Ricochet is the best place on the internet to discuss the issues of the day, either through commenting on posts or writing your own for our active and dynamic community in a fully moderated environment. In addition, the Ricochet Audio Network offers over 50 original podcasts with new episodes released every day.
An Expat in Favor of Rattling the Cages of Countries with Large USA Trade Surpluses
Here are some observations from a retired Texan living in Switzerland, a land of free enterprise, and many small … and some large … manufacturers that export over half of what they make. This is a country with really solid primary and secondary schools that graduate literate young citizens; trade schools for the 80% and universities for the 20%; and a land where if you’re here illegally and you are not a true and registered refugee, you will be caught and unceremoniously deported. (Switzerland’s unfortunate decision to be coerced into the Schengen Agreement has led to complications with migrants first passing through EU countries.)
When a country like the United States signs trade deals such that most of its manufacturing is lost on the altar of “Free Trade” (i.e., that which was employing millions of skilled citizens making average incomes, and such that the R&D that heretofore went into improving the products from those now non-existent plants also was replaced), then you have what you have throughout the Midwest and Southeastern United States: many shutdown factories and towns with crumbling infrastructures; and, stagnant numbers of young American technical graduates.
The illegal immigration, especially in those areas, only made life worse for these middle-income people. (In Aiken County, SC, we had 5,000 illegals among a population of about 60,000!) Note also that today’s opioids crisis is deeply embedded in areas that have lost their manufacturing employment bases (see The Numbers Behind the Opioid Crisis of November 2017 prepared by the Senate Joint Economic Committee). What you see in this report is far beyond sad. We saw all of this and more when we lived in Aiken, SC, during the cooler months from 2001 to 2012, traveling extensively throughout the Carolinas, Tennessee, Kentucky, and West Virginia. Income inequality? You bet. And in my judgment, obviously the principal result of poor public policy.
Take a look at line 8 of the Bureau of Labor Statistics Table A-1 Employment Status of the Civilian Population by Sex and Age. There are 95 million people between 18 and 65 years old “not in labor force.” Although up to half of these people are permanently disabled and students, the US nevertheless has a grotesque number of now permanently unemployable people because their federal elected representatives of both parties did not care a damn about them over about five decades. These representatives drank the Kool-aid of “Free Trade” rather than that of “Fair Trade.” So, along comes a New York City real estate guy who says, “You’ve been screwed and I want to make America great again.” And he wins. He wins for very solid reasons.
An opinion: an American needs to live outside of the USA for a while to fully appreciate how badly the American people have been misled by their ever-expanding and ever more corrupt federal government whose executive bureaucracies (i.e., those supposedly under Art. II of the Constitution) began producing wholesale undemocratic “expert” decisions thereby subjecting The People to regulations far beyond the statutes actually passed by their elected representatives.
Let me say this to any observant person in the US: Go to Texas, as I did this past January and February, and witness what is going on in what we call “The Oil Patch.” Drive past the fabrication yards making drilling rigs, offshore platforms, large valves, pressure vessels, and all that goes into getting you transportation fuel so that you can drive. Texas is booming and reaching out to get more people to come. Income inequality? Yes, there is some. But at 2.4% unemployment in West Texas and less than 4% now in Houston, not much.
I say this: There are not many problems in the US that cannot be solved by enough jobs. Local, state, and federal governments can and should coordinate, but they also have to get the hell out of the way. And we all have to demand fair and reciprocal trade deals.
Published in Foreign Policy
Trumped it was around 9/2016
Listen to those two interviews I posted earlier on this thread. He has another good one on the Peak Prosperity website. The problem is, when Stockman gets interviewed he will never take a freaking breath unless the interviewer has something to contribute as well, so be advised. It’s sort of tedious. He hates the GOP and the GOP hates him, for the record. Big anti-war guy. But I swear to god the GOP is making a big mistake not to have at least having a secret project to figure out what are he is saying.
Listen to the Charles Hugh Smith interviews on the Financial Repression Authority website too. Listen to them in order.
Yes, that is one of the many differences, not involving trade policy, between Switzerland and the United States: they have a different schooling system, apparently a better schooling system.
As for Switzerland’s tariff regime (at least as of a few years ago), it is protectionist of crops which can be grown in Switzerland, exacting a 27.2% tariff on those. But crops which don’t grow in Switzerland get exemptions, and the tariff on non-agricultural goods is 1.9% – hardly protective.
