Is It Common Cents on June 15, 2018? We Will See.

June 15, 2018, by John Norris

This morning, the Administration imposed a 25% tariff on $50 billion worth of goods from China. To put that number into better perspective, in 2016, the US imported roughly $463 billion (excluding services) from the Chinese. So, the Administration put a 25% tariff on about 11% of US imports from that country. In terms of pure dollars and cents, this imbroglio is the proverbial mouse that roared.

Then again, trade deficits are sort of like those mice as well. How now brown cow? Yeah, intuitively, it would seem the higher the trade surplus the wealthier the country, or something along those lines. Right? While there is a positive correlation, it isn’t all that strong.

Consider this: according to the World Bank, Puerto Rico an “external balance on goods and services (% of GDP)” equal to 27.2% in 2016. Thailand’s was 14.7%; Gabon’s was 14.0%; Botswana’s was 13.2%, and Cote d’Ivoire’s was 12.2%. Conversely, the US limped along at (2.8)%; the UK did so at (2.1)%, and our friends the French enjoyed a (1.9)% number.

Let me ask you this: would you rather live in France or Cote d’Ivoire?

In strictly economic terms, a trade (current account) deficit is only important IF the country in question can’t attract a like amount of foreign capital or investment in something called the, appropriately, capital account. In theory, the two accounts (current and capital) should approximate, and things are set to rights when they do. Basically, if you can keep the flow of dollars/currency in some form of equilibrium, your economy shouldn’t be that much worse for the wear.

After all, the US has consistently run an annual trade deficit since 1976, a span of 42 years to date. Has our economy grown over that time? Do we have access to more goods, services, and technology? Is there more wealth in the country? The answers are obviously yes.

Hey, don’t take my word for it. The St. Louis Fed estimates inflation adjusted per capita income in the US was $26,186 in 1976. At the end of 1Q 2018, it estimates it was $53,080…more than double. In fact, the slope of the trend line is steeper from 1976 to present than it was from 1950-1976, but that is a discussion for another time.

So, why is the Administration so preoccupied with our trade deficit? I mean, if it isn’t really a huge impediment to societal wealth creation, or doesn’t appear to be?

Let me start by saying I don’t know the President, and he certainly didn’t ask for my opinion on the matter. However, I have maintained, for some time, our problems aren’t economic as much as societal. Consider the following graph I found on the internet:

That is a pretty shocking graph, really it is. However, it is important to note the Top 1% isn’t always the Top 1%, nor are the Bottom 20% always at the bottom. People move in and out of income brackets every year. Further, people tend to move UP as they mature in their professional lives. So, this isn’t necessarily a static chart.

However, it IS telling in that it suggests, to me, the pay scale for a significant chuck of occupations in the US haven’t really budged over the last several decades, particularly so for the lower end and, intuitively, entry level positions. Since pay is supposed to be commensurate with training and ability, perhaps you could argue, well, a lot of jobs in the US just don’t provide a lot of training and potential for advancement. As a result, intuitively, perhaps “average” American doesn’t have the same type of economic opportunities as maybe we would like. They simply aren’t getting the necessary job skills to engender a significant change in their income….perhaps.

Now, what has happened to the complexion of the US workforce since that time? While the chart only goes back to 1980, I am going use 1976 (the year we started permanently running trade deficits). In that year, roughly 22.0% of the official US workforce had a job in the manufacturing sector, in some capacity. The most recent observation, May 2018, puts that number closer to 8.5%.

Clearly, that is a pretty significant change. So much so, it would seem as manufacturing jobs diminished as a percent of the economy, so did opportunities…specifically for the 3rd and 4th Quintiles where the majority of the blue-collar work force would have ‘resided.’ Historically, we have sort of viewed this as America’s vaunted middle class.

Intuitively, this makes sense, it passes the proverbial smell test, even if it might not be completely economically accurate. After all, we have all seen, in this case, China’s ascendency and growing industrial might, while many of our factories close down…along with the towns where they were located.

