Trump’s Master Plan for Tariffs

I have heard Trump supporters offer the following rationale for Trump's tarris, "It is a bargaining strategy." Then they sit back and smirk, and tell me, "Trump really wants zero tariffs, but to get these other countries to come to the table he has to get their attention. And once he has softened them up, they'll be willing to reduce their tariffs."

I have heard Trump supporters offer the following rationale for Trump’s tarris, “It is a bargaining strategy.” Then they sit back and smirk, and tell me, “Trump really wants zero tariffs, but to get these other countries to come to the table he has to get their attention. And once he has softened them up, they’ll be willing to reduce their tariffs.”

To put it simply I think this is pure nonsense. There are a number of reasons to think this is nothing other than pure nonsense and magical thinking people engage in to justify sticking with their current tribe. First, if this were true why pull out of the Trans Pacific Partnership (TPP)? That was a negotiation between a number of Pacific Rim countries like Australia, Japan, Mexico, Canada, Chile, Vietnam, etc. The goal was to lower various trade barriers. It would have cut 18,000 tariffs. Tariffs on all U.S. manufactured goods and almost all U.S. farm products would have been eliminated completely and most of those eliminations would have occurred immediately. So if reducing tariffs was Trump’s ultimate goal, staying in TPP would have made the most sense. Trump kept calling it a “bad deal” but my guess is he was completely ignorant of what TPP would have done.

Then there is NAFTA. Trump has repeatedly state that NAFTA was another “bad deal”. That the US was losing billions of dollars every year. Never mind that we were getting goods and services that were valued at more than the billions of dollars that were supposedly “lost” (consumer surplus is an actual Thing™). But if lowering tariffs and trade barriers is the goal, then this leads to the immediate question of, “Why get rid of NAFTA?” Why not something like, “NAFTA was a great start, but we need to build on that and strengthen our trade ties with our allies Canada and Mexico”? If Trump’s goal is to reduce tariffs then that rhetoric would make sense. But instead he was practically gleeful in the middle of 2017 as he decided he was going to pull the U.S. out of NAFTA entirely.

Third, President Trump seems to be completely unaware that when it comes to national income accounting identities there are two accounts that deal with foreign transactions. There is the current account which measures goods and services and currently is showing a deficit—i.e. the trade deficit that Trump keeps going on about. Then there is the capital account which measures the ownership of assets. These two accounts comprise what is known as the balance of payments. These two accounts when combined must balance to zero. So if the current account is in deficit then it must be the case that the capital account is in surplus. That is, the money that “goes out” via the current account eventually “comes back” via the capital account. And that money coming back is usually in the form of investments and those investments can and do create jobs. So while it is possible that the increased specialization and innovation on the current account side reduces jobs in the U.S. the capital account is also creating jobs. What is the net effect on jobs? Very hard to say, but considering that unemployment is rather low, probably not that bad.

Trump’s insistence that the trade deficit is in and of itself a bad thing. That the money spent buying goods and services from other countries is a loss. We get goods and services for that money. As I already noted consumer surplus is indeed a thing in microeconomics. The idea of consumer surplus is that whatever it is you are buying must have greater value than the money you are exchanging for it. If I am buying a book for $20 it must be the case that my valuation of that book is at a minimum equal to the book (in which case I’d flip a coin if I’d buy it or not since I am indifferent), but most likely I value it more. That is I might be willing to pay $30 for the book in which case my consumer surplus is $10. So yes, last year we had a trade deficit of $817 billion according to Trump, but whatever was bought was valued at more than $817 billion otherwise people would not have bought those goods and services.

Lastly a thought experiment. Suppose we got to this magical world of zero tariffs. All our trading partners showed up at the White House and said, “Donnie baby…we agree zero tariffs. Tomorrow. Yeah?” And Trump agreed. And suppose it turns out due to specialization and innovation and we….still run a trade deficit. What would Trump do? My guess is run right back to tariffs. My guess is that Trump has got it into his head that somehow the U.S. should either have zero trade balance or a trade surplus if there were no trade barriers. That the U.S. can only be “losing” (i.e. have a trade deficit) if the other side is somehow cheating and the trade deficit is proof of such cheating.

In the end, I think all this rhetorical nonsense about Trump and his grand strategy to eliminate tariffs is an example of tribalism and magical thinking. People like to belong to a tribe and changing tribes can be stressful and upsetting. And tribalism often comes with varying degrees of rational irrationality. After all, sports fandom is a type of tribalism and the rational irrationality there is sticking with your team even when it is having a bad year. You hang out with your fellow tribe members and complain about the teams problems, have a few beers, watch some stuff on television. Same thing with political parties. Look for any reason to justify the things about your party you do not like. Basically a type of confirmation bias. So all this talk of Trump having this clever end goal is just nothing more than Republican tribalism and a healthy dose of magical thinking…”If I love him enough he’ll stop beating me.”

Update:

Oh how could I forget this link, ‘If We Didn’t Trade,’ Trump Argues, ‘We’d Save a Hell of a Lot of Money’

Yes, it is true. However, saving is not the “point” of the economy. The “point” of the economy is not profits, not to make money, not to for “us” to win and “others” to lose. The whole “point” of the economy is so we can have stuff we want and need to make our lives better and easier. The economy is not a household, although it is partly comprised of household. Nor is the economy a business, although it is also partly comprised of businesses. Since the economy is comprised of households and businesses and those are in turn comprised of people, the “point of the economy” is allow people to make their lives better. Admittedly it sure isn’t perfect, but the market process is so far the only way that has been found that lets this goal of “making people’s lives better” be accomplished on a staggering scale. We want to enhance and improve the market process…not clamp down on and make the process less effective at making people’s lives better.

