Wednesday, April 26, 2017

Trade Lies. How Ross and Trump use free trade myths to put us in a deeper hole.

Wilbur Ross, our new Secretary of Commerce, is similar to the President in his ability to flat-out lie. He recently wrote that the US has the lowest trade barriers in the world. We don't. You can refer to the World Bank for that data....I am sure he knows about the World Bank. At least I hope so. Canada, Israel, the European Union, Japan, Indonesia, Belarus, Malaysia, Paraguay, and more all have higher tarrif rates than the U.S. Also, if you split it down to economies, instead of countries, Hong Kong and Singapore are the two most open economies in the world. These two large provinces in China support a huge amount of U.S. economy as a result.

Politicians play upon free trade myths to the detriment of our country and to our economy. Ross is correct that we havethe largest trade deficit in the world — $500bn annually. However he does not address what this really means. We have a large economy. A large trade deficit will occur in a large economy, folks.

The fact is that trade deficits mean many things. For a reference, take a look at this article at Investopedia. Trade deficits are in sync with our GDP. If we have a low GDP, one take-away is that we don't have a healthy index of product developed here in the U.S.  (The other take-away would be that we are a demand-driven economy and part of the low GDP is a result of that). Policies promoted by the current administration, and the past administrations (both Democrat and Republican) do not support the increase of product development in the U.S. At all. That would require policies that promote healthy local economies, instead of policies that promote Mega-international corporate growth.

Don't be fooled by reports that are economy is improving whenever the trade gap shrinks either. This is not a reliable tool for predicting an economic growth that benefits the majority of Americans. It is a predictor of growth for those who are super-investors, not consumers. It is not a predictor of growth for the average JoAnn or Joe, or for jobs. The recent shrink in the trade gap was due to weak imports and had nothing to do with an increase in our economic productivity. In fact it was another measure of the common person's inability to continue the same pace of spending on goods. A shrinking trade deficit also suggests a relative decline in foreign investment in the United States. We cannot afford that right now.

As reported in the Mises Wire, the trade gap is "a measure of relative consumption and foreign investment in the United States" and "a factor in the shrinking trade gap is the fact that slowing domestic demand weighed on imports. In other words, Americans apparently had less money to spend on goods and services imported from other countries. Did Americans just decide to spend more money on domestic goods instead of foreign goods? It's possible. But the more likely explanation is that Americans simply had less money to spend."

This gets to the root of truth. Don't pay attention to the spinning arms of people like Ross and Trump. Pay attention to what is right in front of our own eyes. We will become a healthy economy when policies shift away from protectionism for the wealthy. Trump has given every indication that he intends to continue to stack the deck in favor of those who have nothing to lose, and the cost for this will be paid by those who have already lost a lot.