San Juan Mountains

San Juan Mountains
San Juan Mountains: Grenadier Range

Friday, February 24, 2017

Trump's Tirade Against Trade Deficits

I was driving between jobs yesterday when I heard an audio clip on the radio of King Donnie talking about how the Mexican government is taking advantage of the good, old Socialist Democracy of Amerika.  According to our King the SDA has a $70 billion "trade deficit" with Mexico.  Also according to our King, that is a terrible thing that needs to be corrected.  Also according to our King, he is just the man to negotiate the new trade deals that will restore fairness and equity to the universe of international trade.  Let's consider our King's allegations for a moment today.
Here is a chart showing the state of international trade in the SDA as of the end of 2016:

Year-to-Date Total Trade

Rank Country Exports Imports Total Trade Percent of Total Trade
--- Total, All Countries 1,454.6 2,188.9 3,643.6 100.0%
--- Total, Top 15 Countries 1,022.2 1,707.2 2,729.4 74.9%
1 China 115.8 462.8 578.6 15.9%
2 Canada 266.8 278.1 544.9 15.0%
3 Mexico 231.0 294.2 525.1 14.4%
4 Japan 63.3 132.2 195.5 5.4%
5 Germany 49.4 114.2 163.6 4.5%
6 Korea, South 42.3 69.9 112.2 3.1%
7 United Kingdom 55.4 54.3 109.7 3.0%
8 France 30.9 46.8 77.7 2.1%
9 India 21.7 46.0 67.7 1.9%
10 Taiwan 26.0 39.3 65.4 1.8%
11 Italy 16.8 45.2 62.0 1.7%
12 Switzerland 22.7 36.4 59.1 1.6%
13 Netherlands 40.4 16.2 56.5 1.6%
14 Brazil 30.3 26.2 56.5 1.5%
15 Ireland 9.6 45.5 55.1 1.5%

Notice that King Donnie was in the ballpark with his comments about trade between the SDA and Mexico.  Mexico is the SDA's third biggest trading partner, with 14.4% of all SDA international trade going through it. Last year imports into the SDA from Mexico exceeded exports by $62.3 billion.  Also notice that of the top 15 international trading partners only 3 are not involved in the dreaded trade deficit with the SDA that Donnie fears so much.  It is also interesting to note that the biggest deficit, by far, is with China, at 60% of total trade. That explains why our King so desperately wants to start a trade war with that highly productive country.  I also find it interesting that the SDA's trade deficits with Japan (35%), Germany (40%), Italy (46%) and Ireland (at a whopping 64%, a percentage that is even "worse" than the Chinese deficit....we must be drinking a lot of Guinness) are rarely mentioned by our King when he wants to talk about who to wage economic war with in the future.  I also find it interesting that the SDA maintains a huge trade surplus (43%) with the Netherlands and nobody seems to be very concerned about that.  I wonder what the SDA is exporting to the Netherlands to create such a massive surplus?  Tulip bulbs perhaps?  Windmill parts?  I wonder if King Donnie believes we have stuck it to the Netherlands by beating them in the trade war and shown them just how great Amerika is when it comes to international trade?
A trade deficit is simply a number that shows the dollar value of goods that cross back and forth between an arbitrary geo-political boundary.  Although the deficit is denominated in dollars, it does not include the exchange of actual dollars that takes place with each trade.   If my neighbor buys $100 worth of bathtub gin from me (I am quite a good producer of bathtub gin by the way) he gives me the dollars and I give him the gin. If I only purchase $50 worth of marijuana from him I give him the dollars and he gives me the marijuana.  Under this scenario,  I have a trade surplus with him of $50 and he has a trade deficit with me of $50.  I exported $50 more worth of my goods to him than he exported to me.  For some crazy reason (having to do with Keynesian economics) most economists and career politicians believe that it is a bad thing to maintain a trade deficit and a good thing to maintain a trade surplus.  But when we narrow the discussion down to what happens between two neighbors, how is it possible to make that assertion?  How am I better off than my neighbor simply because I sold him $50 more of my goods than I purchased of his?  Furthermore, how have I beaten him in our trade war, thus proving my greatness?  Conversely, how is he worse off than me simply because he is now the holder/owner of the dreaded trade deficit?  In the real world we are both quite happy with our trades and neither of us believes we have been exploited by the other.  I bought less of what he had to sell and he bought more of what I had to sell but so what?  We both go away happy and there is no trade war going on.
The entire wrongheaded notion of a morally good or bad trade ratio specifically ignores the fact that all exchanges take place in some sort of currency.  Yes, it is true, my neighbor has a $50 trade deficit with me but I still have $50 to spend on things he might produce in the future. Why is that a bad thing for him?  Why is that a good thing for me?  He also has $50 worth more of the goods I produced. Why is that bad for him and good for me?  What trade warriors like King Donnie always ignore is the fact that in addition to the goods we exchanged we also exchanged cash.  Our exchanges are always a zero sum game when the cash we exchanged is considered.   Goods flow one way across the arbitrary border and an equal sum of cash flows back the other way.  In the end there is always a perfect balance between cash and goods that are exchanged across arbitrary geo-political borders.  There is no act of war taking place and neither side wins by exporting or importing more goods.
The general theory running around in the mind of King Donnie is that trade deficits mean that the SDA is buying more goods from foreigners than they are purchasing from us.  That much is true.  Since foreigners are purchasing fewer of our goods than we are purchasing of theirs it is believed that we are subsidizing their jobs and they are stealing ours.  That much is false.  The whole thing comes down to jobs in the mind of our King.  The economic reality has nothing to do with jobs or the quasi-religious belief that career politicians and bureaucrats have the mystical ability to create jobs.  They do not.  Dismiss that absurd notion if you cling to it.  Only profit seeking businesses are capable of creating jobs.  Furthermore, attempting to manage international trade by means of government created trade agreements or government imposed tariffs does not empower our King to create jobs.
The reason the SDA has a trade deficit with other countries around the world is due entirely to the fact that the citizens of the SDA want to purchase more of the goods produced in those countries than the citizens of those countries want to buy from our stock of produced goods.  Why is that a bad thing?  And if it is a bad thing, why is the blame not being placed squarely upon the shoulders of those who are responsible for the deficits; namely, the consumers of the SDA.  That, of course, will never happen as career politicians are loath to criticize their constituents since their constituents are the folks who keep them in power.  So rather than tell the truth about trade deficits, career politicians like our King make up lies, create imaginary enemies and proclaim false news that trade deficits are harmful to the economy of the SDA and must be fought by means of new trade agreements and tariffs that cause Amerika to win each exchange of goods (an absurd and contradictory notion) while making Amerika great again, whatever that means.
SDA consumers are insatiable.  The citizens of this country buy, buy and buy some more.  The citizens of this country are also the richest people in the world so they have lots of money to spend.  Is it a surprise that the SDA imports so much more than it exports?  It shouldn't be.  That truth is nothing more than another way of looking at the fact that we are extraordinarily wealthy and we like to buy things, including things produced by people who live on the other side of arbitrary geo-political boundaries.  What is wrong with that?  Do people living in foreign countries create jobs to produce the goods we purchase?  Of course they do!  But why is that a bad thing?  Are any jobs created in the SDA to produce the goods that nobody in the the rest of the world buys?  Of course not!  But why is that a bad thing?  Why do foreign governments, and their citizens, need to be punished for giving us what we want for a price we are willing to pay?  Sadly, King Donnie does not answer any of these questions.  Let's just hope that his ignorant and economically harmful saber-rattling does not come back to harm us all. 

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