U.S. always have a trade deficit. We want cheaply made goods from countries like China. Who wants to pay more when you can pay less?
A trade deficit means that they have more of your money than you have of theirs.That's what freaks out Tump: he sees money as points in the game. So if they have more of your money, you must be losing.
Conversely, a trade surplus means you have more of their money than they have of yours. That makes Trump happy: a higher score! A win!
Meanwhile, people who rely on trade know that money is just a way of keeping track of the stuff. It's neither wealth nor a score in a game.
1
Maybe it’s time to move past “nationstates”?
1
OK. Trade deficits are complicated and involve more than many of us knew.
But you left us hanging with nothing close to a conclusion on whether the US is hurt by trade deficits net net.
1
One problem with this analysis is it starts out wrong by looking at trade between countries as if countries did business with other countries. But the essence of trade is individuals freely and voluntarily buying and selling with each other. It is absolutely necessary to the survival of the species because no human being in this world today can thrive or even survive on one's own resources and talent. The production of others is required.
Instead of thinking about trade between Mexico and the U.S., think of it as between Jorge and Sam. Start by thinking of Sam and Jorge living in the same town. Jorge has a farm producing most of the foodstuff Sam's family eats, and Sam owns a general stores that sells most of the products Sam and his wife must buy.
With government out of the picture, it is easy to see that Jorge and Sam are dependent on one another for their families' welfare. Chances are the two will be on very good terms, aware of the benefits provided by the other's efforts. Their exchanges are voluntary.
Harmony prevails until a government decides to impose taxes or regulations on Sam or Jorge. Whether imposed on the buyer or seller, taxes impact and distort individual's trade and disrupt social harmony. It doesn't matter if instead of living in the same town, Sam lives in New York City and Jorge lives in Allende, Mexico. The essence of their dependence on each other is no difference. If governments didn't exist, Sam and Jorge might live in harmony forever.
1
No- looking at human history one of these individuals were try to conquer or oppress the other one.
So let's have an article on what a global tariff-free trade program would do to us. Trump and others seem to think it's a great idea though I have my doubts. You still deal with deficits and cheap products produced by cheap labor capturing certain industries as well as over-production, correct?
There's a common belief that those in business, particularly if they are wealthy, understand economic data and the details of trade. But that requires intelligence, knowledge, facts and data, comprehension of concepts and attention to detail. Trump has none of these. He's ignorant to fault, has no interest in details and is intellectually challenged. He pretends to deal with reality using bravado, chaos-disruption and what he describes as "attitude." He thinks he's a the world's greatest dealmaker...he's invariably the dumbest person in the room.
So, he resorts to simplistic, utterly misguided, assertions, insults and mindless generalizations, delivered with the surety of a lifelong narcissist. His supporters insist he speaks for them, but that only makes them as ignorant as he is. The G6 can and should reject this wannabe dictator's demands and angry ad hominem attacks. It is Trump whose very dishonest and weak. He won't make America great but he certainly could make America alone.
Eclectic Pragmatism — http://eclectic-pragmatist.tumblr.com/
Eclectic Pragmatist — https://medium.com/eclectic-pragmatism
3
Since nobody can discuss trade without analogies, here’s ours:
Parker Brothers has decided that it will only accept Monopoly Money to buy its games, thereby imbuing the currency with fundamental value. To the extent that the world needs Parker Brothers products it also needs Monopoly Money. Parker Brothers then makes agreements to fill its supply chain in exchange for the money that it mints. It builds factories and office parks in exchange for pieces of paper that in creates, controls and denominates.
Now tell us, who’s the rube?
(We actually don’t need an analogy. Companies that fund themselves with crypto currency offerings do exactly this.)
Your story is an excellent but it breezes past the most amazing thing: our country creates a bank from nothing which concocts a currency out of thin air and real people are willing to give us real stuff in exchange for it. That’s amazing! We think that once you let that really settle in you’ll be far less concerned about trade deficits.
4
Your fiat currency argument is hoisted by its own petard. What’s the alternative? A return to the gold standard.? What’s so intrinsically valuable about gold? It’s shiny? It doesn’t rust? It’s pretty. It’s only valuable because we decree it such, much like your Monopoly Money analogy.
One might counter “scarcity”! Ok fine that’s true, a commodity currency (ie gold) does bear a built-in scarcity component... but what does that get us? Scarcity simply creates massive instability as people tend to hoard during crises. Also as more of the element is discovered (new mine for instance) it can jar the system artificially. Yes we found more gold but now the whole nation suffers deflation from the discovery. It makes little sense to tie your economy to random discoveries of the periodic table.
This is the reason our economy has been so much more stable in the 80 years since we went fiat. If u look at our nations historic inflation/deflation swings under the gold standard you will find they were way more egregious than they have been under our fiat system (in conjunction with monetary policy) of course.
Unless you want to return to the barter system and restrict it to bare necessities any system is going to require faith to function. In a commodity currency approach that faith lies in the agreed value of said commodity. In a fiat currency approach that faith lies in the government that backs it. So far, fiat wins.
1
If Trump's rants go on long enough, might not other countries become disgusted and decide that the US dollar should no longer be the world's reserve currency? Is the United States as all-powerful as Trump seems to believe?
6
Are we really aiming for more dangerous, grueling labor jobs? Is this not everything the Boomers fought to extricate us from?
3
This seems very over-simplified. If carNation starts growing their own bananas and continues to sell cars at the same rate, the deficit grows. Then, say bananaNation starts to sell bananas to carNation at below cost. And, starts building cars and selling those at below cost. (after steeling the proprietary information about building cars from CarNation). Now, bananaNation, who is now in the lead as the banana plantations and car production abilities in carNation have closed down as they couldn't compete, theorhetically has a lot of money that it 'must' invest in carNation? So, banana nation buys land and capabilities in carNation and hires some of the workers there, but continues to send the bulk of profits back to bananaNation. That's what we're really talking about. Not so much trade, but selling products below market price to take over the market, kill the existing market industries and jobs, and then... carNation is now owned by banana nation.
1
"But don’t trade deficits mean fewer jobs?"
in today's world, with 3.8% unemployment, i think that that more important questions are
a) "don't trade deficits or free trade change the composition of jobs in the labor market?" (think about construction and other services instead of basic manufacturing).
b) "don't trade deficits mean more consumption for the poor?" (think about clothing prices) and
c) "don't trade deficits or more free trade create more income inequality?" (think about profits being reinvested in US financial markets)
let's hear the trump administration talk about these questions, if it can handle the complexities, which probably can not fit onto a twitter page.
3
There are couple of pieces of conventional wisdom that don't stand up to close scrutiny. Yes, the US has a deficit in Mexico but a study by the Congressional Research Service showed that is was all in oil purchases. If you separate out oil, the US sells about as much to Mexico as they do to us. The only way to reduce the oil deficit is if US production keeps growing and cars get better gas mileage. In the meantime we get a good deal. If we depended solely on domestic production, prices would soar. The other point is that companies compete with each other, not countries. The government of China may have some control over some purchases by state-owned companies and may buy some more soy beans products, but that is only affects the margins. If US companies and farmers can't produce more of what China wants, the deficit will continue. The final thing is that we should consider trade between nations like trade between states in the US which which wisely adopted the ultimate in free trade agreements at the beginning. Nobody cares about the trade deficit between Virginia and California, because it doesn't matter.
4
"Be careful what you wish for." Exactly!
Mr. Trump has focused on trade deficits without looking at the big picture.
For example, I am planning a trip to Canada, a lovely country despite Mr. Trump's attitude. Due to our strong dollar, I get a very good vacation at a discount there, the American dollar being worth $1.29 this week in Canadian dollars. So I will theoretically be adding to the trade deficit. But, Canadians visit my area in droves in the late winter and early spring, so it probably evens out.
More importantly, Mr. Trump needs to focus on non-tangibles involved in trade as well as tangibles, like money flowing into the United States. These include goodwill and strong alliances, things his "America First" agenda ignores.
Trade deficits are not the be-all and end-all in foreign relations. In fact, building goodwill and strong alliances are paramount in keeping America strong.
7
One irony of Trump's fixation on trade balance is that almost everything done by the Trump Organization increases the deficit:
Build a building in America? Even if somehow no foreign steel, plastic, or electronics are used, the workers will spend some of their salaries on foreign goods.
Sell an apartment to a foreigner? The sale does not count in the trade balance, but again some of the money received is likely to be used to purchase foreign goods. The same is true when the Trump Organization received royalties from abroad on the Trump name, borrows money from abroad, or has foreign investors.
None of these are bad things, but all increase trade deficits without anyone foreign doing anything unfair.
2
I’m a democrat and a globalist. But I might actually be for some protectionism. People have to work - earning money and being able to feed your family gives many people a feeling of self-worth that no government handout or cheap imported plastic from China is going to replace.
The author’s thesis sounds remarkably like Republican trickle down economics...(from a monetary rather than taxation policy standpoint).
4
the unstated implication though, is that an American deserve to feed their families more than say a Mexican family. Not arguing that's not a valid perspective from an US citizen, but no one ever seems to talk about this point. Less Americans living in a poor econmic level is better than less Mexicans living at the poverty level.
While I agree with most everything Mr Irwin described, I think he left one important issue out, which is how we pay for our accumulating trade deficits. We imported goods and services to the tune of roughly $500 billion more than we exported in 2017. This represents about 2.5% of our $20 trillion GDP. As Mr Irwin correctly noted, it comes back, but it comes back as loans or to make capital acquisitions. This seems like a reverse mortgage scheme to me. If we let it go unchecked long enough, too much of America will be owned by foreigners. Mind you, it will take a long time because USA's entire net worth today is estimated to be around $125 trillion and today's trade imbalance is roughly equal to our growth rate, so we have a long time to figure out how to rectify the problem....but it needs to be acknowledged and addressed.
3
Globalization has exposed the unhappy truth that the US education system hasn’t adequately prepared the average US citizen for the implications of a truly globalized free market system.
We should focus our energies and resources on educating our children, and skills training for displaced workers, as opposed to protectionism. I wish commentators here on the NYTimes would focus on that constructive endeavor with as much rigor as their hatred for Trump’s misguided policies.
10
I would add to that more efforts to push forward job retraining and job relocation beyond solutions like tax deductions that only shift the entire risk to workers.
Trade deficits false trail leading to falsehoods. Example: China has made APPLE the greatest US company in history by assembling their products; cheap and reliable labour. APPLE Cupertino employs thousands of American designers and engineers in the heavy work. Every APPLE requires imported components from Korea and Japan. China buys US mobile phone chips on a massive scale; if allowed. America now bans HAUWEI mobiles as national security risk?
So APPLE products despatched from China to Europe directly (by air) do not show on US-Chinese trade figures. Interdependency not reflected in trade figures or corporate earnings from US investments in Europe. To say Europe takes advantage of US falls wide of the mark. NATO buys US AEGIS missile systems deployed in Poland and Romania at a cost of 700 million dollars for each unit. In Germany US military hospital used in Iraq and AFGHAN wars with special burns unit for US soldiers. Europe is no "piggy bank".
4
The US under Trump is as much a threat -if not more so - to the world's freedom as are Russia and China. The G6 should try to replace the dollar as the world's reserve currency if only to help restrain Trump's impending aggression (which won't be limited to simply tariffs).
1
When all of the economists have had their say, the truth is the steel mill in my town has all but disappeared along with 13,000 high-paying jobs.
We buy that same steel from China now. We don’t make much of anything here in the US any more due to predatory practices of countries like China who dumped their government-subsidized cheap steel on our markets until our makers went bust. Now China uses third-party, other-country shills to do even more damage.
You cannot have a viable middle class without manufacturing, no matter what the ivy tower economists say. And you can not have racial and economic justice without a middle class. So, on the issue of trade, President Trump is not only right, he is righteous.
3
So why are you applying tarrifs to steel from Canada (which is a net importer of steel from the US) if the problem is China? This makes no sense whatsoever.
7
To M. Mendelson of Toronto
Because the US needs its own steel making capacity in case of war, your 300% milk tariff not withstanding.
Canada has soft-talked the US far too long. Don’t tell us you fought in WW II alongside us—when your soldier proportional causality statistics vis-a-vis the US don’t bear that out.
It is instructive to note that the US restricts dairy imports to 3% of domestic consumption and yet Canada imports 10% of its dairy products. Maybe Trump is just focussing on the wrong numbers? https://www.theguardian.com/world/commentisfree/2018/jun/09/milk-canada-...
For all the years the UAW and other organized manufacturing labor used to throw around slogans like:
"Out of a job yet? Keep buying foreign!" and
"Buy American"
Who knew they were lying?! Seems like the Democratic Party used to welcome those same chants.
We import less expensive bananas and high quality cars and things even out when foreign capital purchases real estate in the US (and Vancouver). All makes sense.
A country takes into account other factors than just the free flow of goods between them and others. There are safety standards, environmental standards, worker protections, with food there are concerns with hormones and antibiotics. (Canada's dairy industry) Trump has cited national security as a reason for tariffs, whether legitimate or not. So each country protects it's citizens in the way that it deems appropriate. Trumps idea of completely free trade is a pipe dream and to attack neighbours and allies is insulting and unacceptable.
4
One of the benefits of being the country whose currency is the reserve currency is that the country can wage wars? A good reason to rethink whether we want to be that country.
However, reserve currency is like the English language: English is the language of business communication around the world just as the greenbacks are the currency for international trade relations.
As for "carland" investing their excess cash from "Bananaland" in Carland, it is an oversimplified analysis but sufficient to explain the concept of trade deficit. The flip side is that if Chinese bought up hotels and businesses in the US, given their penchant for treating intellectual property rights like a piece of toilet paper, it it inevitable that the Chinese will "steal" our technology and other intellectual property to our detriment.
In essence, the trade deficit of the type we are facing, while good in some respects, is fraught with national and economic security implications, and it is time someone rattled the sabers to call attention to it.
3
Anyone who knows anything about economics knows that "trade deficits" are not a problem - and can even be great goods - as long as they are handled properly.
That said, the economics profession itself deserves a lot of the blame for the misunderstandings concerning the "trade deficit".
Just calling it a "deficit" at all is highly misleading.
What the economics profession calls a "trade deficit" is a situation where you are getting more real goods and services than you are giving to others.
In what universe would anyone call that a "deficit"? Any normal person would call that a surplus.
Welcome to the world of mainstream academic economics.
The mere word "deficit" sparks a panic in ordinary people, and you can be sure that is why Trump thinks they're "bad".
There is just as much reason to call it a "trade surplus" as a "trade deficit". The untold harm the economics profession has done by deciding to call it a "trade deficit" is difficult to imagine.
9
Unfortunately, economists assumed the average citizen actually had enough of an attention-span to look at and understand the details of the situation rather than sticking to their initial knee-jerk reaction based on a ten-second soundbite. Clearly, they were too optimistic in that assumption...
This is great! Thanks for making such a complex issue a little easier for the layperson to grasp. I'm totally forwarding this to Larry Kudlow.
1
Economists over-simplify things too.
(1) There is an assumption in examples that markets in products/services are mutually exclusive across countries. This is not remotely true in the real world. Trade deficits result in some industries of some countries losing jobs because no country 100% dominates an industry. Some countries attain this advantage by ignoring externalized costs like worker health, worker safety, fair wage laws and environmental impact. You know slavery was the most efficient capital market. Does that mean we should allow that?
(2) The inefficiency of REAL markets limit the gains from trade. The theory says that if each country exports what it does best, everyone gains because we will have a world of the very best products. Ask yourself: is this true in our world? The reason is simple: many large companies are not single country entities; they are global and that creates conflicts of interest. On top of that, what is true of good/services/capital does not have a comparable structure for labor.
(3) The U.S. ALSO has a current account deficit. Meaning even AFTER accounting for capital flows, it STILL has a deficit. This is not good no matter what your politics is. It means the country is spending more than it can afford and that shows up ultimately as DEBT. Irwin mentions the improper use of capital from the last financial crisis but does not really propose a solution so we are stuck in this endless loop of asset bubbles/crashes.
4
Very nice piece, but could the NYTIMES also dig up and publish the actual data on tariffs? For example, according to the World Bank, the average tarrif on manufactured goods imported from any nation with most favoured status was 2.7% in Canada and 3.6% in the United States. This is the opposite of what the US president is saying.
13
Does this great trade authority suggest increasing the trade deficit with rest of the world would create more jobs in US? If yes, why does the author not try for an advisory role in China with the world’s largest trade surplus with almost every country?
I wish president Trump would read this, although I doubt he has the attention span to comprehend and retain it. It's a pointless wish in any case because it conflicts with his preconceptions.
2
Reading the article, and some of the comments below, indicate that the Trade Deficit is part of an intertwined nest of complexity. Trump does not respect complex thinking, he firmly believes his simple notions are enough. Perhaps Putin saw in Trump a global disruptor who would, if in power, take steps that would destroy our standing in the world. With Trump embracing our enemies and trashing our friends, Putin is winning.
3
If Canadians aren’t buying things we make, we aren’t making things Canadians want. How is that Canada’s fault, or “unfair” to us?
