Trump vs. Free Trade

 

It is hard to believe that less than a week has passed since Donald Trump made his presidential address to the joint houses of Congress. The success or failure of his administration will depend largely on the policies it adopts—and his speech is a good window into his administration’s plans. Trump articulated pro-market views domestically, but deeply flawed protectionist views internationally. It’s possible that genuine economic growth will result from the former. But it is equally plausible that implementing his protectionist trade policies will lead to economic disaster. How he resolves this tension may well determine whether he succeeds or fails as president.

Trump’s recipes for domestic economic reform are often right on the money, given that they loosen regulatory barriers that thwart domestic competition. His speech was on target when he announced that “the time has come to give Americans the freedom to purchase health insurance across state lines—creating a truly competitive national marketplace that will bring cost way down and provide far better care.” The President understands that competition drives prices down and reduces administrative costs. This economic victory was squandered when the Affordable Care Act spurned interstate competition in favor of a hugely complex system of regulatory markets that have proved to be, as predicted, unsustainable.

And the same day that Trump gave his presidential address, he took constructive first steps toward curbing regulation by signing an Executive Order that would undo Barack Obama’s ungainly 2015 “Waters of the United States” Rule. Trump’s new Order stated: “It is in the national interest to ensure that the Nation’s navigable waters are kept free from pollution, while at the same time promoting economic growth, minimizing regulatory uncertainty, and showing due regard for the roles of the Congress and the States under the Constitution.” The beauty of this Order is that it keeps the objective so simple that silly and duplicative regulations will not strangle economic growth by cutting out state control on local matters—precisely what Obama’s 2015 Order did.

The great mystery of Trump’s mindset is that he does not carry over the market-driven principles of his sensible domestic policies into the realm of international trade. The introduction of national borders does not mean that the gains from competition, certainty, and administrative simplicity no longer apply. The key principle of comparative advantage applies in both contexts. A good analogy is trade between states in the United States: Open trade among our states has produced growth and lowered costs for goods and services—and it could do the same at the level of nations. It would be a national disaster if states erected barriers to goods and services coming from other states. Trump’s views on international trade represent outright invitations to the worst mercantilist excesses found in Obama’s protectionist trade policies.

At the root of Trump’s intellectual confusion lies his statement that “I believe strongly in free trade but it also has to be FAIR TRADE.” (The all-caps are vintage Trump.) The former term is easily defined. Each government allows cross-border transactions in goods and services to take place on the same terms and conditions as ordinary domestic trades: no tariffs or quantitative restrictions on the flow of goods, services, or cash. The net cash balances, plus or minus, are of no particular concern. Let them fall as they may. Where there is a trade deficit with a particular country, it only means that the United States has persuaded individuals and firms from other countries to invest their money in the United States, where it can help fund new domestic businesses that generate growth, jobs, and products.

Unfortunately, Trump’s key trade advisor, Peter Navarro, does not understand this point. He took to the pages of the Wall Street Journal to explain why the White House worries about trade deficits. In his static view of the world, forcing U.S. automakers to use American parts and labor will improve our position in export markets. But that is not so. The reason American firms go overseas is that the cheaper parts and labor allow them to sell more effectively both domestically and abroad, which is why it is presidential foolishness to badger companies like Carrier to maintain plants in the United States. The market responds to incentives that the protectionists ignore.

Ideally, of course, all nations should follow the same policy, but often, for a variety of protectionist reasons, many nations try to prop up exports with subsidies and drive down imports with tariffs or quantitative restrictions. The hard question is how to improve the position for the United States in this second-best world. Trump is keenly aware that we often face tariffs and taxes overseas, while foreign goods come into this country virtually free. But, notwithstanding his distaste for this practice, there is a huge virtue in adopting a strict policy of non-retaliation that seeks to lift tariff barriers overseas without raising tariffs at home. The subsidies that foreign governments confer upon their export industries redound in part to American buyers, who in turn increase their levels of consumption, or reduce the costs of the goods that they make for sale in both domestic and export markets.

The term “fair trade” is less easily defined, though it covers a multitude of bad policies, like the imposition of tariffs and restrictions on the free flow of goods. And when that phrase is used, as Trump did in withdrawing from the Trans-Pacific Partnership negotiations, “to promote American industry, protect American workers, and raise American wages,” he is asking for trouble. By putting a tariff wall around the United States, he is removing the pressure that state and local governments have to make their own businesses more productive and competitive by internal deregulatory reform. His approach to bilateral negotiations could easily lead to a downward global spiral that will engulf the United States.