Also, there is this excellent post by Veronique de Rugy.

As we embark on a trade war, let’s put this question to rest. Deep down, President Trump is not a free trader.

Nothing in what the president has ever said suggests that he’s anything but a diehard mercantilist. Yes, it’s true that he complains loudly of the treatment of U.S. exporters abroad—treatment he no doubt wants to change. It’s also true that he has endorsed dropping all tariffs around the world to zero.

But even these seemingly free-trade stances stem from fundamentally protectionist beliefs: First, that if there were no tariffs, U.S. exports would rise dramatically and surpass imports, shrinking the dreaded trade deficit. And second, that exports are great and imports are bad. In other words, America wins with low imports and high exports.

He is wrong on all counts. If the U.S. trade deficit were to ever disappear, America’s economic health would take a turn for the worse. As long as the United States is growing and remains an attractive place to invest, we will continue to run a trade deficit with the rest of the world.

Exactly right, note that I mentioned there are two accounts regarding international economic activity, well if the U.S. is always seen as a desirable place to invest then that means we’ll almost sure have a current account deficit. If foreigners are coming to the U.S. and giving U.S. citizens money then inevitably that money will be used to buy foreign goods and services. Remember is the capital account is in surplus then the current account has to be in deficit. In other words, the U.S. as a desirable place to invest means we will have a trade deficit. But since that trade deficit can be summarized as foreigners selling us stuff we want to buy, where exactly is the problem?

[Note: I am using quotes because the economy is not a thing or person, it is a process. It does not think, have wants or desires. Unfortunately our language does not really have a suitable way to describe what a process like an economy or an ecosystem does. When we say, “the market decides” that really isn’t right. There is not a thing called the market that decides, instead people have made decisions and the sum total of those decisions are “the market”.]

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FILED UNDER: Donald Trump, Economics and Business, International Trade, Politicians, US Politics
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. I think it is more than fair to say that Trump does not understand basic economics and that even his mercantilist views are rudimentary at best.

    13
  2. Michael Reynolds says:

    Welcome back, Steve Verdon. Good explanatory piece. I expect now to understand economics fully for as long as ten, maybe even twenty minutes.

    6
  3. MBunge says:

    This is embarrassing. How the expletive deleted do you write something like this and completely ignore the recent announcement with the EU? That announcement is, on the surface, not only a total validation of Trump’s tactics but it legitimizes the very argument you are trying to dismiss. It’s one thing to downplay, find fault with, or otherwise criticize the supposed EU deal…BUT TO PRETEND IT DIDN’T HAPPEN?

    Second, it is simply childish to present TPP as some absolute good to which no on could possibly object. If it is that simple, why did it take more than one day to negotiate? There were a great many people who didn’t like TPP and a good number of them like Donald Trump even less. To refuse to engage with any of that is pathetic.

    Thirdly, why hasn’t Donald Trump already pulled out of NAFTA? It’s because he wants to use the theat of a pullout to extract concessions from Canada and Mexico that he believes will benefit America. Similarly, the President pulled out of TPP because he dislikes multilateral negotiations and prefers bilateral talks where it is easier for the U.S. to use its power to extract beneficial concessions from the other side. This approach could be utterly wrong but you are not arguing that it is wrong. You are arguing as if you don’t understand what Trump is doing, which makes you seem like a moron.

    Fourthly, the lack of any engagement with real numbers or data is pitiful. Free traders like you have been largely running the U.S. economy for decades. NAFTA in particular has been in place for about a quarter-century. Yet your use of airy theorizing about how things should work instead of relying on evidence of how things have worked signifies you are basically ignorant of the actual facts about trade. So why write an antagonistic post on something you truly know little to nothing about? It’s because support for free trade is a TRIBAL signifier.

    Mike

    1
  4. Michael Reynolds says:

    @MBunge:
    You’ve admitted Trump is a liar. You are as well. No one has any further interest in you.

    15
  5. Why is it so hard to understand that a press conference with pleasant words isn’t an agreement?

    28
  6. grumpy realist says:

    @MBunge: Except that if the rest of the countries originally planned for the TPP decide to go ahead and do it without the US, that puts them in a stronger position, tariff-wise. Especially if they decide to hold one view in negotiations with the U.S. It’s the same way that the EU is composed of smaller countries who band together and work with one voice.

    Trump is an idiot, thinking that bilateral agreements work better than multi-lateral ones.

    14
  7. Do all Trump supporters take jobs after a phone call offer and never expect a written contract?

    Do they talk to the salesman about a new car, reach a preliminary agreement on price, and then go home assuming that the car and the statements will just arrive at some point?

    Do they show up to university the first day ready to start class after they were told by a recruiter that sure, their ACT score and GPA would get them into the school?

    Do they not know the difference between “we talked about possibilities and even reached tentative agreements” and “we have written down and have formally signed off on those things we discussed?”

    21
  8. PJ says:

    As an example, CETA:

    The Comprehensive Economic and Trade Agreement (CETA) is a free-trade agreement between Canada, the European Union and its member states. It has been provisionally applied, so the treaty has eliminated 98% of the tariffs between Canada and the EU.