2
Actually, just to be clear, the US does have a surplus in total trade with Canada. We are buying more goods and services from the US than we are selling to them.
1
Agriculture. United States agriculture seems to be one area of U.S. dominance.
1
Not really - US dairy farmers expanded production in the face of declining consumption and now there is such a surplus that their products sell for less than the cost of production and a record number of dairy farmers are going bankrupt. We produce the most - that doesn't necessarily mean we dominate.
1
If Trump doesn't want a trade deficit, the answer is a simple as his mind, "don't buy anything from other countries". Wake me in ten years and let me know how that works out.
It's safe to say that what Trump doesn't know about international trade policy could fill the entire universe, because, other than fomenting racism to secure votes, the man doesn't really seem to know anything about anything, except how to lie, constantly.
7
“Those losers in Mexico gave us $69 billion more stuff than we gave them last year...We’re winners.” No. They didn't "give" us anything. We paid for it, and thereby transferred a net $69 billion of wealth to Mexico. This transfer is a reflection of the original terms of NAFTA, which favored fledgling Mexican manufacturing operations. It encouraged U.S. auto manufacturers (for example) to move parts and assembly operations to Mexico, because it was more profitable for these manufacturers to do so. One result was the loss of tens of thousands of U.S. auto jobs. Another was a reduction in the cost of vehicles for U.S. buyers. All Trump is saying is that the costs of this trade off (as reflected in the trade deficit) has become too high, and needs to be reduced.
Can the Democrats find a way to explain to Trump base, how crude and ignorant his arguments against the US trade deficit are? How bad for everyone, and for the Trump's base in particular, the results will be if a major trade war develops between the US and much of the world economy? Is there a way to cut through the polarization gulf and get the message to most of the voters that this deeply dishonest, uninformed and self-aggrandizing president is simply playing up to the base feelings and anger of the many frustrated and impoverished Americans, while offering no real solutions and enriching himself and others in the wealthy conservative class??
3
Most of the G6 protect their manufacturing with VAT taxes of which we don't have. I think that's the core issue here and we created this system. So blaming them for the problems publicly and not looking at ourselves is the real issue. Trump has tapped into that with the American worker but the one percent have been living the good life for so long change would be difficult as they have gotten used to the large profits they managed to secure for years and will fight like hell to stop. If the US wanted to increase its manufacturing than it should make it known to their counterparts and work with them to make it happen if they really wanted to create more jobs and prosperity for the working class in this country. Trying bluster his way through this is counterproductive.
Do you think that VAT taxes are not applied to imported goods? In fact, they are also applied to the transportation costs that imported products incur.
Well ... it's like with imperial vs. metric units. The US is the only notable exception to a world that switches to VAT. But please explain me how VAT is able to protect a market ?
If you expect Trump to grasp these concepts ... think again. He’s narrowly focused on bringing manufacturing jobs back to the US and damn the rest. In his mind, manufacturing makes America great, so if he can price products manufactured elsewhere out of the market then problem solved. Other consequences aren’t really in his purview.
Rather than focus on this nonsense, liberal politicians need to come up with better ways to address the dearth of high-paying blue collar jobs that used to come from manufacturing. Beat Trump by providing a better way - not by complaining how wrong he is.
4
I suspect that not many people are aware that direct labor costs in a typical manufacturing operation are now less than about 20% of a product's manufacturing cost, much less than even 20 years ago. If they exceed this, manufacturers will think about moving labor intensive operations, such as textiles, low tech products, and repetitive manual operations to low cost areas, and if this is politically unacceptable, replace workers with automated manufacturing operations - robots. As you correctly write, most "high-paying blue collar jobs" have disappeared. Only a rearward looking ignoramous would think otherwise.
I am not an economist but when you look at wealthy countries like the oil countries of the Middle East, it seems to me, that they are wealthy because they sell stuff to the rest of the world. They are wealthy because of a trade surplus.
2
One can look at trade as a decision by companies and individuals on whether to produce a good or service in the US or to seek that same good or service overseas. Making the decision to produce or buy the good or service domestically causes the use of US labor to produce the good or service. Making the decision to produce or buy the service overseas causes overseas labor to be used to produce the good or service.
In this respect, a trade deficit is a measure of jobs created in the US being foregone. When the US runs a large international trade deficit, we have the implication that US jobs are being lost.
Am I wrong?
If we fix the trade deficit by causing production of goods and services to occur domestically, we will create jobs.
But we can also fix the trade deficit merely bu reducing our consumption of goods and serveces. That definitely won't help.
What’s missing here is the fact that the money coming back into the country is mainly going to the 1%. There are no new factories or jobs in mass being built the money sits in the bank accounts or stocks owned by the Rich while the poor struggle for scraps. Any big store in the US is stock piled with made in China products. Soon these stores won’t need cashiers or a stockers all replaced by robotics. And then what? While it’s certainly true that American dollars value as the world currency comes with a price tag it doesn’t mean we have to let other countries flood our markets with lower priced goods that those same countries are unwilling to allow us to export to theirs. Unless of course we are going to heavily tax the few profiting and redistribute that money for the greater good.
3
In the past, empires were built on cheap labor in far off regions feeding the central power. Folks, the problem is not that foreigners are working for you. It's about how you distribute the spoils of the system.
5
Who says the trade deals were poorly negotiated? What data support this claim? None in your piece. Without supporting data you’re pontificating and likely wrong.
2
"Without supporting data you’re pontificating...." A reasonable claim.
"...and likely wrong." What data support this claim? None in your comment. Without supporting data you're pontificating.
Just saying. It's illogical to insist that claims need to be supported, and then make an unsupported claim yourself.
1
If China increases purchases of US goods by, say $100 billion, it will have $100 billion less left over with which to purchase US treasuries.
The reduced supply of dollars to the foreign exchange markets will cause the dollar to become more expensive in terms of other currencies (i.e., the dollar will become "stronger").
That will make US products more expensive in foreign markets, and reduce US exports.
US imports from China and other countries will become less expensive in terms of US dollars. US imports will increase.
Fewer dollars will be available to buy US treasuries, which will cause US interest rates to increase and “crowd out” US business investment and reduce GDP.
Higher interest rates will increase the price of homes and automobiles. Fewer homes and automobiles will be purchased, further reducing GDP.
The negative impact on our economy would be the equivalent of a $200 billion increase in the federal budget deficit.
Bilateral negotiations may or may not reduce the trade deficit with an individual country, such as South Korea or China.
However, the only way to reduce the overall trade deficit is to reduce the federal budget deficit.
1
fewer dollars will be available to buy T-bills because imports increase? their plowing money into the country helps keeping interests rates down, not up as you argue. They help us finance a larger federal budget deficit but are in no way responsible for our budget debt. The failure to tax at our expenditure level in good years is the main driver of our deficit.
1
By rasing taxes on the wealthy and cutting military spending.
3
You can make this as simple as this article or load on factors that further influence the positive and negatives of trade. I thought this article,although very simplistic, is a good way to break into international trade and its ramifications. Someone needs to tie the POTUS in a chair and read this to him so he at least how a trade wars are not easy to win as he stated. Especially when he is not playing with a full deck to begin with but is using this because it sounds bad and guess what, he and his fans think he is just going to fix it, the great negotiator, lol. His insults at the G7 were strictly grandstanding and will prove not useful in the grand scheme of things. Although not greatly better, Congress needs to act to take this trade treaty business out of his hands. At least they have staff that can read it to them.
4
Mr. Trump knows why he attacks Germany on cars. A walk across any parking lot will show you that there are many more Japanese cars in the U.S. than German ones. But if he attacks BMW and Mercedes he is also attacking "them up there" whereas if he attacks Japanese cars he is attacking a lot of his voters.
Does Trump know any of this? Probably not. This is why even the conservative media refuse to support him.
3
This article has no mention of debt payments, which are increasing. How does that amount to a nothing-burger?
Will America be great again if a serving of Guacamole is 30.00 USD?
1
Which is what it comes down to, doesn't it? If citizens really wanted to reduce trade deficits they could simply stop buying foreign made stuff.
Trump can rail as much as he likes about allies charging the US “massive” tariffs and erecting barriers to keep American farmers out - the reality is that US tariffs are almost identical to those of the EU and Canada. Scurrilous!
"US tariffs are indeed slightly lower than those of the EU and Canada but the difference is marginal. WTO statistics show that the EU’s average trade-weighted tariff was 3 per cent in 2015, the latest year for which this figure was available. Canada’s average trade-weighted tariff was 3.1 per cent, compared with 2.4 per cent for the US.
"The difference is even smaller when it comes to the tariffs that US exporters actually paid in 2015 — a weighted average of 1.4 per cent on non-agricultural goods sold in the EU, and 2.1 per cent on non-agricultural exports to Canada. EU exporters to the US paid an average weighted tariff of 1.6 per cent; Canadian exporters 1.3 per cent.
"Paul Krugman, the US economist and Nobel laureate, said Mr Trump appeared to be mistaking the EU’s application of value-added-tax (charged on imported and domestically produced goods equally) for a tariff, showing that he was 'making trade policy with zero understanding of the most basic facts and concepts'."
https://www.ft.com/content/2edf26f8-6b28-11e8-b6eb-4acfcfb08c11
3
Very nice summary. Worth reading if your college years are more than 10 years earlier. It is all Macroeconomics 101 which I am sure Trumps adviser know (how can they not?).
Economic policy in America is not "economic" policy. It is "political" policy designed to give credence to Trump's stupid campaign statements and designed to display him as a tough leader to his political base.
The consoling thing is that a global economy has its own ways to react to changes in money flow across countries. After all currencies fluctuate. And perhaps, only perhaps, this may be an incentive to elevate the Euro to a global reserve currency and thus as so aptly stated in this article transfer power from the US to Europe. Wishful thinking, eh?
2
Not really understanding how things actually work is common. Most of us make assumptions about how jobs we know nothing about are done--and how they should be done. Trump is probably worse than most of us because he has this incredibly inflated view of how smart he is. Worse yet, he has the power necessary to put his wrong ideas into place.
In his book, John O'Donnell talks about Trump's attitude toward the really big gamblers. Casinos like these guys, the "whales," because the house always has the edge in the long run. When a big gambler comes in and has a BIG win, the casino takes a hit for that day, but the gambler will be back, and, well, the house always has the edge. Trump hated people winning at his casinos, and when a particularly big high roller came in and had a huge win, he insulted the guy. Who then left and took his gambling habit to another casino. Oops, no chance to win back what was lost. Typical Trump thinking. He ALWAYS knows better than anyone else. Except when he doesn't.
6
Acting like a petulant child at a summit wont bring about economic solutions or bully your allies into trade deals. It is likely to escalate trade wars, throw the stock market into a tizzy and rid use of and financial gain from the tax cuts. Of course the petulant child thinks this is is a game and it is about winning. Well our score card is zero!
1
Great article. One may or may not agree with the consequences of a trade deficit or the related financial flows but the facts are the facts. One aspect not adequately covered is the size of inter-country trading and the overall balance relative to the size of the total economy. It's minute. For the US it is probably less than 25% of total GDP. Most of the US trading happens within the country. In addition, there is the enormous size of the service sector - from health care to banking - which is largely dominated by US firms.
3
We tried trade protection during the 30's. It was a disaster.
3
1. Running growing annual fiscal deficits bothers me more than a trade deficit per se. his is a failure of democratic self-government that weakens us economically, politically and morally.
2. China is an economic and strategic competitor that I do not think we want to have great leverage over US public debt or private assets in the US. A trade deficit with China is different than one with Mexico, Canada or the UK.
3. What I really want to see is a comparison of tariffs and trade barriers between the US and our major trading partners. If we are equalizing these, I don't see that as anti-trade so long as the door is open to mutually lower tariffs and barriers.
1
Lower Euro tariffs on American autos, and Ford Explorers and F-150s are still going to be a very, very hard sell.
Raise American tariffs on Euro autos, and I’m still never, ever going to buy a Ford Explorer or an F-150... I’m buying a BMW.
That’s just the long and the short of it.
2
the reason the EU imposes a 8% tax on our vehicles and we only impose a 3% on theirs, is to make up for not allowing European companies access to American government contracts.
It must be nice to be in the one percent.............If you worked for a living in the US the only way you could afford that BMW is with debt as in zero percent interest. And that goes for the Fords too. Private sector debt is a problem that's coming into view very quicly.
Many thanks to the NYT for this brilliantly concise explanation by Neil Irwin of trade deficits, particularly the Triffin dilemma and implications for exchange rates.
Moreover, I would argue that trade policy should not be considered in isolation.
Despite what Trump and his minions are attempting with their reductionist views on trade balances, trade is just one of many interest we have in our international relations.
U.S. interests go far beyond trade, and very often those other interests -- military cooperation, law enforcement cooperation, promoting democracy and economic development, contending with transnational threats like terrorism, climate change, disease, and refugee flows -- have a more immediate impact on national security.
Trump's puerile satisfaction in disturbing the apple cart with his tariff wars not only puts global trade at risk, it also jeopardizes the international rules-based system we built and the international goodwill and cooperation we need to confront other issues.
We're isolated not just within the G-7 but from the world at large.
6
How long will this man be allowed to destroy our country, our relationships, our present and our future? More than Russia, more than China he is a clear and dangerous threat.
8
Everyone but the NYT knows that lower trade barriers benefits working Americans. We are the number one economy in the world. If you want to hand this crown jewel to China then you will not be able to retire, have healthcare, or open immigration borders.
If you want economic growth like China you have to reverse the deficit bleeding and create a level playing field with our “backstabbing” friends. Why does Canada charge the USA almost 300 percent tariffs on milk?
Since WWII we have rebuilt these economies and defended them and kept them safe out of our pockets. Do they fairly pay for our troops in Germany and Japan? Do they pay for their fair share of NATO and UN? Absolutely not.
Stop the shipment of Mercedes and BMWs and Volkswagens to American markets and watch the fun!
2
You do know what the dollar is worth don't you? Just under 4 cents and falling. The American worker needs a raise or there isn't any demand which makes up 70% of the economy. What takes the place is consumer debt and it's at an all-time high.
1
I appreciate thoughtful, informed articles that work toward greater understanding. Would it were Mr. Trump's will to progress beyond the self-perfection he already sees within himself. Would that Mr. Trump understood the animus against buying American products created by his belligerence and hostility toward traditional American friends. He can't force me to choose to buy an American product, and increasingly I feel a powerful desire to aggressively look elsewhere. It is up to other Americans to either respond to this by finally reigning in their ignorant bully, or to further the progression toward fracturing relations by climbing aboard Mr. Trump's ignorant bandwagon of insults and threats and uninformed hostility. Please Republicans - it is time to get a spine.
3
The arm-chair economists on here are laughably trump-like in their ignorance of the operation of the world economy. Sad.
3
President Trump wants the G7 to become the G8! Wants to bring in Russia! What kind of trade deficit do we have with Russia?!The only commodity I'm aware of from Russia is an LSU sweatshirt that I purchased several years ago, and the tag in the back, incredibly states, Made in Russia! I know we send them a lot of our goods, but can someone add anything to LSU Tiger sweatshirts?!!!
It is time for the G6 to join the party and start meddling in our elections by educating our stupid citizenry. We are now paying the price of 40 years of dismantling liberal education in favor of science and education. It’s time for Europe to retake the reins of Western Civilization before it’s too late!
2
The article neglects a very important aspect of trade. How much tarrafts are levied on American products in other countries? I was recently in Korea and learned of people going to jail for selling the much sought after Calrose rice from the US because Korea protects its rice industry by keeping US products out. For years the US has been getting shafted by protectionism. We wised up and the world is furious. We must have fair trade first.
1
Does anyone believe Trump understands any of this stuff?
5
Economics 101 for Trump supporters... heck, for the old Wharton “grad” himself. Glad the N.Y. Times explained it to them.
3
Now I bet the G7 leaders were glad to see the Russian American president leave. He is an old man who cares nothing for America. Let’s hear what the foolish GOP have to say tomorrow on the Sunday talk shows The rest of us have to vote and stop this insanity
2
Right NYT times. Mexico received US dollars and we received avocados, a lot of them, and Cancun vacations.
Does this also mean Walmart shoppers are now the vanguard of progressive globalism? Seems like not too long ago we had Democrats posting comments chastizing Walmart shoppers for purchasing cheap Chinese goods.
What a world, what a world.
1
You consistently conflate the actions of nations with the actions of people. For instance, in your first Car Nation/Bananaland scenerio why would the people of Car Nation not take their relatively very large profits and invest them in real estate close to home? Thus jacking up the price of real estate, increasing the value of their holdings and sucking money out of the pockets of their own (undeserving) middle- and working classes.
Do people really care about currency fluctuations more then they care about their investment properties?
Trump is an idiot who has no understanding of international trade. He seems to think of it as a kind of low-level retail transaction. In doing so he has humiliated all of us.
But of course Trump himself is beyond humiliation because he has zero self-awareness and a pathological narcissism that prevents him from ever admitting that he is disastrously inept and hopelessly wrong.
5
The problem is not a trade deficit, but what to do with all of the people in the US that would be manufacturing the goods that we now import. Lets solve this problem with investment in new industries that create products that we can then export.
