TARIFFS AND TRADE DEFICITS

The rationale Donald Trump has used for imposing tariffs is the trade deficit.  Why China?  First lets look at trade deficits and what they mean and how they are used.  Trade deficits are generated when one country buys more goods and services than the other.  We have had trade deficits for years. There are some countries trade deficits that are not as bad as others.  China, Japan, Mexico, and Germany have been our largest deficit countries.  There is no trade debt like the national debt as trade balances are cleared on a monthly basis.

The clearance process involves exchanges of financial instruments tied to the dollar such as our debt.  China uses our trade deficit to purchase our securities (our National Debt).  Our debt then is used by China as collateral for their currency and the purchase of resources in third world countries.  Their exploits are evident in Africa.  It is also being used to fund internal and external Chinese infrastructure a programs.  China is also investing in African infrastructure programs to support their resource exploration.

Trump in a sense is not misguided, however lets look at why China, specifically. China ate our lunch on tariffs.  This is due to our dependence on their low cost electronics and adding tariffs only make their goods more expensive but still desirable.  Our largest export is farm products to China, which can be easily produced by others cheaply with mechanization. By imposing tariffs on Chinese goods, Trump’s thoughts were that the increase in price would discourage buyers of their products, by making their products relatively more expensive.  Thus reducing the monthly deficit. This in theory would work, unless the other country retaliates.  This creates a tariff war.

Lets look at what Japan and Germany do with the monthly trade deficit reconciliation.  Both countries reinvest within the United States, their trade deficit dollars.  One need only look at the Volkswagen, Audi, Toyota, and Honda plants operating in the U.S.  These countries do not accumulate our deficits like China.  The deficit can create jobs within the U.S. if reinvested.  China, as shown, accumulates our debt without creating jobs here like Japan and Germany.

As you can realize, not all trade deficits are bad. If the deficit is reinvested in the debtor country, jobs follow.  The reinvestment scenario is why globalization works well.  Chinas economic model works off others trade deficit.  The economic production model employs the masses with sweatshops and questionable working conditions to generate products which are labor intensive and cheap.  One method of combating this phenomenon is to encourage other countries in the Asian area to band together to manufacture products with a guaranteed U.S. market. Oh my! Is this what the Obama administration proposed with the Trans Pacific Partnership or TPP, which Trump abandoned after all countries had agreed?  An agreement that would guarantee our copyrights and patents are honored as well as the job benefits of their reinvestment.  This would also reduce the trade deficit.

I argue Trump’s tariffs were not imposed for treating the problem of a Chinese trade deficit, but the use of the accumulation of our deficit and turning it into our National Debt. This is the Chinese reinvesting in their own country rather than ours.  China does not act like Japan and Germany.  Trump calls this currency manipulation.  I call these actions commerce.

Now back to tariffs and China specifically.  Trump imposed tariffs on Chinese electronics using the rationale of trade deficit.  Obviously his concern is due to the wrong ways China is using the trade deficit.  Shame on the Chinese to accumulate our debt and not reinvesting in the U.S. 

China then retaliates with by buying its soybean crop from Brazil and puts tariffs on Whiskey and other goods.  Keep in mind China imports massive amounts of foodstuffs, our largest export to China.  Soybeans are a crop that is traded internationally and when our farmers loose market share with alternate sources, everyone loses more than once.  The first year, the farmers are ok, due to the Trump farm subsidy bonus to the farmers.  Is this political pandering to gain traction in the mid-west?  With the farmers next year crop comes the added competition and Voila! lower profit margins for the farmers.  Tariffs are not a good thing in a global economy.

Who pays for tariffs?  Ultimately the taxpayer pays twice for Trumps ill-suited tariff policy.  Let me explain.  The first payment made is the tariffs paid on Chinese goods when they hit our shores.  These costs are passed on to the ultimate consumer. (Note- We pay!)  The second payment made to eliminate the debt incurred by the Trump farm subsidy.  This subsidy amounts to $28 billion to date and is far in excess of Obama’s $12 billion auto industry bailout.  Of the $28 billion,  $68 million was given to a Brazilian agricultural conglomerate that had previously pleaded guilty of fraud.  Brazil is where China has turned for soybeans and other agricultural products Their use of mechanized methods competes with our production and they are increasing market share.

Does this mean that Trump is a Socialist?? After all, he is picking winners and losers.  The redistribution of your tax dollars goes to the mid-west big agricultural giants. This redistribution took place without any opposition.  The small family farm did not receive any benefit.   The soy crop is a crop that is only profitable in large scale.  A record numbers of small farms failed under Trump.  Yet he says he saved the small farmer with his actions.  The Secretary of agriculture, when questioned about the farm failures said, “go big or get out”.

I have another opinion why Trump imposed the tariffs.  Tariffs are a very effective cudgel, which has the effect of either stimulating or depressing an economy.  He said he is negotiating a trade deal with China.  He has started and stopped his foray into the tariff game.  His uncertainty and gyrations create fluctuations in the stock market.  This information can be monetized easily. Are trumps friends and colleges benefiting from the chaos? 

This Corporate tariffs and bailouts socialism (redistribution of wealth) has been a burden to taxpayers generated by greed and avarice at the highest levels.  The use of bailouts seem to be the mantra of the capitalist that wants the redistribution of wealth concentrated at the top.  A free market economy would have had the market do its thing and let the chips fall.