But the connection between US persistent large goods trade deficits and these new tariffs is lacking and I am wondering what those gurus were smoking when they advised our President on how to solve this pressing trade imbalance using tariffs. They must have known that the US has already set in motion more than 100 cases within the World Trade Organization to overturn unfair and illegal trade practices in China and other countries. But I guess that wasn't getting enough attention, and they thought that starting a trade war would be a better approach.
Today I want to show you some data that I obtained from my secret contract in Moscow. Just kidding. I got this data from a perfectly legitimate organization called Facebook. Just kidding again. I got it from the US Census Bureau at https://www.census.gov/foreign-trade/Press-Release/current_press_release/index.html.
The Census breaks down US goods imports and exports into five major categories which you will find in the below table. The negative signs in the third and fourth columns show you that the US has a goods trade deficit in EVERY one of these main categories. So when it comes to laggards in trade -- blame all of them. Steel and aluminum -- the two main categories for the new tariffs -- are found as very small parts of Industrial Supplies. While imports are larger than exports for Industrial Supplies, notice the difference is tiny compared to the trade deficits in Consumer Goods and Vehicles.
How one could have looked at that table and decided to single out steel and aluminum, I can't fathom. If trade deficits are bad and hurt US workers -- I think I might have started with Japan and Korea -- those terrible places that sell us things like Hondas and Hyundais. By the way, if you look more closely at Industrial Supplies the key import villain is not steel or aluminum. It is crude oil.
If you want to know the full set of villains the following list shows you the worst offenders in January 2018 for each of the five categories. I chose the worst villains because they contributed more than 10% to the imports of each of the main categories. Notice that you can't find steel or aluminum in this list of villains:
1. Fish, shellfish, fruits frozen juices
2. Crude oil
3. Telecom equipment, computers, computer accessories
4. Passenger cars and parts
5. Cell Phones, pharmaceutical preparations
If we went after all the countries that sell us all that stuff, that would be a real trade war. But what's the point? What if we won a trade war? Where would they get us?
There is an answer to all this and some economists spout this information regularly even though it puts more people to sleep than Benadryl. I am not shouting but I will put this next sentence in all caps. WE HAVE PERSISTENT TRADE DEFICITS IN THE USA BECAUSE WE MAKE MISS PIGGY LOOK LIKE A VEGAN. WE SPEND TOO MUCH AND SAVE TOO LITTLE. Are you asleep yet?
Those awake might protest. You might ask: What does spending and saving have to do with persistent trade deficits?
Answer 1: When a country consumes more than it produces, it must buy goods from outside the country.
Answer 2: When a country saves too little, domestic investors have to find savers elsewhere. When foreigners buy US assets they first have to buy dollars, driving the value of the dollar higher, imports higher, and exports lower.
If we are really serious about reducing trade deficits in this country, the way forward is simple. Stop all this stupid trade war stuff and implement policies to do two things:
1. Raise output relative to spending.
2. Raise saving relative to investment.
QED.
| Table 2017 Goods Trade Data (Census Bureau) |
||||
| In Billions of Dollars | Net Exports | |||
| Net | as % | |||
| Exports | Imports | Exports | of Exports | |
| 1. Foods, Feeds, Bev, | 132.9 | 137.8 | -4.9 | -3.7 |
| 2. Industrial Supplies* | 462.9 | 507.6 | -44.7 | -9.7 |
| 3. Capital Goods | 532.8 | 640.7 | -107.9 | -20.3 |
| 4. Auto. Vehicles, etc | 157.6 | 359 | -201.4 | -127.8 |
| 5. Consumer Goods | 197.8 | 602.2 | -404.4 | -204.4 |
| 6. Other Goods | 62.8 | 95.6 | -32.8 | -52.2 |
| Total | 1,546.8 | 2,342.9 | (796.1) | (51.5) |
* Industrial Supplies includes iron and steel products and aluminum
Dear LSD. According to DJT’s gurus they targeted imported steel/aluminum rather than other imports due to national security—DOD needed to protect its domestically produced supply of steel/aluminum—despite reports that its consumption of such account for only 3% of domestic production. Sec. DOD Mattis in a memo indicated “that unfair trade practices that aim to ‘intentionally erode’ the country's industrial base are a threat to national security, and that imports based on such practices were thus a security concern.” “Ah, so,” says Confucius. It seems Mattis squared the round numbers of the steel/aluminum deficit. It makes sense that withering steel/aluminum U.S. capacity could possibly put our military response capability at risk should push come to shove. I heard there’s also the issue of the type/quality of metal DOD needs—that imported metal might not satisfy those requirements or delivery priorities. Lastly, reviewing the tariff war-threat-drama from the start it could be a DJT misdirecting negotiating ploy—similar to a naked bootleg—to get trading partners’ attention to rectify unfair trade—specifically China and S. Korea. Now that both those countries have agreed to talk about modifying trade practices (and others exempted from tariffs) and the stock market has gained half its loses since the curtain rose on the trade drama it may be that Chicken Little again was wrong.