    The negotiations were concluded in August 2014. All 28 European Union member states approved the final text of CETA for signature, with Belgium being the final country to give its approval. Justin Trudeau, Prime Minister of Canada, travelled to Brussels on 30 October 2016 to sign on behalf of Canada. The European Parliament approved the deal on 15 February 2017. The agreement is subject to ratification by the EU and national legislatures and can only enter into force if no adverse opinion is given by the European Court of Justice following a request for an opinion by Belgium. Until its formal entry into force, substantial parts are provisionally applied from 21 September 2017.

    To add, the negotiations started on 6 May 2009….

    But somehow Trump supporters seems to think that Juncker visiting Trump, some lofty words were uttered, and now the US is on the brink of achieving the same thing… Embarrassing indeed.

    Also, at the moment Italy’s new government is refusing to ratify the agreement….

    8
  9. Michael Reynolds says:

    The Great Dealmaker has thus far made zero deals.

    No trade deals.
    No wall.
    No infrastructure plan.
    No real opioid plan.
    No election security plan.
    No deal for middle east peace.
    No deal with North Korea.
    No Obamacare replacement.
    No balanced budget.
    No reduction in overall spending.

    19 months of abject failure to accomplish any of the great things he set out to do. 19 months of chaos, stupidity, weakness, corruption and failure, all of it directly attributable to the character of the least fit person ever to occupy the White House. Trump is utterly incapable of anything that requires focus and persistence. He is incapable of attracting allies.

    All Trump can do is lie to morons who, at present, appear to constitute about 40% of the American people.

    22
  10. wr says:

    @MBunge: “How the expletive deleted do you write something like this and completely ignore the recent announcement with the EU? ”

    Because there’s as much substance to that “announcement” as there was to the one about North Korea’s immediate denuclearization. It amounts to them saying that if at some point Trump decides to stop hitting himself, they’re willing to go back to business as it was before. Some great victory.

    16
  11. Yank says:

    Why is it so hard to understand that a press conference with pleasant words isn’t an agreement?

    Because that would mean admitting that Trump is a complete and utter fraud and guys like Mbunge can’t accept that. Most Trump supporters are just gullible marks, but there are some who are just hacks, who know better, but have to pretend like stuff like these written statements are meaningful. Mbunge falls into the latter category.

    7
  12. Just nutha ignint cracker says:

    @Michael Reynolds: “19 months of abject failure to accomplish any of the great things he set out to do that were part of the advertisement that he made running for President.”

    FTFY. I may be too cynical, but I never believed for a moment that Trump was “set[ting] out” to do anything let alone those things. After he got in I was hoping that he would keep from escalating things in the ME because he was too lazy to be engaged in a war, but it appears that I should have been more cynical about that.

    4
  13. Hal_10000 says:

    There’s another aspect to Trump’s supposed “strategy”. Other countries have their pride too. If Trump is running around saying we’re getting screwed and throwing tariffs at them that creates pressure for those countries to respond so that they are not seen as giving in. You can’t call other countries crooks and thieves and then expect them to groveling to the negotiating table. It just doesn’t work that way.

    9
  14. Steve Verdon says:

    @MBunge:

    This is embarrassing. How the expletive deleted do you write something like this and completely ignore the recent announcement with the EU? That announcement is, on the surface, not only a total validation of Trump’s tactics but it legitimizes the very argument you are trying to dismiss.

    This is exactly the kind of magical thinking I am talking about. First, we had a similar report about the U.S. and China and then Trump turned around and levied even more tariffs. Second, this is, at best, a deal to talk about possibly having a deal. It means absolutely nothing as of yet.

    Second, it is simply childish to present TPP as some absolute good to which no on could possibly object. If it is that simple, why did it take more than one day to negotiate? There were a great many people who didn’t like TPP and a good number of them like Donald Trump even less. To refuse to engage with any of that is pathetic.

    Let me see, U.S. goods going to other countries would not face any sort of tariff aimed specifically at U.S. goods…hmmm yeah, that would clearly be terrible for the producers of those goods. Just awful, to have a discriminatory tax removed and make those goods more competitive in terms of price. Selling more such goods…yes positively terrible.

    Thirdly, why hasn’t Donald Trump already pulled out of NAFTA? It’s because he wants to use the theat of a pullout to extract concessions from Canada and Mexico that he believes will benefit America.

    This is a fine display of economic ignorance. By simply reducing our tariffs Americans benefit. Americans pay part of that tax so removing them means Americans stop paying them. Americans will have more money after said purchases to purchase other goods and services including domestically produced goods and services. People in the countries we trade with will also have more money…money they can use to buy more goods and services including goods and services made in the U.S.

    Seriously…why do you want to punish Americans to punish foreigners?

    Yet your use of airy theorizing about how things should work instead of relying on evidence of how things have worked signifies you are basically ignorant of the actual facts about trade.

    There are lots of papers out there analyzing NAFTA and guess what, not one shows that it was a net loss for the U.S. Not one. I don’t think it is up do me to help you deal with your appalling ignorance of economics, both in terms of theory and in terms of empirics.

    14
  15. Hans says:

    @Michael Reynolds:

    All the hallmarks of a Socshevik, calling someone
    he disagrees with a liar.

    1
  16. hANS says:

    Mr Verdon, places the blame of our withdrawal from the TPP
    on The Donald but fails to give a complete account of the facts.

    “However, the deal was never ratified by the U.S. Congress, as it became a target of both Republican and Democratic candidates during the 2016 presidential campaign.”

    1
  17. Yank says:

    There’s another aspect to Trump’s supposed “strategy”. Other countries have their pride too. If Trump is running around saying we’re getting screwed and throwing tariffs at them that creates pressure for those countries to respond so that they are not seen as giving in. You can’t call other countries crooks and thieves and then expect them to groveling to the negotiating table. It just doesn’t work that way.