Trump’s backward views on international trade are reflected in his constant refrain that we should “Buy American and Hire American” domestically. On the positive side, he issued an executive order allowing the Keystone XL and Dakota Access pipelines to move forward on an orderly basis—following endless Obama administration regulatory delays, long after all environmental or preservationist issues were resolved. Yet at the same time, he issued the related but indefensible Executive Order that “all new pipelines, as well as retrofitted, repaired, or expanded pipelines, inside the borders of the United States, including portions of pipelines, use materials and equipment produced in the United States, to the maximum extent possible and to the extent permitted by law.”

Fortunately, these last two phrases show some wiggle room that is often overlooked in the press headlines, because this EO applies, except when it doesn’t. It is hard to give economic content to the phrase “maximum extent possible,” because the words conceal the question of just how much unnecessary extra cost must be incurred in order to make good on a promise that, if kept, only drives up the energy costs of American manufacturers and consumers. Nor is it clear how much of this order can survive the provisions of the World Trade Organization that prevent various kinds of favors to local over foreign suppliers.

The argument here is, again, straightforward. Any form of discrimination distorts the relative value of competitive goods and thus leads to economic efficiencies, which the WTO is intended to combat. With these two pipelines, the problem was happily skirted because both companies had purchased and stored the needed steel pipes before these Executive Orders were issued, making it wasteful to chuck large quantities of steel. But the possibility that such “Buy American” Orders will resurface is ever present. The irony is that the populist Trump is taking a leaf out of the Obama playbook: The previous administration’s American Recovery and Reinvestment Act contained complex “Buy American” provisions that exacerbated the slow growth of the Obama years.

For some reason, Trump wants to blame our economic woes on other countries rather than on the bad policies of the Obama administration. Thus, at one point in his speech, Trump raised the reckless charge that it is our foreign entanglements that have led to our domestic distress. He lamented: “For too long, we’ve watched our middle class shrink as we’ve exported our jobs and wealth to foreign countries.” The first half of this charge again ignores the benefits at home from exporting jobs that can increase the supply and reduce the costs of services that are consumed at home, as well as strengthening through trade our alliances with other countries. It never occurs to Trump that it is the domestic obstacles in labor markets—and not free trade—that stunt job growth and lead to wage stagnation. And no country just gives away wealth to foreign countries without getting some concessions in return. We are not being bled dry by foreigners.

To this point, it is instructive to look more closely at some of America’s most economically beleaguered cities, like Baltimore, Chicago, and Detroit. It is not credible to think that the large population declines in Baltimore, from about 940,000 in 1960 to 622,000 in 2013, relates to any international trade events, especially since extensive federal funds have been funneled, directly or indirectly, into these failing cities. But there has been no corresponding economic growth in these cities because they have not made any meaningful internal reforms. Failing local governments will do far better by following the same program of deregulation and tax reduction that Trump favors at the national level.

Trump insists that “America must put its own citizens first,” but fails to see the disaster that can follow if this mantra leads to the introduction of new protectionist policies. “A great wall” along the Mexican border will do nothing for America other than inflame passions with one of our vital trading partners. It’s a similar story with infrastructure repair. Protectionist “Buy and Hire American” policies will only impoverish this nation as they alienate the rest of the world. Infrastructure will only be restored if we reverse the wildly restrictive permit policy that has made it easier to file applications and law suits than to engage in new construction. Here, again, some well-directed domestic reforms will far outperform any pointless diatribe against our trading partners and military allies.

The difficulty with Trump on this and so many other issues is that he does not have the patience or understanding to separate the wheat from the chaff. So he is right that the stock market is up over three trillion dollars since the election. But much of that uptick is attributable to the repudiation of the progressive policies of the Obama era. Another large source of that gain stems from the sense that Congress may well balk when it comes to funding Trump’s quixotic wall or approving his ill-considered trade policies. Let’s hope that the President’s sensible domestic agenda will not be done in by his misguided international trade policies.

© 2017 by the Board of Trustees of Leland Stanford Junior University

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  1. David Foster Member
    David Foster
    @DavidFoster

    “Where there is a trade deficit with a particular country, it only means that the United States has persuaded individuals and firms from other countries to invest their money in the United States, where it can help fund new domestic businesses that generate growth, jobs, and products.”

    But in reality, much of this money is being ‘invested’ in Treasury securities to finance ongoing deficits….not to do anything having to do with funding new domestic businesses.

