Economist Ivanovitch Calls for China to “Get Out of its Huge U.S. Trade Problem”

March 18, 2019

https://www.cnbc.com/2019/03/18/china-should-quickly-get-out-of-its-huge-us-trade-problem-commentary.html

In the above-linked opinion piece, economist Dr. Michael Ivanovitch calls for China to “get out of its huge U.S. trade problem.”  It’s significant that economists of Dr. Ivanovitch’s ilk, a former economist for both the OECD (Organization for Economic Cooperation and Development) and the New York Federal Reserve, are beginning to recognize the unsustainability of China’s reliance on its massive trade surplus with the U.S. and the threat it could ulitmately pose to peace between the two nations.

Ivanovitch argues that China’s surplus with the U.S. is unsustainable and the longer it attempts to sustain it with endless talks and negotiations, the more it runs the risk of the U.S. seeing China as an existential threat for which it must prepare militarily.

Like all excesses, this one too can badly backfire on China. And it’s not clear what China’s economic and political interests are served as Beijing keeps deliberately pushing the U.S.-China trade relationship into a growing and unsustainable imbalance.

No, China should know that, at some point, the abused party wants out — sometimes violently.

It’s great that economists are beginning to see a danger here, but what they fail to understand is that reducing its surplus with the U.S. isn’t a choice China can make without devastating its economy.  China is no different than other badly overpopulated nations – like Japan, Germany, South Korea and many others – in that they either depend on manufacturing for export in order to sustain their bloated labor forces, or they are doomed to abject poverty.  Economists don’t recognize the inverse relationship between population density and per capita consumption, and the role it plays in driving up unemployment and poverty.  They don’t recognize it because they refuse to even ponder the ramifications of human population growth out of fear of being labeled “Malthusians,” a virtual death sentence for an economist’s career.

China may not understand it either, but they do understand how heavily dependent they are on the export market – especially the U.S. – and they understand that, for reasons that may escape them, it’s proving impossible to transform to an economy driven more by growth in their own domestic consumption.

China will never willingly cede any of its surplus with the U.S.  If the U.S. wants to move toward a balance of trade with China, it must take matters into its own hands, and the use of tariffs is the only tool at its disposal.  It’s time for Trump to stop being suckered by China’s willingness to engage in talks that drag out forever.  Lay down the law, slap 25% tariffs on all Chinese imports, and tell China they will only be reduced when a balance of trade has been established, and even then by just enough to assure that such a balance is maintained.

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More Evidence that Tariffs are Working

March 8, 2019

https://www.reuters.com/article/us-trade-emerson/as-trade-wars-rage-emerson-plots-new-u-s-expansion-idUSKCN1QP0IQ

Here’s more evidence that the tariffs on Chinese imports are working.  As reported in the above-linked article, Emerson Electric now plans to move manufacturing back to the U.S.  It’s a complete reversal from their strategy of only ten years ago.

In 2009, the chief executive of Emerson Electric Co. bluntly told investors at a Chicago conference what many of his counterparts at other manufacturing firms would only say privately.  “I’m not going to hire anybody in the United States. I’m moving,” David Farr said as he blasted U.S. taxes and regulations and called it an easy decision to expand in India and China.

A decade later, Farr has made a stunning reversal: Emerson now plans to build at least three new U.S. plants and is already expanding existing domestic operations. Farr saw a new era of U.S. protectionism coming before Trump’s election – and started planning accordingly, he said in an interview with Reuters at the company’s sprawling headquarters near St. Louis, Missouri.

“For the first time now, I’m looking for best-cost U.S. locations” to build factories, he said.

Trump’s election, Farr said, accelerated a political shift against free trade policy that is now transforming many U.S. firms’ domestic investment strategy. Protectionist policies — especially toward China — are now a rare point on which many Democrats and Trump agree, relegating formerly bold Republican free traders to the sidelines.

The article goes on to provide some details of Emerson’s plans, particularly to spend $425 million on capital projects in the U.S., including $250 million for new manufacturing facilities.