    Exactly.

    Trump never entertains the thought that other parties have their own self-interest. He does it with every deal he has tried to negotiate so far. Trade, DACA, NK etc. every single one of these “deals” have been he gets everything, while the other party gets nothing. This crap may work with contractors you can wear down with lawsuits, but it doesn’t work in domestic and foreign policy. You have to have some level of humility and an understanding what is the other parties political interests. Trump is incapable of doing so because he is a narcissist. This is just another example of why the guy is completely unfit to be president.

    8
  18. Steve Verdon says:

    @hANS:

    Not quite. Yes Congress had not ratified after negotiations were finished, but Trump withdrew the US from the agreement.

    https://edition.cnn.com/2017/01/23/politics/trans-pacific-partnership-trade-deal-withdrawal-trumps-first-executive-action-monday-sources-say/

    President Donald Trump on Monday will start to unravel the behemoth trade deal he inherited from his predecessor, as he signed an executive action to withdraw from the negotiating process of the Trans-Pacific Partnership.

    4
  19. Hans says:

    @Yank:

    Gee, what happen with NOKO?

    “This is just another example of why the guy is completely unfit to be president.”

    But Obomba was alright for US, eh!

    All of our previous presidents were status quo – come along to get along. No
    backbone, no America First, no nationalists. They sold us down the river to
    Mexico and upriver to Oh Canada. Sell outs, one world governnmentalists. They
    crapped on the middle class, unit it began to shrink and crumble.

    The Donald is for the middle class and not the swamp class.

  20. Hans says:

    Those that argue that extended negative trade does not
    matter, are the same volks whom say a nation in massive debt
    is of no consequences.

    For those beholden to such theory, please, show me a nation
    which rose to economic greatness with continuous trade deficits?

    The winner will receive a free guided trip to the UN’s HQ in NYC
    and a free study course on Agenda 21, courtesy of the IPCC.

  21. Jax says:

    Oh dear. We’ve attracted a new troll. He’s all in on Agenda 21 and can’t spell. This should be entertaining! Can you track his IP address, admins? Any chance it’s located in Russia?

    7
  22. Steve Verdon says:

    @Hans:

    Those that argue that extended negative trade does not matter, are the same volks whom say a nation in massive debt is of no consequences.

    This a false equivalence. A trade deficit does not imply debt. Trade deficits are also incurred by the actions of individuals not the government. And those transactions are mutually beneficial. Are you saying that those individuals and firms are doing things that are not in their best interest? If yes then we had better switch over to another economic system because markets don’t work. If you say yes it is the interests of those individuals but not the country’s best interest that just collectivist nonsense. Do you by chance have another answer.

    Oh, and fun fact Singapore unilaterally set all tarred to zero. Their economy is clearly in a shambles. /sarcasm

    4
  23. wr says:

    @Hans: “The Donald is for the middle class and not the swamp class.”

    I’ll believe this once you can explain why 99% of the benefits from his tax cut went to billionaires and corporations.

    7
  24. MarkedMan says:

    @Hans:

    show me a nation
    which rose to economic greatness with continuous trade deficits?

    The United States? Great Britain? Rome? Greece? Egypt? Let’s make this easier – all of them. Rich, powerful countries import more goods than they export. And that would be a problem if economies just consisted of buying and selling pre-existing goods. But they don’t. The zero sum game that exists in your head is completely flawed. Countries are not individuals. They are able to print money proportional to the value of their total economy. If they exceed that significantly, they get hyperinflation. If they under-print they can get stagnation.

    The “we must be getting ripped off because we spend more in dollars than we take in” completely ignores the fact that we print the dollars.

    10
  25. All of this focus on trade deficits also ignore the broader economic system in which those deficits exists.

    For a group that is allegedly interested in American greatness, they don’t seem to understand that the current global system is, more or less, the American (and friends) system. Trade wars, screwing up the G7 and NATO, etc., actually screws up that system and denigrates the US’ leadership role.

    It is monumentally stupid.

    5
  26. Hans says:

    @Steve Verdon:

    Of course, Mr Verdon, tariffs are in general unproductive.

    Are you suggesting their are no negative consequences to running
    an ever, ever trade debt??

    1
  27. Hans says:

    @wr:

    “I’ll believe this once you can explain why 99% of the benefits from his tax cut went to billionaires and corporations.”

    Simply, they paid the most. They do not give income credits or income support
    payment. The 1 to 10 percenters pay over 70% of all federal tax(s).

    BTW, do you really think business pay taxes? Then you believe all of those ads
    which tell you that your order includes “free” shipping or the BOGO offers.

    1
  28. Hans says:

    @Jax:

    Jax, congrats, the senate has just confirmed your appointment
    as Spelling Czar. Your ACT test scores have been placed under lock
    and key.

  29. Hans says:

    @MarkedMan:

    “MarkedMan says:
    Sunday, July 29, 2018 at 10:06

    @Hans:

    show me a nation
    which rose to economic greatness with continuous trade deficits?

    The United States? Great Britain? Rome? Greece? Egypt? Let’s make this easier – all of them. ”

    Please, give a cite for the first two, since the latter used slave labor and private property appropriation.

    “Countries are not individuals.” Then what are their structure?

    “They are able to print money proportional to the value of their total economy. If they exceed that significantly, they get hyperinflation. If they under-print they can get stagnation.”

    Well stated MarkedMan: I concur entirely.

