What Trumps free trade

My favorite Wall Street Journal is a pretty good news source, but it isn't perfect. It exhibits the "foolish consistency" I warned of in a recent article on the issue of repealing the Second Amendment (See http://www.actonforum.com/blogs/allenn/foolish-inconsistency)

My favorite president, Donald Trump, has plenty of faults. But his attempt to do something about our perpetual trade deficit isn't one of them. Yet the WSJ consistently criticizes the President because he isn't a pure "free trader." The Journal of course acknowledges that many of our trade imbalances are unfair and one-sided, and that the Chinese side cheats repeatedly and has done so for years, but the Journal is unable to say anything other than to try to undermine the President's policy. They offer no suggestions other than relying on the self-correcting nature of capitalism in general and trade in particular. For how many years should our country persist in massive trade deficits?

Someone said that the definition of insanity is doing the same thing over and over again and expecting different results. That can be applied to our ballooning trade deficit which has grown very fast in the last 15 or 20 years, such that it is hundreds of billions of dollars a year. Perhaps the problem with analyzing the costs of this imbalance is that our world economy is so large and complicated that "cause and effect" are impossible to prove. Strange how many scientists and people can clearly see the "cause and effect" between global warming and man-made causes, a connection that is probably even more complicated, but that's another topic.

But in general terms, we have hundreds of billions of dollars flowing out of the country, and various manufactured goods flowing in. During this period, American consumers have benefitted by having access to more goods at cheaper prices. This has allowed people to have more disposable income to spend as they see fit, or to invest in the stock market. Our stock prices have roughly tripled or quadrupled over that same timeframe. In the "short term" (10-20 years) it is fair to say that we have benefitted from this trade, and I think it is fair to say that most of the world with trade surpluses with the U.S. has benefitted more.

But what are the long-term ramifications of these perpetual trade deficits? I must conclude that nobody knows. It hasn't happened before, and never on this scale. Without knowing this, we can't conclude that free trade which includes perpetual massive trade deficits is sound economic, let alone nationally strategic, policy. But we do know that in the last 20 years, America has lost a lot of manufacturers, many jobs in that industry, and our economy has turned towards service. This is an alarming long-term trend.

One reason this bothers me is that "services" are extremely difficult to trade. We can't send people to China to do their tax returns, or give them haircuts, or make them dinner. Services by their very nature tend to be domestic. Goods can be exported, but there is a cost for shipping and handling. But if a country has a much lower standard of living, wages are much lower, workers are exploited, there are fewer government costs like health care or social security, there are lax environmental regulations, or any combination of the above, a country can make and export cheaper than us.

Conservative belief in free trade is based on the concept that the government should not be interfering with the economic decisions of its citizens. If Company X in The U.S. wants to sell Company Y in Canada 1,000 widgets at $5 each, that's fine. Those U.S. dollars in Canada cannot be spent and must eventually make their way back to the U.S., likely in the form of purchasing U.S. goods. The trade should eventually balance out, more or less.

But what if the trade were with the Canadian government, and let's say they were ruled by a dictator who didn't allow free speech, free elections, or private ownership of anything, except in name only? Would such a regime have the same motivations, both short and long term, as us? Might they decide to sacrifice the well-being and "happiness" of their vassals in order to achieve a long-term strategy that they think would benefit their country more than say a happier population? Maybe building up huge reserves of U.S. dollars and then strategically investing them to serve their long-term state-dictated aims rather than doing what normal capitalistic countries do?

Initially, we looked at China as a repressed regime that was that way because they were a poor, backward country. If only their standard of living were to rise! If only ordinary Chinese citizens could see the benefits of capitalism! They would naturally insist on copying our system and overthrowing their masters. Would that it were so. Instead, the Chinese regime is probably even more repressive than just a few years ago, with the growing intrusion of technology giving them new weapons to spy on their citizens.

My conclusion is that our U.S. economic system has proven far superior for the masses, despite what our home-grown Socialists preach, but our belief that the strength and success of our system would translate into political change around the world have been proven wrong. Dictators are interested in their self-interests, not those of the people they rule.

Instead, leaders with control over police states are not George Washingtons, yearning to bring freedom and democracy and economic success to their people, but are instead Vladimir Putins and Xi Jinpings who want to essentially be kings and have the wealth of their nation kept by their relatives and cronies. In fact, giving power to their people could imperil their rule as the middle-class can look for other freedoms rather than just basic survival.

How really different are the regimes of North Korea and China?

So perpetual trade imbalances just don't feel right to me, when one side is under a capitalist system and the other is state-controlled. And that's why Trump's attempt to fix this is correct. We need "free trade" that is balanced and reciprocal when we interact with other capitalist systems. But when dealing with communists and other dictatorships, we need a different set of rules.

