Tags: trade | tariffs | trump

What About Foreign Trade?

What About Foreign Trade?

(Tobias Arhelger/Dreamstime)

Friday, 23 March 2018 10:08 AM Current | Bio | Archive

In one of my previous blogs, I outlined two major policy objectives of President Trump, first on foreign policy, to approach Russia as a counterweight against the ever growing China. Secondly, he was hoping to restore our past industrial might by reversing the outsourcing trend and by strengthening our competitiveness vis-a-vis our foreign competitors. Trump’s wise tax policy was a step in the right direction. His next step, to reduce the flood of imports, now about $2,575 trillion per year, by setting import duties or tariffs on steel and aluminum, turned out to be controversial.

A 25 percent duty on steel has the unintended consequence that it will raise the domestic cost of steel by 25 percent. The end result of this is that the U.S. consumers will have to pay for this by paying more for automobiles because they contain more expensive steel. This tariff does not hurt the foreign steel companies, whose profit margin did not suffer since the duty they had to pay is absorbed by the U.S. steel buyers since the now 25 percent higher import price matches the U.S. domestic price. Should tariffs be necessary, then they should be applied only gradually and selectively

There is however, one positive element in that with the tariff, the U.S. steel mill has a sudden increase in its profit margin, which can be used to modernize its factory or expand the steelmaking capacity. This is the outcome Mr. Trump certainly favored and which is part of his aim to restore U.S. production capacity.

Rather than tariffs, a quota system, limiting the tonnage of imported steel from certain foreign countries, might be more effective.

Ultimately, restriction of imports is no permanent solution to solve our negative trade balance and in addition disturbs the world’s trade pattern. The only long term solution is the restoration of our own production capacity in order to meet our domestic demands.

Any country which loses the capacity to produce sufficient goods to satisfy consumer demand is bound to fail.

In order to find the right perspective, it may be wise to look back on history.

About 50 years ago, in 1970, our yearly export amounted to only $56 billion or, to put it in perspective, exports amounted to only 1.2 percent of our then-national GDP of $4.2 trillion. At that time we imported only $45 billion, leaving a trade surplus s of about $11 billion. This is a sign that supply and demand were well in balance, a state of the economy which would be ideal any day. In those days, China was barely awakening and the Walmart company proudly displayed signs in their stores informing “all our products are made in the USA.”

Times change. Last year we exported $332 billion or 1.9 percent of our GDP of $17.27 trillion. However, we imported $900 billion, leaving a deficit of $568 billion, or 3.3 percent of GDP. Now, you have a hard time to find even one product that is made in the USA at Walmart.

The question is: Does the trade deficit matter? It does not, as long as foreign countries such as China and Japan are willing to sell us their products on credit. Since we have no extra cash or gold, we have to pay those countries in I.O.U.'s (treasury bonds). China alone has amassed over $1.3 trillion worth of U.S. bonds.

This entire trade deficit adds to our national debt which stood at about $20 trillion at the end of 2017. At the end of last year, the U.S. budget deficit stood at $666 billion (difference between the U.S. government’s annual income and expenses). Adding this budget deficit to the trade deficit, one finds that at the end of 2017, the national debt swelled by $1.234 trillion, or by 7.1 percent of our GDP, far exceeding the current meager 2 percent GDP growth rate.

While it may not be possible to reign in the U.S. budget deficit, due to high social expenditures, an effort should be made to at least reduce our excessive imports.

Depending too much on imports has other consequences. Disregarding the inconvenience to consumers, should imports be suddenly restricted by, say political events, one has to keep in mind the drastic effects on our national security when imports of special steels, noble metals, or vital electronic components are no longer available.

A final consideration, by replacing that extra $568 billion in excess imports with domestic products, we could employ 4 million more people here in the U.S.

Note: All data by U.S. Census Bureau

Hans Baumann is a licensed engineer in four states and a member of Sigma Xi, the Scientific Research Society. He is an adviser to the dean of the University of New Hampshire Business School. Dr. Baumann has published manuals on valves and was a contributor to many works including the "Instrument Engineers' Handbook" and the "Control Valves Handbook." He has also published several books on business management and German history, including "Hitler's Escape," which suggests that Adolf Hitler did not commit suicide and survived World War II. In his latest book, "Atomic Irony" he proves that the Hirshoma Atom Bomb contained captured German Uranium. For more of his reports, Go Here Now.

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A 25 percent duty on steel has the unintended consequence that it will raise the domestic cost of steel by 25 percent.
trade, tariffs, trump
Friday, 23 March 2018 10:08 AM
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