4
The other measure is the true proportion of our economy effected. We need a government with economists not TV personalities like Kudlow to deal with it.
4
So, can we compare the amount saved by lower interest rates, add in the value increase of stocks and real estate so affected, and tally up a number? Then we’d know if the trade deficit was a net win, or loss.
Enquiring minds want to know.
2
Good start of a discussion.
What is the trade deficit between Maryland and Indiana, or Maine and New Mexico or between the state with the lowest unemployment and the state with the highest unemployment?
If we start using the “trade deficit metric” between our states, we can easily see that it doesn’t make sense as a metric.
The better metric is something that measures trade barriers or restrictions to the free flow of goods AND people (services). There are basically no barriers (except geography) between Maine and New Mexico or Maryland and Indiana.
But are there barriers between nations and how might they be eliminated?
3
All economics 101 of the sort I was reading in textbooks 50 years ago but apparently beyond the understanding of Trump and his so called economic advisors who see it all as a zero sum game. Most of course like Kudlow are total hacks prostituting their so called life long beliefs to cover for the moronic behavior of Trump who shows distinct signs of derangement.
10
Yes, way too complex for Trump to bother to try to understand. Or for Kudlow, et al to consider given his myopic, and inaccurate, ideologically driven perspective. The only hope is that most of the members of the G-7 along with the IMF and maybe the ECB will be able to rein Trump in by standing up to him. Abe and the JCB are not going to do it.
Question to "... so when a country is selling less stuff abroad than it buys from abroad, the country is making less stuff, and as a result there are fewer jobs. This piece of the Trump theory of trade is true." Doesn't this conclusion depend on the context, too? If (to take up on the 2-country example) BananaNation employs 100 workers for the production of bananas worth of 10,000 dollars, and CarLand 100 workers for the production of cars worth of 100,000 dollars, how then does the trade deficit of BananaNation vis-à-vis CarLand contribute to unemployment in BananaNation?
P.S. I changed the attribution to the two example countries, because I think it is a little discriminating to name a country producing agricultural produce "land" and only a country producing industrial products "nation."
1
One significant factor in this equation is conspicuously - if not surprisingly - absent: America's complex financial relationship with Saudi Arabia.
In 1973, in the midst of the oil crisis in the US, Nixon's representatives made a "deal with the devil" - the infamous "oil for dollars" arrangement. Saudi Arabia, the world's largest oil exporter, would take only US dollars for its oil. In return, the US would allow the Saudis to secretly purchase US debt in very large quantities.
This is one of the biggest reasons the dollar is now the worldwide standard in trade: if you wanted to purchase oil from the world's largest oil supplier, you needed US dollars to do it. It's also the reason the US has seldom questioned Saudi behavior.
The US benefited by seeing the US dollar become the strongest and most stable currency in the world, and by having unfettered access to the world's largest oil supermarket. The Saudis of course benefited by enjoying an equally stable currency (the Riyal is linked to the US dollar in value) and by establishing a significant stake in the world's largest and most stable economy.
Now, is that good or bad for the US? That's the question we need to ask. It's interesting to speak of our trade with Canada, EU and Asia, but unless we include oil dollars, we miss a huge chunk of the equation.
13
Not really since there are now so many alternative producers including ourselves.
2
It's very simple. Americans have been pushed for decades to become big consumers, probably the biggest consumers in the world. Americans consume much more than they can produce. So by definition their is a trade deficit.
8
The corollary: Americans have been pushed for decades to become big consumer who buy far more than they can afford. We have a consumer economy that runs on buckets and buckets of consumer debt, from credit cards to auto loans and leases to highly leveraged mortgages.
It’s a house of cards economy.
2
The comparison between a single banana producing country and another which produces cars is oversimplistic and disingenuous.
The real issue is between countries which can all produce the same kind of goods, and which should compete on equal terms.
By that standard, the 'West' has literally committed suicide vis a vis China by granting it, without any condition:
.access to western market with low/preferred nation customs duties
. access to western capital,
. access to western technologies
...an the related income and jobs that went with these.
In exchange, the West did not require anything from China: neither compliance with open currency exchange markets, nor respect of property rights, nor environmental, health and labour standards...etc.
With that kind of 'deal', supported by both Western capital owners and Republicans and Democrats over 3 decades, it was no surprise that capital, technologies and jobs flowed continuously from the West to China, thereby generating business and tax income as well as strong job growth in China, while Western countries have registered increasing trade and budget deficits and worsening unemployment.
Regretfully, MM Krugman, Irwin and others have been silent on this gigantic suicidal mistake, for which Western populations have been and are still paying a steep price, economically and humanly.
7
So you think it was possible to keep China in an economic isolation unit indefinitely? A permanent third world country of 1.4 billion people?
5
addition to my initial post, extracted from the Financial Times:
"...In the speech to the American Chamber of Commerce in Taipei, M Wong, US Deputy Assistant Secretary of State, doubled down ....with thinly disguised criticism of China: “Dynamic, broad-based and sustainable economic growth can never hinge on the whim of a dictator,” he said. “Unfortunately there are actors who fail to give due respect to the obligations they voluntarily signed up for. When economies, large or small, are able to flout the rules, cheat their trading partners, force intellectual property transfer, protect national champions, steal trade secrets and use market-distorting subsidies, it undermines the integrity of the entire rules-based system and . . . the prosperity of the entire region.”
Why have the US, and other Western countries, been tolerating this massive cheating on the part of China, to the detriment of their own countries and people?
It seems to me that western business got cheap labor out of the deal. How does that factor in?
There is another dimension that Irwin didn't deal with, namely services. The trade balance is the difference between exported goods and imported goods; this is what the Census Bureau reports when you look up trade with different countries (e.g., https://www.census.gov/foreign-trade/balance/c5700.html).
But, there is also a service balance which is difference between exported services and imported services. This is much harder to measure, mostly by inference from the balance of payments (net transactions to the rest of the world). By most accounts, the U.S. is running a service surplus with the rest of the world (e.g., see https://www.thebalance.com/trade-deficit-by-county-3306264).
When one considers services, the trade deficits with specific countries are reduced, if not eliminated. For example, the U.S. ran a trade deficit with Canada of $17 billion in 2017 (https://www.census.gov/foreign-trade/balance/c1220.html) but a service surplus (see http://time.com/5185673/donald-trump-us-cananda-trade-deficit-surplus/).
Trump apparently doesn't want to consider services as part of his personal score keeping. But, most economists will do that as will the Federal Reserve. On this point, Trump has put himself 'out on a limb' for no good reason.
19
Yes, and the irony of it is that his own company has, in the past few decades, focused on brand licensing and property management services.
Advanced countries with trade surpluses vs. China, an indicator for doing well in global trade, tend to have resources (Australia, Saudi-Arabia, ...) or produce high quality goods like Switzerland and Germany.
The latter is where the US is failing, from steel in which America can’t compete with either European quality (e.g. steel cables) or Chinese prices, to cars, appliances, ... it’s basically always the same story. This is a problem tariffs will not solve, it is caused elsewhere: market concentration/power due to lack of regulation which reduces innovation, low output of engineering graduates due to outrageously expensive colleges, lack of subsidies to fundamental research, etc.
7
What is the smartphone brand Germans prefer? Financial services? Planes? Quality is only part of the story. Chinese goods have a bad reputation. Yet they sell
Smartphones assembled in China in modern slavery factories with anti-suicide nets? Financial services leveraging people’s deposits for bank’s own financial gains? My point is exactly that we can’t compete with low wage countries on cheap products, but we can sell high quality products to the rising middle and upper class in China. That’s exactly what Germany does.
3
Liz, you make into a national problem which is misleading. I don’t necessarily disagree with your response. I am not a bit patriotic about this. Global capital is in crisis. Not just the US. “Trade wars, Trump, the rise of fascism in Europe are all symptom similar of the same cause. No need to start sing the anthem. Don’t you remember the millions dead because of blind patriotism during the 5 decades of the 20th century?
Absent from the analysis are global value chains and profits not being reinvested in productive activities (instead used for buybacks). GDP figures only suggest as for instance iPhones are counted as part of US production while its components are made in Japan, Korea, and assembled in China. Then some of those profits sheltered in islands. Other TNCs do the same. The issue is stagnation. Money capital and capital in other forms (goods and services) are not flowing as the expected rates that keep the thing going.
2
Money won't flow until it is in the hands of the workers and consumers as apposed to the investor class. Cheap goods from China mollify the lack of wage growth and give the illusion of a rising standard of living. Consumer credit gone wild has done the same all the while wealth was being transferred from government (tax cuts and private contracts), from workers by cutting wages and growing healthcare costs, and accumulated at the top of the wealth ladder, invested for personal gain taxed at very low rates and removed from our consumer based economy which must churn dollars or collapse.
1
So, to translate the article into action: In order to follow the commands the US President has given us, ROW (Rest of world) needs to establish a different currency that acts as reserve currency. In addition, by this ROW needs to make sure that the US limits it’s international power (no sanctions of that type mentioned) + ROW should write a large bill to get a refund for the huge costs, the subprime crisis had globally, and in particular the poor politics, not to save Lehmen Brothers right before the out brake.
Is it that what your country expects from ROW and in particular from its closest allies following the summit in Canada?
5
"Something has to happen with that $1 million. If CarNation doesn’t want the value of its currency to rise, it has to take that $1 million trade surplus and plow it back into BananaLand."
I guess we should be happy to be BananaLand and look forward to those real estate purchases by foreign investors in US cities like NYC.
I mean we always read about how NYC residents welcome money being plowed back in to their real estate by foreign investors...
6
All financial inflows are not the same. Inflows that result from purchasing renewable goods and services are the best. Inflows that result from purchasing infrastructure, real estate, and corporations/patents/research centers are as far from the best as it is possible to get*. Every other type of financial inflow is better than selling our plant and our future.
* I have no problem with foreign purchase of US assets, as long as the terms are completely reciprocal.
4
Imagine two countries, one in which there are many extremely rich people, which has a large manufacturing infrastructure which provides many well-paying jobs. The other country has many extremely poor citizens, who have no alternative but to work for starvation wages. If the rich in the first country can cut their manufacturing costs by offshoring their manufacturing jobs to the other country, paying starvation wages, and then ship their products back to the first country for sale, what are they going to do?
15
There’s always money in the BananaLand.
2
No touching. No touching.
Good example, but do we want to be BananaLand? We'd rather be CarLand.
3
Sounds like we're supposed to be grateful to be BananaLand.
BananaLand gave CarLand small pieces of paper and got cars in return. It’s incredibly cheap to make more little pieces of paper. If you’re running a trade deficit consistently without devaluing your currency, the rest of the world is subsidizing you, not the other way around.
1
For Trump, the world affairs are simply like a real estate general ledger!
5
Nobody in Europe want to buy US cars because European, and Asian, cars have far better quality, that is the real reason why USA have a trade deficit, US products are not good enough to be able to compete!
25
Wrong, wrong, wrong and I’m not a Trumpie. US (Detroit) product’s metrics on first time quality and reliability are, even on Consumer Reports, very competitive in this day. Almost any car or truck is a marvel of engineering and reliability now. Quit pushing that old narrative because it is wrong!
8
So if this is the case I question, why the US does not use the open markets to sell these superior cars in Europe for example? It is certainly not the question of tariffs. I.e German manufacturers sell huge SUVs in the US, and also produce these cars for the US taste, although the US imposes 25% of tarrifs on these products just to protect its makers.
Andreas, the "open markets" are still biased, with the US charging 2.5% import tax compared to 10% charged by the EU (plus 19% VAT).
The current 25% vehicle import tariff only applies to light trucks (the "chicken tax") not SUVs. Besides, most German brands build the majority of their US SUV models in the US and Mexico.
So Trump thinks that if Germany exports, say 100,000 cars to the USA, we should export 100,000 made in the USA cars to Germany? So, what the heck makes him think that Germans want to drive American cars? Especially, since he wants them all to be gas-guzzling pollution machines. Do we export any cars to Germany? I can't imagine. Germany didn't exactly flood the American market with Benzs & BMWs, did they? They're certainly not cheap, usually a result of flooding a market. Maybe they're just better quality (including the ones built here). I hate to tell The Donald this but quality has something to do with this. He should talk to some of his Ayn Rand-loving buddies about forcing hard-working Americans to spend their hard-earned money on a product they don't want just because it is made here.
21
Good point. While we're at it we can bring down the cost of labor in this country by not requiring union wages.
Oh yeah. Our problem all along has been collective bargaining. The last best hope for workers to defend themselves against the onslaught of increased demands and belt tightening in every sector of the economy. Let's throw away 40 bucks an hour with incredible benefits and trade it in for a cool 15 smackaroos, with paid birthdays off after 10 short years of service. THATs been the real bugger and it was staring us square in the face!
Brilliant!
Hello? Unions are big in Germany.
Maybe you were being sarcastic?
It’s a novel proposition trade deficits with other countries encourages investment in companies and the government in the United States.
On the surface, this is true but the quality of jobs, the lack of growth in wages, the sky high cost of owning a home, and general sense that something just isn’t fair for regular people is real only because we know that those investments are driving American companies to sell-out American workers in order to satiate the richest of the rich; to optimize those heavily coveted ROIs.
We can blame China all day but it’s really a Moral Deficit created right here in America. Americans want to consume endlessly, on all fronts. Too many people expect to live a lifestyle beyond their means. Silicon Valley tech companies discourage unionizing by requiring workers to sign that right away just to get a job. The Supreme Court upholds law that makes it impossible to file a class action suit against companies. A new tax law that benefits investors in capital. A Nine figure salary to Disney’s CEOs while the workers are sleeping in their cars.
It’s not the trade deficits, it’s normal Americans being silenced by companies who have a fiduciary responsibility to a few wealthy investors and not their employees.
20
"We can blame China all day but it’s really a Moral Deficit created right here in America. Americans want to consume endlessly,"
That's a pretty good rationalization you have going there.
But regardless of the level of consumerism, the net is still flowing off-shore. On the flip side, we do have foreign money flowing back into real estate. How's that working out for working class folks in California?
Seems fairly obvious that no one really understands this clearly enough to explain it in a way that most can understand even though it affects all of us. It reminds me of Climate Change... which, by any long term criteria, will make the trade deficit inconsequential Nonetheless, we maintain our monotonic focus on a few economic ills and ignore the elephant in the room. Just sayin'.
17
There was a clever comment on the WaPo the other day that explained trade deficits this way:
The US sells $100,000 in component parts to Mexico, let's say for cars because this does happen a lot.
The Mexicans have some inputs themselves (mostly labour) and use those US component parts, their own labour, and some other things to assemble finished cars which they export to the US for $200,000.
Does the US have a $100,000 trade deficit with this deal?
Or does each country make $100,000?
Is this a zero sum game or a win/win? Mexicans get work they might not have had otherwise, and Americans get cheaper cars.
If there were no cars exchanged, some, but not as many, would be made with all US labour, but they would be more expensive. Even though there were those assembly jobs (and fewer as robots take over), people who did not have those jobs would not be able to afford the cars.
This can be taken further into the geo-political arena.
Mexico now does not have those jobs. Their people are poorer. The pressure to emigrate which has been bedevilling your countries for at least 100 years will be greater. Do you want that? Or is it better to try to ensure that economic conditions there are better? Is that a 'win' or a 'loss'?
We can take it even further. Maybe the world would be a better place without so many cars.
It is not simple, but there are some ethical choices to be made.
29
In terms of the Mexico deficit, for the Michigan the ratio is more like 4 to 1 in favor of Mexico. That's a distinction with a difference.
"Mexico now does not have those jobs. Their people are poorer. "
Even with the miracle of NAFTA? That's strange!
Do you expect the US to ship ore jobs to Mexico in order to raise the standard of living there? I know that Canada doesn't want to and fights doing so through its labor unions.
You're wrong on a couple of points.
The example you use is more likely to be closer to 4 to 1 in favor of Mexico. That's a distinction with a difference.
https://www.naftamexico.net/naftaworks/usmextrade/michigan.pdf
"Mexico now does not have those jobs".
OK, we've had NAFTA in place with assembly jobs transferring there. Do you think the US will or should give up more manufacturing to help out Mexico? Canada won't. Just like Canada, the US has the legal right to control its borders. And yes, your mounties and border patrol watch the Detroit river like hawks.
"Maybe the world would be a better place without so many cars."
Maybe, but that has nothing to do with off-shoring jobs and the impact on the respective populations.
The bottom line is that our trade is mostly getting cheap stuff in exchange for jobs. Now I have no problem running a deficit with countries that are our friends and poor, I do have an issue with it when they are not either like say China. Yes our influence would be reduced if we had no trade, but that won't be happening. If you never have change you can't have improvement. Trump is change and improvement, there will be a price but it probably will be worth paying.
7
How is Trump an improvement, as compared to what exactly. Without trade, our economy will stall, and recession is sure to follow. Only the GOP will, as they always do, will sit back on their hands while people suffer, because trump supporters somehow feel that they’re going to get something from a man that has never had a successful business. Every business this man has touched or created, has failed, and the only reason he’s rich, is because the tax code is so skewed to the rich, that he gets to pay ZERO in taxes.