ReplyDeleteYour two solutions to reducing the trade deficit. 1. Raising output relative to spending: Most consumers don’t earn enough to pay for basic stuff now, credit card debt is increasing to cover gaps, and any increased output would have to be priced competitive to imports—which may not leave sufficient profit to incentivize domestic producers. 2. Increase saving relative to investment: Will require higher interest rates to attract savers (assuming there’s any moola left after paying for basics) and could increase the deficit due to lower tax receipts but more percent of the budget going to debt service. Regardless, I like the two solutions—devil is in the details.
RE: oil. Reportedly, we will soon be a net exporter of oil. That will reduce the deficit.
Ok Larry, you've got me convinced. So yesterday (no kidding) I sold my Acura and put the $ in the bank. Today I resisted buying that new handheld vacuum cleaner I've been lusting for. And I made myself a pork sandwich for lunch instead of eating lobster roll. How am I doing so far?
ReplyDeleteI realize that you operate from a macroeconomic perspective, but on a serious note I think there is another facet of the tariff debate. Sure, some of the politics is self-serving for purposes of appealing to those who long for the days when they were paid $30/hour for making widgets and now earn half that for driving the Lil Betty Ice Cream truck. However, I suspect there is a hidden national security aspect to the bellowing about tariffs. Consider the following:
1. Terrorism and dictators like Kim Jong Un notwithstanding, DoD has assessed the PRC as the #1 long-range threat to US national security. China's continued efforts to seize control of the ECS and SCS have been combined with cyber warfare, efforts to infiltrate education in the US to propagate its propaganda, and other initiatives designed to make countries globally more dependent upon it. All efforts to stop PRC hegemony have only resulted in more hegemony. Xi's recent success in consolidating his power and making himself dictator for life has only increased concerns about the PRC's long-range intentions. We can no longer realistically hope for a less hegemonic regime to take over in China.
2. As the USSR learned, you can't be a global military power absent an economy to support it. The PRC is dependent upon trade with the US to support its economy, but past administrations have been reluctant to weaponize trade for fear of hurting the US economy and hurting themselves at the polls.
3. Although painful in the short run, any demonstration that the US is actually willing to impose tariffs may have a deterrent impact on China's hegemonic intentions when other efforts have failed. Who knows, we might actually be able to live without some of the cheap Chinese goods we import, but I doubt China can realize its intentions of becoming a global military power without our de facto economic assistance.
Bottom line: Although tariffs may be often contraindicated from a purely economic perspective, I am not opposed to weaponizing them to combat hegemony if used carefully. And even if not well targeted, their use in certain circumstances - even if China is not directly impacted - may send a message to the PRC about possible future economic consequences.
If we fail to create real pain when nations cross our bright red lines as we have during the past three administrations, then we end up with messes such as the current one with the DPRK. And, as a means of inflicting pain, having been shot at numerous times and hit once, I prefer economic warfare with its adverse consequences to the human and economic consequences of shooting wars.
Just my thoughts and I may be wrong, but I do know two things for sure. If we butt heads with the PRC to the point that it stops allowing the offspring of wealthy Chinese to attend IU, the BMW, Porsche, and Jaguar dealers in Indy are going to lease a lot fewer automobiles, and the Asian food counter at College Mall Kroger will take a big hit.