And it’s not just Emerson:

Farr’s new take on U.S. investment reflects a broader questioning of overseas expansions, especially in China, for both political and operational reasons. A survey of top managers at 500 U.S. companies conducted in December by investment bank UBS AG found that 31 percent have moved or are moving production facilities to avoid tariffs. Fifty-eight percent said they expect tariffs to “have a positive impact on domestic investment.”

It’s not just the tariffs.  Farr seems to be disillusioned with manufacturing in China.

Forces beyond politics are pushing manufacturers like Emerson to reconsider investments in China, including rising labor and logistics costs there …

… Emerson’s renewed commitment to U.S. manufacturing is also part of a larger move by global manufacturers to produce more goods in the regions where they are consumed to save on transportation costs.

I believe there are other factors at work here too.  The domestic Chinese economy is flattening out at a far lower level than CEOs expected.  They dreamt of a nation of more than a billion people becoming western-style consumers in the mold of Americans, making China a market four times the size of America.  It hasn’t happened because gross overpopulation in China strangles their per capita consumption.  They built a lot of capacity in China to serve a market that never materialized – capacity that was then dependent on exports to make it profitable.  Along with higher wages and high shipping costs, Trump’s tariffs have eroded their profits even further.  Supplying the American market from China no longer makes sense.

This story, and the one I posted about yesterday – about BMW putting on hold its plans to export EV’s from China – are just tiny examples of the effect that tariffs have in driving manufacturing back to the U.S.  Just imagine the potential as this begins to snowball.  Imagine how many factories would have to be built and how many people would have to be hired to staff them to make all of the products you see on the shelves at the box stores today that are all sourced from China.  There would be an economic explosion in this country the likes of which haven’t been seen since the end of World War II.

The tide is turning against the failed concepts of free trade and globalization.  It’s crumbling right before our eyes.  The very fact that Reuters, a pro free trade and pro globalization publication until now, saw fit to even publish this information is evidence in itself of changing sentiment.

And kudos to Reuters for pointing out that Republicans were even more guilty than Democrats for pushing the free trade globalization agenda to the detriment of the American people, and that Trump has led the charge against it.  Nice to see that some on both sides of the aisle are getting on the bandwagon.

 


Trade Deficit in Manufactured Products Explodes in December

March 6, 2019

http://www.bea.gov/system/files/2019-03/trad1218.pdf

The Commerce Department announced this morning that the U.S. trade deficit grew to $59.8 billion in December, the worst reading in ten years.  But that doesn’t begin to tell the story.  The deficit in manufactured goods exploded in December to $77.3 billion, obliterating the previous record set only two months earlier.  Look at this chart:  Manf’d Goods Balance of Trade.  Exports rose by $6.1 billion to $189.2 billion – a new record – while exports fell $1.8 billion to $111.9 billion – virtually the same reading as in March, 2012.

On an annualized basis, the December deficit in manufactured goods is $927 billion.  It’s entirely possible that the deficit in manufactured goods will exceed one trillion dollars in 2019.  The U.S. economy is headed for a train wreck if something isn’t done.  The federal government can’t sustain the level of deficit spending needed to offset the trade deficit’s drain on the economy.

President Trump has got to get serious about halting the flood of imports that’s wrecking the manufacturing sector of our economy. The token tariffs he’s enacted so far are much too small and too narrowly focused to do anything other than take a small bite out of exporters’ profits.  Trade deals don’t work.  The rest of the world isn’t going to deal away their one trillion dollar surplus.  The negotiations with China are a waste of time.  He needs to raise the tariffs on all Chinese imports to at least 25%.  He needs to put 25% tariffs on all auto, truck and parts imports.

So far Trump’s pledge to “Make America Great Again” has boiled down to nothing more than a tax cut sugar high that has boosted the economy only slightly.  Americans who voted for Trump expected more.


Why is Finland the best place to have a baby?