So I ask again, how is Trump an improvement, compared to what.
22
The correct statement based on the article is that our influence would be reduced if our trade changed in such a way as to to reduce our trade deficits. That's what the article says. It does not say anything about having no trade. You either misunderstood what you read or deliberately misstated it in order to promote a position.
Trump does not represent improvement. He represents chaos. He is deeply evil in character and destructive in nature. He is also incapable of understanding something as complicated as international trade. He probably lacks in abstract thinking, as many people do, notably the ones who struggle with algebra in high school. Unfortunately this weakness helps him in resonating with other people who think only on the concrete level, of which there are many tens of millions.
1
Buried in the middle of the article
"So money has flowed from China into the United States... more recently in the form of direct investment from Chinese companies into the United States."
To the article writer that is perfectly fine but is it when the buying up the USA happens on such a large scale by a foreign govt?
Neil Irwin just shrugs that issue away.
My sense is that the biggest global banks and global corporations prefer the global trade deficits between nations. And of course Mr Irwin would agree.
8
Very complicated. One thing is clear -Trump wants to demonized immigrants and foreign countries to convince voters that going after them will fix the problems such voters face.
The conundrum is that the issues facing many of our population are primarily the result of both parties padding their individual pockets (just look at the net work of most U.S. politicians) and their inability to take rational long term policy positions that the voters may not like in the short term, but would put the country on the correct path.
11
You are absolutely correct, if the tax code is skewed it’s because congress wants it that way. These people know, a majority of people don’t know, or want to know what the real effect of trade is on our economy. People wait for Trump to tell them what to think for the day, who to like, who not to like, these people aren’t free thinkers, they can’t think critically. We live in a world where information on trade, trade deficits and the like, are readily available. Yet they choose to sit back and read a 140 word tweet, and think they now have the answer, then they “like it” , or they retweet it, or regurgitate it like it’s their own thought.
8
It is really quite bizarre where we now live in a world where so much of the the complete history of human knowledge literally lies in the palm of people's hands and epic willful ignorance is the rampant problem of our time. Ya can't make this stuff up!
1
Trump demonizes our allies and our workers (including citizens and legal & illegal immigrants). He praises our enemies. Bizarro Land has triumphed!
Now:
Who is going to do the work?
Who is going to come to our aid when trouble occurs? Russia? North Korea?
The vast majority of economists are a sorry lot.
5
The “Economist in Chief” is the sorriest, followed by his biased “experts”.
1
No the only ones who are the sorry lot are republicans that are so willing to destroy and undermine this country’s standing since the end of WWII. When trump gets done, and this country’s a backwater, you’ll be one of those sorry lot of people Trump also left behind.
Clearly, we need Neil Irwin doing the thinking for The #1 Grifter on economic matters in relation to trade deficits. I doubt seriously that Trump understands the economic dynamics of trade deficits. He has some conservative numbers crunchers who are isolationists with an agenda (of course) that is reversing age old protocols of our government. Trump is gradually destroying our world position of leadership. Soon others may dictating our fortunes.
16
This is a good example of why relying upon the typical simplistic treatment of issues by politicians in public statements confuses the discussions and leads to public support for poor policies by popular leaders.
10
BUT, there are not just two countries in the world. CarNation does not have to invest the extra money in BananaLand. It can invest them in IronOreRepublic. Or it could just put the extra money in the basement of the NY FED as many countries have.
The crucial figure is how much money counting everything flows in or out of the country. Since 1974, this net figure has been for money flowing OUT, Until the 1990's this figure was too small a percentage of our GDP to make much difference.
But we have recently seen what happens when more money goes out of the private sector than comes in from the federal gov. Except for a brief period in 2003, this is what happened from 1996 to 2008. This shortage of dollars led people to borrow from banks. Private debt exploded. By 2007, the large banks had 27 or 28 times the amount in outstanding loans as they did in reserves.
The way to solve this problem (and thus the Triffin Dilemma) is for the federal gov to run a deficit larger than the amount of money leaving the country. Since it can (thru the FED) create as much money as it needs out of thin air, there is no problem doing this except stupidity.
What about inflation? Well while prices are proportional to the amount of money in the economy they are INVERSELY proportional to the amount of stuff we can produce. Money spent on infrastructure will not only facilitate production, the money paid to construction workers will spur investment to produce yet more stuff.
7
Your last paragraph. Inflation directly affects EVERYONE in everything they buy both -- good and services -- every day. You mention inflation as a good thing for building "infrastructure" and avoid talking about all of the effects of inflation. Remember the 1970s. Then you suggest inflation will increase production which is by no means a given. Where are you getting these ideas.
7
K, Henderson, read again what I wrote.
The more stuff we produce, the lower prices are.
So adding money to the economy will NOT produce excessive inflation if it facilitates the production of more goods and services.
I never said "inflation as a good thing for building "infrastructure". I said fixing and building infrastructure will NOT produce excessive inflation.
7
" the money paid to construction workers will spur investment to produce yet more stuff."
The majority of it will probably flow off-shore with the purchase of more consumer goods. But as long as the feedback mechanism is robust enough we can match that and print more money. Then when more flows off-shore we are ready to print more - dollars flowing like water everywhere in increasing amounts!
So i guess the money printing industry is the one to watch.
Wouldn’t also the population difference between 2 counties have an impact as well? Take the difference between US and Canada for instance. The US has about 10x as many people as Canada. It would make sense that we would buy more from than they would from us, unless the average income in Canada was 10x the US, which I obviously is not.
15
Isn't anybody explaining any of this to the bully sitting in Air Force One flying around wasting gas?
Surely, his advisers must have told him what this article so simply explains.
Trump and his trade war crusade may be just his way of playing to his base, but this time at the expense of humiliating our allies like the Canadian Prime Minister whom Trump called "dishonest and weak" after he left the G7 meeting.
20
Too simple, and of course the president promised some things to get elected, and now he is delivering.
1
@vulcanalex I agree that he has delivered right-wing judges (but often inexperienced ones for which there will be a cost), and tax cuts (that are temporary for his so-called base, and load the country with debt that they and their children will be paying back), and a poke in the eye to other countries (short-sighted at best). He has failed to deliver health care or infrastructure (or even the wall). The economy is carrying on as before because of the mixed signals from the top... so... what has he delivered?
4
It's dangerous for a president of the United States not to understand this stuff. He doesn't know what he doesn't know. We're just seeing Trump doing his usual blaming and projecting hostility onto others. A separate Times story said Trump was enraged at the G-7 Summit. Enraged? Like a 3-year-old? He said he could tell by the "smiles" of the other leaders that they were laughing about what they've gotten away with, trade-wise. What??? I can't believe that so many Americans don't recognize a train wreck in progress, but see a succession of triumphs. The quick victories over Poland and Czechoslovakia in the late 1930s were no doubt exhilarating for many Germans.
45
There is a widespread belief, fueled by the press’s coverage of “Trump’s trade war”, that we had perfectly free trade with the EU and Canada until “protectionist” Trump decided to impose tariffs, when in fact it’s been the EU and Canada who have been imposing one-sided protectionist measures for years to benefit their domestic export industries at the expense of our own.
According to the WTO, which tracks the percentage of imports to a given country that face tariffs of 15 percent or more, 7.1% of Canadian imports and 4.1% of EU imports face such tariffs vs. just 2.8% of imports to the United States. In what way is this “free trade”? That such unbalanced, unfree trade regimes were memorialized in “Free Trade Agreements” is farcical at best and Orwellian at worst.
One can take issue with Trump’s brash negotiating style, but his assessment that our present trade agreements are “horrible deals”, while crude, is an accurate one. Nor was such a proposition controversial among liberals until Trump took office. Obama campaigned hard against NAFTA on the campaign trail in 2008, as did Bernie Sanders and to a lesser extent Hillary Clinton in 2016.
As someone who believes that free trade is an ideal to strive for, I hope Trump succeeds in negotiating for lower import tariffs on our exports to Canada and the EU. Americans working in export industries ought to be able to compete on a level playing field.
9
Canada and the EU protect their dairy farmers who would be non existent if there were unfettered competition with the US. The Canadian dairy industry is managed by the milk marketing board which assigns quotas to farmers and insures a reasonable price for their products. Most Canadians don’t mind paying a higher price to ensure we have an industry. The United States has a large surplus on agricultural products with Canada. Europe is similar. Countries want their farmers to be protected particularly in the dairy industry.
The Nafta agreement is a detailed contractual document outlining the negotiated rules respecting each industry.
17
If your assertion that most Canadians don’t mind paying a higher price to ensure the strength of their domestic dairy industry is true, then the current regime of quotas and tariffs is unnecessary. However, I am very skeptical that such claim would hold true if put to the test in a free market. I suspect your Prime Minister shares my skepticism, or else he wouldn’t be battling so hard to keep the quotas in place.
1
To be clear, using the WTO country trade profiles, 2.8 percent of US imports in 2016 is roughly 77 billion USD . For Canada 7.1 percent of 2016 imports is roughly 37 billion USD. Your figures indicate that America imposes tariffs of 15 percent or more on more than twice the value of imports that Canada taxes at 15 percent or more.
All government that issues its own currency benefits from seigniorage (profit from issuing a currency). The world's biggest beneficiary of seigniorage is the US as the greenback is used globally to finance trade and held widely as reserve currency.
The price and the privilege of having the most widely held reserve currency is that you must run a trade deficit (the Triffin dilemma) so there will be a growing supply of greenbacks in the global economy.
That of course gives the US enormous power over global movement of money and which sanctions to use against whom. This has been the envy of China, Russia and many others.
Trump's attempt to reduce the US trade deficit could eventually undermine the global financial power of the US. This is why China applauds and appreciates Trump's Make America Great Again mindlessness.
27
This is the best explanation that I’ve read, you are absolutely correct. In the 1980s when the British Sterling, was the predominate world currency, they too ran deficits. That comes with being the most powerful country in the world. Or should I say, that what comes with territory when we WERE the most powerful country in the world.
4
Mindlessness - perfect observation.
It all comes down to who benefits from the USD being a reserve currency and who suffers and the respective parties political pull. In addition, not all trade is equal, even when trading is in similar sums. If a foreign student attends a US university that charges $60,000/yr in tuition, that has a total service export value of $240,000 which does not have the same value to our economy (in jobs, multiplier effect, etc.) that shipping eight $30,000 new cars would.
3
Please explain why $240,000 spent by a foreign student does not have the same "multiplier effect" as selling $240,000 worth of cars. University faculty get paid, and those faculty spend their salary in their communities. Others in University communities benefit from the direct spending of foreign students and the spending of faculty. If anything, the foreign student may have a greater multiplier effect because some foreign students may choose to stay in the US and contribute to the growth of our economy in a myriad of different ways.
7
How can you be sure that $240,000 worth of tuition is more useful than $240,000 in cars, without knowing exactly how each is precisely distributed?
What if the $240,000 in tuition is in turn used to fund U.S. students who are former U.S. auto workers displaced by automation; meanwhile, the same $240,000 minus unit cost is in turn pocked mostly by shareholders and top executives, with production line workers (with auto production lines increasingly automated by robots since the 1960s) seeing no portion of each sale?
I’m not sure your argument - that shareholder-dominated and highly automated manufacturing is a better industry than education - holds water or even makes sense as a comparison. It further reminds of a Stalinist undertone that one can arbitrarily prioritize economic sectors by its perceived value to society.
6
@rowland: The money going into US produced consumer goods is more likely to get to workers who will (need to) spend it. That money flowing into a university will not as readily flow into working families who will spend it more readily.
Those actions get the money back into circulation.
Get it?
1
The bigger problem is that while Banana land has an average wage of $5 per day, Car Nation has an average wage of $50 per day. So the owners of the factories move the factories to Banana land. Now workers in Car Nation face stagnant wages and are having a hard time affording cars or bananas.
9
The flows in this sort of view is that any student of economics can apply Turnpike Theory and explain in favor of this article.
I think, this is a good example of explaining collocated economic principles of global trade in simple language that applied into current US trade policies.
Great job, great work.
Yeah, that’s how a plutocracy works, they suppress wages one of two ways. They import labor, or, they export the work to labor friendly countries. All things being equal, lower labor costs should result in lower prices for goods, as should lower corporate taxes, since consumers pay a large part of corporate taxes because its structured into the price. But, many auto parts for example, cross the border 3 times before coming back as a finished product.
The only way to combat stagnant wages is unions, but they’ve come up, with an answer for that too. Republican states have been passing right to work laws, for purpose of limiting the unions power. It was the unions that have brought fair pay, better working condition, better healthcare, etc.
Which is one of the reasons Boeing moved a plant to North Carolina, and pays machinists there, $21.00 an hour that employees get paid $35.00 for doing the same thing. So the level of skills that are needed to build a plane haven’t changed from Seattle to N Carolina, the only thing that changed was Boeing’s profit margin. By the way, Boeing also gets billions of dollars in tax brakes at the state level, in both Washington and N Carolina, and they get tax breaks from the federal government and they also get defense work, which is more tax payer money they stuff into their pockets.
4
Wonderful lesson.
I still want to know what Trump's beef is and the list of "unfair" trades he feels that has been imposed on the US. Might you follow up with a specific trade-deal graphic that shows what the real deals he object to are. The theory lesson is really really good. Now I want to apply it to real evidence so I can argue one side and/or the other at the bar tonight with my trump and no trump bridge partners. Thanks.
27
The savings that are made by buying from cheap labor countries accrue to only the richest. Most of us pay extremely high profits to them.
6
So the cheap imported goods that Walmart sells is bought by the wealthy? I might also suggest going back over the article and reading it carefully.
1
No, you missed it, I guess that what happens when you’re on the bottom of the world. He’s saying that, even given the fact that they are paying less in labor costs, and as a consequence prices should be lower, the same should be true now that they pay substantially less in corporate taxes. However, none of that is true, we still pay far more for products than we should, therefore more money makes it into the pockets of the rich.
2
So when 60,000 factories close, we all benefit?
5
Please try to follow the argument. If Mexico can produce bad bananas much more cheaply than the US then we actually to benefit because we can buy cheap bananas. If we're forced to make them in the US will pay a lot more so well some workers lose out when companies move overseas the vast majority of Americans actually benefit.
4
When China was admitted into the World Trade Organization (WTO) in 2001 and allowed to trade and receive overseas investments more easily, there was a rush of factories from the US, Canada, and Japan to China. There followed an intense and damaging decade. Scores of appliance and electronics makers went under in Japan too.
But looking broadly over the past three decades, more than 60% of the manufacturing jobs that disappeared in the US was due to (1) productivity gains (automakers require less man-hours to assemble a car) and (2) product changes (panels instead of CRTs, LEDs instead of bulbs, etc.)
There are many instances where jobs were created in the US because some manufacturing jobs were located overseas. No one assembles iPhones in the US, but because of that more people can afford it and use it towards many productive ends.
9
Growing up in Cleveland, Ohio those jobs were disappearing long before NAFTA and before China joined the WTO.
2
Could someone please explain this trade deficit reasoning to the stable genius?
22
Excellent! Would someone PLEASE have our POTUS read this. Then give him a pop quiz.
15
Unfortunately we all know this president a) wouldn’t be able to read this through to the end and b) couldn’t comprehend it even if he did.
1
doesn't read, doesn't understand
1
Where is the Republican Congress while our ignorant president is busy making enemies of our allies and once again praising Russia—a country that no American Democrat or Republican loses love on? What does Russia have on Trump that he wants to desperately cover up.
Where is the video of his tasteless doings in Russia in the past. We need to see that and probably will someday.
In the meantime why hasn’t the Republican Congress behaved with honor and rid the country of this ignorant self-serving evil president? As a former
Republican I want to know!
49
At presently, an angry Canadian over Private Bone Spurs continued attacks and threats, I've stopped buying all US made products, stopped purchases from US online stores and refuse to travel to a nation I used to like vacationing in. I'm not the first and won't be the last to employ these tactics. There is more to lose than he thinks!
10
We have a vicious government that has no regard for the American people, their healthcare or nourishment. The president is an ignorant uninformed man with no political savvy. Unless we rid ourselves of these people our country will have no future.
The very idea that Putin be included in anything American after his intervention in Crimea is absurd and only an unsavory Russophile like Trump
Would even consider such an outrageous an
inappropriate idea. Trump is a Russian pawn.
37
But wait, ask any Trump supporter and they will look you right in the eye, and tell you, he’s delivering....what they don’t know, but they’re getting whatever he’s delivering.
I appreciate the explanations included here, however I don’t understand why the total and growing size of the international trade volume isn’t as important. Notwithstanding the negative impact on some industries, wouldn’t it be more valuable to the our economy to have a growing amount of international trade even though our percentage of that trade is less than 50%? Wouldn’t anyone rather receive 40% of $1000 rather than 60% of $500?
10
Unless this excellent article can be adapted to a cartoon version to be broadcast on the Fox Cartoon Network, Trump will be unable to comprehend these issues.