    • #1
  2. NigelT Member
    NigelT
    @NigelT

    Did you see the keynote speech Navarro gave at the NABE conference? I’m not an economist, but what I’m hearing is “unilateral trade deals, fair and thoroughly enforced.” Seems to me all they’re saying is, for example, that if a country is imposing tariffs on us, then it’s reasonable that we do the same to them. I’m hoping it’s more of a negotiating tactic and that the end game is to have other countries remove or at least reduce roadblocks into their markets, rather than us increasing ours.

    https://www.c-span.org/video/?424924-3/peter-navarro-outlines-trump-administrations-trade-policy-economic-policy-conference

    • #2
  3. Trinity Waters Inactive
    Trinity Waters
    @TrinityWaters

    Richard Epstein: “A great wall” along the Mexican border will do nothing for America other than inflame passions with one of our vital trading partners.

    Text that to Kate Steinle.

    • #3
  4. Guruforhire Member
    Guruforhire
    @Guruforhire

    What about our inflamed passions?

    The American people are people too.

    • #4
  5. Ario IronStar Inactive
    Ario IronStar
    @ArioIronStar

    NigelT (View Comment):
    …what I’m hearing is “unilateral trade deals, fair and thoroughly enforced…”

    https://www.c-span.org/video/?424924-3/peter-navarro-outlines-trump-administrations-trade-policy-economic-policy-conference

    I didn’t watch the video, but I suspect he means “bilateral.”  “Unilateral” suggests we do whatever the hell we want, which isn’t really “dealing” with anybody.  But if “unilateral” is indeed their plan, we should expect significant chaos.  (I do think they mean “bilateral” ;  please correct me if I’m mistaken.)

    By the way, I do enjoy Mr. Epstein’s arguments when he does not use his prestige within the legal profession to serve his policy preferences.  So bravo on this one (even if he does get a bunch of stuff wrong, particularly the implication that Trump is significantly different from the Presidents of the last few decades regarding policy seriousness.  Obama, Bush, Clinton, and even the elder Bush were much more the politician than they were serious and principled policy thinkers.  Reagan, on the other hand, appears to have thought long and deeply about policy principles.)

    • #5
  6. Kozak Member
    Kozak
    @Kozak

    Trinity Waters (View Comment):

    Richard Epstein: “A great wall” along the Mexican border will do nothing for America other than inflame passions with one of our vital trading partners.

    Text that to Kate Steinle.

    The patients waiting in the jammed ER’s around America would appreciate that too.

    • #6
  7. blood thirsty neocon Inactive
    blood thirsty neocon
    @bloodthirstyneocon

    Kozak (View Comment):

    Trinity Waters (View Comment):

    Richard Epstein: “A great wall” along the Mexican border will do nothing for America other than inflame passions with one of our vital trading partners.

    Text that to Kate Steinle.

    The patients waiting in the jammed ER’s around America would appreciate that too.

    The wall is non-negotiable. We’ll see if we can negotiate some bilateral trade deals from a position of strength.

    • #7
  8. NigelT Member
    NigelT
    @NigelT

    Ario IronStar (View Comment):

    NigelT (View Comment):
    …what I’m hearing is “unilateral trade deals, fair and thoroughly enforced…”

    https://www.c-span.org/video/?424924-3/peter-navarro-outlines-trump-administrations-trade-policy-economic-policy-conference

    >>I didn’t watch the video, but I suspect he means “bilateral.” “Unilateral” suggests we do whatever the hell we want, which isn’t really “dealing” with anybody. But if “unilateral” is indeed their plan, we should expect significant chaos. (I do think they mean “bilateral” ; please correct me if I’m mistaken.)<<<

    Yes! I meant bilateral – sorry, I was typing too fast trying to escape the office.

     

    • #8
  9. Sash Member
    Sash
    @Sash

    I don’t come here all that often, but you have really calmed down about Trump.  I hope the rest of America does that soon, it’s so tiresome to hear the conspiracies, and they really believe he’s going to be impeached next week.

    So I agreed with a lot of what you said, and feel very positive that this country can get some sanity back, thank you.

    We will survive.

    Together.

