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Trump’s Trade Deficits

Free trade is constantly being blamed for America’s trade deficits and static living standards. It’s not true!

First, it’s questionable that living standards have not increased. Consider the iPhone, Uber, and Amazon’s time saving convenience and prices—all these effects upon living standards can’t really be measured and economists’ analyses don’t include events which they can’t measure. Their profession is built upon measuring what they are able to measure. Secondly, average Americans see imports from China and Mexico first hand at Walmart when shopping for simple household goods. They don’t see the multi-billion dollars of exports of jet aircraft, armaments, movies (just one can earn the U.S. some half a billion dollars), computer chips, oil drilling equipment, some $130 billion of agricultural exports, and vast other quantities of hi-tech goods and knowledge products. Foreign tourist spending in America is also less noticeable to many.

Moreover trade deficit statistics are very misleading [1], as Time reports, as China’s apparent billions of export surplus includes iPhones. But actually only $10 on each phone is “earned” by China for its assembling; inputs of costly vital parts come mainly from Japan, Korea, Germany, and the U.S. But their costs as Chinese imports are not shown in the trade deficit figures with America. Most of the cost and profits stay in America from the intellectual property rights and patents. Manual assembly lines in China lower the cost enough as to make them affordable for millions; if they were assembled in America, as Donald Trump proposes, their cost would be prohibitive. An excellent article in Slate explains Apple and the whole framework of modern world trade. [2] Appreciation of China’s currency would have almost no effect on the end price of an iPhone as this study shows in a detailed breakdown [3] of the manufacturing process and the non-Chinese inputs.

Beyond all the above, Big Media rarely explains the stifling, monumental costs of many Washington impositions and regulations. These add tremendously to the costs, particularly for American manufacturers. Services are less burdened, which is one reason for their exponential growth and export surpluses.

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Here are six reasons for stagnant growth:

1) America’s monopolistic and dysfunctional health care costs eat up double the percent of gross national income that they do in Europe, some 17 percent. Several years ago, I wrote how Canadian auto workers’ health insurance costs were just 10 percent of what American car companies pay. Every American worker is costing his or her employer some $10,000 for health insurance [4] plus now they must pay all sorts of co-pays and deductibles. Ford pays some $15,000 per year per worker. [5]Imagine these costs for our manufacturers compared to foreign competitors. Indeed it shows the tremendous productivity of American workers that we create as many jobs as we do.

2) Free trade is often blamed for the decline of blue collar jobs in America. Actually robotics and information technology are the major causes. But it is the Environmental Protection Administration that is the next major cause of lost and non-created jobs. The number of ways is incalculable (see my article “The EPA Job Killers [6]”). The EPA likes jobs such as working at computers or flipping hamburgers. But not ones involving bending metal or digging in the earth. Just one new regulation, cutting ozone levels from .0075 to .006 particles per million, will cost industry from $20 to $100 billion per year. Think how horizontal fracking for oil and gas is virtually prohibited on all federal lands, some half of the country west of the Mississippi. Yet this is one of the greatest inventions of the 21st century, making America energy independent and providing low cost energy into the foreseeable future. In a similar vein, the EPA enforces Clean Air Act limits over the desolate Arctic Ocean at the same level as in densely populated cities. The ruling caused Shell Oil to lose a year in its Arctic drilling program.

The cost in businesses which never start up is unknown but high. I have written how new mining ventures are virtually prohibited on Western lands. Yet mining could provide lots of very well paying blue collar jobs and cut our trade deficit in mineral imports. (The Competitive Enterprise Institute has explained this well in “Ten Thousand Commandments –An Annual Snapshot of the Federal Regulatory State [7].”)

3) Spurious lawsuits are another great burden for American exporters. We are so accustomed to them now that few commentators write about their costs and taking of executive focus and time. Some of them may indeed make life safer for some Americans, but we should not blame “unfair” foreign competition when we add up the costs of lawsuits or defensive measures, such as in medicine, for example.