Maybe the most important factor is the lack of free and fair elections. I've always thought this was about allowing the people to choose their leaders, and how unfair it was that many countries are ruled by people who have seized power and not been elected. But maybe the problem is even worse: by not having elections, dictators don't need to consider what is best for their population because they are never up for reelection. And therefore the state motivations are different than for free societies. For example, how often do "democracies" initiate war? It is probably very rare. But dictatorships do it all the time and that threat is ever present.

The WSJ would have readers believe that China's attempt to thwart Trump by imposing tariffs on U.S. farmers and Boeing is good enough reason to give in and drop all talk of U.S. tariffs on steel in general and tariffs on China in particular. They warn Trump that his voters are being targeted and he'd better stop his foolishness if he wants to be reelected. But Trump is not a politician and say what you will about his personal life and personality quirks, he is a patriot. He really believes in "America First." On trade, he is right and the WSJ is wrong.

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Comment from Walt on free trade

I also like the WSJ, primarily for their business expertise.

Your conclusion that a trade imbalance is bad, is based on virtually zero facts.

You identify that America has lost a lot of manufacturers and our economy has turned towards service. You pronounce that “and our economy has turned towards service”, as a negative result. With the robotics future eliminating so many manual-labor jobs, I would challenge your view and suggest that moving into a service economy is most appropriate.

You conclude that “nobody knows” what the long-term ramifications of perpetual trade deficits with state-controlled countries are. We do know, from our previous experience, that tariffs have a very negative near-term impact. Why change something that is working? The stock market sure seems to know what the impact of tariffs will be.

Finally, you conclude that the Trump is smarter than the WSJ folks since he is a “patriot”. Are you serious? Wasn’t he the one that got the deferment for bone spurs? His entire motivation for the tariffs is to appeal to his political base. Concluding that Trump has more economic insight than the WSJ is ridiculous. I’ve found few economists that agree with Trump: https://www.washingtonpost.com/news/wonk/wp/2017/03/07/trump-rails-against-the-trade-deficit-but-economists-say-theres-no-easy-way-for-him-to-make-it-go-away/?utm_term=.4e1e4e8865d3

Walt Tetschner

Allen Nitschelm has lived in Acton since 1998 and writes about fiscal issues at the
local and state level. He is a former member of the town's Finance Committee
and is an Associate Publisher of Acton Forum.

Fake news galore

Hi Walt,

There is not time enough in the day to respond to all the "fake news" such as the article you cite quoting all these economists who are apparently untroubled by annual $500 billion trade debts that they say look like they will just keep growing ad infinitum. So I'll do it this once and next time you want me to read something from the Fake News media, I will just refer you to this post.

The trade deficit has grown dramatically in the last 10 or 15 years. Perhaps we won't know this is a problem until it is a problem. Like so many crazy things in our economy, we are in unchartered territory which should give us lots of pause.

But of no doubt is the news media selectively writes and finds quotes to substantiate its claims. There are many conclusions in this year-old article that are based on faulty logic which are meant to assure readers that the central premise is correct even though the underlying logic does not prove the claim.

The article reads to me like a weather forecaster who is predicting snow next week but wants to cover all his bases because he can't really know what is going to happen. Classic economic theory is that trade deficits balance themselves out over time. Has the situation we are in now as I describe in my post been studied? Perhaps so, and I'd be happy to read such work, but it will be not much better than the meteorologist, judging from the quotes I read in your link. Go back and count the number of "weasel words" used and you will see what I mean. ("May," "might," "could," etc.) I counted 13 of them. Note the end quote, which makes it sound like tariff talk is just crazy. But the example used (standing on a platform makes you taller) is crazy. Nice rhetorical trick there, used by the writer to paint the entire Trump tariff talk the same way. Fake news.

If you think that having $500 billion dollar trade deficits are fine, and there is no problem if it grows to a trillion dollars a year, and that we don't need a manufacturing base, we can just perform services for each other all day long, and in 10 or 15 years when our children take over and we are the third or fourth largest economic power and China is ruling the world, then we will have to agree to disagree on this one.

I will also note that Trump's tariff plan, while it could cause a trade war and may hurt our economy (did you like my use of weasel words there?), might be the only way to try to rebalance our trade deficits. The non-free traders would love to just let things keep going the way they are. For example, our cars face a 25%'tariff to go into China yet their cars have a 2.5% tariff to come here. (But we shouldn't insist on fair trade!) But if the threat of tariffs causes the deficits to decrease and maybe, one day, to be eliminated, that would be a good thing.

Or is it your position that you prefer us having these trade deficits and therefore we shouldn't even try to fix this because it isn't a problem? The fake news article you cite offers no alternate solution. Do you agree with that?


Allen Nitschelm has lived in Acton since 1998 and writes about fiscal issues at the
local and state level. He is a former member of the town's Finance Committee
and is an Associate Publisher of Acton Forum.