Trump’s Red Herring

Trump Ties

Donald Trump identifies some of the most important economic problems we face, but comes up short on solutions. Failing to emphasize sufficiently the real culprits he winds up focusing on red herrings.

First let’s look at the problem, as he sees it:

In an early interview, Donald Trump said this: “I know from a common sense financial standpoint that something has to burst.  When a country is losing billions and billions and billions of dollars and a year, and when other countries are making hundreds of billions, something is going to burst.”

Trump concluded that unfair trade deals and practices were responsible.  Other countries were getting rich at our expense.

But should we blame Mexico?

This item comes from Texas Monthly. Texan Erica Grieder writes:

“Last year, Texas’s GDP was about $1.6 trillion, meaning that our economy is slightly larger than Canada’s; in 1993 it was $444 billion. Since 2001, we have led the nation in exports, selling about $250 billion worth of goods abroad each year. If you doubt that NAFTA (North American Free Trade Agreement) has spurred the growth of Texas’s exports, consider this: Mexico is our largest trading partner, and Canada is second; exports to those countries have increased by more than 400 percent since NAFTA. In recent years, our state’s employment growth has been famously better than the national trend, and that’s partly because of trade. Sectors relating to international trade support roughly three million jobs in the state, according to a 2015 study by the conservative Business Roundtable group.”

Since NAFTA came into being in 1994, this shows that at least some of our manufacturers do benefit from it.

But we could still ask, “What do you say to the workers of Carrier Heating and Cooling when they found that their company was transferring operations and 1,400 positions from Indiana to Monterrey (in Mexico), and that they would soon be unemployed?”

If we examine Carrier’s reasons for moving, we see that a company official, Chris Nelson, explained that one of those reasons was the “cost and pricing pressures caused partly by new regulations.”

We could also point out to those workers that Indiana is exporting tens of billions worth of goods and services, and that its top three export markets are Canada, Mexico, and China.  So if they want a job in a nearby company, trade is their friend.  Foreign owned companies have also built manufacturing plants in Indiana.

In the debate with Hillary Clinton, Trump pointed out a defect of our trade agreement with Mexico.  He said

“Let me give you the example of Mexico. They have a VAT tax. We’re on a different system. When we sell into Mexico, there’s a tax. When they sell in — automatic, 16 percent, approximately. When they sell into us, there’s no tax. It’s a defective agreement. It’s been defective for a long time, many years, but the politicians haven’t done anything about it.”

Various critics I’ve seen say this is a misunderstanding.  If you buy a car in the U.S., you pay sales tax.  The company you buy the car from then hands this tax over to the U.S. government.  If you buy a car in Germany, you pay a VAT, which could be the same amount as the sales tax, however, the company doesn’t  hand it all to the government, because it has already been charged tax when it bought parts from its suppliers.  Supposedly in the U.S. the American company is NOT charged tax when it buys from its suppliers because it can use a “resale exemption”.

If Germany exports the car to the U.S. there is a sales tax, but that tax is going to the U.S. government, not the German government.  So the Germany company doesn’t get compensation for having paid a tax on the parts it got from its suppliers.

So the WTO (World Trade Organization) has decided that it is only fair that exporting companies don’t have to pay VAT tax to their suppliers.  Those companies should get a rebate.

Conversely, if we sell a product to a VAT country like Mexico, according to Tim Worstall at Forbes, “They (the Mexicans) have to pay the full VAT whether something is an import or domestically produced. ”  So the Mexican consumer is not penalized when he buys an American product.  So there is an even playing field.

The WTO did rule that European planes (Airbus) were unfairly subsidized by European governments, but that is another issue.

As far as fairness goes, we are not pure free traders either.  We subsidize agriculture and we subsidize various industries like Boeing, GM, Goldman Sachs, Dow Chemical, Google, Disney and others.  Plus, we have many tariffs already in place in order to protect various industries that lobby for them.  As far as currency manipulation, we engage in “quantitative easing” which involves printing vast amounts of money.  In contrast, China is NOT devaluing its currency at the moment, but actually boosting it.