March 5, 2019

https://www.cbsnews.com/news/why-finland-is-consistently-ranked-one-of-the-best-places-in-the-world-to-be-a-mom/

The above-linked segment aired on “CBS This Morning” today, reporting that Finland is one of the best places in the world to have a baby because of the low infant mortality rate and the fact that, on average, the medical bill is only about $60.  Why?  The story highlights higher taxes in Finland which fund their socialized health care program.  Finns don’t seem bothered.  In the U.S., if the government raised taxes enough to fund a health care program similar to Finland’s, many Americans then couldn’t put food on the table.

I bring this up because it’s worth considering how balance of trade factors into the equation.  In 2017, Finland enjoyed a $4.4 billion surplus of trade with the U.S., which accounts for approximately 80% of its surplus of trade with the rest of the world as a whole.  That may not sound like much, but in per capita terms the surplus is almost $800 per person, or $3200 per family of four.  That’s how much money the U.S. injects into their economy through trade.  The rest of the world injects about a quarter of that, or another $800 per family of four, for a total of $4,000.

Now consider the U.S., which has a trade deficit with the rest of the world of about $720 billion.  In per capita terms, that’s a deficit of about $2,200 per person, or $8,800 per family of four.  That’s how much the trade deficit sucks out of the U.S. economy.  And that’s how much the federal government needs to inject back into the economy through deficit spending – much of which is accomplished by under-taxing its citizens.

The trade deficit makes Finn families $4,000 richer and makes American families $8,800 poorer.  It’s as simple as that.  That’s why Finland is able to afford a health care system that Americans can only dream of, or that older Americans can remember from decades ago when company-provided health care that required almost no out-of-pocket expense was a benefit that virtually all working Americans expected.

“Wait a minute,” you may be thinking.  When we talk about the trade deficit, we all think of China, and maybe Japan and Germany.  But Finland?  How do we have a deficit with Finland?  Well, for starters, in 2017 we imported $1.14 billion worth of cars from Finland.  Can you name what brand of car is imported from Finland?  I doubt it.  All of them are Mercedes-Benz’s.  Finland’s Valmet Automotive manufactures Mercedes models under contract with Mercedes.  How many cars does America export to Finland in return?  In 2017, we exported only about $32 million worth of cars.  To put that into perspective, we import 20 cars from Finland for every car that we export to them.

Our next biggest import from Finland is pharmaceuticals – about $0.7 billion worth in 2017.  How much pharmaceuticals do Finns buy from us?  About $47.8 million in 2017 – only one fifteenth of what we buy from them.  And on it goes across hundreds of categories of products.

Finland is merely one tiny example of how balance of trade matters – how a trade deficit drags down our economy and our standard of living while boosting them in other countries.  But no one ever explains it to the American people because it’s too complicated a subject to be covered in a five minute story on “CBS This Morning,” or in a 60-second story on the evening news.

I wonder how many people who complain about the sorry state of health care in America are also those eager to lambast Trump for trying to get tough with our trade partners, not understanding the connection?  Is it any wonder that we’re in such a mess?

 


Debt Denial

February 18, 2019

https://www.cnbc.com/2019/02/13/that-22-trillion-national-debt-number-is-huge-but-heres-what-it-really-means.html?recirc=taboolainternal

A few days ago, the national debt hit $22 trillion for the first time, and the above-linked article appeared on CNBC, essentially downplaying the seriousness of the situation.

  • What matters is the debt-to-GDP level, which is not in the danger zone now but threatens to get there before long.

Baloney.  When the people holding that debt – China, Japan, Germany and all the others who use our trade deficit money to buy U.S. debt decide to cash out and demand their money back, are they going to say “Hey, U.S. GDP, we want our money?”  Of course not.  U.S. GDP is an economic measure, not a holder of money.  They’re going to come to you.