However, in defense of our ignoramus in Chief , he isn’t not actually contesting the trade deficit as an evil in it’s own right. His actual complaint is that certain countries impose unfair trade barriers upon or exports: these may take the form of tariffs, subsidies, price supports, dumping or or requiring exporters to manufacture in their countires or partner with national of the import country. Trump is referring to the trade deficit as a measure of the those alleged unfair practices. Of course, we also support favored industries, and good faith negotiations will accomplish what bullying will not , but Trump’s flaw is his tactics, not his lack of understanding the implications of trade deficits.
9
Deficits to China and Mexico are actually forms of American Welfare, by another name. I call it "toasters and avocados at Wal-Mart." Avocados from Mexico at less than a buck. Toasters from China at $15.00. For many in poverty, those are gift prices. Get ready for a rude/huge come-down-to-earth repricing. Poor Republican voters, once again, have shot themselves in the foot.
81
Just as chicken shouldn’t cost only $1.99 a pound, microwave ovens shouldn’t be $41 and store brand jeans should not by $12, the economy and pricing are so distorted as to be operating on their own wavelength.
6
It is not just the poor who benefit from the current system. If we go back to the 1960s before all this blew up, we have to go back to the days where everybody had one car, one TV and one phone. Most of us won't be able to afford more than that if this stuff starts being made in the USA. Even if it is made in the "right to work" south.
8
The US also made the entire supply chain for that toaster and could afford to pay many a living wage that could buy better quality domestic goods.
5
Trump cannot possibly understand this. If anyone makes a 6 or 8 word synopsis of an issue this complex, it can only mean a profound lack of knowledge of the subject.
16
Trump is intellectually deficient in being able to understand abstract concepts. Huge numbers of people are, which is why many do not benefit from four years of college. Worse than his being deficient, which can be compensated for by listening to advisers, he is intellectually lazy. This is one reason why he doesn't prepare for anything.
Tens of millions of Americans, comprising the so-called trump base, recognize trumps defects as their own, and perversely love him for it.
1
Very informative article. Yet the tone-deaf author carefully ignores the cost to human beings in the USA from losing well north of twenty million good paying jobs since Clinton signed NAFTA in 1993 and since the same person got Communist China to join WTO in 1999. Like most intelligent people he seems to be saying that everything must remain the same forever and any attempt to fix what’s wrong with the system (and how it has destroyed thousands of communities here) is an effort in futility. Fortunately, voters are now “woke” to the horrible damage that the abstract concept of “free trade” has done to people in the West. Free trade: a code word for easy corporate access to labor camps in third world countries. P.S. If ocean going freighters were a nation they would be the sixth largest producer of greenhouse gas emissions. So if you think global warming is real then you must come out against this free trade nonsense.
2
Your Fox News argument fails to take actual data into account. Tariffs are economic inefficiencies that have not proven very valuable at promoting human rights or environmental protection. Your climate change argument needs to include an analysis of the efficiencies gained from the global economy, e.g. the role of cheap Chinese solar panels in promoting a transition to a carbon-neutral energy infrastructure. Try thinking deeper.
13
Sixth largest - after who? Let me guess. And now, you want to lower environmental standards in the US and revive the dirty coal industry? If you believe in climate change, forget about free trade and come out against this protectionist nonsense.
9
If we've lost so many jobs, why has unemployment been coming down steadily since 2010?
3
Trump cares nothing about analysis of this kind. He has reduced the subject to a brief dichotomy between them and us, big number versus small number, victim versus villain. Threaten and bully, repeat a sufficient number of times and his constituency roars in approval. It is quite amazing to see the G7 absorb his flamboyant, gratuitous insults and baseless claims but sooner or later they and others are going to learn to deal with him in kind. Bullies like him mostly retreat when so confronted. But not always and therein lies the rub.
8
And, the recent comment Trump made to a "piggy bank," must have been a reference the international reserve currency markets.
Thanks to this article, I've figured that out.
But, Good Lord, please help us !!!
Neil, you trivialized economics into a 3rd grade math equation. Not that simple! Picking bananas off a tree and selling it to your neighbor is NOT like acquiring and keeping the knowledge and skills to make and market cars. Please!! I am starting to believe Trump is the only adult around.
2
The original classic example in economics is Portugese wine and English wool. Maybe that comparison is more to your liking.
The problem lies elsewhere: what if both the Portugese and the English would like to make both, wool and wine? Now you’re getting into market economics. People will decide which wool and which wine they like better.
“The only adult in the room” and “one of the most successful business men ever” doesn’t seem to get that products have to be competitive to make it on the world market. Golden spray paint doesn’t work. Slapping a Trump label on doesn’t work. Telling people to buy inferior stuff by penalizing the better products with tariffs doesn’t work, either.
Trump is toying with a very well-running economy in order to stay on message for his MAGA label. He doesn’t care about facts. He does have have the patience to understand them. He only cares about marketing. And he will kill American jobs and make living in America more expensive as a result.
57
Rosamaria - if you think Neil's article "trivializes economics into a 3rd grade math equation" then it's already far too complicated for Trump to grasp. Also Trump would never read something with so many words or anything at all that (gasp) contains information - that requires a desire to know something that doesn't already exist in his head
15
T R, precisely.
Trump's running headlong into this and whipping up the globe in the process. In the end, he won't make any difference that we feel in any large way, even if he were to discover specific areas of concern and get them addressed. And more likely than not, this will eventually lead to a tweet of victory when nothing is actually changed anywhere. But his base will hoot & holler with delight and stick their tongues out to rub our noses in our latest failure to have faith in the devine providence that is the Donald. Oy yi yi.
His big plan is a mere trimming of the edges when the problem has always been the dried up towns that were once booming industrial centers. I dont know how anyone thinks a chipping away at a few import barriers will begin to make real improvement in life for those folks who've been left in the rust. He's enjoying himself though. Let'm tucker himself out overseas so he'll be ready for his nap when he gets home.
Unfortunately most Americans and 99.9% of Trump's base will never take the time to comprehend the nuances and analysis necessary to understand macroeconomics in a global trading world.... Instead, they rely on bumper sticker slogans along with bombastic ignorance on display by Trump and his army of sycophants. Ugh!!!
8
American dairy farmers received $22.2 billion in direct and indirect subsidies from the federal government in 2015 alone. So, when Trump demands greater access to Canada’s dairy industry that is a supply managed market, he is operating on very thin ice. When he demands that our trading partners eliminate all tariffs, he seems to forget that more than a few American industries are maintained through subsidies and price supports that would be called into question in a tit-for-tat trade war.
31
Fine and dandy - but this article fails to address the huge problem that unrestrained foreign investment can cause for domestic markets. These might not be problems at the macro level, but ask the citizens of Vancouver or NYC if they love the way Chinese investments in housing have made it prohibitively expensive for even the well-off to buy in these locations, just as job protections, wages, healthcare, etc. all continue to wither on the vine of supposed “free trade.” The president of the USA is wrong about almost everything, but the current trade system IS broken. That is why income inequality in the USA is extreme and that it why it is increasing in Europe. The various attacks on social democratic policies from internal center-right forces has paved the way for the present resurgence of fascism (call it what it really is) throughout the west. It’s time to reorient our economies toward cultivating thriving, prosperous, well-educated citizens (NOT simply consumers) before it is too late.
12
Not exactly. The profound rise of extreme inequality is due to the far too few controlling all the financial gains vs the too many. If all those monies that come in through investment globally were distributed to the laborer vs the Corp pocketbook globalism could benefit everyone. But, it would take transnational labor agreements. We can barely get paved roads...
9
@South Of Albany: Here's another take on income inequality from.... oh from America's Paper of Record:
https://www.nytimes.com/2017/11/17/upshot/income-inequality-united-state...
Would the physicians and managers have to share their pay?
Protect all labor. Enforce all labor laws. Consider all work, “legal” work. Physicians and “managers” are highly protected, overcompensated job fields as noted in the article.
Have always agreed a nation benefits from open trade. I don’t think trade should be free, nothing wrong with a flat import duty of 10-12%. The US import duty rates are a mess, and likely a reflection of the mess our political system is in.
You fail to discuss the impact free trade has on individuals and how a country shows at least some compassion (I don’t recall compassion 101 being part of my economics curriculum). Explain how capital flows benefit the 50 year old factory worker when his $25 hour job is moved to Mexico. His new $10 hour (part time) at wall mart reduces his local communities taxes (most school funding is local or state), reduces his ability to consume (or put pressure to finder cheaper goods, driving more jobs overseas to regions with lower wages and lower environmental standards)
In reality, the benefit goes to the top percent of the economy and bottom 1% is left to suffer a life only Dickens could imagine
The reality, our system lacks the necessary compassion to keep this man or women whole even though we all know there’s more than enough money in the system.
There is a good reason turn of century cartoons depicted monopolists as fat pigs.
9
Scott i think the problem is the 25 dollar jobs going to mexico and replaced by 10 dollar an hour ones. That’s where the money went. The bigger question - what benefit did we gain in exchange? The answer is none. We shouldn’t run to restrict the free movement of capital to say, Mexico, but instead use net job loss as leverage to gain free access to Mexico’s markets. We haven’t done that as this, to me, is the outrageous failure of government
1
Why are there $10 jobs at WalMart? Because people like to buy cheap stuff. Which tends to be made in China. To change trade, you must first change you preferences and your buying behavior. Everything else is just plaster on a structural crack.
If you’ve even eaten out at a restaurant in the USA, you’ve experienced our taking advantage of “Mexico’s Market.” We pretend that only jobs with union rates are the only decent jobs for the middle class. But, that’s not how employers use the labor pool. It is absolute nonsense to talk about losing jobs when the government doesn’t even crack down on employers who hire illegally and pay illegal wages. If you vilify workers and blame trade agreements you’re a hypocrite. Protect all labor in your country before you start complaining about losing jobs. The only way the race to the bottom will end is with transnational labor agreements and a global wealth tax. Everything else is smoke, mirrors and lies.
This country was built on enslavement. That hasn’t changed.
3
This article is consistent with the Cato testimony before Congress in 1998. International trade is not simple nor easy. Yes, there are abuses that need to be addressed. Proclaiming treaties are “Bad” and Blowing up agreements that have worked for decades is not a reasonable approach.
8
Unions disagree with this analysis, sadly. Farmers disagree too. Elections sadly do not focus on college level economics.
1
Unions and farmers will be the worker affected when other countries importing American Agri add tariffs. Then they will surely get it.
Really? The head of the most powerful union in the country, the AFofL/CIO is against Trump's tariffs. Wonder why that is.
Trump's humiliating and caustic treatment of other nations form the real barriers for US trade. Who would want to deal with one so untrustworthy and demeaning?
To trade, confidence in the quality, reliability and stability of the product matter. Trump's disruptive mission and distasteful remarks sully US products.
Much as he's wanting to extend his power to governing other sovereign nations, his overreach will not succeed. Europeans are known for their consumer boycotts. This president cannot force us to buy from those we do not like.
3
The US has a great deal on trade. They send us some really nice stuff for a very low price. All we have to send back is pieces of paper with nice looking print on it. Trump has is backwards - we are the ones robbing the piggy bank and getting away with it.
5
Two prefaces: 1) if trade deficits are good, then why do Germany, South Korea, and China so determindely pursue mercantilist policies? and 2) I can defend certain things that Trump says without defending Trump, or hinting at “getting the trains to run on time.”
Free trade rests on a number of foundational assumptions that are neither explained by the author nor respected by our alleged trading partners. The simplifications of the two nation trade model are necessary and acceptable only for teaching undergraduates how to conceptualize and analyze international trade. In the wild it is a witless caricature of how trade works and only contributes to public ignorance.
At present, the countervailing force of financial flows is structurally unsound. If reverse financial flows were in renewable goods and services, that would good. But much of those reverse flows are unsustainable in property and capital, or outright theft. That is a catastrophe for the trade-deficit nation; it is called ‘economic colonialism’.
Exchange rates would balance trade, but Germany shelters in place behind the Euro and China outright manipulates its currency, so forget about that. Expecting property owners and shareholders to donate the proceeds of their property sales for the common good, as the article proposes, is preposterous.
Triffin made a valid observation, but economics says much about the limits of economics. The global reserve currency is about one thing: trust.
5
Charles I would like to hear more about your thoughts on China. In my opinion they are poised to dominate the world economy. It’s our own fault for giving them what we have. We’ve lost whole industries to China and more disturbingly, we still fail to understand Chinas ambition. Trump is a start but we need a dramatic cultural govt and corporate shift in the way we formulate and enforce agreements
1
First off Germany 's currency is NOT the world's global reserve currency BIG DIFFERENCE. And second ever since Ronald Reagan the US has voted time and time again to run deficits so that rich people can get ever bigger tax breaks. In fact it's the republicans entire investment strategy instead of infrastructure, education or pretty much anything else and much of the country votes for it.
6
jay,
Although this is not relevant to the point I made, have a quick read from Wiki: "The share of the euro as a reserve currency increased from 18% in 1999 to 27% in 2008. Over this period, the share held in U.S. dollar fell from 71% to 64% and that held in Yen fell from 6.4% to 3.3%. The euro inherited and built on the status of the Deutsche Mark as the second most important reserve currency."
The point I was making is that every nation's currency is a countervailing force to their trade balances. Since "Germany's currency" is nicely hidden in among much weaker Eurozone economies, German trade policy cannot individually be held to account by exchange rate adjustments.
Sorry, but your point about politics is a red herring.
1
Terms if trade matter; not the deficit. Trump gets it
1
No he doesn’t get anything, are you better off today than a year ago today. No.
1
Tiger shark, whose terms? USA and Europe setup the terms of trade after WW2 in Bretton woods. You think ROW should always be poor and USA with 5% of world population should and will continue to enjoy disproportionate share of global wealth(like 25%)?
A nation “dumping”, selling at less-than-cost cannot do so forever - it loses on every sale, assuming real dumping, not just lower costs.
Zero tariffs during trade talks would give smart US investors time to trash ancient steel and aluminum plants to build efficient clean mills, radically cutting costs - at China’s cost until tariffs returned.
Build new plants, make cheaper goods later.
Problem: undereducated voters believe national finance runs like personal finance, and have a fear a nation could cut off our supplies or control us by owning factories here.
A right-wing error based on 30s US leftist Tom Johnson’s belief in state ownership of UTILITIES “if you don’t own them ... they will own you.”
And every watt of profit-maker’s power drains us.
Trump’s lie: “how can you have a country without steel?”
We make steel, expensively.
And tariffs drain resources smart investors could use rebuilding.
If Japan turned enemy and shut down Toyota plants here, we’d have Toyotas, built in seized plants, maybe even make all the parts.
The national interest could be met with tax credits for building new US plants to build stuff we can’t make - refrigerator & AC compressors, power tools,home appliances; Screens and disk drives for tvs and small computers. TVs & electronics.
GOP tax theory made outsourcing cheaper than updating US plants.
A world 3-year tariff holiday with steep US taxes on big wealth; deductions for building needed industries would do it.
We’d need a real President.
7
Eatoin, I like your ideas!
2
Very clarifying on a macro level, but still murky for me at the industry and firm level. I guess the devil is in the specific country/bloc trade agreements. For example, it seems unfair (or ridiculous) that US auto companies must share trade secrets as a pre-condition of access to Chinese markets. Who agrees to these terms? How widespread are these? Why should any public company management or shareholder subsidize the learning curves of nascent foreign industries without significant upside? I obviously don’t have answers but perhaps hitting the reset button can benefit US industries by creating a more level playing field, one term at a time.
4
Nobody „must share“ trade secrets, and US car companies aren’t treated and differently than European ones. Chinese law states that in order to establish a business in China as a foreign entity, just must do so together with Chinese shareholders - i.e., through a joint venture. That creates a risk that your intellectual capital is syphoned off, yes. But it’s no infairness particular to US companies.
And if you ask me personally, I don’t think think there’s that much leading know-how in the US car industry, anyway.
13
Gadfly you’re thinking what I’m thinking. “a more level playing field one term at a time”. We better get this right or we’re going to get rolled by China
1
@TR:Have you ever tried to get the Chinese government to enforce IP laws? Two words for you: good luck.
The FED has sold T bills to China at the price of 1,2 or so Trillion dollars. That means they Own our debt paper. If they stop buying our debt paper, then we will have few people to sell it too. While that might sound good, on one hand. On another it will mean the nation will be stuck looking a bit more bankrupt.
.
But wait there is more, we are a debtor nation. And have been for a while. Not much Trump can do about it, though as someone that has had a lot of bankrupt experience he might think he does.
Woe unto us.
10
The article, while interesting and correct from an economics perspective, leaves out an important aspect: the market perspective.
Why can Germany sell a lot of cars in the US? Because they’re good and people like them. Not because they’re subsidized (which they aren’t, to be clear). Why can’t the US sell more cars in Germany? Because they’re horrible and people don’t like them. Not because they‘re taxed or otherwise penalized. Why can China sell so many toys and clothes and gadgets in the US? Because they’re cheap and people like that.
Imposing tariffs is telling your population „You must not like that. You should by something inferior instead.“ It never works and it doesn’t address the underlying issue: that other places make better stuff than you do. Fix that, and you fix a good part of the trade deficit - in case that makes you feel better.