Best, John
This is a reply to the Tuna and to John. I wrote a similar reply earlier today and somehow it vanished. Drat my rambling fingers!!!!
ReplyDeleteI don't disagree that China is a threat in the way John describes. I don't disagree that a more direct and sure resistance is necessary. But I do not think that these tariffs against Chinese steel and aluminum will be very effective in eliminating trade imbalances or security threats. Russia and China are large ships that cannot turn very much or very fast. If Trump wants to gain support at home and abroad then he should use his bully pulpit and economic and military strengths to send strong messages. The average American does not know the details of the myriad ways China skirts trade laws. I'd love to see Trump's people hammer away over and over at the ways they cheat and the ways that impacts firms, workers, and consumers. AS they do that they should try to generate more effective coalitions in all the right places. I know -- that sounds weak and ineffective. But times have changed and more countries are willing to join such a campaign. If it doesn't work it will be for the same reason that tariffs won't work -- China is a large boat and cannot be changed quickly or much. And I like sanctions that are directly related to the offenses. A tit for a tat.
Neither of you think much of the macro story about saving and investment. But there are many rich countries who seem to have ample savings and better trade imbalances. We know that debt is spiraling out of control in the USA -- seems to me we would be better off if we weren't buying iphones like pancakes.
Dear LSD. Respectfully, I think DJT has already sent strong messages—did you and DJT chat while you were penning your lost reply?—and without having triggered trade or military wars. Time will tell if China’s big ship will change course to avoid a collision—even a modest course correction would be a good sign that it’s gotten DJT messages. If that occurs you might realize your love interest in seeing, as a result of Sino/’merican negotiations, China’s cheating ways exposed and reported—but certainly not on the fake newz channels. You might get your tit-for-tat-sanctions-specific-to-offenses if countries coalition (new verb??) with the U.S. bandwagon to pressure China to behave better. But I’m dubious about that cooperation—seems Uncle Sammy is having to go it alone, once again .
DeleteYou’re correct about our thoughts about less consumption/more production and more saving—I think there are too many headwinds and trade-offs and besides, the stars and planets are not properly aligned to make those things happen. Ouija rules!
Tuna, Interesting how you have this faith that going alone as a tough negotiator is all it is going to take to get China to play nice. Even if other countries join in China knows that neither the Europeans nor a majority of Americans have the tenacity to stick with all this if a trade war or fighting war starts to loom. China is not going to give in without a trade or other kind of war. China knows if it drags things out a while Trump will lose support in the next election and they will be rid of him.
DeleteWhat's strange to me is that you are betting on something working that is such a long shot -- and then you conclude by dissing a rational approach to debt, saving, and economic growth. Many of Trumps real successes in taxes and regulation are going to be offset by a continuation of too little saving and too much spending....especially by government. Kinda sad.
Dear LSD. That Uncle Sammy is negotiating alone is not faith-based . . . it’s Groundhog Day déjà vu all over again. Not faith; rather past, present, and likely future. Negotiation backed by credible fortitude to take action rather than drawing more flaccid red lines will either lead to practicable outcomes or unwanted tariff/military action. Tough negotiations with China have not begun so I am not partial to thinking that it “is all it is going to take to take to get China to play nice.” Talking and acquiescence have gotten us nowhere. So, it’s time to put cards on the table; put up or shut up. I don’t know that China thinks occidentals have no stomach for confrontation—your insight must be better than mine: But I think it a gross miscalculation to opinion China would accept a trade/military war rather than give in, even a little—too much to lose on both sides. And I don’t think DJT would allow China to drag things out till ’20.