Consider this snippet from an article by an Alana Semuels entitled “Ghost towns of the 21st Century,” which appeared in ‘The Atlantic’ back in 2015:

BRUCETON, Tenn.—When textile companies started sending jobs overseas in the 1990s, this town wasn’t spared. Here, the Henry I. Siegel Company made jeans and suits in three giant plants, employing 1,700. It started laying people off in 1995. Over time, Siegel, known locally as H.I.S., closed its wash plant, its distribution center, and its cutting center. It laid off its last 55 workers in 2000.

In the 15 years since then, this town has struggled to figure out how to survive. The three giant H.I.S. plants in town are empty, their windows broken, their paint peeling. A few new manufacturing operations have come, but they’ve also left. One by one, the businesses on the main streets of Bruceton and neighboring town Hollow Rock have closed, leaving modern-day ghost towns. In downtown Bruceton, the bank is gone, the supermarket and the fashion store have closed, and there’s a parking lot where there used to be another supermarket. All that’s left is a pharmacy where seniors come to get their prescriptions filled.

All trade deals have winners and losers, but towns such as Bruceton, which haven’t rebounded after more than a decade raise an important question: If trade is good for the nation, why have the benefits still not reached these towns?

“We’ve got an awful lot of people who have been displaced, including low-skill workers who have just not had good options,” said Wally Hop, a professor at Michigan’s Ross School of Business. As low-skilled manufacturing jobs have left, he said, “the knowledge-worker class is doing better and better, and the labor-worker class is doing worse.”

Now, I am going to stop short of saying the Administration is imposing tariffs on the Chinese to penalize them for their success. No. I believe, and have told plenty of folks this, the President is simply starting the negotiations with the Chinese to at least “level the playing field” somewhat. First it is the Chinese, and then it will be the Canadians and the Mexicans. The Administration will keep going down the line until it believes our trading partners are playing by the same rules as we….never mind we do some protection ourselves, but that is a discussion for another time or not.

To that end, here is what The Office of the United States Trade Representative on China in its most recent report:

The United States continues to pursue vigorous and expanded bilateral and multilateral engagement to increase the benefits that U.S. businesses, workers, farmers, ranchers, service providers and consumers derive from trade and economic ties with China. In an effort to remove Chinese barriers blocking or impeding U.S. exports and investment, the United States uses outcome-oriented dialogue at all levels of engagement with China, while also taking concrete steps to enforce U.S. rights at the WTO as appropriate. At present, China’s trade policies and practices in several specific areas cause particular concern for the United States and U.S. stakeholders.

What follows next is a pretty lengthy outline of Chinese business practices and perceived abuses. While perhaps not the most non-biased place to learn about Chinese trade with the US, it does give insight to the current mindset in Washington. Couple this with the yawning gap in income inequality in the country, and, voila, a 25% tariff on about 10% of our imports from China a political no-brainer for the Administration. If nothing else, it will “prove” to a certain subset of our population that the government actually does care what is happening in former factory towns and areas. I would venture to say a lot of these folks feel as though the political class has forgotten about them. To them, this feels good and so what if it is bad for the economy? The economic reality in a lot of these areas couldn’t get much worse.

This, then, mercifully takes me to the primary argument for today’s piece: these tariffs have almost nothing to go with our trade deficit in goods with the Chinese. The numbers are relatively insignificant in the grand scheme of things. They are purely political and: 1) the start of the negotiations with Beijing primarily over intellectual property rights for US companies, and; 2) a bone for the frustrated blue collar class, with whom this move will be incredibly popular.

But will it work?

The Chinese will retaliate with a 25% on a like amount of goods, but can’t or won’t be able to do much more than that. Our negotiators will meet with their negotiators, and they will hammer out a deal where both sides can ‘save face.’ The end result will be the Chinese will be a little more diligent on enforcing intellectual property rights and combating counterfeiting….but not as much as we would like. At this time, both sides will remove their tariffs and proclaim victory to their constituencies. As Laozi/Lao-Tzu (fittingly) wrote over two thousand years ago: a journey of a thousand miles begins with a single step.

Oh yeah, that and some of the Administration’s target audience will feel like someone has their back…even if today’s action was/is the mouse that roared, at least at this time.