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Trump’s looming trade war

Posted by John Reed on

Page A12 of today’s East Bay Times has a very ominous headline: “No protectionism pledge dropped by economic powers.” The key event was a change in the wording in a statement issued by the G-20 finance ministers at their annual meeting.
Last year it pledged to “resist all forms of protectionism.” This year they dropped that statement and vaguely allude to “working to strengthen the contribution of trade to their economies.”

Too similar to the run-up to the Great Depression

The stage for the Great Depression was set by easy money margin loans that caused an irrational exuberance boom in the stock market. We recently had a boom in housing caused by easy money in mortgage ending. But instead of learning the lesson, we continued the easy money by the Fed’s Quantitative Easing.
The Great Depression was then triggered by Republicans promising the Smoot-Hawley Tariff. Then their guy Herbert Hoover won the 1928 presidential election 444 electoral votes to 87. In the House Republicans were a 270 to 164 majority; in the Senate, 56 to 39. Although Hoover did not sign the law until 1930, he said he would sign it before the 1929 crash.

Ending all tariffs would optimize U.S. trade prosperity

Demagogues like Trump push the narrative that America would be more prosperous if we put tariffs on countries with whom we have trade deficits. That is almost certainly not true. Rather, they will retaliate by placing tariffs on U.S. products currently doing well in their country.

Who would take the mythical new jobs Trump claims to bring back?

The unemployment rate in the US is currently below 5%. True, the labor participation rate is the lowest it has been in 47 years, but that is caused by overly generous unemployment benefits, professional victim mentality, lack of training for vacant good jobs, overly generous welfare entitlements, and so on.
But how many more jobs can America use if almost everyone already has one? Trump say he is risking an international trade war to bring jobs back to the U.S. Who will take them? The professional victims? The current very low labor participation rate is 63%. The peak was 67% in 2000 at the end of the dot-com boom. Only 4% more can take new jobs.
Trade deficit has many causes
Reductions in manufacturing jobs are mainly caused by automation, which in turn is turbocharged by anti-employer regulations and taxes. Trade deficits are caused by a lot more things than low wages and foreign trade misbehavior.
Other causes include the strong dollar. When I first started watching the WSJ dollar index in the early 2010s, it was always 73. In more recent years, it has been around 90. That is caused by irresponsible fiscal and monetary policy in most of the countries with whom we have trade deficits. We also have those policies, but we are being graded on the curve and getting an A for still looking like the safest place for the world to put its money.

Trade deficit is meaningless

The correct position on trade deficits are that they not news or a concern. The people who sell us more need to make up for the deficits by buying US bonds or US real estate or US companies. In effect, when you take into account our “exports” of bonds, US real estate, and US companies, there probably IS no deficit.
The way to increase US prosperity is to implement and strengthen the seven pillars of prosperity—ONE OF WHICH IS FREE TRADE, THAT IS, NO TARIFFS OR QUOTAS ON IMPORTS FROM ANY COUNTRY.
Another way is to increase productivity which stems from innovation and capital investment to implement those innovations

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