Last week, I read an article in the National Review entitled “Understanding Trade Deficits” by Kevin Williamson. What I assumed would be a respectable piece from a reputable publication, turned out to be something so devoid of truth, so devoid of any semblance of national strength, I felt compelled to provide a full critique. Enjoy.
The article begins, “The problem with all this trade-deficit talk is that nobody seems to know what trade deficits are, what they mean, or what causes them.” And yet, over the next couple pages of writing, we are supposed to listen to Kevin Williamson on the subject – who is highly educated in . . . English Literature.
The article continues “A trade deficit is nothing like a budget deficit. Each year’s federal budget deficit adds to the total debt owed by the federal government. Trade deficits don’t do that, which is one reason why “trade deficit” is not a very useful term.” Clearly demonstrating his complete ineptitude in this subject by sentence #2 of the article, Kevin Williamson purports that a trade deficit is not analogous to a budget deficit. However, they are in fact very similar. A trade deficit is not a “bookkeeping entry”, it is a net outflow of a country’s wealth. For example, in 2017 America ran a trade deficit with China of roughly $400 billion. This means, the country shipped out almost half a trillion dollars of it’s wealth. How can we afford to spend $400 billion more than we receive? Sell our existing wealth, which mean’s China uses those dollars to purchase assets in America such as infrastructure, businesses, and real estate. Or we raise $400 billion, which we pay back later. In either case, just like a budget deficit, we leverage our future economic wealth in order to enjoy the benefits today.
Kevin elaborates, “Far from being victimized by such trade, Americans are enriched by it. We get $118 billion in German-made goods in exchange for $54 billion in U.S.-made goods, which leaves $64 billion over to invest in American assets.” But wait, now the Germans get $64 billion to invest in American assets. How great! What is better than German’s buying, for example, General Motors for $50 billion and for the rest of time selling cars to Americans and shipping the billions in profits back to Germany? Oh, I have an idea, waiting until they get their $64 billion next year, so they can buy Ford too. America doesn’t need to own our businesses or have wealth if we can keep getting cheap German-made goods!
Slightly switching gears, Kevin says, “BMW, like Mercedes-Benz and General Motors, gets a lot more value out of each worker than it used to, through massive investments in robotics and other technology. American factories produce more than they ever have — our factory output has nearly doubled since 1990, and is much higher than it was in the so-called golden age of the 1950s and 1960s — but they need fewer people than they once did.” Technology has enabled great strides in our productivity for centuries. However, the Germans are not radically more productive than we are in building cars or machinery. So why would we have a trade deficit with Germany in these areas when there is no meaningful difference in productivity? The contributing cause is because the Germans use a value-added tax system, which is specifically designed to subsidize their exports to the rest of the world. But hey, as long as it’s not a tariff, right Kevin!?!?
Switching to Asia, Kevin claims, “China, which gives the Trump administration such agita, has cut its average tariff by nearly 90 percent since the 1990s, from a very high 32.2 percent to 3.5 percent — and its economy has thrived during that period.” Thanks for the thorough explanation of Chinese tariffs, Kevin. Now let’s talk about the myriad of other information you excluded. First off, while Kevin makes it seem like 3.5% is a low level of tariffs, but that is double the tariff % America applies. Additionally, China has a huge amount of non-tariff barriers. For example, some companies like Google, Facebook, Youtube, Amazon Japan and the New York Times are simply banned. For other companies like Tesla who want to sell their cars in China? You are forced to create a joint venture with a Chinese company, so aside from stealing American technology, they will also take half the profits. Furthermore, if Americans want to buy, say a Chinese financial company, they cannot more than 25% of a large publicly traded company, or 49% of all others.
So here lies the dilemma of the situation: if trade deficits are not bad economically, why do the Chinese and Germans take explicit steps to ensure America has one? Do they understand that a huge inflow of wealth into their countries is beneficial to their long-term prosperity, or does it really not matter like Kevin Williamson argues?
Now as the Trump administration levies tariffs against our trade partners, Kevin Williamson opines “the Trump administration is doing so for no good reason, because it doesn’t really understand trade deficits.” Surely the tariffs aren’t a response to the unfair economic situation that has developed over decades of hostile actions by foreign countries. It must be that Robert Lighthizer, Peter Navarro, Steve Mnuchin, Wilbur Ross, and the rest of America’s economic leadership truly do not understand trade deficits as well as Kevin Williamson. Thank you for showing us the light!