Sometimes (e.g, 2006-2012) the US runs a goods surplus with Switzerland, though since then a deficit. Either way, even those who do worry about trade deficits don’t seem to be concerned. Would it also be in Swiss interest to “rattle the cages” of those it runs trade deficits with?
These seem like two separate arguments to me. One is an argument for increased employment, hopefully by getting government out of the way, but perhaps by any means, as a good in itself. The other is for a certain kind of trade deals.
Charles Hugh Smith on trade. Start at 36:00. Pretty interesting.
Ok. Let’s get the extreme end point dealt with. Do you really like cheap goods above all else? Not unless you are some kind of monster. Cheap goods produced by slave labor? Of course not. (or do you?) You mean cheap goods produced in free markets, by free labor without government interference. Duh. So do we all. But we don’t have that. And it’s not a question of how much they tax their corporations”. Their tax structure is their business. That’s part of the differences that make trade work. But subsidizing exports is -by any definition – unfair trade It skews the efficient market.
Am reading “Skin in the Game”, of which most politicians take risks at our expense. Their families do well, and they are not scrutinized like political donations are.
Nassim Taleb rules. His last two Russ Roberts interviews are epic.
In theory I would agree with Valiuth. The problem is that in practice nearly every country on earth has arranged to provide a favorable tax structure to selling things in the U.S.. This is giving them an artificial comparative advantage via discounted taxes on exports. That advantage is making it increasingly difficult to produce things in the U.S. which is eroding our capital while providing us with cheap consumables.
My preferred solution would be to pass a constitutional amendment eliminating all federal taxes except for a VAT (or national sales tax). (I’m not in favor of adding a VAT without removal of other taxes.) Then when we refund our 30% VAT on our exports we can watch the rest of the world throw a hissy fit for turning the tables on them. Since this is unrealistic I settle for wanting tariffs equal to the VAT refunding for all VAT countries.
If you listen to that Charles Hugh Smith interview, part of the tariff stuff is when countries don’t have gigantic central banks to push everything around.
Force begets force until something is squashed completely. War, bankruptcy, whatever. That is how it works.
I thought we were talking about Switzerland. A nation of scum and villainy to be sure.
IMO this is good analysis. The Fed is just making almost everyone stupid. Some get their cut.
Of course their clanging sooths the populist soul. We must begger each other or risk being taken advantage of. I wonder what we would do with the money from our future trade surpluses? Probably eat it, or perhaps like Fafnir we shall amass it into a large pile and sleep on it.
This point is so important it cannot be stated enough. When Europeans come to the US they are always amazed at how inexpensive basic consumer goods are even with the good exchange rates.
Particularly food. Europeans tend to be very protective about preserving local folkways regarding food, subsidizing (directly or indirectly) them as part of cultural heritage. As a result, food becomes more expensive.
A tariff, such as Switzerland has (or had as of 2011) on crops which can be grown in Switzerland, is an indirect subsidy. More specifically, it seems like a preservationist tax: citizens pay a tax on comparable food not produced by local folkways so as to favor the food produced by local folkways.
If we thought of manufacturing in various portions of the United States as a local folkway, rather than industry, justifying a tariff as a tax preserving that manufacturing as a local folkway at least makes sense, even if the tariff is still a bad idea. Should fellow citizens pay taxes to help various regions of the US preserve their local folkways? Huh, that rather ties into this other post!
I have never figured out the problem with accepting goods from China that are subsidized by their government. All that means is that the Chinese are taking wealth from their citizens and giving it to the citizens of the USA. Doesn’t seem like a good long-run policy for China, but why should we in the US care?
People complain that iPhones are made in China, which is a falsity. iPhones are assembled in China, but 90% of the price of the iPhone is value and profits created by companies in the US. The assembly is just a tiny bit of the process.
Exactly. Can anyone in either party lead on this, comprehensively? No.
Why do you ask disingenuous questions? You know that Chinese tariffs hurt America business, and that the cell in the prisoner’s dilemma payoff matrix where neither we nor they put tariffs on imports is better for us than the one where only they have tariffs.
I’m a quarter Swiss, you racist!
This assumes a zero sum trading game. Trade just doesn’t work that way.
Prisoner’s-Dilemma-style games can be positive-sum.
BTN explicitly said that both sides lose with tariffs, which is the opposite of zero sum. Who is saying trade is zero sum? And are you trying to say that other countries tariffs on our products don’t decrease our market share and profits derived from those products?