4) Our education system does not prepare young people for high-tech or even high-grade manufacturing. Good basic skills with math and reading comprehension are necessary today even for factory workers, as machines take over the dull, repetitive jobs. Just try reading today the labels on home chemicals or furniture. Manufacturers are crying for prepared workers. [8] Some two million jobs are unfilled today because of lack of basic education, what used to be provided by 8th grade in the old days. Also industry does not train workers like it once did, in fear that the costs won’t help the short term bottom line of profits upon which stock prices and so many bonuses for executives are usually based. Industry trade publications recognize [9] this problem. Think of reports of how German corporations are less fearful of hostile takeovers, and so invest very heavily in worker training. Washington could help this situation by adjusting tax laws so that training costs did not impinge upon corporate earnings.

5) The politics of global warming (now called climate change) is causing major non-recoverable expenses. Obama’s veto of the Keystone XL pipeline not only cost very well paid construction jobs, it also means using resources less economically, e.g. shipping oil by costly rail instead. Extreme environmentalists, spurred on by their victory in shutting down coal mines, are doing all they can to shut down horizontal fracking of oil and gas wells with new regulations. This, when the breakthrough has brought America energy independence and the long term prosperity which comes from cheap energy. Together with the iPhone, these two technologies have put the American economy back on top of the world.

6) New threats from Obama’s Washington are looming all the time. For example, a new enormous burden is being generated by the pay-equity police. Companies will have to report incredibly minute details to “prove” different pay for different jobs. This does not mean that they are discriminating against women. Just imagine the complications from new lawsuits! The Wall Street Journal reports [10] how companies “will be required to report on employees by 14 different gender/race/ethnicity groups, within 12 pay bands and 10 occupational categories. The companies will also have to report the number of hours worked per employee—even for salaried staff, whose hours now are not normally tracked. Firms with multiple locations will have to complete such forms for each branch with more than 50 employees…” Just imagine how many other destructive arrows are in the government’s quivers and aimed at increasing manufacturers’ costs.

Job creation in America, particularly blue collar jobs, could be vastly increased by rebuilding our crumbling infrastructure [11]. Here again it is government regulations (often municipal union rules as well) which make for incredible costs and years of delays. An interesting study shows how Europeans build their infrastructure for many times less cost that America’s. An extreme example is the comparison of the cost of a tunnel in Berlin, $250 million per kilometer, compared to $1.3 billion in New York City [12], or five times as much.

Increased world trade has also helped bring relief from starvation and disease to billions of human beings. In 1990 a third of the human race lived in extreme poverty; today it is 10 percent according to a World Bank study [13]. We should, in a religious sense, be very proud of what American policies and free market ideology helped accomplish for mankind. In a strategic sense we should help and be more secure by having prosperous, stable neighbors. Isn’t that worth some tradeoffs? Think, if we shared borders with some of those miserable nations of Asia and Africa, how insecure we would be.

Even partially correcting some of the above issues would vastly increase the competitiveness of “Made in America” goods and stop many jobs from going overseas. The challenge comes not from China but from ourselves. Cutting off foreign imports won’t bring a net increase of American jobs. Foreign nations would retaliate against our exports, but also would have less money to import American goods and services. World trade and prosperity, including ours, would decline precipitously as it did in the 1930s from a similar protectionist program, Smoot Hawley.

Jon Basil Utley is publisher of The American Conservative.

20 Comments (Open | Close)

20 Comments To "Trump’s Trade Deficits"

#1 Comment By Kurt Gayle On April 22, 2016 @ 3:41 am

“Free trade is constantly being blamed for America’s trade deficits and static living standards. It’s not true!”

You’re missing the point.

The key to understanding the Trump Campaign position on “free trade” and “globalization” is to be found in an interview with the late Sir James Goldsmith, the British-French billionaire businessman. Charlie Rose interviews Goldsmith for PBS on the eve of the passage (in the US and Europe) of the last round of the GATT free-trade agreement:

#2 Comment By John Gruskos On April 22, 2016 @ 8:37 am

7. Sanctions prevent exports to Syria and Iran.

#3 Comment By KD On April 22, 2016 @ 8:41 am

Germany, Japan and other exporters with high standards of living have been able to protect their manufacturing base despite many of the very same trends discussed above.

#4 Comment By Sal On April 22, 2016 @ 8:42 am

Free trade no doubt increases efficiencies. As does labour mobility, including by way of easy immigration.

