Dear Mr. President: You Flunk (Sophomore General Business)

One can only imagine Mrs. Barnberner, imaginary teacher of high school sophomore level General Business grading the Oval Office Occupant’s essay — all 280 characters of it — on international trade.  “F.”

What’s worse is that he thinks he’s on to some great thing … a trade war… a war to rectify the “advantages” taken by foreign countries in our trading relations.  Dear Mr. President, you obviously don’t have a clue about what a trade deficit means, and that it can mean different things in different contexts.  Let me make this simple for you:

Example, after purchasing a small mending plate with screws from my local hardware store I have a $3.49 trade deficit with the enterprise.  I bought the little package, paid for it, and did not sell a single thing to them.  Therefore, I have a 100% trade deficit with them.  This is NOT a bad thing.  I do not wish to manufacture my own metal mending plates.  I do not wish to manufacture my own screws.  I wish to buy these from a reliable, legitimate, source.  I will pay them in coin of the realm and go home to my “wreck it and run” project.

Therefore, one cannot assert, with any level of economic competency, that trade deficits are a negative in all contexts.   That said, there are other reasons you, POTUS*, have flunked this exam.

When discussing sales it’s important to remember that we measure both Goods and Services.

“Trump said we have an $800 billion deficit. It sounds like he was actually alluding to how we bought “$810 billion more in foreign goods than other countries bought from the U.S.” as the AP cites from the Census Bureau. That leaves out our $244 billion trade surplus in services.” [jal]

Please recall, sir, commercial enterprises encompass both goods and services.  Goods are those things which are mined or harvested (primary industries) or things that are made from raw materials (secondary industries), AND there are tertiary (wait strike that, to keep it easy for you Mr. POTUS* let’s call them ‘thirdish’) industries and sectors –> financial, legal, transport, consultancy…etc.

Your automobile example is fraught with inconsistencies:

“TRUMP: “If the E.U. wants to further increase their already massive tariffs and barriers on U.S. companies doing business there, we will simply apply a Tax on their Cars which freely pour into the U.S. They make it impossible for our cars (and more) to sell there. Big trade imbalance!” — tweet Saturday.”

Where to begin?   Let’s start with the fact that Americans bought about 17.2 million motor vehicles last year.  The top selling item (15% of all sales) was the Ford F-series pickup truck line.  Europeans are not as enamored of gas guzzling V-8 engine, half and three-quarter ton pickups.   The price for a gallon of gas in Paris, France right now is about $5.54 per gallon.  [Money.cnn] A person can buy gasoline for $2.21 per gallon at the EZ Mart in Paris, Texas at last report. [Gasbuddy]  Getting the picture yet Sir?

For someone who makes much noise about being an international business tycoon, you Sire, are demonstrating an alarming lack of cognizance of  the structure of retail markets.  Europeans are beginning to purchase items in the Ford Ranger series [MFool] because the smaller, lighter, vehicles are more practical in their home markets. Lesson?  If we are not manufacturing products people want to buy in their home countries, it doesn’t have to be about taxes and tariffs — it could just as easily be a function of retail market interests.  You cannot make a Chevy Silverado or Ford F-150 as popular in down town Paris, France as it is in Paris, TX, just because the tariffs are lower — because you cannot make some “rues” wider in Paris and the price of petrol cheaper.

Not only is the automobile argument risible, but the general idea that trade wars are fun things to play with is equally ludicrous.

The president’s argument, in essence, is that high tariffs will force other countries to relent quickly on what he sees as unfair trading practices, and that will wipe out the trade gap and create factory jobs. But the record shows that tariffs, while they may help certain domestic manufacturers, can come at a broad cost. They can raise prices for consumers and businesses because companies pass on at least some of the higher costs of imports and imported materials to their customers. A trade war is also bound to mean that other countries will erect higher barriers of their own against U.S. goods and services, thereby punishing American exporters. [YahFin]

Since the POTUS* is talking about manufacturing, let’s stay there for a moment.  The US exports approximately $533 billion in capital goods annually.  These include aircraft (think Boeing), $57 billion in industrial machinery, $48 billion in semi-conductors, $43 billion in electrical apparatus (think GE), and $38 billion in telecommunication equipment. [Bal]  Now, since by their very definition, trade “wars” involve retaliation, imagine the retaliation impact on GE and Boeing?

A far better, but obviously more complex, response would be for the US to develop a MANUFACTURING POLICY.  What a concept!

And, back to my soybeans again, not all American exports are manufacturing.  There’s no rule in a trade war that tit has to be for tat.  Or, that tariffs on cars and trucks are matched with tariffs on our cars and trucks; the reaction could just as easily be on major American agricultural exports. Download and take a gander at the USDA yoy and monthly export spreadsheet located here.  There are some major amounts which should be noted. Look at grains and feeds, soybeans, red meats and products, and animal feeds.  There’s NO rule that says an increased tariff on steel and aluminum can’t be matched by increased tariffs on sorghum, soybeans, and animal feeds. This is not a difficult concept. It is, however, a segment in the overall lesson that no, trade wars are not easy to win. There really are no winners.

And we haven’t even explored some of the more complex elements in international trade policy — just the basics. The basics someone who actually stayed awake for 50% of the time in sophomore General Business class should understand.

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