    “The “we must be getting ripped off because we spend more in dollars than we take in” completely ignores the fact that we print the dollars.”

    America is privileged because we are the world’s currency and the sinkhole for most
    exporters. As Maury Povich would say – you (USA) are the world’s baby daddy caddie!!!

    I will be WAITING for your cites. If not then you are a MarkedMan.

  30. Hans says:

    @Steven L. Taylor:

    “For a group that is allegedly interested in American greatness, they don’t seem to understand that the current global system is, more or less, the American (and friends) system. Trade wars, screwing up the G7 and NATO, etc., actually screws up that system and denigrates the US’ leadership role.”

    Mr Taylor, do you think most Americans understand the immaculate conception of
    these worldly organizations, setup by and for the global elites? They metastasize just
    like most governmental units and their agencies. Go on the https://blogs.imf.org/
    and see if they publish a critical comment?

    Have you ever have “friends” take advantage of your generosity?

    How many American have even a simply understanding of the TPP, let alone
    know what the initials means? Do you? Does, Mr Vendon? CONgress?
    The 1.4 million professors in the USA baccalaureate system?

  31. @Hans: What I do not understand are your comments (or, more accurately, I understand them to largely be blather).

    If you have a point to make, make it.

    2
  32. Hans says:

    ATTENTION: Dear reader and poster

    Please report any and all spelling and grammar errors
    to JAX. Please, exercise patience as he is under staff
    and over worked: as he has now been anointed Grammar
    & Spelling Administrator, of the Chicago (Chirack) public sckool system.

    Again, your deference and cooperation is requested for the
    grammar authorities and their underlings.

  33. @Hans: Or, you know, people who want to be taken seriously ought to be able to spell and use proper grammar and syntax.

    This is not an unreasonable expectation.

    7
  34. Steve Verdon says:

    @Hans:

    Are you suggesting their are no negative consequences to running an ever, ever trade debt??

    You are mistaken here. A trade deficit need not imply debt. I run an on going and most likely permanent trade deficit with Trader Joe’s. However, I am not in debt to Trader Joe’s as a result. And in point of fact this trade deficit makes me strictly better off. I do not know how to make scotch and even if I did I likely could not duplicate my preferred brand…but thanks to Trade Joe’s and by trade deficit with them I can still consume it.

    Why such a deficit has to suddenly become “bad” when it crosses international borders you have not explained. It is merely something you insist on.

    And as I have explained, and which you keep ignoring, there are two accounts related to foreign transactions: the current and capital accounts.

    The trade deficit (or surplus) relates to current account. It measures the expenditures by Americans (broadly defined) on foreign goods vs. expenditures by foreigners on American goods. Note that goods is really goods and services. The capital account relates to transactions relating to assets by Americans and foreigners. Together they must balance to zero, that is:

    Current Account + Capital Account = 0.

    Now if the current account is in deficit–i.e. negative then the capital account must be positive by an equal amount.

    There is no reason to assume that a current account deficit means there must be and equal increase in net debt. In fact, if the U.S. is seen as a generally desirable place to invest it is likely that our capital account may always be in surplus and if so that means our current account will have to be negative.

    Your persistence on not grasping these concepts only underscores your economic ignorance and that your comments are not worth much other than to mislead and distract.

    6
  35. Michael Reynolds says:

    Just to repeat a point: 0% tariffs do not equal 0% trade deficit. In fact, 0% tariffs may worsen the trade deficit. The trade deficit that actually doesn’t matter much because what really matters with China is their massive IP rip-off, something Trump has done nothing to address because that is, you know, complicated and would require reading.

    3
  36. Michael Reynolds says:

    I run a trade deficit with Molly Stone’s grocery store in Greenbrae, California. Every week I buy hundreds of dollars worth of groceries from them, and they don’t buy a damn thing from me! I get nothing out of the deal! Well. . . except for groceries.

    But at least they’re Amurricans. I also run a deficit with a certain German auto company, and despite me buying a car from them, Mercedes Benz has bought nothing from me! Nothing! And all I have to show for this rotten deal is the car I deliberately chose to buy! Rip-off!

    I am now insisting that if I ever buy another 75K Mercedes, MB will have to buy 75K worth of my books. Because that would be ‘fair trade.’ I’d have a great car, they’d have way more books than they need. Winning!

    3
  37. @Michael Reynolds: But just think of the furniture you could have constructed from the money you saved by not buying stuff.

    A dollar bill throne, yo.

    4
  38. Jax says:

    @Hans: Excellent. My first order of business shall be cleaning up Donald Trump’s terribly spelled Twitter feed, and then I’ll turn my attention to his Russian bot friends. The country shall be very grateful, I’m sure!

    1
  39. Yank says:

    Your persistence on not grasping these concepts only underscores your economic ignorance and that your comments are not worth much other than to mislead and distract.

    You just described the current Republican party, Steve.

    1
  40. MarkedMan says:

    @Steve Verdon: I was contemplating as to whether I should reply to Hans’ nonsense or to clean my bathroom and the cleaning won out. (Honest to god. I decided I would rather literally scrub a toilet.) so I was happy to see you handled it pretty well.

    3
  41. MarkedMan says:

    @MarkedMan: This thread is probably dead, but just for the record, I should clarify my comment about printing dollars. This ability to pay off our debt in our own currency is unusual. Most countries have to worry a great deal about balance of payments, because their money cannot be used to pay international debt. As an example, 10 years ago Iceland came very close to going bankrupt because they didn’t have enough dollars or Euros in their accounts. The Chinese have to run a hard currency surplus because no one accepts the yuan outside of China. In many third world countries large capital items can only be bought with dollars because ultimately dollars are needed to buy them.