Take another look at the picture in the article of the man looking up at the national debt clock.  Not mentioned in the article are the words just below the national debt figure:  “YOUR family share 086858.”  That’s right, the average American family now owes $86, 858.  Measured in terms of debt-to-average household net worth, the national debt has skyrocketed far beyond the average household’s net worth and ability to pay.  The reason that expressing the national debt as a percentage of GDP is so bogus is that, although the GDP has been growing steadily, the average net worth of American households has been stuck at about the same level for decades.

The source of all this debt?  The article provides a half-truth:

The main culprit of public debt is budget deficits, …

Well, yeah, but that’s like saying you owe money on your mortgage because you borrowed it.  The real question is “why do we have to keep running such huge budget deficits?  Why don’t we just stop doing that?”  Think about it.  What would happen to the economy if the federal government suddenly stopped putting a trillion dollars per year into it?  Instant recession – probably one that would quickly spiral into a depression.  Without the federal government putting that money into the economy – and it’s no coincidence that it’s almost exactly the same as the amount that the trade deficit takes out – the economy would collapse.  There are those who would tell you that balancing the budget, without addressing the trade deficit, would somehow prove to be an economic stimulus.  Don’t listen to them; they’re idiots.  The only way to deal with the budget deficit and the national debt is to eliminate the trade deficit.  Period.  Plain and simple.  There are no other options.  Let the trade deficit continue to grow and we’re soon headed for a real disaster.

It’s astonishing to me and scary how few people in the media, and even economists, understand this basic truth.


No Progress on Cutting Trade Deficit

February 15, 2019

Last week, the Commerce Department released the trade data for the month of November.  It was expected that the data for November would be the first to show that the tariffs enacted by Trump are beginning to “bite,” after the data for the previous two months was supposedly skewed by importers loading up in advance of the tariffs.

Didn’t happen.  Although the trade deficit was down slightly, the drop was insignificant.  At $49.3 billion, the overall deficit tracked right in line with previous months.  More importantly, the deficit in the all-important category of manufactured products (where jobs are concentrated) dropped by $4.8 billion to $72.5 billion.  Nice that it dropped, but it’s still the fifth worst deficit ever recorded.  Here’s the chart:  Manf’d Goods Balance of Trade.  The deficit with China fell by only $2.8 billion to $35.4 billion – the fourth worst deficit ever recorded with China.

So far, all of the alarm raised by globalists about harm being done to the global economy has proven to be nothing more than fear-mongering.  The impact of the tariffs – 10% on half of Chinese imports and 10% on steel and aluminum – has been zilch, other than to slightly erode the profit margins of those exporting companies and adding a couple billion dollars per month to federal revenue.  And the whining by American farmers that China has stopped buying?  Exports of “foods, feeds and beverages” is running $9.0 billion ahead of the same time in 2017, led by a 20% increase in soybean exports.

In the meantime, though the economy has been booming since the enactment of the tax cut last year, the effect is beginning to fade, as does the effect of every stimulus plan enacted for decades.  Retail sales fell last month, as did industrial production, led downward by manufacturing, especially by auto production.  It’s no surprise.  Without significant measures aimed at restoring a balance of trade, the economy will be eroded as the trade deficit worsens, regardless of any economic stimuli.

The problem is that, although the tariffs implemented by Trump so far go far beyond what any president in modern times has been willing to do, it hasn’t been enough.  The tariffs are too small and too narrowly focused.  They need to include all imports from China and need to rise to 25%.  And we need the 25% tariff on autos that Trump has long threatened.

The current trade talks with China are a complete waste of time.  When the U.S. agreed to hold off on further tariffs in exchange for such talks, China had already won.  Any deal with China, no matter the terms, is a win for China because it puts them back in the driver’s seat.  All they have to do is make promises – the same thing they’ve always done.  When they fail to meet them, what will the U.S. do?  Engage them in more talks.  Trade deals in general are utterly pointless, since tariffs are the only thing that can influence other nations’ trading behavior in our favor.  It’s extremely disappointing that Trump doesn’t seem to fully grasp this.


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.