the Focus once production has moved to Mexico?”  I would have loved to see him squirm and see the smirk run away from his face when he replied that the price wouldn’t change a bit.

Has any company ever cut the price of any product once its production was moved overseas?  Of course not.  They pocket the extra profit.  Which brings us to one of the arguments employed by economists (and cited in the 2nd CNN segment which starts immediately after the Mark Shields interview) that prices will rise and consumers will be forced to pay the tariffs, hurting the economy and cutting deeply into consumer spending.

That’s absolute nonsense.  Consumers don’t pay the tariffs.  The importing companies pay the tariffs.  Whether or not they elect to pass that extra cost along to the consumer is entirely up to them.  As we saw above with the Transit Connect, Ford doesn’t pass it along.  Sure, that would cut deeply into profits.  By far, the smarter alternative is to move manufacturing back to the U.S.

During the course of the interview, Ms. Harlow repeats a myth about tariffs and their role in the Great Depression.  “… the last time a big tariff was instituted in the United States back during the Great Depression, all the economists agree that it made the Great Depression worse.”  I’ve said it many times but it bears repeating here:  that’s factually false and is absolute nonsense.  First of all, no new, big tariff was implemented during the Great Depression.  The Smoot-Hawley Tariff Act of 1930 was a very slight tweaking of the  Fordney-McCumber Tariff Act of 1922, raising tariffs overall from 38.5% to 41.4%.  Following enactment of Fordney-McCumber, the economy boomed during the “roaring ’20s.”

By the time Smoot-Hawley was enacted, the Great Depression had already been underway for a year.  During the Great Depression, America’s balance of trade declined by less than $1 billion while GDP fell by $33 billion.  To blame tariffs for the Great Depression is ludicrous.  But that didn’t stop economists from doing it, eager to make a case for their new, untested theory about “free” trade.

In the CNN piece following the Mark Shields interview, CNN reports on dire warnings by economists that Mr. Trump’s tariffs would have disastrous consequences for the economy, cutting GDP by up to $1 trillion and would result in the loss of 4 million jobs.  Such claims are really puzzling, given the fact that economists know very well that a trade deficit is actually a subtraction in the calculation of GDP.  It’s impossible that bringing back manufacturing would do anything other than boost GDP dramatically.  Merely balancing trade in manufactured goods would be an $800 billion boost to the economy.  That would be a 4% jump in GDP which, not coincidentally, is what Trump has targeted for economic growth.  Any further surplus in trade in manufactured goods would boost the economy even more.  And instead of cutting 4 million jobs, it would actually create approximately 10 million jobs.

Free trade advocates claim that manufacturing jobs don’t matter any more, that most manufacturing is automated and there are few jobs there to be had.  If that’s true, then why do so many badly overpopulated nations with huge, bloated work forces cling so desperately to the manufacturing that they do for the American consumer?  Certainly, automation has improved productivity in manufacturing, but not nearly to the extent that free traders would have you believe.  Consider the production of the supposedly high-tech cell phones like the i-phone.  Their manufacture is about as low tech as you can get – thousands of people assemble the circuit boards by hand in China.

During one of the CNN segments, the reporter comments that “cars aren’t really built from scratch any more.  They’re assembled.  Those plants in Mexico will be assembling them from American-made parts.”  As if the process of assembly requires no effort, and as if cars haven’t been built that way since Henry Ford invented the assembly line.  I can tell you from personal experience, having toured the Dearborn plant where Ford builds the Focus, that it takes a lot of workers to make an assembly plant “tick.”  Watching a stack of sheet metal being turned into a finished automobile in less than 24 hours is truly awe-inspiring.  Having toured both auto assembly plants and electronics manufacturing, I can tell you that an auto assembly plant is far more “high-tech” than electronics production.

Trump’s plans to use tariffs to return manufacturing back to the U.S. is exactly what the American economy needs – and is exactly the thing that globalists fear the most.


The ‘Malo’ Half of NAFTA

March 15, 2013

In the previous two articles, we examined trade with America’s two largest trading partners (by total imports and exports):  Canada and China.  We saw that while the U.S. has a fairly large trade deficit with Canada, all of it and more is due to the fact that Canada is by far our largest source of imported oil.  The U.S. actually enjoys a healthy surplus of trade in manufactured goods with Canada, making Canada the good half of NAFTA – the North American Free Trade Agreement.