32
Mr. Irwin is wearing rose-colored glasses. He says that the result of China's trade surplus is that they send this money back to us by way of investing in our bonds and businesses. Unfortunately what that really means is that money is flowing our way and ownership of American resources is flowing to the Chinese. We are mortgaging our future and the Chinese are the mortgage holder. Once the Chinese buy the NY Times, Mr. Irwin will get a raise because the Chinese will appreciate the way he has presented our trade deficit with them as maybe not so bad.
5
Bingo
The article discusses how foreign investment has pros and cons. You mention only the cons. Go back and re-read the article. Then write another comment also summarizing the pros. Then intelligent people might be more interested in what you have to say.
What part of China buying our debt did you miss, that’s the only reason this country hasn’t gone bankrupt (yet). When the debt ceiling is raised, someone has to buy trillions of dollars of debt. However, since Trump is very experienced with bankruptcies, then he’ll be good for that, not much else.
i’m no economist, but doesn’t the fact that the US dollar is the global currency also mean that the US can never face the types of crises that Argentjna (the country i’m originally from) has faced so many times in the past?
that is, the US can never run out of dollars to pay its national debt —i know there are other legal and economic implications that would have to be considered, but the US, if facing a financial crisis, could ultimately print as much money as it wanted to pay its debt and avoid bankruptcy.
other countries don’t have that benefit —if they run out of US dollars they can’t just print more of them. isn’t trump, with his anachronistic tariffs, risking the status of the US dollar in the global trade world, and hence making it possible for the US to lose that unique status it has today? budget and trade deficits will really matter a lot more if it ever comes to that —ask Argentina if you don’t believe that.
4
My thinking is that much of this desire for tariffs is about generating meaningful employment. If as China did many hundreds of years ago, the United States isolates itself from world trade then many goods and services must be either lived without or self generated by employing Americans in sustaining our nation’s living standards with viable wages. But as in the case of China, we may become uncoupled from the world economic engine. This maybe fine for a time and help narrow our economic disparities. People with wealth will either emigrate or pay prices and wages to other Americans to produce goods and services that can no longer be cheaply imported. If this process fails then we may have to return to the world economic order humbly as the system would have adapted without us.
1
Your forgetting the debt expansion to power the economy from 4 trillion to 20 trillion would become unwound in this case. You think so simply. Are you ready for the mass unemployment worse than 2009? Are you ready for the food shortages? I think famine could happen in isolated parts of the US as well.
Tariffs don't gain meaningful employment. They are just taxes.
2
Your analysis about China, the real player in this exercise, is excellent
Why should our economy necessarily shrink and unemployment necessarily increase? Would we not adapt to produce products and services within our borders? Would we not train and employ people in proximity to the production sites? Inexpensive labor and manufactured goods would not be as readily available. Also I believe that as a nation we still have the capacity to feed ourselves. As we currently export a lot of agricultural products. I think what would happen is that our economy would become more insular in some variation of what was experienced during our participation in world wars. Our population would have to adapt to potentially less instantaneous accessibility to all world products. Our capitalists would need to accept less profit temporarily by paying labor more or investing in more productive equipment. Yes repayment of debt would be a challenge. But it is going to be a challenge regardless. If more of the society is working and producing domestically our desired goods and services then there is less demand on social services provided by governments and churches and a broader tax base. Right now , an entire swathe of our citizens seem to have been chucked in the waste basket, while simultaneously being humiliated and belittled. This is why there is an almost desperate desire to withdraw from globalism. Because the gains from that system are not organically “trickling down” to the broader population.
Hey Neil - How about 'splaining this to DT?
If you're able to dumb it down to a 10th grade level and keep it really brief, with picyutes to boot, maybe he can can grasp this.
22
No way. It would have to be dumbed down to third grade level.
Could you shorten this article enough to get Trump to read it? Oh, never mind.
21
Thanks for this clear presentation. Please boil it down to four bullet points, put in some happy snaps, and send it to the White House.
42
Amazingly the graduate of Wharton Business
School doesn't understand the basics of trade
and finance. One missing piece, indirectly
referred to, is the debt. When other countries
with surplus dollars buy US treasury bonds
it creates debt. with perpetual deficit and
continuously rising debt a point will be
reached when the world will lose confidence
in dollar.
Increasing use of sanctions and the threat of
barring the banks of other countries from
using US financial system extend American
law or executive order worldwide. Other
counties that disagree with the policy decision
such as pulling out of Iran deal(UN approved)
will have to create alternate system of
international finance to adhere to their own
policies without having to suffer economic
consequences. Dollar has the dominant role
partly because other countries trust US policies
will be in international interest and not abused
arbitrarily.More Mr Trump abuses this power
the greater the incentive to develop alternate
system British Sterling used to be a dominant
currency. Currencies are not cast in concrete
that should impel president Trump to be careful.
28
I really do not like Trump, and I think that he is a lousy President.
But I have serious doubts about the analysis put forth here. In fact, in the long, long, long run... of course, the trade deficit is a problem. The world is that simple, in the long, long run.
The “current account” went into deficit in the 80s.
3
Trump reduces economics and trade policy to such simplicities that he ends up speaking nonsense. The tariffs that exist are ones that have been agreed in order to reduce others. Trump’s assertion that he can eliminate tariffs by having trade wars is stunning. Will raising costs of nearly everything intimidate foreign countries to abandon tariffs or induce domestic manufacturing investments as he seems to think? Possibly but it’s clear that it cannot happen overnight and U.S. companies and consumers will pay more for a wide array of important items.
Tariffs built industries in the United States when the only products produced that the industrialized countries in Europe would buy were agricultural commodities. The tariffs made domestically produced value added products competitive in the domestic markets. Without the tariffs most of these would have been bought from Europe.
Free trade is not a positive good nor are tariffs a positive evil. The context in which these are applied makes a lot of difference.
5
Neil Irwin performs a public service here by bringing objectivity and economic expertise into the discussion. Now, if he could just reduce it to one typewritten page of bullet points and translate into sixth grade reading level, our ADHD president might be able to follow it.
8
And he mustn't forget to put references to DJT throughout the document, which will increase the likelihood that it'll get read. The National Security team taught us that.
1
CarNation rapidly buys up BananaLand's real estate and banana business. BananaLand's workers are forced to work long hours in intolerable conditions for meager wages for their CarNation bosses. CarNation investor charge high rents for BananaLand renters. Forcing BananaLand residents deeper into debt.
BananaLand debtors are forced to perform all tasks that CarNation owners demand. Many of them objectionable. BananaLand children are oppressed for generations
7
Bravo!! Excellent analysis. I would only add: BananaLand children will eventually appear at the boarder, unaccompanied, and, once in CarNation, they will be used as manual laborers by the rich car-producing nation.
1
Eventually BananaLanders on the bottom of the pile have had enough and revolt. CarNation decides to "protect" the investors and the BananaLanders who work for them by sending military aid or the military itself. Too much of this and CarNation focuses most of its reaserch and excess wealth on its "protection" forces.
CarNation does this so often, it falls.
At what point is it too late for CarNation to change and focus on fixing itself? Can CarNation redevelop the focus on knowledge which once made it a leader (but without the greed, evil, and the need to control others)?
How can CarNation sell it's product, if it has made the citizens of BananaLand completely subordinate, as you describe?
When a country C invests into another country U, C doesn’t just put money at the disposal of We The People of U.
The money can be invested strategically. “Strategos” means general. There is a military component: Persia sent gigantic amounts of money to Greek democracies 24 centuries ago, to dominate policy. China is investing strategically, globally, to insure the flow of goods it thinks it needs, but also to achieve technological supremacy (which insured its existence for 6,000 years).
Thus China invest in the highest tech from the West, in many ways, including sending students and professors.
Another way to invest in a country is to send capital to enslave it, and colonize it. After all, that’s what the Europeans did to the Americas.
Investment from abroad can be good, only if one keeps in mind the strategic aspect of it all. The first thing a country have to make sure of, is that, differently from Greek cities 23 centuries ago, foreign money (in that case Persian) is not used to pervert its leaders, and enslave its population.
However, in the West presently, there is plenty of evidence that trade is impoverishing and enslaving nations throughout the West. The USA is not the most egregious case.
Many European countries are suffering mass unemployment, stagnation of income, collapse of prospects, because so many jobs and know-how have been transferred to China by global plutocrats (using typically joint venture with China to do this). Trump will wake them up.
4
Give me a break, trade has created a "age of abundance". Man, you don't get it. You forget before the dollar era, famine was typical and expected. European mass unemployment simply isn't that impressive by how they create their stats. It is made to be high by choice.
1
Patrice, You are missing the very fundamental reason why China(and India) have been the largest two economies in the world throughout human history until about 1800s. All China(and India) is doing is to merely regain its historic role as a top economy.
Why are these two Asian giants able to keep their preeminent position(but for a brief 200 years of western plunder from Americas) for over 5000 years? Why not Greece or Rome or Egypt or Persia or UK or France or Russia or the US? Why is that only China and India have preserved their own unique civilization, culture and religion for 1000s of years when the rest of the world, starting with Europe first, has been run over by Christianity and Islam? What’s so special about them?
The answer is their geography and Himalayas which gives them perennial rivers that helps them support a huge internal market (population) throughout human history. Europe and US broke them briefly thanks to a sudden spurt of free resources plundered from Native Americans and Slave labor, which killed their industry and made them uncompetitive. Now that the stolen American glut is over and slave labor is no longer legal, we have few tools to fight the re-emergence of Asia.
US with only 5% of world population enjoys 25% of world wealth and this can’t go on because China will get its fair share as will India and others. The US needs their huge market to grow or else we can only sell to 5%. So a smarter America should work with them to shape the future.
Mass immigration and outsourcing to China may go down in history as the policies that brought down the West
Sadly, not enough people will try to read and understand this. Donald Trump will certainly not be among them.
6
I read it and understood the article. But this is the same argument that got us these huge deficits, made by the same people. The benefits of trade are not evenly distributed and the consequences have destroyed countless cities and towns across the USA.
1
Of course automation and ruthless attacks by corporate America on unions had nothing to do with it, right.
Trade deficits can be good or bad, yes. However, not all trades are equal. Selling bananas is not selling cars. A car has much more “added value” than a banana. Some of this “added value” involves knowledge. If one loses the ability of making high tech products, one loses cognition and know-how. Selling bananas will not compensate for this dearth of mind and intellect: one will become, irresistibly, the proverbial banana Republic.
For 6,000 years China has been the “Central State” (as China called itself), because of superior Chinese know-how (even in the Nineteenth Century, all what Britain could sell to China in exchange for advanced Chinese products was opium).
A deficit in added-value jobs will lead to a deficit in know-how. Ultimately, this becomes a question of national security deficit. The converse is true. This is why China maintains an enormous trade surplus in added value job products with the rest of the world.
The enormous trade imbalance with China enables major companies in the West to escape local Western laws, taxes and regulations by offshoring the work to China. This makes the owners of these companies, which are entangled with ownership of Western media, keen to defend that trade imbalance which makes them ever wealthier, and more influential, thus anchoring their domination. This fits China’s strategic purpose just fine.
5
This is one reason that gutting our education funding and placing little societal value on it as well is a long term disaster in the making. Saddling kids and families with enormous debt to go to college grossly reduces the number of people who will take on that risk. And who benefits?? Does it free up money for tax cuts that are small near term gains at the expense of ling term planning? I know the richest will enjoy much more gains, near and long term, but unless they all plan to migrate in the next fifty years, the yll be hurt by it too.
5
Agreed 100%. However there Europe and the US differ: in Europe, education is "federal" (central state) always. And ALL European states have been derelict in matter of education, ever more decreasing financing since the 1950s, with few exceptions (Finland, Switzerland).
In the USA, education is a matter of the states. Bush, Obama, or Trump could sing about it, but little more (1% global budget).
Obama did one good thing though: the Common Core. But it never got to science, just math...
1
Sorry Patrice, but your description above appears to have the facts completely backwards. You seem to be implying that the US has a deficit in "added-value jobs" and that is not at all true. The US has a deficit in employees capable of filling all of the high added-value jobs that are available.
As for China having a trade surplus in added value job products, that to is completely backwards. China has a surplus in low added value manufacturing, and a deficit in high value added goods.
As an example, take the iPhone manufactured in China. Of the total value of an iPhone, China provides very little. Most of the components are manufactured in South Korea and Japan, and the engineering know how to put it all together into a product that people pay $700 for comes from Apple, ARM and Qualcomm (non-Chinese companies).
Another example would be Chinese phone manufacturer ZTE. As soon as the US cut off their access to US technology they had to shutdown. Not reduce or down-size their business, but just close the doors, because without US tech, they had no business.
China may have ambitions to be a world leader many technology based fields, but as of today, they are nothing more than ambitions.
This is piece is very informative: both deeply knowledgable and easy to understand.
You will therefore not find it in Republican briefing books.
5
As most economists say the trade deficit is neither good nor bad depending on the circumstances. But in our world very few things either good or bad. Climate change which upsets the ecosystem of our fragile world is one of the exceptions, but Trump will not acknowledge this and destroys every effort to control it. Meanwhile, the things that require careful balancing like the relations between nations Trump attacks without knowledge or planning. Trump seems completely oblivious to these distinctions and that stupidity is the source of the danger he poses to the world.
6
Trump obviously does not understand the economic complexities of trade, nor does he have any intellectual curiosity to seek out advice, listen, read or in any way improve his understanding. Coupled with his sensitive narcissistic personality that reacts to any hint of criticism, his ill thought out actions may do real damage to allies’ economies, not to mention the US economy.
8
Ernie please accept an apology for the rhetoric about Canada. Our friends to the north are clearly not the problem.
But the deficits with China and Germany are clearly not sustainable. Trump for all his many flaws is acting in the best interest of the people of the US, and is living up to his campaign promises.
2
People who support the Russian chaos machine don’t actually want to know what “trade,” “deficit,” or “trade deficit” are. They also don’t understand money supply, how banks work, what the federal reserve is and what it is not, why Bretton Woods matters or any of dozen of concepts because we make sure our schools don’t teach financial literacy and soon we will be lucky if they teach any literacy at all.
At a minimum though they should understand burning the Canadians and no matter how racist they are, they should be well aware that we are burning the Mexicans too. That at least should make them stop and think.
Oh, I see, thinking isn’t on Fox’s lies of today show?
5
Gee, Who knew trade could be so difficult? Anyone who paid the slightest bit of attention in any 100 level economics class that’s who. Who awarded Trump his degree again?
11
Whatever the answer is, Trumps use of words like the rest of the world is using 'unfair' trading practices on the USA and that the USA has been taken advantage of for decades and decades where trade is concerned, is wrong.
Each nation decides what it imports and export and 'unfair' has nothing to do with it. The global economy is evolving and like anything that evolves you have to move with the times or get left behind.
USA was going to be part of the TPP but dropped out when some nations, including NZ, wouldn't agree to unfair proposals by the USA . I think Trump suffers from attention deficient syndrome and is intolerant of any nation that won't agree to what USA wants. Learning how to 'listen' to what other nations want or don't want, would be a start.
The USA will never get a free trade deal with the European Union unless they get involved in reducing pollution and climate change; as even climate change is an issue that will help get you a free trade deal. Even China is now evolving and becoming environmentally aware because of consumers in nations they export to. You need free trade deals so as to keep you citizens employed and creating income for your nation, and it's up to your nation to have great negotiators who are firm and don't put your nation at a disadvantage with those trade deals. It has nothing to do with winning or losing or unfair trading practices but more to do with negotiation skills of your nations own negotiators.
27
Example. I try to sell flight simulator software to NZ. I have to add 15% GST to my price plus import tariffs. Before you say so does a domestic NZ producer then why is the NZ producer exempt from export duties? I get no benefit from the NZ tax.
3
When you opt out of climate change and pollution abatement agreements which mandate use of cleaner fuels, more emissions controls on industry etc. isn’t that an unfair trade advantage? As for “slave labour” which figures in many comments, the cost of living is different in different countries folks. One man’s slave labour (e.g. American fast food restaurants and various minimum wage jobs) is another mans living wage in China, Vietnam etc. The global levelling of incomes is underway and Trump is trying hold back the inevitable.
6
And you are exempt from the NZ GST on any product not sold into that market, same as the NZ exporter. Level playing field. People who claim VATs are unfair to foreign trade have no understanding of how they work.
2
Recently I passed through downtown Las Vegas and the cab driver pointed out many big projects going on and reported that china was investing 40 Billion in rebuilding these hotels and 15,000 new jobs expected. I also note that billions of investments were happening all over. The number of asian Tourists in Honolulu is tremendous and all have shopping bags filled with goods.
Yes trade is complicated, as is medical care and infrastructure and foreign affairs, and this is way beyond trump and the types he chooses to say yes sir to him.
104
And all the profits will return to Communist China. Wonderful news!
1
@David
(1) They seem awfully capitalist for communists.
(2) People complain about jobs going to China, but now that the Chinese are creating jobs here, you're not happy?
(3) Profits will get reinvested wherever it is profitable, including in the US. Like these construction projects. Do you imagine stacks of cash going back to China on a boat?
And "Communist" China should invest and not get profits, like U.S. investors everywhere who invest just to create jobs.