I think the problem with free trade and easy immigration is beyond economics. These policies dislocate and isolate people, and create and strengthen power structures – corporations and international regulatory structures – that are increasing removed from the public. They weaken accountability and entrench new social and economic classes. They are anti-local.

In other words, free trade and easy immigration are capitalism multipliers. They multiply the benefits as well as the costs of capitalism.

Much like the Internet, which was initially thought of as social and economic leveller, but actually, like any technology, is more lethal, so to speak, in the hands of the powerful than the weak. Hence the end of privacy.

#5 Comment By MP2 On April 22, 2016 @ 11:17 am

It’s oh-so-easy to demonize environmental protection when you completely ignore the costs of environmental damage. You have to be pretty willfully ignorant to think that unfettered ozone release, use of coal, fracking everywhere, or any extractive or manufacturing industry with hazardous byproducts does not incur costs you’re ignoring. Of course, you’re really just caught up in the ‘politics’ like you accuse others, otherwise you might have some measured assessment of regulations instead of frantic whining.

#6 Comment By Johann On April 22, 2016 @ 11:38 am

Just making those who sue responsible for the defendant’s legal costs should they lose would stop all of the frivolous suits. But, since a large portion of our lawmakers are lawyers, that won’t happen. Attorneys are the one profession which should be banned from legislative office, since its a direct conflict of interest. So many of the frivolous lawsuits are settled automatically out of court because the legal costs will be more than the settlement. Its another wealth extraction extortion racket.

#7 Comment By Clint On April 22, 2016 @ 12:17 pm

Trump knows that “Free Trade” Deals are Bogus.

Trump’s proposals for fixing trade — starting with China — address the salient issues of currency, trade barriers and subsidies. Those echo Mitt Romney’s 2012 platform — and candidate Obama in 2008 — but threaten entrenched interests in both the Republican and Democratic parties.

Trump is hardly reckless on trade — just a long needed agent for change.

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#8 Comment By balconesfault On April 22, 2016 @ 12:19 pm

Every American worker is costing his or her employer some $10,000 for health insurance plus now they must pay all sorts of co-pays and deductibles.

Consider all the countries which provide free healthcare for their citizens. While a lot of our trade deals prohibit industrial subsidies – essentially a national healthcare system would be a $10K subsidy per worker to all our manufacturers. It’s not just our high cost of healthcare – it’s that we largely make the employer bear it in contrast to our trading partners.

Meanwhile – on the environmental front, I’ve long argued that the correct solution there isn’t to push American cities to share the air quality that the Chinese tolerate – but rather to structure our trade deals to mandate baseline environmental (and workplace) standards for those who would import to America.

Meanwhile, there are a lot of flaws in the industry claims on the ozone price tag. As a study by Synapse Energy Economics concluded:

“NERA significantly exaggerated the emission reductions needed to meet a stronger standard through a series of unfounded and skewed assumptions. Applying a more reasonable estimate of needed emission reductions to EPA’s cost estimation approach yields an annual cost figure that is $1.4 billion/year lower than EPA’s projected cost of meeting a stronger standard.

NERA grossly inflated the costs of meeting a stronger standard by basing those costs on a high-priced version of a “cash for clunkers” program where people would be paid to scrap older cars, one of the most expensive and inefficient ways imaginable for cutting ozone-forming pollution.

NERA’s analysis, as presented to the EPA, suffers from a math error of about $70 billion—nearly half of NERA’s annualized cost estimate.”

If you’re concerned about healthcare costs, fighting pollution control standards that directly address respiratory health in American cities is a poor start.

#9 Comment By panda On April 22, 2016 @ 1:05 pm

“Just making those who sue responsible for the defendant’s legal costs should they lose would stop all of the frivolous suits. But, since a large portion of our lawmakers are lawyers, that won’t happen. ”

Ah, the internet libertarian three-step!

Step A: we don’t need any stinkin’ regulations, because we can sue bad actors out of existence.
Step B: Tort Reform, because those frivolous lawsuits are killing us!
Step C: Profit! (for other people, not the internet libertarian, which makes it all even more pathetic).