Now we turn to the other half of NAFTA – Mexico.  Mexico is a fairly densely populated nation – almost twice as densely populated as the U.S.  Mexico isn’t a wealthy nation but, by world standards, they’re not poor either.  With a per capita purchasing power parity (PPP) of $15,300, Mexico ranks 83rd out of 228 nations, placing them in the top 40%.  However, 51% of its people live in poverty, though it’s not for lack of jobs.  Mexico currently enjoys a rather low unemployment rate – 4.5% – a rate that is the envy of the United States.

Here’s a chart of overall trade with Mexico, through 2012:  Mexico Trade.

Since 2007, our overall trade deficit with Mexico has moderated somewhat, dropping from $73 billion to $61 billion in 2012.  But all of that decline is due to a drop in oil imports.  Our deficit in manufactured goods rose in 2012 to $46.1 billion, only $0.8 billion shy of the record deficit set in 2007.  Expressed in per capita terms, that’s a deficit of $401 with every Mexican citizen.  In 2011, our per capita deficit with Mexico in manufactured goods was our 14th worst – worse than China, with whom our per capita deficit is “only” $258.

So, of our top three trading partners in 2012 (who together account for 43% of all U.S. trade), the U.S. enjoys a surplus in manufactured goods with only Canada, a nation with a population density of less than ten people per square mile.  The U.S. suffers large deficits with China and Mexico, nations with population densities of 361 and 151 people per square mile respectively.  You should be starting to get suspicious that population density may be a factor.

As we did with Canada and China, let’s consider the other factors that economists like to blame for trade deficits – weak currencies and low wages.  The following is a chart of our trade deficit in manufactured goods with Mexico vs. the peso-dollar exchange rate:  Mexico Trade vs Exchange Rate.

As the peso has weakened from 9 per dollar in 2001 to 14 pesos per dollar in 2012, our trade deficit in manufactured products with Mexico has worsened dramatically, almost doubling during that 11-year span.  This is the effect that economists would predict but, so far, the exchange rate theory is only batting 2 for 3, while the population density theory is batting a thousand.  Mexico’s weakening currency may explain why our enormous deficit with Mexico is so out-of-proportion to their population density. 

And I won’t deny that low wages also play a role.  Many American companies have set up shop just across the border for that very reason.  Here’s a chart of our balance of trade in manufactured  goods with Mexico vs. their PPP:  Mexico Trade vs PPP.

As you can see, Mexico’s PPP (analagous to wages in Mexico) has risen by over 50% since 2001.  But, instead of our balance of trade improving as economists would predict, our trade deficit in manufactured goods with Mexico has nearly doubled.    If the “low wages” theory really held water, we should be seeing at least some improvement in our balance of trade with Mexico as their incomes have risen dramatically.  Instead, it has gotten much worse.  Once again, we see that economists have the cause and effect backwards.  Mexicans are growing wealthier because of their surplus with the U.S., instead of rising incomes in Mexico improving our balance of trade.   So far, economists’ “low wages” theory is batting zero.

Taken together, the 55% decline in the value of the peso since 2001 essentially cancels out the 50% rise in PPP (and wages) during the same period in Mexico.  So traditional economic theory should predict that our trade imbalance with Mexico should have held steady instead of nearly doubling.  The real explanation for that is that the effects of the population density disparity are becoming more pronounced the longer we attempt to apply free trade in a situation where it’s a hopelessly inappropriate trade strategy. 

Free trade with sparsely populated Canada – the good half of NAFTA – makes sense and has been enormously beneficial to the U.S.  Free trade with Mexico – the “malo” (or bad) half of NAFTA – has been a trade policy disaster, draining hundreds of thousands of manufacturing jobs from the U.S.  And it’s getting worse as the Obama administration stands idly by and renegs on its promise to fix NAFTA.

Next up, our 4th largest trading partner:  Japan.


The Good Half of NAFTA

March 11, 2013

This article marks the beginning of my annual update of trade data for 2012, about a month behind schedule.  Sorry about that, but it’s not my fault.  I’ve been waiting for the Foreign Trade Division of the Census Bureau to publish its annual update of country-by-country trade broken down by the 5-digit “end use code” for all products.  After waiting a month beyond that time when it’s usually published, it became apparent that, for whatever reason (budget cuts, perhaps?), it’s not happening. 

So I’ve had to adjust, switching to data broken down by the 6-digit NAICS code (North American Industry Classification System).  It classifies products in much finer detail than the 5-digit end use code – more detail than necessary for my purposes.  So it’s ballooned my spreadsheets and made my data gathering more difficult.  But for me, at least, it’s fascinating data and interesting work, and so it goes on.

