Trump, Tariffs and Trade Deficits

By Chris Kanthan

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

What is Trade Deficit?

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

Why Trade Deficit is Bad

Trade deficit is transfer of wealth.

Since our Federal Reserve Bank creates fiat money out of thin air, it’s hard to see the adverse effects of trade deficits. However, imagine for a moment that all trade happened with gold. Every year that we have a trade deficit, our gold reserves will shrink, and we can then clearly see that perpetual trade deficit is unsustainable.

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

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

Symptom of Jobs Lost

A corollary of trade deficit is that Americans are not producing the goods that we import. Of course, no country is 100% self-reliant, but everything we import potentially represents a lost American job.

Blame China? Not so Fast!

Blaming China, which is also a rising economic superpower, is a political winner. Yes, we have the largest trade deficit with China – about $380 billion – but that number is fake.

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

Thus, our true trade deficit with China is about half the official number.

But the Math Keeps Getting Murkier!

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

Consider that GM sells more cars in China than in the US. GM’s profit from those cars represent a transfer of wealth from China to the US. Similarly, US corporations such as Starbucks, McDonald’s, KFC, clothing brands, hotel chains, etc. have tens of thousands of branches all over the world. Profits from all such activities are ignored in the trade deficit numbers.

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

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

Who to Blame?

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

The only people to blame for this are the globalists. They are the ones who championed globalization and wrote NAFTA and WTO. Driven solely by the desire to maximize profits, they have been outsourcing American jobs for the last three decades.

Can Tariffs Help?

Tariffs are deliberate taxes and protectionist measures that make goods from other countries more expensive. They are usually helpful in nations that lack mature markets – for example, in the 19th century, the US benefited from high tariffs, which protected fledgling industries from European competitors.

Right now, guess who demands low tariffs on imports? Apple, Walmart, Home Depot, Starbucks, Ford and most other big firms that rely upon cheap raw materials, labor and finished goods from other nations.

Given that tariffs should be used only in special circumstances, Trump’s tariffs on lumber and steel are quite misguided. Look at the prices of steel and lumber over the last two years – do these two industries need protection from foreign competition?

Trump’s tariffs may hurt the average American by raising the prices of many consumer goods – for example, prices of washing machines are up 19% this year.

Furthermore, retaliatory tariffs from China, Canada and EU are coming soon and will hurt US farms and businesses.

Petrodollar – The Elephant in the Room

In the discussions about trade deficit, there’s a shocking fact that everyone ignores: after WWII, globalists built a global financial system that requires the US to run massive trade deficits! Look at the dominance of the US dollar in foreign exchange reserves held by central banks around the world:

How are those countries going to accumulate US dollars and US treasuries? Answer: by selling us goods and services.

Similarly, the US created the Petrodollar system in the 1970s, forcing other nations to buy oil and commodities using US dollars. This system also perpetuates our trade deficit. For example, how’s India going to get USD to buy oil from Saudi Arabia? By running a trade surplus with the US.

Originally, this system worked because of the so-called “petrodollar recycling” – countries like Saudi Arabia would use much of their oil revenues and trade surpluses to buy American products and weapons.

However, as the US manufacturing kept declining over the decades, the dollars from trade surpluses stopped flowing back to the US as it once did.

Without a Trade Deficit

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

  • USD will no longer be a global reserve or trading currency
  • foreigners won’t have USD to buy US treasuries/bonds
  • the US government will be forced to slash its expenditure (social security, military, etc.)
  • we won’t be able to punish our geopolitical enemies through economic sanctions (since they won’t use US$ to conduct trade)
  • in other words, the USA won’t be a superpower anymore!

So Complex! What’s the Solution?

The best solution is to produce more American goods that the rest of the world gladly buy without coercion. In order to do that, we need to rebuild a competitive, high-end manufacturing sector. (Note: this also creates numerous white-collar jobs). We should also emulate Germany and encourage vocational/trade schools that pave rewarding technological and manufacturing career paths for high school graduates.

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

Chris Kanthan is the author of a new book, Deconstructing the Syrian War. Chris lives in the San Francisco Bay Area, has traveled to 35 countries, and writes about world affairs, politics, economy and health. His other book is Deconstructing Monsanto. Follow him on Twitter: @GMOChannel

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