  42. Hans says:

    @Steve Verdon:

    “You are mistaken here. A trade deficit need not imply debt. ”

    You are correct, Mr Verdon, it is a poor choice of words. Trade balance or
    trade surplus or trade deficit are much better.

    “I run an on going and most likely permanent trade deficit with Trader Joe’s.”
    In order to sustain such commences, it will require you to have a permanent
    trade surplus as an employee of Aldi.

    “Why such a deficit has to suddenly become “bad” when it crosses international borders you have not explained. It is merely something you insist on.”

    One issue is a declining local currency, which means ever higher costs of imports.
    It means a selloff of domestic assets, until, you wind up a fourth world nation and
    then the only imports will be foreign ad monies.

    Sorry, but those whom think that a nation (its people folks)which runs a red trade account
    into perpetuity are badly mistaken.

    “And as I have explained, and which you keep ignoring, there are two accounts related to foreign transactions: the current and capital accounts.”

    I ignore nothing you say, your excellency. And yes, they balance one another.

    So do corporations balance sheets. They always balance liabilities and assets. That
    is wonderful, but it does not mean the business is healthy and prosperous. The
    application of accounting, does not materially effect the health and welfare of a
    nation’s (people) economy and its productivity.

    I shall utter this again, a nation (consumers) can not spend more than it
    produces into perpetuity without the decline in their standard of living.
    (think Argentina & please cry for me)

    “Argentina benefits from rich natural resources, a highly literate population, an export-oriented agricultural sector, and a diversified industrial base. Although one of the world’s wealthiest countries 100 years ago, Argentina suffered during most of the 20th century from recurring economic crises, persistent fiscal and current account deficits, high inflation, mounting external debt, and capital flight.”

    https://www.forbes.com/places/argentina/

    Please, Mr Verdon, short term trade imbalance will have little or no
    consequences; what will are long term trade deficits. Just axe a Cuban or a Haitian.

    “Your persistence on not grasping these concepts only underscores your economic ignorance and that your comments are not worth much other than to mislead and distract.”

    Then I will not hear from you, Mr Verdon? I am so sorry that I have failed to
    meet your expectations. I see your level of tolerance is quite low.

    The human trade balance is in deficit. :<(

    1
  43. Hans says:

    @Jax:

    JAX, The Donald does badly need helf on his Twitter
    feed. :<) His public speaking also needs a shoe brushing.
    BO, beats him hands down.

    1
  44. Hans says:

    @MarkedMan:

    “MarkedMan says:
    Sunday, July 29, 2018 at 21:48

    @Steve Verdon: I was contemplating as to whether I should reply to Hans’ nonsense or to clean my bathroom and the cleaning won out. (Honest to god. I decided I would rather literally scrub a toilet.) so I was happy to see you handled it pretty well.”

    M&M, in light of the fact, that you were incapable of responding to
    the two questions, your reassignment of the Custodial Department was
    most appropriate.

    ” show me a nation
    which rose to economic greatness with continuous trade deficits?

    The United States? Great Britain? Rome? Greece? Egypt? Let’s make this easier – all of them. ”

    Please, give a cite for the first two, since the latter used slave labor and private property appropriation.

    “Countries are not individuals.” Then what are their structure? “

    1
  45. Hans says:

    @MarkedMan:

    “The Chinese have to run a hard currency surplus because no one accepts the yuan outside of China.”

    Not true, M&M, as the Mao is the world’s third most used currency.

  46. MarkedMan says:

    @Hans:

    since the latter used slave labor and private property appropriation.

    So did the former. What does that have to do with anything?

    Unfortunately, the concept of trade deficit in its modern sense is pretty recent. We do know that the US has been running a trade deficit for nearly 50 years and has only increased its influence and wealth, at least until your boy Trump came along. We also know that Britain ran a currency deficit with all their colonies the whole time they were creating their empire. Ditto the other empires I mentioned.

    Look, it’s dangerous to argue country level economics by personal analogy but take a look at your average billionaire. Most of them hold a significant amount of debt until the day they die. Oftentimes the debt far, far surpasses their income. But the interest on their debt doesn’t. And their capital assets far surpass their debt, which allows them to continue to create new wealth in the form of improved real estate, or manufacturing companies, etc.

    Which doesn’t mean debt is good or bad, in and of itself. Rather, are you using that debt to increase or maintain capital or other long term value? If the answer is yes, you have a good chance of being ok, as long as you pay close attention to cash flow. If on the other hand you borrow money to throw parties or snort up your nose, you will eventually reach an unsustainable point. The country equivalent to this: are you borrowing money to finance tax cuts for millionaires (which has a fractional multiplier effect) or are you using it to build infrastructure and invest in a better educated or more highly skilled populace? On the local level, are you using it to finance civil war statues or lawsuits against gay people, or are you investing in bringing high speed Internet and excellent schools to town?

    If the rate of expansion of your debt exceeds the rate of expansion of your worth, then, and only then, you are right. Country, or county or billionaire, you will be in trouble.