DeleteNot dissing your rational solutions—but rather illuminating the dismal science with forecasts of good growth accompanied by reports of credit card debt increases and modest wage increases. Those reports seem—at least to this econ layman—to counter expectations/ideals for saving and reduced consumption. Interestingly, you say there is too much spending—but isn’t that point of tax reduction—to put more $$ in consumers’ hands? I don’t see how DJT’s tax/reg stuff will be offset by too much consumer spending—isn’t that the basis for stimulating growth/demand? Oh, I see—you want them to save rather than consume; likely not to happen given the economic malaise of the last eight years. And, shure, govomit spending excesses will ‘ventually come home to roost, but in the short-term isn’t some govomit spending—like on military and infrastructure (assuming the yobs are weally weally shovel-ready) stimulative?
Dearest Tuna, No sense beating a dead horse. You think Trump is a great negotiator and will be able to get mostly what he wants. I seriously doubt it. As for your last paragraph you seem to be quite the liberal these days as it has to do with fiscal policy. The goal of the tax cuts were mostly to stimulate business to produce more-- not to generate a wave of consumer spending. But Trump relented and now we have a mishmash of tax cuts. Sure spending might increase for a while. But Americans have shown that if you give people a tax cut they will end up borrowing even more. Just like gravity holds one's feet to the Earth, a country that spends more than it produces and takes on too much debt will have to pay the piper. The rock place/hard place has arrived. The country might need more defense spending and more infrastructure, but unfortunately we are in deep debt. Sorry Charlie.
DeleteLarry, ever since "It's the economy stupid" back during the GHWB v. WJC election, the past 3 presidents have deferred dealing with the PRC's growing global hegemonic ambitions. Now there is a president willing to deal with them, even as they are reached the point of perhaps being unstoppable.
ReplyDeleteDon't get me wrong, I don't like Trump as a leader. I do not believe for a second he is more honorable than the next politician. I have long felt I could not stand to be around the man for more than 5 minutes. He brings lots of personal baggage to the office, and he is often his own worst enemy in how he heals with situations. That said, he is on the right track about some things, and deterring the PRC's ambitions even at the risk of kicking off a trade war is one of them.
The biggest obstacle to a trade strategy working in this regard is the short length of our political cycle compared to the PRC's. The PRC leadership has long felt it could simply wait us out, making two steps forward and one backward hen necessary, and taking advantage of US leadership turnover with oscillating political ideologies. Xi becoming president for life obviously exacerbates this disparity.
In the past few years the PRC has become increasingly emboldened in its military adventurism. Its intentions are clearly hegemonic by its own de facto admission. If the PRC is allowed to control the Straits of Malacca and sea access to Japan and S. Korea, the free world could end up playing a terrible price.
Since diplomacy is a sham game with the PRC designed only to periodically placate the power it regards as its principal enemy (us) and lull the US into submitting to its gradual domination of significant portions of the free world, the only possible anecdote is to slow the PRC's economy to the point that it is unable to afford economically ever-increasing militarism and perhaps even affect regime change if powers underlying Xi become dissatisfied with the state of its economy and lack of military expansion. No Chinese leader can stay in power for long without the support of the PLA and the Central Military Commission. This means Xi will likely accede to the PLA's wishes for power to a large extent.
One silver lining is that Japan, long content to be an economic power while basing its national security on the US defending it, has finally been awakened to the China threat and is taking steps to rearm itself. But that will take an extended period of greatly increased defense budgets.
In addition, at the moment DoD is incapable of defeating every PRC military capability tit for tat. While we were focused on the terrorist threat during the W Bush and Obama administrations, the PRC was reconfiguring the PLA from largely a ground force focused on countering invasion by the USSR to becoming more expeditionary in nature. Obama's so-called "Asia pivot" late in his second term was in name only, his DoD was focused as much on PC as it was deterrence of the PRC, and he left Trump with some serious deficiencies with which to deal. DoD needs time and money to reconfigure itself and shore up some serious weaknesses to be able to counter the portfolio of PRC threats that include, among others, cyber warfare and Dong Feng missiles allegedly capable of taking out CVN battle groups. Thus slowing China's economic engine makes sense from a national security standpoint.
Just the hard, cruel facts that we as a nation have been unwilling to face for the past 24 years. Along with being spread too far and too thin being the world's military savior, that quarter century of neglected focus has left us between a rock and hard place.