#10 Comment By EliteCommInc. On April 22, 2016 @ 2:23 pm

I would echo many of the above thoughts and two other points:

1. I am not sure that we need to bankrupt employment here to feed billions. This observation reflects the type of argument that suggests “free trade” as you describe must remain a it is for the planet to reap said benefits. Never-mind, the constant concern about the planet at the expense of the citizens who it is suggested should be sacrificed in the name planetary good. It is possible to adjust the model by which we engage in free trade and till not lose our shirts.

2. I would submit that changing our trade policies and adopting the measures you suggest are not mutually exclusive. That being the case, I think a Mr. Trump is the more likely to examine your suggestions and implement them to the intended effect at the same time he moves to do what almost every other nation does, protects their ability to employ their citizens —

the “free trade” of the academic mind just does not exist – that’s reality.

Note: It remains the the case that unless our export exceed our imports or at best is balanced, the economy is not growing. If the economy is not expanding — it is unlikely the country will see employment increase in the private sector – crucial to economic well being.

I think your observation on CO2 is heading in the right direction.

#11 Comment By David Helveticka On April 22, 2016 @ 4:49 pm

Well, that’s the opinion of CEO classes who benefit from outsourcing jobs and importing workers, instead of actually doing anything creative.

Couple of problems with his argument though.

First, the author makes the common mistake of establishment apologists for CEOs, which is confusing the very essence of free trade theory, comparative advantage with labor arbitrage.

What the author should plainly say instead of bypassing the issue, is just say that American workers with a western standard of living should be replaced by slave wage labors in dictatorships like China. But he doesn’t say that.

Another thing he doesn’t say—that American workers and consumers should be subject to the same health and safety conditions of countries like China with it’s smog invested cities and high levels of work related disabilities as in China.

Second, the additional labor costs of American workers under Obamacare forgets the fact that healthcare is FREE in China. So costs of labor in China do NOT include health care costs. The implication of his argument is that the US government should relieve the American manufacturer of worker health care costs, by single payer health care, and get rid of the insurance companies.

Finally, I have never understood the argument that taking a job away from an American worker earning 25/hour and giving it a Chinese worker making %8 a day is going to result in mutual benefit. First of all, the American worker now works for 17/hour and can buy LESS of what he used to make, while the Chinese worker can never buy what he makes at $8 a day…so the American workers buys LESS and the Chinese worker has less employment hours…so it’s a race to bottome.

#12 Comment By bacon On April 22, 2016 @ 7:44 pm

Yes, EPA regulations cost jobs. My guess is that you don’t live in an area where there are nearby hog or cow feed lots, mountaintop removal mining, manufacturing that causes pollution one can see and smell, companies that are regularly fined token amounts for toxic waste violations, the list goes on. If you did, I would bet you would find one or two EPA regs you could support.

#13 Comment By Buzz Baldrin On April 22, 2016 @ 10:34 pm

When it comes to economic determinists, give me Marx every time.

Unlike neoliberals, who share Marx’s free trade policies but not his understanding, Marx foresaw free trade’s threat to Western civilization, though I doubt he had divined the Kardashians.

In 1848, Marx wrote:

“In general, the protective system of our day is conservative, while
the free trade system is destructive. It breaks up old nationalities and pushes the antagonism of the proletariat and the bourgeoisie to the extreme point. In a word, the free trade system hastens the social
revolution. It is in this revolutionary sense alone, gentlemen, that I vote in favor of free trade.”

#14 Comment By Egypt Steve On April 23, 2016 @ 10:30 am

You know, I really admire how an unregulated, free-market health-care system in countries like Germany has managed to keep costs for employers and employees alike substantially under the level of costs imposed under socialist regime of Obama Care. Oh, wait …

#15 Comment By EliteCommInc. On April 23, 2016 @ 5:25 pm

“Just making those who sue responsible for the defendant’s legal costs should they lose would stop all of the frivolous suits.”

For all of the complaints about tort reform and frivolous law suits, it’s curious that most of the tort cases clouding the courts and expense is among the corporate world themselves.

