China, Trump, and trade

Here is a reality check for everyone concerning our current trade situation with China.

We import $4 of merchandise from China for every $1 they buy from us. China is not interested in buying more from us. We exported less to China in 2016 than we did in 2013.

China keeps promising to buy our exports such as beef. Remember how our Free Trade Mavens said that selling beef to China was going to "bring billions of dollars into America's cattle ranchers."

In reality China does not buy beef from us. They blocked the importation of U.S. beef for 13 years and only recently promised to reopen their market. Will China keep that promise? Don’t bet on it.

China imports from cheap-labor countries like itself, not the United States.

And what did we do for China during those 13 years? We opened our markets to everything they wanted to sell us. We gave them everything. They gave us nothing.

Our trade deficit with China 2016 was $347 billion, mainly in manufactured goods.

No ill wishes against the Chinese. I am glad to see that their hard work and intelligence is prospering them. However, allowing China to have free access to our market is insane.

Does anybody believe that the United States is any better off because of China? If China did not exist, and had not been a conduit for dis-employing the American workforce would we:

1. Have thirty million able-bodied adults between the ages of 16 and 65 out of the workforce because they can't find jobs?

2. Be called "the nation of despair" (we used to be known as the "land of opportunity") because life expectancy is declining due to our unemployed class seeking solace in booze and opioids?

3. Have a $20 trillion debt (headed toward $40 trillion) because 1/3rd of our workforce is unemployed/underemployed and eating government services instead of paying taxes to the government?

And it's only going to get a lot worse as these 30 million unemployed Americans age onto the Social Security and Medicare rolls.

On a purely substantive policy basis the only thing that bothered me of Trump's inelegant pronouncements was the one to do with trade. I am about as free trade as they come.

Moreover, I knew, or thought I knew that what is happening is that costs are being lowered as a result of comparative advantage and that is supposed to be good for everyone. It did trouble me that we are not replacing the jobs lost in this country with new well-paying jobs but I have attributed that to the slow decline of education and the skills necessary for higher technology, and a parallel decay of the work ethic, including the drive to better oneself.

Then I recalled a bit of history and it got me thinking about whether we are diagnosing the problem correctly. I recalled the fall of the Roman Empire, which among other things declined because of a decline in values and morals, and tellingly because the government could no longer afford the freebies its population had become used to, including their equivalent to our food stamps.

The Roman government had been able to provide free food because it was getting it at very low cost from its newly acquired territories, like, for instance, in North Africa and what is now central Western Europe. That lower cost supply and the freebies also led to the population becoming softer and losing some of its work ethic.

When that supply became difficult to maintain the government could no longer keep the Romans happy with free goodies and things went downhill.

Now look at the parallels with our foreign trade today. We can produce our own food but just like the Romans, we are increasingly becoming used to and dependent on cheaper goods produced abroad.

In the meantime, and just like the Romans, we are growing soft. We are not taking advantage of any kind of Ricardian comparative advantage. We are not keeping up with the replacements necessary for creative destruction to work, not even in technology because our education and skills development are not keeping up with the rapidly changing and growing needs.

I don't think closing borders and trade wars are the answer but frankly we are going downhill just like the Romans and nobody is coming up with good solutions. Having traveled that road myself, I do know that the school of hard-knocks, the school of actually having had to deal with and solve real world problems like Trump has, is far more likely to come up with good solutions than the abstract academic thinking world that policy wonks, politicians and academics live in.

They can keep doing studies until the cows come home and they will still not reach a consensus or even address the real facts, which are not quantifiable and therefore not amenable to incorporation into the mathematical models economists depend on.

Let's face the fact that the whole theory of comparative advantage rests on the proposition that if we stop making something we can import at a lower cost we will release resources for use in areas where we do have a comparative advantage, a win-win for all. But notice what that assumes.

It assumes that the shift in production from one product to another, including new innovations, will happen automatically, or as economists will say and always assume, the process is "frictionless."

The truth is that investment in new products the last ten or twenty years has slowed down as regulation has increased, the tax system has become more burdensome, and the investment environment has deteriorated with so many interest groups ready to obstruct new investments.

Add to that the fact that most countries that export to the U.S. have a value added tax they rebate for products sold here while our companies have to pay full taxes on everything they produce, including for export, and you have that we are at a notable disadvantage against the rest of the world.

There is one big truth in all of this, however, and that is that most of those wounds are self-inflicted.

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