    1
  47. MarkedMan says:

    @Hans:

    the Mao is the world’s third most used currency

    Sure, with 1.5B people, a lot of people use Chinese currency. (BTW, a “mao” is what some people call a jian, a tenth of a Yuan aka Renminbi.). And lots of small to mid-sized traders, especially ones that aren’t bothering with all the legal niceties, accept it at a discount in the countries surrounding China. But I have been peripherally involved in the finances for setting up a decent sized US enterprise in China and the incredible tangle of companies and sub companies in China, Singapore, Europe and the US had one overriding goal against all others: we only wanted to earn enough Yuan to cover our local costs, and everything else needed to be in Euros, Dollars or some other freely traded currency. Oh, and that had to be legally located in a non-Chinese entity or you couldn’t get it out of the country.

    1
  48. Hans says:

    M&M, third in use for international settlement.

    1) dollar
    2) Euro
    3) the bill with the mass murderer picture of Mao.
    I think the other side has his little “red” book and the gang of three

    1
  49. Hans says:

    @MarkedMan:

    “US has been running a trade deficit for nearly 50 years’

    1976, is when the endless streak began. https://www.globalpolicy.org/images/pdfs/Z/ustrade1960-2006.pdf

    Both USA and UK trade spiral began around 1976. https://tradingeconomics.com/united-states/balance-of-trade

    https://www.nber.org/chapters/c2491.pdf Historical annotations and data; brilliant parchment

    M&M excellent post, especially regarding the instrument of debt.

    “If on the other hand you borrow money to throw parties or snort up your nose, you will eventually reach an unsustainable point.”

    Yes, indeedy. That has been happening for the past 18 years
    with FedZero. Tell me, are stock buybacks the best utility for
    capital? If so, then I can run any S&P 500 business.

    The first sign of trouble is a continues lack of free cash flow. (the O&G BKs of 15 & 16)
    Also, the world is now holding a record debt level and I suspect
    we will have truth or consequences for the planet.

    Only those who are on the moon, will be safe.

    1
  50. MarkedMan says:

    @Hans: FWIW, all the bills in China have Mao’s picture.

  51. MarkedMan says:

    With respect to the RMB being internationally traded: you are right and I was wrong. I know that in 2008 they started it float against international currencies but I had no idea it had gained popularity that fast. 8th in 2012, 5th in 2015. I didn’t see the most recent but I accept that it has reached third.
    Given the incredible lengths my company went to in order not to end up with excess RMB from 2010 to 2015 I wonder if that still holds.

    1
  52. Hans says:

    My last post was not listed??????????

  53. Steve Verdon says:

    @Hans:

    I ignore nothing you say, your excellency. And yes, they balance one another.

    So do corporations balance sheets. They always balance liabilities and assets. That
    is wonderful, but it does not mean the business is healthy and prosperous. The
    application of accounting, does not materially effect the health and welfare of a
    nation’s (people) economy and its productivity.

    I shall utter this again, a nation (consumers) can not spend more than it
    produces into perpetuity without the decline in their standard of living.
    (think Argentina & please cry for me)

    And this is where the analogy breaks down. Nations are not individuals, they are a collection of individuals. And consumption is done by individuals not by nations. So long as people have incomes that allow them to consume goods either from domestic or foreign sources matters not.

    Further, you fail to see the implication of a capital account surplus…it can fund those foreign purchases. If I own an asset and a foreigner comes and buys it from me, I then have the cash to fund additional consumption including from foreign producers.

    And what was the point of that quote about Argentina? That all of those problems are the result of a current account deficit? Or maybe those problems are due to other factors and adding the current account deficit to the list is something economically ignorant journalists do.

    1
  54. Hans says:

    M&M, the Chicoms have made a determined
    effort to undermine the strength of the dollar
    and replace it with a basket of other currencies.

    They have made inroads, but so far their goal
    of displacing the $, has not succeeded.

    BTW, I did reply to your July 30th post at 15:10
    but do not know why it was not published?

    1
  55. Hans says:

    @Steve Verdon:

    “And this is where the analogy breaks down. Nations are not individuals, they are a collection of individuals. And consumption is done by individuals not by nations.”

    Yes, Mr Verdon, that is without dispute! But then what is the lexicon to be use
    to describe or categorize this group of individuals?

    “Further, you fail to see the implication of a capital account surplus…it can fund those foreign purchases. If I own an asset and a foreigner comes and buys it from me, I then have the cash to fund additional consumption including from foreign producers.”

    Indeed, it is a true and powerful argument. This does bring trade to an
    equilibrium and is an excellent settlement tool. It works well in the vast majority
    of economies, but backward nations with unwanted local currencies and no
    valuable hard assets, it in itself will not generate trade. Theoretically, consumption
    can continue indefinitely, whereas, asset sales become a diminishing base.

    “And what was the point of that quote about Argentina? That all of those problems are the result of a current account deficit? Or maybe those problems are due to other factors and adding the current account deficit to the list is something economically ignorant journalists do.”

    Of course not, nevertheless, exporting strength is an indication of a healthy
    and vibrant economy. Gentina, had a variety of stability issue and their exporting
    sector was just one of them.

    I still maintain, my opinion, that no country (individuals) with a weak
    exporting sector and running continuous trade deficits will rise to be an elite economic power.

    1
  56. Steve Verdon says:

    @Hans:

    Indeed, it is a true and powerful argument. This does bring trade to an equilibrium and is an excellent settlement tool. It works well in the vast majority of economies, but backward nations with unwanted local currencies and no valuable hard assets, it in itself will not generate trade. Theoretically, consumption can continue indefinitely, whereas, asset sales become a diminishing base.

    Right, and these countries would be…?

    Of course not, nevertheless, exporting strength is an indication of a healthy and vibrant economy. Gentina, had a variety of stability issue and their exporting sector was just one of them.