As in the past, I’ll begin with America’s top trading partner, the nation that accounts for 16.1% of all of our exports and imports.  Some may be surprised that it’s not China.  The title of this article should tip you off.  The North American Free Trade Agreement (NAFTA) went into effect in 1994 and established a trilateral free trade zone encompassing the United States, Canada and Mexico.  In terms of total imports and exports, Canada is our biggest trading partner, beating China by $80 billion per year who, in turn, beats Mexico (the other half of NAFTA and our 3rd largest trading partner) by $42 billion. 

Our trade results with Canada stand in stark contrast with our balance of trade with the rest of the world in the critical category of manufactured products.  Here’s a chart of the data for the past twelve years, broken into five categories –  food, feeds and beverages; energy resources (oil, gas, coal & nuclear); metals & minerals; forestry products (lumber, logs, etc.); and manufactured products:  Canada Trade.

Our trade deficit with Canada improved slightly in 2012, declining to $32.5 billion from $35.7 billion in 2011.  The reason for the deficit is no mystery; Canada is, by far, our largest source of imported oil.  Our deficit in that category alone was $83 billion in 2012.  In the category of manufactured products, it’s an entirely different story.  In 2012, we had a trade surplus of $66 billion in manufactured goods with Canada – much larger than with any other nation.  Why do we have such success with Canada when the U.S. suffers a trade deficit in manufactured goods of over $500 billion with the rest of the world?  It’s a matter of population density.  Canada’s is one tenth of the U.S.’s. 

Especially when it comes to our trade deficit with China, economists are fond of blaming low wages in China and a Chinese currency that is kept artificially weak by Chinese manipulation.  But, just as the laws of physics must be valid regardless of one’s frame of reference (the foundation of Einstein’s theory of relativity), so too must the laws of economics.  They should apply to trade with every nation or, if it appears that they don’t, there should be a good explanation.  So let’s see how these claims hold up in the case of trade with Canada.  The following is a chart of our balance of trade with Canada vs. the exchange rate between the Canadian and U.S. dollars:  Canada Trade vs. Exchange Rate.

If economists’ claim that a stronger currency makes imports cheaper for our trading partner and makes their exports more expensive, thus helping our balance of trade, then what we should see is an “X” pattern in this chart.  As the exchange rate drops, the U.S. balance of trade should rise.  (The exchange rate can be a little tricky to understand.  A drop in the rate means that the other country’s currency has gotten stronger.  If it once took two Canadian dollars to buy an American dollar, and now it only takes one, then the Canadian dollar has become twice as strong.) 

In this case, the claim is valid.  As Canada’s dollar has strengthened, from 1.53 in 2001 to being equal to the U.S. dollar in 2012, our balance of trade with Canada (including manufactured goods, as we saw in the previous chart), has improved.  Our deficit has shrunk from $53 billion per year in 2001 to $32 billion in 2012.  But is this improvement really due to the change in exchange rate, or is it due to Canada’s low population density?  The answer to that question will become evident as we explore our trade results with more countries in upcoming articles.

As for the claim that trade deficits are caused by low wages – that is, that manufacturers will move production to where the labor is cheapest –  here’s a chart of our balance of trade with Canada vs. Canada’s purchasing power parity (PPP), a good measure of wage rates relative to our own:   Canada Trade vs. Canada PPP.  As you can see, as incomes have risen in Canada, our balance of trade has improved, just as economists suggest would happen.  But one data point doesn’t validate the theory.  Again, has our balance of trade with Canada improved because of their rising incomes and stronger currency, or has it improved because of Canada’s low population density?

And consider this:  it’s not as though our suplus in manufactured goods with Canada is purely a matter of exporting goods to them while importing nothing.  The U.S. imports more manufactured products from Canada – a high-wage nation – than from any other nation except China.  (We import slightly more from China.)  But China has 40 times more people than Canada.  When expressed in per capita terms, our imports of manufactured goods per Canadian dwarfs those from China!    How do you explain that?  How would economists explain it?  It’s because Canada’s low population density makes them capable of having a high rate of per capita consumption – perhaps even higher than that of Americans.

Free trade with this half of NAFTA – Canada – has indeed been very beneficial to the United States.  This is one situation where it works very well.  There are others, too. But free trade doesn’t always yield such results.  There are situations – as when trading with badly overpopulated nations – when free trade is tantamount to economic suicide. 

So stay tuned.  My next article on our number two trading partner – China – will paint a very different picture.


Vote on Tuesday

October 26, 2010

I was actually planning to  publish a post titled “Vote on Tuesday?  Don’t Bother.”  Both parties run on platforms designed to energize their base and then, when elected, move toward the middle.  The result is that both parties are indistinguishable and nothing ever changes, at least not on the critical issues of immigration and trade.