Capitalist China, like capitalists everywhere, exploits labor to obtain profits. In most cases, such as in the USA those profits just make the rich richer. (And they still want lower taxes.) In China profits build infrastructure among other things.
I will venture another definition. A trade deficit occurs when the citizens of a nation habitually spend more on imports than they earn via exports. It is a fool's paradise that will end when debt owed to others adds up and credit runs out. The only answer then is to begin selling off domestic assets to meet creditors' rightful demands. When enough of those are sold, national sovereignty and pride go with them. We become economic vassals.
7
"It is a fool's paradise that will end when debt owed to others adds up and credit runs out."....When credit runs out the dollar will be devalued. Right now one of our trade problems is, versus other currencies, the value of the dollar is too high. The trade problem we have is exactly opposite of what you suppose.
1
@W.A. Sptizer. Interesting comment! I see it somewhat differently. I see the dollar as temporarily too high vs. other currencies because it is being used by others as the international unit of exchange. Others gather and hoard dollars for use as foreign exchange reserve, to trade between themselves, not for intended use in buying US made goods. It amounts to expanded credit for the US. That will come to an end, as it has for all national currencies used in that way in the past. The dollar then will crash as it is replaced by some other international exchange unit. Those excess dollars floating around the world then will end up being used to buy up our domestic assets. We make for export less and less of what others need to buy. That already is happening both in urban real estate and corporate ownership.
1
Trump knows nothing personally, about trade. He is reacting to his possibly bias and ill informed advisors opinion on world trade, period.
Only God can help us
17
Meanwhile, Mulvaney is hard at work dismantling CFPB to make sure that financial firms, you know, those leaders of the global economy, can continue to cheat consumers .. a great recipe for an economy overwhwelming dependent on consumer purchases.
12
This article is contorted.
The trade deficit means we are trading consumables for assets. Consumables depreciate whereas assets are vital to our future.
This is why foreign governments are opposed to any attempt by Trump to ease the dumping of foreign consumables on the American consumer. We should be supporting and not undermining Trump's efforts
5
"We should be supporting and not undermining Trump's efforts"....Could you please explain what Trump's efforts are.
5
Well, I don’t mind Walmart going belly-up with all their made in China products. They treat their workers miserably anyway. I’m willing and able to pay more for responsibly produced American products, and I am a progressive. Are you willing and able to pay more?
3
The main theme, being that international trade is an immensely complicated matter and the benefits and drawbacks are multifaceted and equally complex. You saw a simple give and take of less value for us and more for everyone but us. Just the opposite of what this piece lays out.
First off, we don't go out and shop to fill a trade quota, we buy what we want and need. So are you suggesting we do without?
Next, you took away that our partners buy valuable appreciating assets but you didn't factor in the positives those purchases by foreign investment offer us in lower interest rates and easier access to capital. Nobody says the person/company who took that money in can't turn around and buy similar appreciating assets in our country either. Part of the reason we consume so much is our ability to afford to buy so much more than the consumers in other countries. You also didn't address any effects of being the reserve global currency. Trade has hollowed out too many jobs we were accustomed to, and im all for finding a way to mitigate that and find ways to create new jobs and industries. But trade was inevitable as it was costs that prevented earlier disruption, less so was it the particulars within trade agreements. I'm facing my own learning curve here, but you ignored half the article in order to make your point. Do you wanna be right or do you wanna get it right?
6
“[M]aintaining the global reserve currency … helps ensure that the United States can afford to finance wars...”
…and alternatives to wars.
This morning Trump slammed Obama for "letting" Russia take Crimea. Trump has at times described this as ancient history we need to just accept and get over.
In fact, Obama was able to use the US dollar and political relationships to coordinate international sanctions against trade with Russia.
The alternative to sanctions wasn't "let's all be friends". The alternative was Russia taking more and more neighbouring territory by force, eventually leading to hot war in Europe. This could still happen if Trump enables Russian aggression.
34
"Trump has at times described this as ancient history we need to just accept and get over."
You are exactly right! This is the attitude that Europe took in the 1930s, trying to appease Hitler rather than fighting him. We all know where that got them--and us.
Very informative article, thanks.
It would also be useful to address how domestic policies can affect (lower the deficit). My understanding is that by having an economy that is based on consumer spending (less saving) we are particularly exposed to racking up trade deficits. As opposed to German economy that is more based on consumers saving money and the government promoting manufacturing. Along this line VAT, a tax on purchasing stuff, would diminish consumer spending somewhat. On the other hand, government investing in infrastructure, education and supporting small businesses with grants and apprentiship positions, would create jobs, stimulate manufacturing and increase export. We have around 1 million of hight tech positions that are unfilled becausl of lack of educated workforce. How much wealth filling these jobs would create? Pretty stupid to blame this on China, isn’t it?
However, such changes would increase the government oversight in the economy which would be vehemently fought against by conservatives. We let the markets choose the winners and losers and the result is obvious, we are the loser and China is the winner. Can’t blame China for that too.
9
Trump and Bolton propose to stop trading with Canada and the EU - what about China? Americans will use their BMWs, Audis, Bentley’s, Lexus, Ferraris, Porsche’s, Mercedes, Hondas, and Toyota’s, high end appliances, clothing (designer and mass produced). No more Walmart, Costco, Target etc. And of course food from Mexico, pharmaceuticals from Europe, etc etc- The EU, Mexico, and Canada have the rest of the world. Kick the US milittout of Europe. Go for it Trump, Bolton and Navarro- brilliant as always!
4
There's no such thing as "trade" between "the U.S." and "Mexico" (for example). Neither "the U.S." nor "Mexico" is a commercial entity that buys or sells anything. They absolutely don't "trade" one bundle of goods, services, and financing for another. Thinking of them as two entities trading with one another is just crude anthropomorphization: clear, simple, easy to understand, and wrong.
Firms buy and sell, but firms aren't nations (or even inherently national) and firms don't "trade." ("Countertrade" deals are usually much more complex than a swap of goods.)
Bilateral balances are artifacts of specialization: it's rare that you source stuff mainly from your main customer. You pay money to (have deficits with) your sources and receive money from (have surpluses with) your customers. Neither a deficit nor a surplus indicates any ethical lapse or harm.
A commercial entity's overall surplus or deficit results from its choice to build up savings or draw down savings. But referring to a country's residents collectively as a commercial entity and calling the sum of their net payments a "national" balance is just anthropomorphization again.
An overall sum only matters when there's a separate currency and the central bank has to worry that there are adequate foreign exchange reserves to keep the payments system liquid. But hopefully the collective won't wall itself off behind a separate currency, any more than it would behind tariff barriers.
5
Trump is talking about market access and unfair trade barriers that hinder American producers. He is bang right on this. Lefties may not agree but you will see other countries know that they are exploiting open US market. They may posture publicly but you will see them come to terms slowly. No one I repeat no one wants to be cut out of a 8 trillion market.
8
So you want a closed US market. No imports from other countries and no exports to other countries. Good luck with that! Do they grow tea and coffee anywhere in the US?
4
Not sure you read the article - going to tribalism and ‘teams’ around trade is particularly strange since this version of free trade has been primarily pushed by ‘righties’ . The truth is, trade policy is hard with winners, losers and a ton of nuance and people in between. There are secondary and tertiary effects that need to be thought about. There is no simple on/off solution button.
The vast majority of the very same producers you cite are begging/pleading/lobbying to ensure no major changes occur to the existing system which overall has lifted hundreds of millions of people around the world out of poverty. The bigger problem is the effect on those left behind. This is a problem every industrialized country is struggling with. Those that are most successful are typically those who invest more in their citizens. That’s a model our current political paralysis and ‘othering’ has made impossible to pursue (for the time being).
11
Did you not read this article? Lefty or Righty, trust and believe—losing dominance as the global currency would radically change life for all Americans, and not in a good way.
5
An excellent and very clear explanation of the trade deficit. But alas! The Trumpsters who should read it either won't read it or won't believe it.
20
This is wonderful as far as it goes. I get that trade is complex and can have secondary or tertiary impacts.
Reality, however, is stark and potentially destructive. Trump has focused on a particular segment of our population which represents a substantial portion of the problem. He was elected in large part by those people who have been displaced from better-paying jobs, and a middle-class future by trade deficits.
They are angry and stripped of hope. It doesn't help them to know that the Chinese are buying Treasury Notes or hotels. It doesn't help them to know that this reduces the cost of government borrowing. They don't benefit in a visible and material way from low-paying jobs catering to tourists.
Trump has tapped into something potent here and he won't let go until he has done real damage. We need to focus on what we can do to help the victims of "creative destruction". This includes US citizens who have lost their future as well as protecting those in developing countries who are 21st century slaves toiling in factories.
This article only pedantically defines the status-quo and the resulting abuses. What we need instead is a way forward that changes the playing field and addresses the abuses.
24
I agree with you Brian. It’s easy for me to live in my posh town in Westchester County, with a nice middle class office job, great public schools to send my kids to, and a luxury SUV in my driveway, and have an academic discussion regarding theories on the impact of trade deficits.....I’ve never really been negatively impacted by those deficits. For me, the simplistic two nation example used by the author makes sense, as well as all the implications he outlines, but he unfortunately doesn’t even mention the many millions of Americans who have lost hope of living a middle class life.
6
Excellent comment. Very insightful. I'd only push back on trade deficits being the cause of the dying towns and bleak existence left in the wake. It was trade. period. This globalized market has hit every industrialized country in one way or another, which is why Europe is dealing with a lot of the same demons we are. For years I've wished our elected officials would stop tinkering with the symptoms of what this global market left behind, and focus on finding solutions to it head on. From inside the box ideas like infrastructure investment to way outside the box like a minimum basic income. Because you are right. Until this is first.. accepted as a root cause for all this upheaval, and then second, that we need to cooperate and agree to put politics aside until this national emergency has at least been gotten a handle on, cities and rural parts of this nation will grow further apart politically, it'll breed hate, and Congress will end up in the same place by nature of the voters, paralyzing the body even further. Yep, I hear ya and totally agree. And almost nobody seems aware of the outsized role trade has played, which is terrifying.
4
Brian,
You got that right. Thare is a lot we as a country could do to mitigate the trade deficit in a rational way.
We have around 1 million of high paying high tech jobs go unfilled. This reflects the high cost of our education and college education being portrayed as unnecessary. The liberal proposal to make colleges tuition-free would go far to help move people from low paying jobs to high paying jobs.
Trump is reducing investemnts in green energy and instead gives incentives to coal, oil and gas. Wrong direction.
Most of the problems with the high trade deficits could be addressed by our own internal policies.
4
Good to remember Trump has bankrupted a number of his private businesses. That happened because he is greedy and sees everything in terms of what’s in it for him, and him alone. He doesn’t view the world in terms of deals being good for all parties. And he definitely doesn’t think outside the economic box, that is, realize that economic stability is partly a mindset that fairness and honesty are important aspects, as is respect. Trump cannot convey any sense of trust throughout the world because he is basically in it for himself, as his actions show very loudly regardless of how much he shouts.
52
He declared bankruptcy twice in Atlantic City in the 1990s when owning a casino there was all but a license to print money.
4
Excellent overview. Even Trump, if he wanted, could read this and understand the dynamics of trade and imbalance of payments and the significance of the US dollar in providing our country unique power in the world. It would not matter though, because narcissist Trump is all about himself personally as the power that counts, has to get his scent on everything and be in control -- although his only real impact is likely that of a wreaking ball (which gives him a sense of power, no matter it is destructive).
3
Typical socialist obfuscation. Tariffs are only the tip of problem. Simply put if I can sell my widget overseas I have a job if I can't I don't. Trade barriers of rules and regulations discriminate against US producers. Why do you think the G6 are so frantic to keep the current trade deficits? Under Trump fair trade both countries will actually be better off due to competitive advantage.
PS Do you think China buys US treasuries because they want to help us keep running up our national debt? Get real.
8
Yeah ok fine. But nothing you must said forces any foreign countries or foreign companies to purchase anything from us to raise our exports. You can't force a neutral trade balance. Could Trump be onto something within the narrow area of concern he's addressing?? I hope so. But it isn't going to do much. A lot of his supporters seem to think he's going to "fix trade" and dead industries and towns will roar back to life and America will be great again, exporting are eyeballs out. I'm not seeing him say much more about what he plans to fix beyond this, which would make alllll that talk about his genius plans night after night after night a big swing and a dribbling bunt. But any improvement is still improvement. I'll take any win this guy can muster.
Why do we want China or other countries “investing “ in our country. That means they are buying up our assets. They are getting the profits and monetary growth of our companies.
The tenant does not have it better than the landlord. The trade deficit balances out with us becoming tenants to the trade surplus countries
5
Good article, well thought through. Now many of us have a much better understanding of trade deficits and our currency valuation.
Too bad the President does not avail himself of reading material such as this. But he's probably got too many scheduling conflicts, like time needed for the tanning bed and golf.
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Yeah, that was a great read. i thought i had quite a handle on a lot of this, for a layman with no finance education. But I had never heard of this Tiffin (sp) thing or even that the reason other countries bought so much of our debt was to offset their surpluses. Bam.. and I'm right back to where I belong. Where I don't think I know more than I think I know. Hope it lasts, 'cause it's a real driver of further reading and learning. I still wonder if Trump confuses trade deficits with budget deficits, though. The way he rails about this with no deviation from his singular POV and a total lack of explanation for how he thinks an evening out of trade will lessen "us getting ripped off" to borrow his oh-so sophisticated phrase. The globalized market that allows for such cheap movement of goods and capital played a part in outsourcing jobs, but I don't see a forced trade balance recreating any more jobs than the super duper tax cuts have. But as I just learned, I might not have a clue!
10
Excellent article explaining these economic concepts. Please condense it using simpler language, amply (perhaps excessively) illustrate it, and try to get the president to read it. And good luck.
Is there anyone who believes Trump understands or even knows any of this? All indications are that it is way over his head and much too complicated for his minuscule attention span.
15
The population of Car Nation and the population of Banana Land must also be considered. Direct comparison is unrealistic unless the population of each nation is similar. A hundred people will not spend as much money buying cars as 300 people will. Expecting the population of Mexico or the population of Canada to spend the same number of dollars on goods from the United States as consumers in the United States spend on goods from Canada or Mexico is unrealistic. Per capita numbers are rarely factored in. Those numbers tell a different story and need covered.
19
Trade imbalances are dangerous; e.g. the recycling of the massive Chinese trade surpluses into the U.S. mortgage finance system greatly amplified the U.S. real estate bubble and the severity of the subsequent crash. The liberals' favorite economist, John Maynard Keynes, proposed at the Bretton Woods Conference that penalties be imposed on countries with excessively large trade surpluses. The U.S. disagreed thinking that it would always be among those countries with substantial surpluses.
3
I do not agree with this article. Trump is on the correct path and therefore the jobs on the rise. The Country that benefits has the power and it dictates. The Surplus may not be used in the country that it has benefited from. Why should there be a trade deficit? Are Americans not capable to manufacture? Trade deficit can happen in places where the country lacks expertise etc. The example clearly show that Banana Land is in trouble. If Car Nation does not invest in Banana Land than Banana Land is doomed. Car Nation has power over Banana Land.
3
Don't take the story literally. It was a purposely simplified scenario meant to be used to simplify understanding at a very basic level. If someone realized no more than that a trade deficit did not equal a debt, Carland and Bananaland served their purpose well.
Of course americans are capable of manufacturing. However, American CEOs and companies were more interested in selling the means of production. And this was not just "lower value" production, it included quite high value goods (not just luxury goods, but goods with high demand we used to sell elsewhere).
Some of those "brilliant" CEOs like jack Welch were great at selling off high value product lines.
Let's not forget Ronny Reagan's policy of driving the dollar higher (e.g., on par with the pound 10 Francs per dollar, etc.). Artificial high exchange rates hurt a lot.
1
Of course Americans can manufacture anything the Chinese or Mexicans can, but not as cheaply. The factory owners are not going to eat the additional costs. IMO, two things will happen: costs of the final products will increase and but in order to keep the things somewhat affordable, the factory owners will take the pound of flesh out of the workers. Especially in the non-union, low wage south.
BTW, the people in Banana Land buy very few cars because they're expensive to run (gas guzzlers) for working people. The wealthy class may run everything in Banana Land, but there are not enough of them to make a difference in this argument (they won't all buy 1,000 cars each or something. Refusing to buy their bananas is not going to make them richer and will hurt us when we don't get our potassium.
1
A helpful article, thank you. The arguments make sense, although it seems the main question the article raises is - where does the money flowing into the country go to? No doubt the money invested in US stocks and treasuries eventually creates benefits for “everyman/woman” in the US in some “trickle down” way. However, it could be easily argued that this inflow of capital have a downside in that they further exacerbate income inequality in our country as significant portions of this money flows into the hands of the top 5%, most of whom are naturally residents of the metropolitan centers of the nation. As has been correctly pointed out before, this cash is often reinvested in parochial ways. Surely most of the people living in smalltown USA do not see much upside from this arrangement. My guess is they would prefer to see manufacturing jobs, etc return to their locales (even if they will never achieve the vaunted greatness of the past). I even think that most of these citizens would be willing to pay the additional expenses for goods that tariffs might incur to make this new arrangement work. In fact, rising costs in some of these areas might even help tamp down some of our insatiable materialistic appetites!
