Tuesday, August 21, 2018

Why Trump is right and wrong about trade deficit

While Trump has been harping on trade deficit for thirty years – he was complaining about the Japanese in the 1980s – he’s vastly oversimplifying the issue and the solutions.

Image Credit: Thomson Reuters

“The Chinese are raping us” and “Canada is killing our farmers”! Such melodramatic claims from Trump resonate with many Americans, because the effects of globalization have been devastating for half the population. To his credit, Trump has been harping on trade deficit for thirty years – he was complaining about the Japanese in the 1980s. However, he’s vastly oversimplifying the issue and the solutions. This is an important topic that requires serious thoughts.

What is trade deficit?

Simply put, trade balance is the difference between our exports and imports. If we export more than we import, we have a trade surplus; but if we import more than we export, alas, we have a trade deficit!

Why trade deficit is bad

Trade deficit is transfer of wealth.

Since we can now print money and borrow like a drunken sailor, it’s hard to see the adverse effects of trade deficits. However, imagine for a moment that all trade happened with gold. Every year that we have a trade deficit, our gold reserves will shrink, and we can then clearly see that perpetual trade deficit is unsustainable.

Another facet of trade deficit is its impact on money supply or circulation. Let’s say you spend $1000 on jewelry at a local store. That’s not a one-time transaction. The jeweler may spend that money on furniture; and the owner of the furniture store may use that money to pay his employee, who uses that to pay his rent, which the landlord uses to buy grocery, and so on. Thus the economic effect of $1000 can be multiple times its value.

Now imagine the catalytic effect of $9 trillion! That’s the tremendous economic stimulus we have lost in the last 17 years alone due to our trade deficit.

Symptom of jobs lost

A corollary of trade deficit is that Americans are not producing the goods that we import. Every stuff we import potentially represents a lost American job. Of course, no country is 100% self-reliant, so we have to aim for a “reasonable deficit.”

Blame China? Not so fast!

Blaming China, which is also a rising economic superpower, is a political winner. We do have the largest trade deficit with China – about $380 billion last year. However, that number is a bit fake.

Consider an iPhone that’s assembled in China and shipped to Apple in the U.S. Our commerce department will claim a U.S.-China trade deficit of about $600. In reality, China gets only about $40 out of that $600, since China merely assembles various expensive parts from Japan, South Korea, Taiwan etc.

Thus, the true trade deficit that we have with China may only be about $150 billion.

But the math keeps getting murkier!

Trade deficit also fails to include the effects of overseas operations, foreign investments etc.

Consider that GM sold more cars in China than in the U.S. last year. GM’s profit from those cars represent a transfer of wealth from China to the U.S. Similarly, corporations such as Starbucks, McDonald’s, KFC and numerous U.S. retail stores have tens of thousands of outlets all over the world. Profits from all such activities are ignored in the trade deficit numbers.

Furthermore, when foreigners buy homes in the U.S., purchase shares of U.S. corporations, acquire entire firms, or open a manufacturing plant in the U.S., those investments aren’t reflected in the import-export statistics either.

Perhaps we need to come up with a new metric that’s more sophisticated.

Who to blame?

There’s no doubt that the U.S. manufacturing has been decimated over the years. In the 1950’s, the U.S. produced 80 percent of world’s steel and cars; today, the shares are 5 percent and 10 percent respectively. The number of people in the manufacturing sector has steadily fallen over the decades and tens of thousands of manufacturing plants have been closed.

The only people to blame for this are the US corporate elites. They are the ones who championed globalization and wrote NAFTA and WTO. In their spreadsheet, the only difference between a Mexican and an American worker is that the former costs less and hence is a better employee. Walmart buys $60 billion worth of Chinese goods every year, because the executives only care about maximizing their compensation and pleasing the major shareholders.

Interestingly, neither Trump nor any politician dares to challenge the corportocracy that rules the West.

Petrodollar – the elephant in the room

Above all, here’s a shocking fact that everyone ignores: after WWII, globalists built a global financial system that needs the U.S. to run massive trade deficits! If the U.S. dollar has to enjoy the status as the global reserve currency and the dominant trading currency, then there must be a lot of U.S. dollars floating around the world. Every central bank in the world needs U.S. dollars to shore up its foreign exchange reserves. Where are those countries going to get those dollars? Answer: by selling goods to the U.S. – i.e. through trade surplus with the U.S.

Similarly, the U.S created the Petrodollar system in the 1970’s, which forces other countries to buy oil and other commodities using U.S. dollars. For example, how’s India going to get USD to buy oil from Saudi Arabia? By running a trade surplus with the U.S.

Originally, this system worked because of the so-called “petrodollar recycling” – countries like Saudi Arabia would use much of their oil revenues and trade surpluses to buy American products and weapons. However, countries around the world now have other options, and the dollar isn’t flowing back to the U.S. as it once did.

Without a trade deficit

Trump dreams of a world where the U.S. has no trade deficit. However, if that happens:

  •  USD will no longer be a global reserve or trading currency;
  • foreigners won’t have USD to buy U.S. treasuries/bonds;
  • the U.S. government will be forced to slash its expenditure, which will mean cuts to social security, military etc.;
  • we won’t be able to punish our geopolitical enemies through economic sanctions; and
  • in other words, the U.S. won’t be a superpower anymore!

So complex! What’s the solution?

Unfortunately, there are no simple slogans to solve this problem. Tariffs on intermediate products such as steel and aluminum will only the raise the cost of numerous consumer goods such as appliances, cars, construction materials etc. Trump can threaten a trade war and bully China/EU to buy a little more from us, but it won’t solve the fundamental problem.

Only corporate elites can really fix this by bringing jobs back to America. U.S. corporations plan to spend $800 billion on stock buybacks and $500 billion on dividends this year, which will only inflate the stock market bubble and put money in the pockets of the 0.1 percent. If the elites are patriotic, they will stop such greedy schemes and instead invest that vast sum of money to create jobs and innovative products at home. Of course, more Americans with higher-paying jobs will help everyone, the 0.1 percent included.

There are also numerous other efforts that need to be taken by the U.S. government, civil society, and individual Americans to address the systemic problems in our economy. It will take an entire book to discuss all those, and I am in the process of publishing one.

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