    Nonsense. As has been mentioned if the US is a desirable place for foreigners to invest then the US may always have a current account deficit so long as that is the case. The current account deficit is not indicative of weakness, but strength.

    I still maintain, my opinion, that no country (individuals) with a weak exporting sector and running continuous trade deficits will rise to be an elite economic power.

    You are free, of course, to be deliberately obtuse.

  57. Hans says:

    @Steve Verdon:

    “Right, and these countries would be…?”

    It would be the bottom 20% of the UN roster of nations.

    “As has been mentioned if the US is a desirable place for foreigners to invest then the US may always have a current account deficit so long as that is the case.”

    Mr Verdon, it was the “may” which allows for an agreement.

    ” The current account deficit is not indicative of weakness, but strength.”

    Have you registered as a foreign agent…?

    “You are free, of course, to be deliberately obtuse.”

    Thank you for the freedom, to be deliberally obtooht. You, sir, are a hoot…!!!

  58. Hans says:

    In the main, under conventional circumstances, trade
    balance(s) matters little in regards to the “health and
    welfare of the economy.

    What I am concern about, are negative trade balances (in the red)
    over extended periods of time. (30+ years)

    I am of the opinion, that it can and will imperil and sap the
    local economy and reduce its standard of living. And yes, in many
    instances, these are extreme cases but also effecting advance nations.
    I do fully knowledge that other factors do influence a declining economy
    and in itself, even a lengthy trade imbalance will not be 100% responsible for
    the decay of an economy.

  59. @Hans:

    In the main, under conventional circumstances, trade
    balance(s) matters little in regards to the “health and
    welfare of the economy.

    What is the revenue is spent on policies that are not aimed at the whole (by your definition)? You have criticized social welfare policies, for example.

    Also: how do you defend the fact that tariffs directly interfere with the market? So, you are capitalist, but not a free marketeer? (This is, of course, possible, but seems odd given your generic socialism phobia).

  60. MarkedMan says:

    @Hans: FWIW, you seem to have more knowledge and a deeper perspective on this than your initial posts indicated. I don’t know if you are a Trumpoid/Tea Partier but you came across with a vibe associated with them: “Everyone is an idiot, all problems are simple but libtards are hysterical wusses and can’t see what’s right in front of them. MAGA!” The comments section here skews a lot deeper, except for a half dozen or so regulars who are resoundingly mocked when they are not just ignored. But if you want to bring a conservative bent and are willing to address an argument in a reasonable way, you are welcome.

    1
  61. Hans says:

    @Steven L. Taylor:

    “What is the revenue is spent on policies that are not aimed at the whole (by your definition)?”

    Dear Mr Taylor, foreign policy matters, such as tariffs can not be considered
    an act of socialism. There is no mandate to consume tariffs, as the market place
    allows for the exercise of discretion, unlike taxes and redistribution of labor.

    If tariff revenue enters the treasury and is spent on the part rather than the
    whole, it would be what I would define as socialism.

    “Also: how do you defend the fact that tariffs directly interfere with the market?”

    I don’t. Tariffs, are a direct impediment to market efficiency and hence should
    be voraciously opposed. But I do agree with, The Donald, that America has made
    “stupid” trade agreements. This board is in unanimous agreement regarding this
    issue and it would be in error to argue the contrary.

    “So, you are capitalist, but not a free marketeer?” You can not have the one
    without the other. What value is a vessel without a rudder?

    “(This is, of course, possible, but seems odd given your generic socialism phobia).”

    A phobia of socialism is warranted given the study of history. Its production and
    outcome can be characterize as generic, as well as a known impediment to human
    economic development. Only sociopolitical theorists would argue the other side.

  62. Hans says:

    @MarkedMan:

    “FWIW, you seem to have more knowledge and a deeper perspective on this than your initial posts indicated.”

    It is by design, my good man. It is a form of salutation, since I am in the midst
    of strangers. I am a courrier from http://www.rtable.net/index/rt/economics/recent/
    as an irregular reader.

    A person reduced to name calling lacks wisdom and cognizant abilities. It is
    the domicile of radicals.

    “But if you want to bring a conservative bent and are willing to address an argument in a reasonable way, you are welcome.”

    Thank you for your most gracious greeting, M&M. The only gospel I seek is
    the truth and wisdom, irrespective of the fork in the road. Those whom evade
    them should be disgorged, with contempt.

  63. @Hans:

    A phobia of socialism

    “Phobia” (as in “irrational fear”) does seem to describe your approach to the subject. Especially since you have not provided a coherent working definition of the term.

  64. Hans says:

    @Steven L. Taylor:

    “Especially since you have not provided a coherent working definition of the term.”

    Neither have you, Mr Taylor. :<( Please do so. Bear you soul.

  65. Hans says:

    Steven L. Taylor says:
    Sunday, August 5, 2018 at 10:55

    @Hans:

    A phobia of socialism

    “Phobia” (as in “irrational fear”) does seem to describe your approach to the subject.

    Considering the dynamics, it is a healthy and warranted approach.

  66. Hans says:

    It is time to bid a goodbye, as the Taylor/Wolf/Verdon
    consortium have nothing more concrete to add.

    Dear readers, draw your own conclusions as to whom
    made the most effective arguments and parries.

    Ladies and Gentlemen, thank you and goodnight,
    Hans has left the building.

  67. @Hans:

    Neither have you, Mr Taylor.

    It is utterly bizarre that I should have to define what you are attacking.

    You are attacking X, but don’t seem to understand what X is. It is not my job to define it for you.