    • #9
  10. James Of England Moderator
    James Of England
    @JamesOfEngland

    NigelT (View Comment):
    Did you see the keynote speech Navarro gave at the NABE conference? I’m not an economist, but what I’m hearing is “unilateral trade deals, fair and thoroughly enforced.” Seems to me all they’re saying is, for example, that if a country is imposing tariffs on us, then it’s reasonable that we do the same to them. I’m hoping it’s more of a negotiating tactic and that the end game is to have other countries remove or at least reduce roadblocks into their markets, rather than us increasing ours.

    https://www.c-span.org/video/?424924-3/peter-navarro-outlines-trump-administrations-trade-policy-economic-policy-conference

    It’s possible that Trump’s trade policy will be the same as that of a normal President, passing bilateral trade agreements worded to maximize American advantage and enforcing them thoroughly. If he does that, following through on his commitments to FTAs with Vietnam, Japan, Brunei, Malaysia, New Zealand, and the UK, manages to renegotiate the NAFTA on the trivial guidelines put forward by Wilbur Ross (changing the rules of origin a little), and otherwise does nothing aside from some trivial things like the Keystone Pipeline steel thing, he’ll be pretty good for the country indeed in trade terms, just like every other President from FDR onwards.

    It’s also possible that he’ll follow through on something like the alternative threatened in “renegotiate NAFTA or leave it”, that he’ll wreck the global trading system, and that his decision to abandon TPP will be merely his first step in moving us in the direction of Argentina. We’re all hoping that he’s going to be awesome and that his import substitution rhetoric is just rhetoric, and there are grounds for hope; Rex Tillerson is a particularly helpful thing here, and he’s surrounded by Pence, Priebus, Ryan, McConnell, and other advocates for free markets. On the other hand, he also appointed Ross (his least qualified secretary, including Carson), Lighthizer, and Navarro, apparently on the basis that they agree with Bannon on this stuff. We should all hope and pray.

    • #10
  11. Viator Inactive
    Viator
    @Viator

    Dan Dimicco dissents.

    Nations have never played by the rules. We’ve been had, trade mercantilism has destroyed free trade. While “free trade” is fine in theory, in reality, it seldom exists, except in the dogma of economists. Should America continue to insist we’re in a game of touch football when everyone else is playing tackle?

    • #11
  12. Majestyk Contributor
    Majestyk
    @Majestyk

    I have a huge trade deficit with the grocery store, but I don’t really mind because I like to eat.  I would also have a huge trade deficit with Colorado if I took my family skiing.

    The thing is, this simplistic vision of how trade works seems to be nothing more than rhetoric from Trump.  As Richard points out, Trump understands perfectly well comparative advantage when applied to the states.  There’s no way that Congress will go along with a suicidal tariff/protectionism scheme, despite the presence of populist voices on both sides of the aisle.

    • #12
  13. Trinity Waters Inactive
    Trinity Waters
    @TrinityWaters

    Majestyk (View Comment):
    I have a huge trade deficit with the grocery store, but I don’t really mind because I like to eat.

    This is not a deficit.  You spent (traded)  cash, which represents value placed on someone’s toil, for some grits, which in turn are priced according to the toil involved in producing them at market value.  This is an even exchange, intrinsically fair since it is at your discretion.  Extension of this example to international trade is a bit much, maybe?

    • #13
  14. Could Be Anyone Member
    Could Be Anyone
    @CouldBeAnyone

    Trinity Waters (View Comment):

    Majestyk (View Comment):
    I have a huge trade deficit with the grocery store, but I don’t really mind because I like to eat.

    This is not a deficit. You spent (traded) cash, which represents value placed on someone’s toil, for some grits, which in turn are priced according to the toil involved in producing them at market value. This is an even exchange, intrinsically fair since it is at your discretion. Extension of this example to international trade is a bit much, maybe?

    Who is doing the trading internationally? Its not the United States Government but individuals and firms trading with other firms and individuals. It is the same. And “toil” is not the only factor, both sides haggle. If Majestyk did not think the goods from that store were worth the price they were charged then he can go to another store where the prices do match his tastes, trade is consensual whether domestic or international and done only when both parties have something to gain. If the first store is not selling its goods at the rate needed then it will lower prices in order to meet the demands of the consumers or close.

    As to the trade deficit its calculated by adding the value of imports and exports between nations. It is the same as domestic because regardless of the transactions they are all being weighted by the same currency of exchange, the dollar. Goods are being traded for dollars by various actors within both states and neither side would be trading unless they had something to gain (all sides engaged are winning by these transactions).

    It is the same, just different distance.

    • #14
  15. Damocles Inactive
    Damocles
    @Damocles

    Ario IronStar (View Comment):
    I didn’t watch the video, but I suspect he means “bilateral.” “Unilateral” suggests we do whatever the hell we want,

    Hey, we’re the one with the atom bombs!

    • #15
  16. James Of England Moderator
    James Of England
    @JamesOfEngland

    Viator (View Comment):
    Dan Dimicco dissents.