John
Nice analysis John. I couldn't agree more. You end with the rock/had place. And if one can truly envision such a place you realize that it means there is no easy way out. And that is why many people would prefer a status quo of not rocking the boat. Every action has the probability of producing a better result -- but every action also promises a degree of hurt. Those politicians, including Trump, will say what they want but they won't commit political suicide by creating hurt. So while I agree with your analysis I am less optimistic that Trump's go it alone or his bravado will succeed. As you say, China's leader is there for a long time. Our leaders are not. Think of a game theory problem in which the guy with the longest tenure knows that his adversary thinks he is a good negotiator. I just don't see how Trump can win that game.
DeleteNothing in my analysis is intended to imply Trump will succeed, but when between the rock and hard place trying something is preferable even when there is pain involved. What follows is a true confession of an example of stupidity followed by the benefit of taking action.
ReplyDeleteThe other night I was attempting to restring a cable on an automatic garage door. As I restrung the cable I told my wife to hit the button to close the door. My plan was to feed the cable around the wheel as the door closed, but the cable slipped and I reacted intuitively to grab it.
Result: Got my wrist caught between the door and the railing with the door stuck. Unable to extract my wrist, I was in considerable pain with my circulation to my hand being cut off. Since the door was being lowered, if my wife hit the button again it would have tried to raise the door tightening the door on my wrist and possibly doing even worse damage.
The first option of pulling the release cord to release the door to manual mode didn't work because my wife wasn't strong enough to free the door in its stuck condition. I was between a rock and a hard place.
I could have said, better red than dead, call the fire department to come ax the door, and what's a hand anyway? By the time the fire department got me out I might have lost a hand. So, instead I felt I must take immediate action even if it failed. I said a little prayer and immediately an idea popped into my mind - even though I had no idea if it would work. I told my wife to hand me the large screwdriver lying on the floor, and I used it as a lever between the door and the rail. With considerable muscling moving a door slightly in a direction it wasn't designed to go, it worked! (I was thankful for all those days in the weight room.) I was able to move the door just enough to extract my arm, albeit with considerable pain.
Result (besides feeling incredibly stupid): minor damage to the radial nerve which may go away in time, nasty cuts on both sides of my wrist with pain for several days, but wrist and hand are ok now. No damage to door either.
Moral of my sad story (besides learning never to attempt repairing a garage door cable again): I'd rather Trump try something even if the outcome is questionable than maintain the present course and watch the PRC not only threaten us but take the freedom away from 100s of millions.
That is exactly why I refuse to try to fix almost anything! I can screw in light bulbs and rake leaves. But that's pretty much it.
DeleteAs for your other point -- I think there might be other options for security and economic issues under Trump. Doing nothing and being very aggressive with tariffs are polar options. I think Trump can be very aggressive in other ways and some of those he is doing already. He is good at tying retaliation to the specifics of a given offensive Chinese practice. I think forming coalitions with countries that have shown an interest (Japan, Korea, Saudi Arabia) to join us in very specific tit for tat policies could be more effective than in the past. So I think we can be more aggressive but I think we need to be more targeted. It doesn't help to call China bad names. It is more useful to combine a given US response while educating US citizens and others exactly in what ways China is cheating. I think you can get more support when you have a very specific cause that appears to need mediation rather than one-up them on a protectionist agenda.
Not sure DJT's tariff on steel and aluminum were little more that a photo op for his base. Since every republican and economist I know thought it was a bad idea.
ReplyDeleteEconomists and Republicans cannot be trusted. :-)
Deletehegemonic ? Second time in a month I have seen that term. Honestly, who writes like that? I guess I am just a simple man.
ReplyDeleteIn wikipedia...he·gem·o·ny
Deletehəˈjemənē,ˈhejəˌmōnē/Submit
noun
leadership or dominance, especially by one country or social group over others.
"Germany was united under Prussian hegemony after 1871"
synonyms: leadership, dominance, dominion, supremacy, authority, mastery, control, power, sway, rule, sovereignty
"the Prussian hegemony of the nineteenth century"
I am simple but so much so that I don't know how to use a dictionary.
ReplyDelete