Then this came in the mail yesterday:

It seems that Lance Enderle is running to replace incumbent Mike Rogers in Michigan’s 8th Congressional District.  Since moving to Michigan in ’01, I have supported Republican Mike Rogers because of his opposition to illegal immigration and amnesty for illegals.  But, like virtaully all Republicans and Democrats, Mike was a staunch supporter of free trade.  So I had to hold my nose each time I voted.  Besides, Mike’s opposition to illegal immigration was more passive than active.  Being in a “throw the bums out” frame of mind, I’d probably have voted against him this time around anyway. 

As you should know by now, there are only two issues that I believe affect the direction of this economy – trade and immigration.  Everything else is a side-show that ultimately has little impact on our economy.  Since both parties generally support high rates of immigration and free trade, I’ve had no enthusiasm for this election.  They’re all the same and no one is going to take a stand on these issues. 

But, as you can see, Lance Enderle has clearly stated his belief that NAFTA (North American Free Trade Agreement) should be repealed, and he believes in raising tariffs on all imports.  While that actually goes further than I would (I’d only raise tariffs on manufactured imports from overpopulated nations), it’s a step in the right direction.  Tariffs on all imports would be better than what we have now.  At least now I have a reason to go to the polls on Tuesday.  And, if Enderle is elected, at least we’d have one advocate for sensible trade policy in Congress.  If he makes it, I hope he doesn’t disappoint me on these promises in the way that Obama did.


$US-$Can Exchange Rate vs Balance of Trade

July 8, 2010

Yesterday we looked at the dollar-yuan exchange rate and found no tendency for a declining dollar to positively impact the balance of trade between the U.S. and China.  But that’s just one piece of data.  Today we’ll examine the effect of exchange rate on trade between the U.S. and Canada.

In this case we have more data available.  The following chart includes the total balance of trade between the U.S. and Canada dating back to 1985, the balance of trade in manufactured goods dating back to 2001 (the data I compiled in researching my book), and the exchange rate dating back to 1990.  Here’s the chart:

$US-$Can Rate vs Balance of Trade

Some observations:

  1. First of all, it’s important to note that, since Canada is America’s largest supplier of imported oil and gas, our balance of trade with Canada is dominated by trade in those categories.  Oil is priced in U.S. dollars.  A falling dollar results in higher oil prices.  Thus, as the dollar declines, one would expect that our balance of trade in oil would worsen.  Economics says that as the price of an imported commodity rises, imports will decline as consumers switch to domestic suppliers.  But that doesn’t work for oil.  Domestic supplies are maxed out and, in fact, declining.  We have no choice but to continue to import at the same rate.
  2. From 1990 through 2002, as the dollar soared in value by 35%, our balance of trade with Canada worsened by 625%, a move in the direction that economists would predict, but the size of the move is beyond what one would expect.  Early in this time frame, NAFTA (the North American Free Trade Agreement) was implemented (on January 1, 1994).  You can see that our trade deficit (again, driven by oil imports) really took off at that point.  Thus, the worsening of our total trade deficit with Canada during that time frame had much more to do with the implementation of NAFTA than it did with the strengthening of the dollar.
  3. From 2003 through 2008, however, our overall balance of trade with Canada continued to worsen in spite of a dramatic decline in the dollar.  This is likely due to the rising price of oil, coupled with rising demand.
  4. Looking at the effect of the exchange rate on trade in manufactured goods from 2001 to 2009, we see what seems to be exactly the relationship that economists would predict – that the falling dollar resulted in an improvement in our balance of trade, improving from a slight deficit to a tidy surplus of over $40 billion in 2009.  But is this really caused by the falling dollar or was it driven by the disparity in population density between the U.S. and Canada?  The U.S. is ten times as densely populated as Canada.  My theory would predict that, upon implementation of free trade between two such countries, the more densely populated will end up with the trade surplus in manufactured products.  And that’s exactly what has happened here. 

So is America’s  rising surplus in manufactured goods due to the falling dollar or due to the population density disparity?  It’s impossible to say with certainty based on just this one data point.  Our experience with China indicates that the falling dollar has no effect.  Our experience with Canada is inconclusive.  My prediction is that, as we examine more exchange rates with other countries, it will become clear that the effect of exchange rates is dwarfed by the effect of population density disparities, if there is any exchange rate effect at all.  Stay tuned.

*****

Exchange rate data provided by OANDA:  http://www.oanda.com/?srccont=breadcrumb

http://www.oanda.com/?srccont=breadcrumb