    Nations have never played by the rules. We’ve been had, trade mercantilism has destroyed free trade. While “free trade” is fine in theory, in reality, it seldom exists, except in the dogma of economists. Should America continue to insist we’re in a game of touch football when everyone else is

    Do you believe that America faces comparable barriers to its exports to those ten  years ago, or that they did not reduce dramatically in the ten years before that? Or the decade before that or in any other decade going back to the 1940s?

    There are regulatory and tax burdens everywhere, even domestically, so trade is not entirely free, but it is vastly cheaper to trade than ever before in history.

    • #16
  17. ModEcon Inactive
    ModEcon
    @ModEcon

    Could Be Anyone (View Comment):
    Who is doing the trading internationally? Its not the United States Government but individuals and firms trading with other firms and individuals. It is the same.

    It actually is the US government and other governments that are doing the trading in some cases. The USA prints money and borrows money. This is changing the value of our own currency which effects how much we are willing to spend over seas. Also, other governments have done currency manipulation. So the idea that it only individuals who are doing the trading is not true(as I understand it). You are also ignoring government effects like taxes etc.

    Also, @trinitywaters is correct and @majestyk is wrong IMO. The grocery store is not a good example of a trade deficit. A trade deficit is calculated by combining all trade. If, for example, you worked for hte grocery store, you would get more money from the store than you paid to it for groceries. And, even if you don’t work for the store, you work somewhere else. That somewhere else is in part paid by the store for your services. So, there is no deficit when accounting for all trade by the consumer and producers. Well, there might be, but that becomes more complicated since it would be about who is saving money vs spending money. If the store is doing well, it could be collecting wealth and that might indeed be a trade surplus for the store.

     

     

    • #17
  18. ModEcon Inactive
    ModEcon
    @ModEcon

    ModEcon (View Comment):
    If the store is doing well, it could be collecting wealth and that might indeed be a trade surplus for the store.

    Now, lets consider what this means with trade balances between nations. It means that when the USA has a trade balance in the negative, we are becoming poorer relative to other countries. If we compare to the store, it would be like the store (Amazon for example) expanding while another (pick whichever of the brick and mortar stores that has gone under) goes out of business or has diminished business. Trade is not not purely positive nor is it purely negative.

    I believe that the economy is zero+-+-… sum game. That is, the majority of the economy is a zero sum game with positive and negative effects. If one entity gains, another looses equivalently unless there is an actual improvement in over all production. So, when China has a 340 billion dollar a year surplus against the USA, it means that China is gaining that amount relative to us. Let us be clear however, this isn’t always a bad thing. It is to be expected that some countries will have surpluses against one country, but then have deficits against another. However, in the end, all must be equal.

    A trade deficit means that we are selling our future labor to another country. Whether they invest it and take the profits, or just demand interest from national debt doesn’t matter. It is not good.

    • #18
  19. Viator Inactive
    Viator
    @Viator

    James Of England (View Comment):
    Do you believe that America faces comparable barriers to its exports to those ten years ago, or that they did not reduce dramatically in the ten years before that? Or the decade before that or in any other decade going back to the 1940s?

    There are regulatory and tax burdens everywhere, even domestically, so trade is not entirely free, but it is vastly cheaper to trade than ever before in history.

    I don’t know the answer to that question.

    Débâcle: The 11th GTA report on protectionism

    http://www.globaltradealert.org/11th_GTA_report

    http://cdn.tradingeconomics.com/charts/united-states-imports.png?s=tbimtot&v=201703081823t&d1=19170101&d2=20171231

    http://cdn.tradingeconomics.com/charts/united-states-exports.png?s=tbextot&v=201703081823t

     

    • #19
  20. Could Be Anyone Member
    Could Be Anyone
    @CouldBeAnyone

    ModEcon (View Comment):
    It actually is the US government and other governments that are doing the trading in some cases. The USA prints money and borrows money. This is changing the value of our own currency which effects how much we are willing to spend over seas. Also, other governments have done currency manipulation. So the idea that it only individuals who are doing the trading is not true(as I understand it). You are also ignoring government effects like taxes etc.

    Where are governments trading internationally? The United States government technically does trade domestically in order to inflate the economy when it buys government bonds held by individuals in order to inject dollars into the economy but unless you are arguing that is the cause of a trade deficit then I don’t see your point in bringing it up. The argument as presented in the vast majority of cases by protectionists is that trade deficits show the failure of the American Economy in its ability to “produce”.

