Posted tagged ‘Peter Navaro’

The Wrong End Of The Hammer

November 21, 2018

The Trump Administration is twisting and turning trying to make America Great Again.  Tariffs and new Trade Agreements seem to be the tools of choice aimed at making things happen.  I wonder why neither tariffs or one sided, imposed trade agreements have not worked yet and why they should not be expected to work in the near future?

Trade Agreements openly negotiated combined with judicious use of tariffs where the situation demands have been key tools of international trade for over 100 years.  What makes these tools inappropriate today?

Nothing, except tariffs and trade agreements are injudiciously applied.

Managing international trade, somewhat like using a hammer, can have beneficial results if the hammer is used purposefully, and unsatisfactory, if not disastrous consequences if used incorrectly.  The Trump Administration “thinkers”, in keeping with the President’s “bully” preferred approach, decided to levy massive tariffs unilaterally on steel and aluminum imports.  The President claimed “national security” (that these materials were essential to the US national defense and as such the US needed healthy steel and aluminum industries).  

The “national defense”assertion was incorrect and laughingly irrelevant, but it serves little purpose to re-litigate this position. The Administration’s strategy was (and is) to claim something, impose a tariff, and then negotiate an agreement more friendly to America.  

International trade, in the ideal circumstance, involves anyone any where in the world buying or selling products or services from anyone or any place in the world.  The purchase price should reflect the seller’s selling price plus applicable taxes and shipping costs.  

Life, however, is not that simple.  Most countries might wish to protect certain products or industries and provide “subsidies” to those chosen products or industries.  These subsidies make these products and services less expensive than those same products or services produced by other countries.  So “country A” might impose a tariff on imports originating in “country B” claiming “country B” was in effect taking unfair advantage of “country A”.

The quarrel with China is different.  American companies discovered that China could produce goods at significantly lower costs and at the same or superior quality than the exact same product made in the US.  This simple discovery morphed into “outsourcing”, and in a few years lead to a huge trade deficit (China bought less from the US than the US bought from China).   

Today one goes to Pottery Barn, or Crate and Barrel or Macy’s and buys chairs, tables, underwear and guess what, the chances are near certain that these goods were made in China to Pottery Barn or Crate and Barrel or Macy’s specifications. In essence, US companies are driving imports from China.

On the flip side, China buys Boeing Aircraft or Grgich Hills Cabernet Sauvignon but those products are made to Boeing or Grgich Hills design and specification.  Chinese consumers buy these American products because they are superior to similar products available in China.  

In the classic international trade dispute, China might want to develop its own aircraft industry or wine industry and seek to depress the availability of US products.  Tariffs, which make the price of imported goods more expensive, are the tool of choice.

The Trump’s Administrations policy is to make Chinese (and later European) goods more expensive when bought by US consumers.  Hmmm.  If US manufacturers knew how to make chairs, tables, dresses, and underwear less expensively, wouldn’t US companies already have done that?  An even greater irony is that most every thing the US now imports from China could be imported from other low labor cost countries such as Viet Nam, Cambodia, Jordan, or Egypt.

So, what do you think Wall Street thinks about this?  Do investors see Americans, after more rounds of tariffs, as having more money in their pockets and able to buy even more US products and services?  I think not.

It is time to put the hammer away.