Do trade deficits really matter?

So we are having trade wars at the moment. Trump started all of them, first with a 30% tariff on solar panels manufactured in China but then on steel imports. It expanded into tariffs against Canada, Mexico, the European Union and more tariffs on China. Predictably these countries responded with counter-tariffs designed to give Trump’s biggest supporters a case of indigestion. And it’s working. Farming is typically a low margin business. With less demand, prices drop. With fewer crops being sold it is quickly making agriculture here unprofitable. Trump says that tariff wars are easy wins. That wasn’t the case in 1929 when they caused a global depression.

Trump acts like trade deficits really matter. Unquestionably they do matter to some businesses and people, i.e. those affected by them. After NAFTA was passed we lost a lot of our industrial base simply because countries like Mexico could manufacture stuff a lot cheaper than we could. To compete though in many ways we have upped our game. We are much more of a service economy now and we design leading edge stuff that is often manufactured elsewhere. Aside from Apple products, there is also stuff like my CPAP machine. This work is more specialized and the margins must be higher.

I don’t recall a time when the United States was not carrying a trade deficit. Perhaps we weren’t back in the 60s and 70s, but I was much younger then. And there are scattered months here and there when we do export more than we import. We have trade surpluses with some countries, like Canada. It’s a mystery then why Trump targeted that country. Mostly though it’s the other way around. While some sectors have suffered from all this free trade, I think overall it’s been a benefit.

One big benefit has been that trade has kept prices and thus inflation low. As long as these tariffs are in place, we are likely to see creeping inflation again. And Americans love imports. Low prices have helped us live beyond our means and our stagnant wages. It’s how companies like Walmart stay in business. Moreover, these imports increase competition and that too tends to lower prices. In many cases, the best quality products are available overseas. Take hybrid cars, for example. Yesterday I was in a neighbor’s Toyota Prius Prime and marveling at its engineering. This model may have been manufactured in the United States, but it’s an amazing value for the money. Since he too has solar panels on his house, most of the time he is driving using its electric motor. He’s getting very close to living carbon free, thanks to hybrids built and perfected overseas.

We have a choice of where we buy things. Most likely my next car will also be a foreign hybrid or fully electric car built or designed overseas. If I buy a Toyota Prius built in Japan and pay $30,000 for the privilege, while it causes a trade imbalance, it’s not like I didn’t get anything for my money. I get a great value in a car that gets 51mpg when it’s not running in fully electric mode. The effect of buying a foreign car is that some Americans (presumably) did not have a part in its design and manufacturing. Maybe that’s bad for the economy if we presume that whoever would have been building the car here in the states wasn’t doing work of similar or greater value. I’m not an economist but I’m not sure we can credibly make that claim.

In the case of hybrids and electric cars, American auto manufacturers are upping their game. In one case (Tesla) are providing a superior (albeit much more expensive) alternative. The Chevy Volt and Bolt are two other examples, although their cost is subsidized by generous federal tax credits. Tariffs on cars manufactured overseas do make our domestic versions more competitive, but only by raising foreign car prices. It doesn’t actually save buyers any money; in fact we pay a double penalty for tariffs: higher costs and potentially less competition.

There is certainly a convincing case to be made that China trades unfairly. To gain market share, it heavily subsidizes certain sectors like its solar and shipping sectors. It often doesn’t respect international copyright laws. In most cases though foreign products are cheaper because they can manufacture them for less. Often these industries are low profit. It’s unclear why we would want to compete in these low profit industries when doing so probably won’t give us a better lifestyle. Tariffs are at best a poor way for addressing these issues. They may work, but history is generally against you. Leveraging them in a large way like we are doing now is very dangerous, as the Great Depression attests.

In any event, the United States is not blameless. Even before these latest rounds of tariffs, we have been subsidizing many of our own industries through longstanding tariffs, including our sugar and peanut businesses. Free trade is one of these ideals that are rarely fully realized. When it is, someone is usually paying a price. Americans pay much more for sugar and peanuts than is necessary, and now we’re paying more for steel and solar panels too.

The evidence doesn’t seem to prove that trade deficits cause a country’s decline. In some ways they can demonstrate resilience. The strong U.S. dollar shows that we are a strong country in spite of these trade deficits. To me, trade deficits suggest that our knowledge economy is our real strength. Anything that we can do to continue to foster that, for example by allowing more technical people to acquire H1-B visas, should be a good use of government. On commodities like agriculture, we are highly efficient. In spite of the burgeoning world population, we can feed much of the world. Perhaps we should be strategically reducing the amount of farmland under cultivation to keep farming profitable.

I doubt that tariffs are the instrument we need. And I really am skeptical that trade deficits matter at all.

Is mutual interdependence the solution?

That is what I have been asking myself this evening. As often happens, I was getting dishpan hands this evening while listening to the radio. Tonight, C-SPAN Radio was featuring speakers at yesterday’s Republican Straw Poll in Ames, Iowa. I happened to tune into a speech given by candidate and former Arkansas Governor Mike Huckabee. He was winning kudos from the friendly crowd by speaking of the virtues of energy independence. He proposed a plan that within ten years would make our country energy independent. He also warned of an even bigger national security issue: food independence. A nation that cannot grow the crops to sustain itself could be blackmailed, he warned. He warned the crowd that we could not let this happen. He received warm rounds of applause for these points.