    But that does not answer the argument that TW brought up. TW argued that international trade was not the same as domestic trade within the nation. But it is and what you mention specifically does not change that. There are taxes on the selling of goods in the USA. There is currency manipulation in the USA and that affects trade too in domestic trade. So what you mention does not change the analogy at all.

    ModEcon (View Comment):
    The grocery store is not a good example of a trade deficit. A trade deficit is calculated by combining all trade. If, for example, you worked for the grocery store, you would get more money from the store than you paid to it for groceries. And, even if you don’t work for the store, you work somewhere else. That somewhere else is in part paid by the store for your services. So, there is no deficit when accounting for all trade by the consumer and producers. Well, there might be, but that becomes more complicated since it would be about who is saving money vs spending money. If the store is doing well, it could be collecting wealth and that might indeed be a trade surplus for the store.

    What is happening when you are working at the grocery store? You are trading your time for the cash they offer you. You would rather have that cash than the time and inversely so with the store. Its a trade. Money is a commodity just as is your labor or time or food or clothing or anything else, it just happens that a currency is a medium of exchange.

    Money is a measure, not the wealth in itself. I can’t build a house out of money or eat it for food. Its value is in what it can attain, buy. The “deficit” doesn’t indicate that America is indebted. It just means firms/indivduals are buying plenty of goods from overseas.

    • #20
  21. Trinity Waters Inactive
    Trinity Waters
    @TrinityWaters

    Could Be Anyone (View Comment):

    Trinity Waters (View Comment):

    Majestyk (View Comment):
    I have a huge trade deficit with the grocery store, but I don’t really mind because I like to eat.

    This is not a deficit. You spent (traded) cash, which represents value placed on someone’s toil, for some grits, which in turn are priced according to the toil involved in producing them at market value. This is an even exchange, intrinsically fair since it is at your discretion. Extension of this example to international trade is a bit much, maybe?

    Who is doing the trading internationally? Its not the United States Government but individuals and firms trading with other firms and individuals. It is the same. And “toil” is not the only factor, both sides haggle. If Majestyk did not think the goods from that store were worth the price they were charged then he can go to another store where the prices do match his tastes, trade is consensual whether domestic or international and done only when both parties have something to gain. If the first store is not selling its goods at the rate needed then it will lower prices in order to meet the demands of the consumers or close.

    As to the trade deficit its calculated by adding the value of imports and exports between nations. It is the same as domestic because regardless of the transactions they are all being weighted by the same currency of exchange, the dollar. Goods are being traded for dollars by various actors within both states and neither side would be trading unless they had something to gain (all sides engaged are winning by these transactions).

    It is the same, just different distance.

    Well, yes and no.  Of course distance doesn’t really matter, but it’s far less likely that Majestyk’s Cherrios are affected significantly by tariffs or money valuations.

    • #21
  22. Could Be Anyone Member
    Could Be Anyone
    @CouldBeAnyone

    Trinity Waters (View Comment):

    Could Be Anyone (View Comment):

    Trinity Waters (View Comment):

    Majestyk (View Comment):
    I have a huge trade deficit with the grocery store, but I don’t really mind because I like to eat.

    This is not a deficit. You spent (traded) cash, which represents value placed on someone’s toil, for some grits, which in turn are priced according to the toil involved in producing them at market value. This is an even exchange, intrinsically fair since it is at your discretion. Extension of this example to international trade is a bit much, maybe?

    Who is doing the trading internationally? Its not the United States Government but individuals and firms trading with other firms and individuals. It is the same. And “toil” is not the only factor, both sides haggle. If Majestyk did not think the goods from that store were worth the price they were charged then he can go to another store where the prices do match his tastes, trade is consensual whether domestic or international and done only when both parties have something to gain. If the first store is not selling its goods at the rate needed then it will lower prices in order to meet the demands of the consumers or close.

    As to the trade deficit its calculated by adding the value of imports and exports between nations. It is the same as domestic because regardless of the transactions they are all being weighted by the same currency of exchange, the dollar. Goods are being traded for dollars by various actors within both states and neither side would be trading unless they had something to gain (all sides engaged are winning by these transactions).

    It is the same, just different distance.

    Well, yes and no. Of course distance doesn’t really matter, but it’s far less likely that Majestyk’s Cherrios are affected significantly by tariffs or money valuations.

    I will repeat it again but what do you think a sales tax is? Do you not think that the USA inflating its currency affects the number of dollars it takes Majestyk to buy his Cheerios?