So let’s look at China.

Trump is not all wrong in saying that China does not play fair.

Richard Clarke, former White House counter-terrorism adviser, told ABC News that “The Chinese have attacked every major U.S. company, every government agency, and NGO’s. Their attacking the Chamber of Commerce is part of a pattern of their attacking everything in the US. If you’re working on U.S.-China relations with an NGO, government agency, you can be sure the Chinese are reading your emails and on your computer,”

At one point, U.S. Chamber of Commerce chamber employees were surprised to see one of their printers printing in Chinese.

What about the trade deficit? Robert Reich (Labor Secretary under President Clinton) said this in 2008 “The real problem is that America as a whole is living beyond its means. If anything, China has been an enabler, lending us heaps of money to continue our buying binge including homes with low-interest mortgages.”

Is a trade deficit really a bad thing?  After all, the dollars that go abroad to purchase foreign goods and services (imports) and foreign assets (outward investment) are matched almost perfectly by dollars coming back to the United States to purchase U.S. goods and services (exports) and U.S. assets (inward investment). Any trade deficit (net outflow of dollars) is matched by an investment surplus (net inflow of dollars). That investment inflow ideally would undergird U.S. investment, production, and job creation.  The problem arises if the inflow is being used to subsidize our government’s profligate spending, or consumer debt, or to buy assets that we would rather China or Russia not own.

But our economy has done well for many years with large trade deficits.


Trump is correct that all is not well in our economy.

He recognizes that our 20 trillion dollar budget deficit must be addressed, and he criticizes our unusually low interest rates.

But we should address those problems without assuming that unfair trade practices are the central problem.

If we are concerned about trade deficits we should have an economy that encourages savings and long-term thinking, instead of a zero-interest economy that encourages consumption and gambling on the stock market.  We should reduce the drag that government debt, whether city, state, or federal, has on the economy.

As Trump correctly noted in the debate, regulations in America are suffocating businesses.

A liberal skeptic told me that blaming regulations is just a diversion from recognizing the inherent problems of capitalism.  But look at the numbers:

“According to the Competitive Enterprise Institute, the cost of complying with government regulations is astronomical. Federal regulations alone cost businesses an estimated $1.75 trillion in compliance costs. The Federal Register needs over 80,000 pages to explain all federal regulations.”

It is easier to get things done in China.  Deb Weidenhamer,  founder of Auction Systems, has had experience with Chinese bureaucrats.  She says this about our own bureaucrats: “…when I bought a company in California last year, I was struck by how similar the bureaucratic hoops were. There actually were more of them than I typically face in China. I took to making jokes about how perhaps those who talk about the “Communist State of California” were on to something. It took more approvals, paperwork and time to buy an existing company in California and have its business licenses transferred than to open a new, wholly owned foreign business in China.”

The legal climate in the U.S. for business is not good either.  In 2000, Wal-Mart was sued nearly once every two hours, every day of the year.  Wal-Mart is a big business, but small business does not escape either “The tort liability price tag for small businesses in 2008 was $105.4 billion dollars.”

The environmental movement is to a great extent, a movement against economic activity.  Mandates for energy efficient cars that consumers do not want have hurt the automakers, and the mandates for solar and wind energy (and against coal and fracking) raise the price of energy.  If you raise the price of anything as basic as energy, many products that depend on it become more expensive, and less competitive.

And there are social problems.  Any business owner thinking of relocating to – let’s say – Charlotte North Carolina, would look at the riots on TV there and think again.

The concern with Trump is that by trying to make trade fairer, he would end up putting a trade wall around the country.  Obviously this would hurt the many American jobs based on exports.  The question is not whether we are for “America First”.  Of course any country has to look after its own interests.  Instead of the carrot and stick approach, we should rely completely on the carrot.  The best approach to providing good jobs in the U.S. is not by creating many new tariffs (which ultimately are a tax on the American consumer) but to provide businesses with a friendly, low tax, safe, reasonable-regulation environment.


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