I too have made similar points in the past. When discussing illegal immigration, I pointed out the consequences to our nation if much of our agriculture disappeared because we could not find sufficient migrant labor to pick our crops. When discussing global warming, I pointed out that conservation and renewable fuels could help us become energy independent. Once we were energy independent, the consequences of another war in the Middle East would trouble us a lot less.

While I still think that both goals are laudable it occurred to me that there is a downside to all this independence. What we are really saying when we talk about energy or food independence is we want our nation to be completely self-reliant. If we can take care of ourselves, then, if necessary, we can seal our borders and live in relatively happy isolation from the world’s chaos.

In our interconnected world, we will never be isolated from the world’s problems again, if we ever were. It is still said that when Wall Street sneezes, the rest of the world catches a cold. This seems to be borne out by the turmoil the last few weeks in our risky sub-prime mortgage market. Now it is also true that when stock markets tank in South Korea or in China, Wall Street catches a cold. These effects of course simply reinforce my point that we are increasingly interdependent. There is no way to go back to our isolationist past. We need to accept this reality. That our economy is growing at all is largely a result of our interdependence. Imagine how you would feel as a shareholder of Microsoft if it could only sell inside the United States.

So what does this mean? It means, as I have suggested before, that nation-states are moving toward obsolescence. I see this in small ways in my own life. I earn a few bucks on the side installing software for clients. I have yet to meet any of my clients in person. There is one client twenty miles or so away, but even in his case, all of our interaction was accomplished through email. Most of my clients live in the United States, but I have had clients in Israel and Great Britain too. It is not hard to transact business. They send me money via PayPal. I do the work over the Internet. At least in my case I can state that the Internet has made such things that used to matter, like the country where someone lives, irrelevant. Their money may be in a different color when they go buy groceries, but it is green when it arrives in my PayPal account.

It looks like before we ingloriously leave our debacle in Iraq will cost us at least a trillion dollars. Why did we do it? President Bush was quite candid about his rationalization before we invaded: because he perceived a real threat from Iraq to our national security. We thought that given more time Iraq could create atomic weapons that it might lob at us. Apparently, that was unacceptable to the cost of about one trillion dollars and hundreds of thousands of lives. Our ability to remain an independent nation apparently trumps all other needs including the need for all nations to peacefully coexist.

Most economists tout the virtues of free trade. They see it as a cure to the world’s economic ailments. Free trade, they intone, raises all boats. If it is cheaper to import vegetables from Mexico because the labor is cheaper there, this is ultimately good. Consumers benefit. Our farmers may be a bit put out but overall both the United States and Mexico would benefit. Our agriculture would change to be more efficient, or we would develop new industries to replace it. However, what free trade also does is that it promotes our world’s mutual interdependence.

From listening to politicians running for office, I am left to conclude that the world’s mutual interdependence is a bad thing. Is it? Maybe what we really need is to encourage our interdependence. Maybe nation-states are entities that are on their way out. Maybe what the world needs is world federalism instead. If this is where we need to go, from a world of autonomous states, to a world of federated nation-states then we need more interdependence, not less.

My firm conviction is that these dynamics are already well underway. Those who adapt to this new reality, like Europe, are likelier to prosper. The longer that the United States of America deludes itself into thinking that we will always be completely sovereign the more painful and costly our adjustment will be. Arguably, the debacle in Iraq is a one trillion dollar consequence of our delusion.

Imagine a different world where this is no my country vs. your country competition except in sports. I am not naïve enough to think that such a world will happen overnight. However, I do think that since the process is already well underway, the longer we delude ourselves then the more painful our transition will be. We need to discard ourselves of foolish notions like we can provide entirely for our country’s needs. While energy independence may help us find cleaner means of generating energy to reduce global warming, its ultimate goal is to find ways for the world to also do this. For global warming, like much of what ails us, can only be solved globally.

The more we rely on other countries, and other countries rely upon us, the more natural incentive there is for all of us to get along together in peace and harmony. These ties truly bind us together as a planet. We need to listen to the message. China, Russia, North Korea, Iran, Pakistan, India and many other countries need to listen too. The European Union has already heard the message and is prospering.

We cannot solve our national problems by being independent in all things, or even in areas that we consider critical to our sovereignty. This is delusion. However, the world can solve its problems by engaging in them together. Economic interdependence is the means by which a newer and saner world order could emerge. It is likely to be messy, as are most things in human affairs, but it offers a hopeful vision, and seems more viable than our current tactics.

Imagine there’s no countries
It isn’t hard to do
Nothing to kill or die for
And no religion too
Imagine all the people
Living life in peace…

You may say I’m a dreamer
But I’m not the only one
I hope someday you’ll join us
And the world will be as one

– John Lennon, “Imagine”