    • #22
  23. ModEcon Inactive
    ModEcon
    @ModEcon

    Could Be Anyone (View Comment):

    First, here is the literal example of US government trading internationally.

    Foreign governments hold about 46% of all U.S. debt held by the public, more than $4.5 trillion.

    China has massive debt as well. Over 10 trillion as listed by nationaldebtclocks.org. So, how is this not the government of China manipulating trade as well as trading themselves. It’s called currency manipulation, which China has been known to do.

    According to many estimates, Chinese government intervention keeps the yuan approximately 20 percent below its free market value against the dollar.

    So, it is basically the government of China that has been paying for up to 20% of the cost of Chinese goods to Americans. You might say that this is good for us, but it is a case of international trade by governments. Trade doesn’t have to be just goods, it can also be money.

    I think that it is very clear that government influence international markets even more than local market. Local markets don’t have the difference in value that a change of currency allows for. The whole fiat currency program is bad, but that is a different matter.

    You are asking about international trade. The answer is that yes, it is different just like state to state is different from country to county, and person to person. There are different effects by government on each.

     

    • #23
  24. ModEcon Inactive
    ModEcon
    @ModEcon

    Could Be Anyone (View Comment):
    I will repeat it again but what do you think a sales tax is? Do you not think that the USA inflating its currency affects the number of dollars it takes Majestyk to buy his Cheerios?

    The price of cheerios is indeed influenced by inflation. However, that is based on a true difference in value of the dollar if done natually. If the government didn’t print money, the price of cheerios would actually fall over time as the currency would deflate due to higher demand for a limited amount of currency. The fact that it has been inflating is a bad thing that is an effect of US government influence. But, we choose to influence our economy and dollar value in this way by our own choice of government policy. Once we stop printing money, the inflation should slow.

    International trade is not the same. Now, you have multiple different parties involved. One, is the USA government. Two, is the foreign government. Incidentally, if you live outside the US and the US inflates its currency, then you would have cheaper cheerios if they are produced in the US since the relative price would be lower. Which is exactly what China and Japan and many other countries have done, is to inflate their currencies so that dollars can buy more, but this is not natural.

    • #24
  25. ModEcon Inactive
    ModEcon
    @ModEcon

    Could Be Anyone (View Comment):

    Sure, but lets say you could grow food in the back yard. So, you can either spend the money and time to grow your own food, or buy it from the store. If the government decides to pay for 20% of your grocery bill, then your decisions will change. You will no longer find it as profitable to use your own time to grow food and buying it will become less expensive. This example is not a “free market”. It is not a true exchange of goods for time. It is instead an exchange of your time and government cost which comes from everyone, for the cost of goods.

    Yes, to you personally the decision would be clear, however the subsidy is immoral. It is an government effect on the free market. The debt is the governments, by extension you.

    As for the governments effect on local trade by taxes etc. You just make my point again. Trade within a government system is different from trade between two systems. The difference in government policies effect the trade. It is up to the people within the systems to decide how to deal with that effect.

    There is no such thing as “free trade”. Not as long as governments are involved. The biggest problem with American local trade is our own government. I believe that as long as our government effects local trade, it also must equivalently effect intersystemal trade.

    • #25
  26. Majestyk Contributor
    Majestyk
    @Majestyk

    Trinity Waters (View Comment):

    Could Be Anyone (View Comment):

    Trinity Waters (View Comment):

    Majestyk (View Comment):
    I have a huge trade deficit with the grocery store, but I don’t really mind because I like to eat.

    Well, yes and no. Of course distance doesn’t really matter, but it’s far less likely that Majestyk’s Cherrios are affected significantly by tariffs or money valuations.

    I’m not even sure what you’re saying.

    Let’s examine 2 different transactions.  In one, I go to Wal-Mart and but a shirt made in China.  Or a dozen of them. It doesn’t matter.  Wal-Mart is just a financial intermediary in this example.  Ultimately, I was giving green paper or digital currency to a manufacturer in China for a shirt.

    I can’t make a shirt.  Nobody in this country is willing to work for the wages that workers in China work for in order to get me a shirt (or a dozen) for a reasonable price.

    Example 2: A company mining gold in Tanzania calls me up and needs a power plant so they can have consistent electricity for their refining operation.  I promise to help them design the power plant in exchange for green paper or digital currency because they don’t have the time or inclination to learn how to design a power plant.

    I send them bits of paper containing the ideas they need to build a power plant.

    Now, explain to me why the one transaction is bad and the other is good?  The answer is both are good.  The mining company doesn’t have a deficit with me – they’re getting something they want more than the money I’m charging them for paper with ink on it.