Sure they do, but burden is ultimately born by the consumers in those countries who pay higher prices and have less choice of goods. The argument that we should tax our own citizens to cater to specific industries that want access to foreign markets is morally repugnant. Why should our citizens have to suffer for the benefit of a specific industry?
This argument demonstrates zero sum thinking because we assume there is a winner or a loser in a trade deal – there isn’t. Trade doesn’t happen if both sides aren’t made better off – tariffs be damned.
The prisoner’s dilemma makes no such assumption. If both prisoners keep their mouths shut everyone gets the maximum payoff. But we have to choose the sub-optimal cell in the payoff matrix, at least temporarily, to let the other prisoner know that it is in his best interest to choose the low tariff cell. If we start from an ideology of free trade no matter what, then we have no leverage. Free traders who at least acknowledge this reality win my good faith seal of approval.
My argument assumes no such thinking, because I don’t assume that trade policy is a game that can be played only once. On the contrary, it is a repeated game. In a repeated game construct, one player can punish the other for cheating, and thus “encourage” him to cooperate in such a way that both players achieve the maximum payoff: win-win.
Here is why. With a consumption tax like VAT, the principle is that each person gives the same proportion of his consumption (his economic well-being) in that country.
So, if you eat 100 g. of beans, you put 20 g. in the public kitty. If someone else is less well off and eats only 80 g., he only puts 16 g. in the pot. If someone is better-off than you and eats 100 g. of hamburger, he puts 20 g. of hamburger in the public till.
No tax is collected on something not consumed in the country, since that would violate the principle that each gives the same proportion of his prosperity. If a watch is sent to another country, there was no consumption in Switzerland, so there must be no tax. If a watch is made in another country and brought to Switzerland and consumed there, then it must be taxed, in order to ensure that all consumption in the country is taxed exactly once.
Of course, it is never implemented with perfect loyalty to the principle. Politicians give favors and dole out arbitrary punishments, like politicians everywhere and always, and practical realities interfere to some extent.
It’s true repeated prisoner’s dilemma, or something like it, can be used to model trade wars. As I Walton points out in another thread, though,
Are game-theory models close enough to be of some descriptive use to international trade? I think so. FiveThirtyEight thinks so, too. On the other hand, a nation doesn’t actually act as a single trader. Despite a shared national trade policy, the many merchants within each nation are the ones actually making the trade.
It’s true that with repeated prisoner’s dilemma, a strategy that’s mostly but not entirely cooperative, with some room for retaliation and forgiveness, is the way to go. That national leaders would act the same way seems sensible enough, but they’re not the only players when it comes to actually doing the trading.
Fingers crossed!
@midgetfadedrattlesnake, I think your appraisal of the situation is pretty close to my own. This is why my original statement was that I have gone back and forth on this issue, and I have settled on strategic patience with regard to the Trump policy. Long before Trump became president I was a free trade guy, and I still am. After all, I am a neocon, not a paleocon. But Trump makes some very good points about China’s policies. I must admit that I am simultaneously nervous about the aforementioned uncertainty of Trump’s trade policies and more than a little bit curious from a purely academic standpoint whether the final result of the dispute will be more favorable to the US. I am eating popcorn at this point and hoping for the best.
Any time I run into a Gold Bug (someone who buys gold as a hedge against inflation or as a survivalist), I always ask, “Do you really think someone is going to exchange 1) Food, 2) Water, 3) Medicinal supplies, or 4) Weapons & ammunition for a chunk of metal they can’t spend anywhere?
The four items I mentioned would be infinitely more valuable than gold if society descended into anarchy – or we had the zombie apocalypse . . .
It’s just a form of money that can’t be debased. If you take the right countermeasures it can’t be confiscated, either.
The interest in bitcoin. is similar.
Until fiat yields 3%-4% real rate of return, which would break the government, gold is pretty safe.
And why do you think extremely progressive Europe implemented VATs, which are the most regressive form of taxation but also gives their exports a leg up against anything produced in a country without a VAT? It’s the equivalent of implementing a neutral poll tax (not morally, but it is a good example of the justification and theory diverging from the purpose and application of the policy). Just look at the rest of their tax system which is set up to be very progressive in order to balance out the overall tax burden.
If it were up to me I’d eliminate all current federal taxation and replace it with a ~30% (whatever the revenue neutral rate would be) VAT or national sales tax (I don’t mind a regressive tax system). Then you’d get to hear from all our trading partners exactly how unfair high VATs are when our imports are suddenly slapped with a 30% tax while our exports face no taxes except theirs. But that is not even close to politically feasible.