I do not have a degree in economics, but I do know something about buying, selling, trading . . . and economics. Furthermore I know a little about money . . . how to make it, invest it, and spend it. That sure doesn’t make me an expert, but it seems to me that a bunch of folks are speaking out and they are not experts either. So here is my two-cents worth.
The debate today is about tariffs and some folks are quite troubled over what President Trump (DJT) is doing. He has made reducing the U.S. trade deficit, which has expanded significantly in recent decades, a priority of his administration. He educated the American public about the huge trade imbalance between China and the USA, and spoke of how China unfairly devalues its currency throughout the election campaign. He was elected President and is now working at keeping his promise. He proposed tariffs on a couple of the larger items we import from China. Suddenly, one would thing he had declared war . . . and the critics step forward and explain his error.
DJT and his advisors argue that renegotiating trade deals, promoting “Buy American” policies, and confronting China over what they see as its economic distortions will serve to help shrink the trade deficit, create jobs, and strengthen national security.
Many economists and trade experts argue that trade deficits hurt the economy, and warn against trying to “win” the trade relationship with particular countries. Many of them foolishly declare the trade war “as being over” and announce that “China won it long ago.” Others believe that sustained trade deficits are often a problem, and there is substantial debate over how much of the trade deficit is caused by foreign governments, as well as what policies, if any, should be pursued to reduce it.
A trade deficit occurs when a nation imports more than it exports. For instance, in 2016 the United States exported $2.2 trillion in goods and services while it imported $2.7 trillion, leaving a trade deficit of roughly $500 billion with China.
The balance of imports and exports, or the trade balance, is part of the broader measure of the U.S. economy’s transactions with the rest of the world, known as the balance of payments. The economy’s balance of payments consists of the trade balance, or current account, and the financial accounts, or the measures of U.S. purchase and sales of foreign assets. The financial accounts include assets such as stocks and bonds, as well as foreign direct investment. These accounts generally balance, since a current account deficit—the trade deficit—results in a corresponding financial account surplus as foreign capital and investment flows into the country.
The fundamental cause of a trade deficit is an imbalance between a country’s savings and investment rates. Many economist explain the reason for the deficit can be boiled down to the United States—as a whole—spending more money than it makes, which results in a current account deficit. That additional spending must, by definition, go toward foreign goods and services. Financing that spending happens in the form of either borrowing from foreign lenders (which adds to the U.S. national debt) or foreign investing in U.S. assets and businesses—the capital account. Hence, China today holds $1.2 trillion in U.S. issued Treasury Bonds.
The exchange rate of the dollar is important in that a stronger dollar makes foreign products cheaper for American consumers while making U.S. exports more expensive for foreign buyers. Therein lies the purpose of China devaluing its yen.
DJT’s companies have done business successfully in China for years. He knows that nation and its economic system. I would argue that folks should just be quiet, watch as Trump does that thing he does as he moves to Make America Great Again. It has been many years since we have had a President who really understood business and trade. I can’t recall ever having a President recognized for his ability to negotiate business deals. The guys we have had were poor traders who always left us sucking hind-tit.
As the debate began upon DJT’s announcement of the new tariff, I watched as a former financial advisor to President Reagan was asked his opinion on the matter. He smiled and said, “I am just going to shut up! I have been opposed to everything Trump has done since he has been in office, and each and every time he has been right and I have been wrong. Now, I am just going to watch and learn!”
That would be pretty good advice for many of his vocal critics. The last thing that China wants is a trade war with us, or a troubled U.S. economy . . . they hold much of our debt. I bet they will come to the table and deal.