#16 Comment By BK On April 25, 2016 @ 2:54 am

Try to make everyone look the other way on the simple fact that its low overseas wages killing US jobs. The iphone example is a joke. I have worked in the technical semiconductor fields and have seen the components that go into these devices. Lots of components are made in China. TSMC is NOT in America folks, that is where Apple makes most of its chips. I don’t believe your stats based on real world experience.

#17 Comment By David Baltz On April 25, 2016 @ 6:14 pm

I got as far as this statement in the third paragraph:

“if they were assembled in America, as Donald Trump proposes, their cost would be prohibitive.”

If, as the author claims, Chinese labor contributes only $10 of cost to an iPhone–which retail for about $650– then $20, or even $30, of American labor would still produce an affordable American iPhone.

The author lost credibility at that point.

#18 Comment By kalendjay On April 26, 2016 @ 8:39 pm

Remarkable what facts are lumped in to defend free trade.

Expensive German tunnel work? That is the product of high payroll taxes chasing after expensive goods and services under a high VAT — yet Germany competes.

Expensive medical care? Canada should by all accounts be even more expensive, considering their higher cost of living v. the US, and very high personal taxes to pay for more than medicine. Yet they compete to manufacture our consumer products, without imports of cheap Mexican labor.

Inability to mine Western land? Mosaic is in as high-value added a product as there is in global mining (rare earths) with unmatched processing technology from the US. Yet they have failed against China in their latest restart of a California mine.

iPhones only affordable “by millions” from Chinese assembly lines? Ever hear of Nokia, a manufacturing giant within Finland, technology and assembly there? Or New Balance sneakers, made in the US in one of the toughest capital markets of all? Massachussets?

Or businesses crying for skilled labor? Tell that to my county labor office, located within the richest concentration of America’s most wealthy townships (New Jersey)

Jon, I’d really check my facts if I were you.

#19 Comment By RJJCDA On April 28, 2016 @ 5:52 pm

If free trade was beneficial, then the British, who repealed the Corn laws in 1840s, would have economically buried America by WWI. For America practiced what Clay called the American System of protective tariffs. But alas, America did not become a hopeless country whose citizens were living in hovels along the eastern seaboard. They had easily surpassed the British and assumed world economic leadership. And the Asian tigers of past decades coming out of WWII were protectionist to the core, and mostly remain so.

Free trade has utility when substitution is not available without exorbitant costs. But with the advent of industrialization and manufacturing two centuries ago, each and every day that utility has been dissipating until now it is negligible at best. Manufacturing whisks off to wherever the labor and other costs are the most reduced; but where manufacturing goes, soon goes design and engineering, and then finally marketing and ALL functions of en enterprise.

If country A had absolutely ZERO impediments to cross-border trade but 100% tax on income; and country B had 100% proscription of cross-border trade but ZERO tax on income, which country would likely be the most economically viable.

This comparison matrix should tell us that human volition is more important than trade. I favor a uniform 20% tariff on ALL imports.

#20 Comment By JoeD On June 1, 2016 @ 6:29 pm

The problem with most of these idiotic comments is the common held belief by most people that free trade is a win/lose system. That when someone wins, someone else has to lose. This idea is so pervasive, even in the minds of the so-called intellectuals that it is very hard to get past. Free trade is not a win/lose scenario, it is a win-win scenario. If it weren’t then no trade would happen. It is axiomatic! Business men, however, live in a world of win/lose. They are in direct competition with other companies and so they, of course, will view things in this manner. But they are wrong. They were wrong, Kurt Gayle, when Sir James Goldsmith spoke (history proves that) and they are wrong today.

“If free trade was beneficial, then the British, who repealed the Corn laws in 1840s, would have economically buried America by WWI. For America practiced what Clay called the American System of protective tariffs. But alas, America did not become a hopeless country whose citizens were living in hovels along the eastern seaboard. ”

There are MANY other factors at play that you aren’t even beginning to consider. America no doubt would have buried England regardless of protective tariffs. In fact, without the tariffs it’s probable the US would have done better yet. Why is it that so may, who haven’t the slightest clue about economics, think they can talk about it as if they do have some knowledge? Economists, the people who actually study these things, are in almost unanimous consensus that free trade is beneficial to both sides. Your kind of ignorance reminds me of reading the posts of creationists who argue with evolutionists and have no idea what they’re talking about.. like you.