    This is just like Walmart and the shirt.  I want the shirt more than I want the dumb green paper in my fist.

    The ideas in my head are worth more to the mining company than the heap of cash in their pocket.

    Nobody is at a deficit.  Everyone got what they wanted.  The fact that foreigners are willing to take worthless green paper in exchange for real stuff is something we should be thrilled about.

    • #26
  27. Could Be Anyone Member
    Could Be Anyone
    @CouldBeAnyone

    Majestyk (View Comment):

    Trinity Waters (View Comment):

    Could Be Anyone (View Comment):

    Trinity Waters (View Comment):

    Majestyk (View Comment):
    I have a huge trade deficit with the grocery store, but I don’t really mind because I like to eat.

    Well, yes and no. Of course distance doesn’t really matter, but it’s far less likely that Majestyk’s Cherrios are affected significantly by tariffs or money valuations.

    I’m not even sure what you’re saying.

    Let’s examine 2 different transactions. In one, I go to Wal-Mart and but a shirt made in China. Or a dozen of them. It doesn’t matter. Wal-Mart is just a financial intermediary in this example. Ultimately, I was giving green paper or digital currency to a manufacturer in China for a shirt.

    I can’t make a shirt. Nobody in this country is willing to work for the wages that workers in China work for in order to get me a shirt (or a dozen) for a reasonable price.

    Example 2: A company mining gold in Tanzania calls me up and needs a power plant so they can have consistent electricity for their refining operation. I promise to help them design the power plant in exchange for green paper or digital currency because they don’t have the time or inclination to learn how to design a power plant.

    I send them bits of paper containing the ideas they need to build a power plant.

    Now, explain to me why the one transaction is bad and the other is good? The answer is both are good. The mining company doesn’t have a deficit with me – they’re getting something they want more than the money I’m charging them for paper with ink on it.

    This is just like Walmart and the shirt. I want the shirt more than I want the dumb green paper in my fist.

    The ideas in my head are worth more to the mining company than the heap of cash in their pocket.

    Nobody is at a deficit. Everyone got what they wanted. The fact that foreigners are willing to take worthless green paper in exchange for real stuff is something we should be thrilled about.

    Is it not obvious? We need that green paper! And we need it now! We could build pyramids with that green paper or perhaps many paper airplanes or more importantly we can show how the CIA is related to 9/11 by folding the paper bills.

    • #27
  28. Majestyk Contributor
    Majestyk
    @Majestyk

    Could Be Anyone (View Comment):
    Is it not obvious? We need that green paper! And we need it now! We could build pyramids with that green paper or perhaps many paper airplanes or more importantly we can show how the CIA is related to 9/11 by folding the paper bills.

    What’s worse – we could inflate the currency that those foreigners now hold making it worth less. That would be super dirty…

    • #28
  29. FloppyDisk90 Member
    FloppyDisk90
    @FloppyDisk90

    Majestyk (View Comment):
    Nobody is at a deficit. Everyone got what they wanted. The fact that foreigners are willing to take worthless green paper in exchange for real stuff is something we should be thrilled about.

    Just to play devil’s advocate here, it’s a bit more complicated then this.  All those dollars flowing overseas don’t just get parked in the nearest plutocrat’s mattress.  They’re used to purchase dollar denominated assets:  property, stock, or as is largely the case with China, government debt.  So the argument you’ll hear is that when/if China decides to cash in then the exchange value of the dollar plummets and the interest rate the government will have to charge for future debt will skyrocket.

    • #29
  30. ModEcon Inactive
    ModEcon
    @ModEcon

    Majestyk (View Comment):
    I can’t make a shirt. Nobody in this country is willing to work for the wages that workers in China work for in order to get me a shirt (or a dozen) for a reasonable price.

    This is a flawed premise to your argument. People would be willing to make teeshirts in America if the government let them without the burdens of an advanced society. Take away minimum wage, high tax, environmental regulations, worker safety regulations, power regulations, mandatory benefits, etc., I bet people in America would make tee shirts at a reasonable price.

    I only complain about “free trade” because its not a free market. Trade with Europe is much better than trade with China. Europe has more similar regulations than China does, and thus is more allowable. China has policies that harm Americans (pollution actually) or harm Chinese people in a way that America is unwilling to allow for our own people. Therefore, we should not allow/dis-incentivize trade with countries that have practices that we prohibit since the prohibitions are harming our own people who would do those practices like low wage labor.

    • #30
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