My dear Grandchildren,
In our world of 7/24 information cycles, social media, and intense, sometimes tribal politics you are going to be incessantly bombarded with ideologically driven opinions. You will need facts, and informed judgment, if you are to free yourself from ideological posturing. In the last analysis, the purpose of 4thqtr.com is to provide such information in order to help you frame your own opinion.
With this in mind, I want to contribute a few comments on global trade. I believe this to be reality as we know it, based on data through the start of 2018.
Bloomberg offered stats showing China trade imbalance at about $347 billion. They listed Japan at negative $69B, Vietnam at $32B, and South Korea at $28B. Other data, which show same numbers as shown here, also show Mexico with negative $71B, Germany with $65, Canada with $18. Trump touts the imbalance at $800 B, more or less. However, trade is comprised of goods and services. The services component is frequently not added in when this subject is discussed. In fact, if you add in services, the imbalance is $566 B.
US is the largest net exporter of services. Services is very heavily knowledge based, which some might call the future. As shown, US is positive to almost $250B in services.
Moreover, I have read that it is very difficult to calculate the services component. It is not as easy to track knowledge transfer (invention, R & D, consulting, advice giving, financial services, accounting services, design consulting, engineering consulting, etc.) as goods moving across the ocean on big boats. Our services advantage could even be bigger, much bigger. And it is the future, from a macro point of view. This almost never gets discussed. We are the largest by miles in net services trade.
Notice that our biggest trade deficits are with countries we have met on the battlefield during the past 75 years. Do you find this interesting? This is the point made by Peter Zeilan, in his excellent book, “Accidental Superpower”: We are the only conquering power in history to give up our markets to the vanquished, rather than to seize their markets. ( Allied leaders attending the Bretton Woods Conference, 1944, decided on post WW II economic rules.) Maybe not such a bad idea when you figure that we no longer view Japan, Germany, Mexico (1846-48), Canada (War of 1812) and probably China (Korean War) as military threats. (Of course, we still apparently need to spend $600 billion+ on military – not counting War Supplements, which are off the books – I guess to keep these trade routes open, or perhaps for less admirable reasons.) Other than narcos, North America may be the most peaceful place on earth. (China has no history of needing more land or conquest. Generally, China has been conquered or taken advantage of, by Europeans, and especially by the Japanese, and even the Russians, less so the US, throughout the last 100 years.) We even ran a $10B trade deficit with Russia, if you can believe that.
“Goods” only trade with Canada and Mexico combined has more than tripled since NAFTA started in 1994. And that is only goods. Services must add another third to that since proximity has a positive impact on services exchanges, wouldn’t you think. And services would surely be net positive for US. Those jobs are as important as goods manufacturing jobs, aren’t they?
Another point. I guess you could argue that such a huge trade imbalance with China needs to be addressed since they are a strategic competitor, using a competitive system of government, and since there is considerable evidence that they don’t play by fair rules of trade. I could agree that this needs to be addressed.
Here’s a guess. To the extent that these people/Nations actually believe that an irrational, uneducated, contrarian, ego centric Trump might stick it to them, the more likely it is that they’ll get their asses to a negotiating table pretty quickly. Think of it from a business standpoint. We are a much bigger customer for China than they are for us. Same, Germany. Same Mexico.
Trump’s biggest asset is that no one really knows what he might do. This is both scary – really scary – but also an advantage.
But, overall, trade is complicated. Benefits are complicated. Calculating benefits is complicated. Calculating non-economic benefits, e.g., lessening of military threat, is complicated. This complexity just flies in the face of a human desire to make things simple. To get to simple bottom lines. Good or bad? Consequently, taking a very simple and unequivocal approach to a very complicated problem must have unintended consequences, both good and bad, that will not be forecastable. Tighten your trousers and skirts because the downside of these risks is also incalculable. There is a reason why sensible people are generally pretty cautious.
Finally, as I have written before, I truly wonder how relevant is the economic analysis that categorizes a country’s trade imbalance as a very bad thing. Economics is one of several relevant criteria for measurement, others being legal, scientific, moral, behavioral, righteousness, etc. US has run negative on the trade subject against economic criteria for decades, generally with all of these countries. And yet, the US seems to be doing quite OK, thank you – not counting our debt created by budgetary deficits, not caused by trade, but materially financed, ironically, by China and Japan because of all the excess dollars they have generated from trade surpluses, which finds a home in US Treasury borrowings. Perhaps the US and its people have run quite positive against some of these other criteria as our values of freedom, liberalism, legal fairness and, yes, ugly capitalism have contributed to a tremendous advance for hundreds of millions of people around the globe since the end of WW II. Just thinking.
Tesla’s Elon Musk Tells Trump China Trade Rules ‘Make Things Very Difficult’
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