Bottom line - I’m not sure that Trump’s approach is the right one, but it’s hard to mak the argument that this is as good as it gets for middle America. Of course all bets are off of the entire global system recoils from these moves and sends everyone into a tailspin.
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I dunno, if Trump is speaking with clarity and honesty that barriers to trade exist that can be lowered, it'd be helpful. How helpful, who knows. But not the fix-all he's acting like he's undertaking, that's for sure.
Beyond that, globalized trade is exacerbating wealth inequality everywhere. It's not unique to the U.S. So, I agree investments tend to enrich the top leaving everyone else crumbs from whatever trickle down occurs, but if it weren't surplus reinvestment, the owners and shareholders of some other company would enjoy most of the gains. Either way, without gov't intervention to mitigate some of this ever worsening wealth gap, it'll just keep accumulating in less and less hands. It seems to be a natural result in the system we have that only an outside force can disrupt. Rural America NEEDS an injection of some of that hoarded wealth, without a doubt.
2
Although trade deficits and capital surpluses are essentially the same thing, the nature of the foreign capital investments in a country running a trade deficit could make life worse for its residents. Details hiding in the aggregate analysis of deficits and surpluses can be crucial.
For example, insofar as those foreign capital investments are seeking a haven for wealth in the US in the form of residential real estate, the increased demand necessarily raises housing costs for US residents. In locations with high inelasticity of housing supply (New York, Boston, San Francisco), this indirect effect of the trade deficit in principle could be making shortages of affordable housing even worse.
2
Doing a big of math, The GDP per capita in US is 57K, In EU 35K. Disposable personal income is harder to find by google, but the median income in US is 60K and Germany 44k. By money standards we are better off. They do have more robust services like health care, so apples to apples is hard. Nonetheless, on average we are doing fine. However, the fine print suggests that the income distribution in US is much worse than EU, at least in some countries. So they are our poorer cousins, and depend on us to buy their chotski's while we give them money. The income maldistribution makes this an issue for the formerly well paid, low skilled wage earner. He/she still can't compete with a German worker making 30% less and who is still happy, because it isn't just money.
But the point is that we have had trade deficits for decades and our GDP per capita is still much higher. Mr. Trump thinks he can keep the restless natives quiet with promises that don't require that he and his rich palls give up massive profits. Plenty of jobs, low wages, big profits, hallelujah!
7
Nothing in Donald Trump’s statements gives the slightest indication he understands international trade. Repeating an idea often and loudly is not a sign of eradication. It should clear Trump’s business acumen is, to put politely, limited.
19
He is not a business man as his record shows, but he is a salesman. Unfortunately he is a position where he does not understand the product.
6
America by far has enjoyed being the country in the world by taking arm to save others and destabilizing principles and countries which is against their self interest. guess what its new world order and world is getting much more decentralized as soon as world doesn't need dollar as reserve currency then ?.we are here not only money is here but freedom of expression and other things which makes america great.
Left out by Mr. Irwin
After the deal : BananalL and has one million dollars , that it can use to invest in its industry to overtake and start making its own cars
That is problem # 1.
BanalLand gets 1 million per year, has now a flourishing car industry and starts exporting its cars to the CarNation. Car industry their withers, except for pickup trucks , protected by a 25% import tax.
That is problem # 2
After 30 years, BanalLand stops accepting dollars from CarNation, because CarNation now has so much outstanding debt that it has become a credit risk
That is problem #3
As it explained it to my students : How long are you willing to lend money to your richest uncle , who keeps asking and asking for more loans and yet has to pay you back ?
That is the question
6
I'm pretty concerned with what you are teaching to students. Here are a few problems with your problems, which seemed to be based on false suppositions.
As to your problem #2, trade deficit and budgetary deficit are not one and the same. Trade balance and tax revenue-generating economic activity are not one and the same. In fact, look at last 20 years, the two do not track. US economic recovery does not track trade balance.
As to your problem #3, the US not a rich uncle. The US is a bank. People, institutions, and countries buy US bonds because it's an investment. The US DOES pay back. But yes, if big institutions wanted to close all their accounts and withdraw, it would be a problem for this bank as it would for all banks and nations. But the US is actually more resilient because such a big withdraw would be as much a risk for the account holder.
5
Banana nation spend $2 M and sold $1M. So you are seeing the example incorrectly. (Trumpish?) But if you were correct and Banana nation sold $2M worth of Bananas, leading to a $1M trade surplus, it could only spend the surplus in Car Nation since it got paid in Car Nation money. It could build up its own car industry with the money but it would have to buy the factory from Car Nation.
2
As long as the Uncle can make his own money and thats the money the world uses then yes, forever.
But China has not used that surplus to reinvest in the US economy. They have spent that surplus around the world to transform China from a backward farming country to the world’s most modern manufacturing country.
Meanwhile, we have become a nation of clerks selling stuff from China we used to make. Take a look at the stuff you buy: made in China, made in China, made in China, . . . .
In the final analysis, wealth is created by making useful stuff from raw materials. Distributing stuff (retailing) is not creating wealth.
26
Not true. China is the by far largest creditor of the US - more than 1.2 trillion. Since they trade with other countries as well, they also invest in these countries, minimizing their risks.
Like it or not - they could cause severe financial trouble, if forced. So far, they are creating jobs.
16
They sell to us, and Donald Trump is an experienced pro at managing bankruptcies...
Who benefits more from the current arrangement, China, which has rapidly industrialized and seen the emergence of its middle class, or the US, which gets to buy poorly made goods at low prices while its once glorious middle class has been gutted and de-mobilized by excessive debt?
Who gets hurt more, China if the US stops purchasing its goods and servicing its debt, or the US if China stops purchasing our debt?
The answer to these questions is obvious: the US is in the driver seat, even if we’re driving German cars.
Not entirely, as this article points out there’s a little more to it. American companies and British ones have their products manufactured in China and then reap the benefits in profit, they could pass those savings onto the consumer, but they don’t. Who’s using the system in this situation? The Chinese manufacturer whose been selected by a western company? Or the boardroom of the company to post a good dividend for shareholders? Companies like Nike, Apple, clothing brands and others are happy with their reduced costs and increase their profit, would the consumer want to pay 25% more for their new running shoes if they were made in Chicago?
True global trade is a recent phenomenon, previously the West made huge gains by exploiting the third world and now in this internet age those Asian countries are all too aware that they’ve been taken for a ride and understandably want a piece of the action. Possibly one of the main issues is the West’s obsession with consumerism, made slightly more poignant as the playing field is levelling.
The world is a very different place and the rules are still evolving, but surely global cooperation is a better way forward than division and isolation?
15
Who knew that international finance was so complicated? Trump and his supporters. Yes it is complicated and difficult to understand that we all share the planet and the economic situation isn't what it was back in the 1950's.
The planet has seen a growth in college educated people and given modern communications, if your job is based on the processing of information and making decisions, there are competitors for your job all over the planet. Yet the US Economy, at least for the moment, is the leading economy on the planet.
Close the doors, put up walls, impose massive tariffs and the potential is that the rest of the planet will simply ignore the USA. If you think outsourcing is bad, try a planetary embargo on all US made products and services and the US having to settle it's debts by purchasing non-US currency. It could get that bad.
We just slapped Canada with an de-facto 300% tariff on commercial aircraft. That gives Boing a non-competitive market so they can raise their prices. Unless other nations decided to boycott Boeing. Whoops, that could happen.
The business man as president - perhaps that wasn't the best idea we ever had.
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A successful businessman as president could be a good thing, but Trump is not and never was a successful businessman. Instead, he is successful at taking advantage of others. Much of his rants are the kettle calling the pot black.
Meanwhile, give me someone who has studied political science and international relations any day over Trump. We'd be much better off.
1
Thanks for an excellent primer on international trade. There is no question the system has worked well for America across the board. However, this doesn't lend itself to political soundbites. Trump's scorecard approach does. Perhaps the best counter to his simplistic view is to remind Americans that import tariffs are taxes on them. And that Canadian tariffs on dairy products cost Canadians not Americans. And that 50% tariff on US beef costs the Japaneses consumer, not Americans. And if US dairy could be sold freely in Canada, the cost of milk would rise in the US. And if US beef could be sold in Japan, the cost of US beef would rise here. More Americans consume milk and beef than produce it, so it should be clear that lower prices benefits 99% of Americans. Trump should have left well enough alone, but, of course, Trump's disrupting of free trade across the globe and his undercutting the Western alliance is in Russia's interest. Putin could not have found a better agent to diminish the power of America than Trump.
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Here in Japan, I only buy US or Australian beef. They are about 40% cheaper than Japanese beef. What held back beef import from the US was the bovine disease scare and the price competitiveness of the Aussies.
Pork is either American or Danish, but more recently Japanese consumers are taking to the acorn-fed Iberian pork, which is even more expensive than the local SPF (specific-pathogen-free) variety.
Cheapest poultry are either Brazilian or Thai, but Japanese appear to prefer the more expensive but "tastier" local open-ranged variety.
1
Tariffs increase prices to protect local industries. It is reductive to claim they only hurt consumers. To maintain local steel production in case of emergency, the administration is seeking to balance competition between international companies as domestic companies have to raise prices to afford bloated health insurance prices and legal fees to interpret yards of regulation paperwork. Believe it or not (and it may be hard in the echo chambers of NYT), this move has a rational basis. Agree or not, I just feel its hypocritical not to outline both sides.
Now I realize why I didn't take courses in economics and high finance. This article is very illuminating while being scary. So a $500B trade deficit a year with China isn't altogether bad. Seems contrary to reason.
The reason stated for why this deficit isn't bad is that China will use the 500B surplus to invest in US Treasuries, with different payoff terms. The Treasuries however are debts the US owes to China. So now we have a deficit of $500B a year being justified by China's investment in our Treasuries which are also debts. Isn't that two enormous debts that the US will have to pay back to China? True, Wall Street receives great benefits from China's investments in US Treasuries, but how does this investment benefit the rest of us? So, the Stock Market goes up but the money is never anything more than profits for the stock market, which is never used for anything more than stock buy-backs and dividends, and never trickles down for the rest of us who are not involved in the stock market.
Suppose China stops investing in our Treasuries? What then?
48
The "debt to China" is not like lending money to your cousin. It is more like a deposit to a bank. You can buy and sell US treasury bonds and those bonds hold value. Would it be a problem if big institutions said essentially wanted to close their accounts? Yes, but so it would with all banks. But it would hurt the bond holder just as much, if it forced a situation where the bonds it held became devalued.
But what else is money in the global sense? There is no stacks of money or even bars of gold. "Money" in the global sense is just a series of credit and obligations.
8
If China stopped buying US government debt, it would still have to spend their dollars in the US, either to buy US products or to invest in US private businesses.
4
Lester, not quite. If I were China I would use those dollars to stockpile raw goods while prices are low. Raw goods purchases on the world market, as Irwin says, don't necessarily benefit the US.
Irwin says that increased investment could be good for US workers if it is done correctly. But supposing this to be true, investment has not been done correctly. What has happened is that jobs have flown the country and wealth at the top has increased. We can't expect beneficial results for workers when the decisions are made by CEO's who consider that their own obligations are to cut wages as much as possible and increase stock price as much as possible. Their own compensation typically depends on stock price. Irwin's hypothetical picture of how trade should work, which is presented by many economists who try to claim that globalization is beneficial to American workers, just does not agree with what has happened in the real world.
Denying reality in this way may continue to present opportunity for Trump and possible succeeding demagogues. Trump and his advisors do not have sufficient understanding to improve things directly, but voters may at least give them credit for trying.
9
This article further bolsters why America must tighten up it's trade deficit and being the world's currency. The world holds too much influence over the United States economy by using our currency as their standard. Obama's policy of cosmopolitan globalism has hurt America in many, many ways. Trump's getting that reversed one tweet at a time.
2
The president's trying to impose import tariffs and other trade restrictions that will end up being paid for by U.S. consumers, workers, and businesses hurts America rather than helps out like most of his misguided and unhinged tweets.
3
That’s not how trade or currency works. Please do take Economics 101.
3
Kurt Pickard, other countries were using the dollar decades before Obama became president and the term ""global cosmopolitanism" has nothing to do with economics but is a sign of your ignorance intended strictly as an insult. One reason we have a high trade deficit with China is Chinese people save more than Americans do on average. Trump's imposition of tariffs will cause inflation as the cost of hoods will rise so Americans will go more in debt despite the tax cuts. Trumps policies will just increase these deficits.
4
This is the standard false "theoretical" justification for running major trade deficits. The US doesn't need investment money, it needs good jobs and less pressure to cut wages. The inequality in wealth within the country continues to increase but the wealthy are not investing constructively, that is is a way which benefits American workers. Most Times writers condemned the latest tax cuts because they simply increased income for the rich which increases the store of investment capital, but trade deficits do the same in practice. The main thing that corporations have done with the increased money is not invest but buy back their own stock. Chinese and other foreign investors may have somewhat different ideas but they generally are not interested in the welfare of US workers either.
The winners from expanded trade in this country are the capitalists and managers who can take advantage in some way of the much cheaper foreign labor and the reduced bargaining power for workers which results. The losers are American workers - reduced prices for some goods are not nearly a full compensation for the exported jobs. Since wages have been stagnant demand in the country has not increased - modern economies depend on mass consumption. The promised overall benefits to the US from globalization have not materialized - globalization has not produced an increase in the rate of growth of GDP. Economists would not be talking about "secular stagnation" if it had.
36
And modern economies need government spending and investment in infrastructure -- and running deficits in government spending by willfully cutting taxes doesn't help this country either -- it just makes the wealthy wealthier, the poor poorer, and middle class diminished.
92
> “The US doesn’t need investment money.”
That’s not how an economy works.
> “Chinese and other foreign investors...are not interested in the welfare of US workers.”
Correct but incomplete. US companies are also disinterested in the welfare of its own workers, contrary to what they proclaim. Have you heard of this concept of shareholder value?
> “Exported jobs”
Do realize that the basis of comparison for the US economy (during 1940s-1960s, where global manufacturing only resided in the U.S. because WWII had reduced almost all other countries to rubble) was a temporary one. These jobs were in fact “exported” from Europe, Japan and other industrial powerhouses to the US prior to WWII. It’s strange that Americans developed an object permanence for those temporary jobs and never expected them to go back abroad.
> “The promised overall benefits to the US from globalization have not materialized - globalization has not produced an increase in the rate of growth in the GDP.”
Liar, liar, pants on fire. The US has experienced uninterrupted growth (considering business cycles and ignoring the Iranian Revolution) of a 2% GDP growth rate. This is impossibly high given how developed it had already been and is unparalleled in the rest of the deveoped world.
17
You missed the most important reason why wages haven’t increased. The corporations and wealthy get all the benefits of globalization and they just hoard their wealth and pass it to their undeserving kids. There is no wealth sharing plans with employees as Japan does or job training programs, free education and healthcare as Germany does.
9
What a great article. I have long wondered why the US experienced its financial booms and busts. Would a natural outcome not lead to a need for greater, not less, regulation of the financial system to better manage the disruption to a system, that appears to be a natural phenomenon of being the global reserve currency?
11
Thank you for the info Neil. As you point out trade/trade deficit are complicated issues.
As I see it, there are two basic issues with fairness re trade.
If somebody is obviously breaking the rules with agreed upon by most nations transgressions like massive dumping of goods or services it should be addressed. We have intl. trade courts, assns. etc. that deal with this.
The other issue is "slave labor countries". One notable example of this are the textile and auto industries where we cannot compete with countries like India, Vietnam, Mexico etc. because of the massive difference in wages. Fair non onerous tariffs are one way to address it.
Trump knows nothing about trade. He flails away, threatening or imposing tariffs on anything and everything and all countries.
If he really wants to do something for America, he should bring back his and Ivanka's trinket factories to America from slave labor countries like India.
131
The thing is with wages or environmental issues you’re country twenty odd years ago wanted nothing to do with placing environmental standards, wage gap or a magnitude of other issues Canada wanted addressed in nafta. You’re country wanted access to our resources and cheap labor from Mexico. You reap what you sow.
Now you want to change the rules. For get that, it’s a global economy now so you’re country does not have the clout to push everyone around.
I really needed this article in order to understand the meaning of "trade deficit." It is obviously much more complex than Trump makes it appear to be ("other countries are taking advantage of us."), and I don't think he himself understands all the ramifications of what he is doing when he slaps tariffs on our allies. But then again, he doesn't really take the time to consider the complexities of anything, does he?
308
He may understand the trade deficit just fine, as I assume most GOP leaders do. It is the base to which they are appealing that does not understand the complexities but instead react, Pavlov-like, to what Trump tells them—mostly lies but they either do not recognize that or don’t care.
Question is: Is the only “ally” we have left is Russia, and all the other G6 countries are only former friends??? Certainly beginning to look that way.
17
June 9th, 2018.
Mark this sad, sad date.
Today the U.S. lost its best and most trustworthy partner.
1