Writings and observations

mckee

In his major policy speech last week, and when on the stump generally, Donald Trump continues to berate Obama about the trade imbalance, contending in a string of bumper-sticker declarations, without detail or explanation, that the manufacturing trade deficit is approaching $1 trillion a year, that this is result of terrible deals negotiated by political hacks of Obama, and that the United States is losing jobs to other countries on account of it.

He promises to bring in high powered negotiators to renegotiate everything to get better deals, to impose punitive tariffs to get the trade imbalance in line, and somehow to reach out and retrieve all the jobs that have been moved offshore.

Trump is completely misrepresenting the scope and nature of the problem, and deliberately overstating the consequences that may be expected from any of his proposed solutions. He is only looking at half the picture. When all of the picture is examined in perspective, it becomes clear that Trump’s entire argument on this point is pure, unadulterated nonsense, and he should know better.

Fundamental to understanding what is really going on is the recognition that nations do not trade with one another, individuals do. A trade deficit is not the product of one nation making a lopsided deal with another, it is the net sum of thousands if not millions of separate, individual deals made between individuals and businesses in the separate countries, each expressing their individual choices within the countries involved. Trump’s promise to bring expert negotiators in to renegotiate all the trade deals that make up the trade deficit is a good indication that he has no idea what he is talking about.

As any economists will explain, a trade deficit, standing alone, is not a bad thing – it is merely the economic indicator of an existing condition. A trade imbalance or deficit occurs when the dollars out to buy imports exceeds the dollars in to sell exports. To determine whether any such deficit is good or bad depends upon why the imbalance occurred. The United States has almost always maintained a trade imbalance; we are and have been since at least 1975 a net importer as a nation, and we largely benefit because of it.

The average American consumer benefits hugely from the importation of cheaper foreign goods. Where the fundamentals of the economy are strong, any shortage from the excess in dollars flowing out over reciprocal dollars flowing is absorbed by increased GDP and normal growth without resulting in abnormal inflationary pressures. Capital returning in the form of investments in the U.S. or acquisition of U.S. securities (i.e., Toyota and Honda, for example, in constructing automobile assembly plants here) is providing a capital surplus that directly benefits the U.S. economy, which on balance has led or will lead to increased opportunity throughout the local markets.

According to a series of Cato Institute studies published in 1998-99 and corroborated in a 2015 analysis by the Wall Street Journal, a burgeoning trade deficit is consistent with a healthy growing economy and indicates an economy ripe with investment opportunity and flush with consumer confidence. Trade deficits tend to be pro-cyclical, growing during expanding economies and shrinking during times of recession. By almost every measure, America’s economy has performed better in years in which the trade deficit rose compared to years when it shrank.

Trump’s wringing of hands over the burgeoning trade deficit is further indication that he is either trying to kick sand in everyone’s eyes or he does not understand the fundamental economics of international trade.

The trade imbalance is not causing domestic manufacturers to take their plants and jobs overseas. Improvements in technology in underdeveloped nations – particularly the increasing availability of reliable electric power – and improvements in communications and shipping alternatives have made it possible to duplicate quality manufacturing capacity in underdeveloped countries. For labor intensive manufacturing, this means that production can be accomplished in an underdeveloped country at significantly lower labor costs. The loss of labor intensive manufacturing from the United States to underdeveloped countries is becoming and will continue to be an economic certainty regardless of the status of the balance of trade. Further, and no matter what Trump promises, these manufacturing processes are not going to return to the United States until further technological improvements here, such as robots and automation, eliminate the labor cost consideration.

Imposition of tariffs to dampen the benefit of cheaper labor overseas may appear to solve the problem of jobs being outsourced overseas, but it is only of short term relevance. Any tariffs that are imposed will be added to the price and be passed to the consumer, which will cause a decline in the demand for the foreign goods. The resultant increased price on the goods from foreign competition may permit the local manufacturer to continue to compete price-wise in the domestic market for a while. But the lower cost alternative will continue exist in the international markets, preventing the domestic producer from competing world-wide.

In very short order, the impact of imposing tariffs on one segment of the import market will reduce the amount of returning capital – reducing imports will lower the flow of dollars out which then become available to finance reciprocal trade, or capital investments, or acquisition of securities. All elements of the market will eventually be dampened to some degree by the imposition of tariffs or other artificial restrictions on any one segment of the market.

The net effect may appear to save some production jobs in some areas, but this will come at the expense of higher prices to domestic consumers throughout the market, lower reciprocal trades in other areas of the market, and lessened availability of foreign investment capital. If the domestic manufacturer in the tariff market attempts to continue to manufacture goods at the higher labor costs of the United States, he will be unable to compete in foreign markets. Determining the actual net value of all these elements is an ongoing and extremely complicated process. Suffice to say that theoretically and by definition, it will eventually balance out exactly, as by definition the markets will always strive to achieve equilibrium.

The take away from all of this is that Trump is simply blowing smoke in his tirades and promises around the trade deficit, and what he can actually deliver in the way of increased jobs and balanced trade. Recognizing that this is an extremely technical subject it can all be summarized in a phrase that anyone can understand:

Either Trump is a fool or he thinks we are.

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McKee