By Kevin D. Williamson
Wednesday, December 07, 2016
‘Thank goodness for Kevin McCarthy!” isn’t something one
says every day, but in the matter of President-elect Donald J. Trump’s backward
and destructive plan to resurrect 19th-century tariffs, the gentleman from
California is invaluable.
Trump wants to impose 35 percent tariffs on . . .
somebody. He does not seem quite sure. One of the reasons for that is that
Trump has the question of trade deficits mixed up in his head with the question
of offshoring and, like most Americans, he does not understand either of them
very well.
The president-elect, writing on Facebook (because that’s
what presidents-elect do now), insisted: “Any business that leaves our country
for another country, fires its employees, builds a new factory or plant in the
other country, and then thinks it will sell its product back into the U.S. . .
. without retribution or consequence, is WRONG!” (Eccentric punctuation and
capitalization the president-elect’s.) “There will be a tax on our soon to be
strong border of 35 percent for these companies wanting to sell their product,
cars, A.C. units etc., back across the border.”
Pretty tough talk for a guy who just oversaw a
multi-million-dollar corporate-welfare giveaway to Carrier as his first
semi-official act.
It is not clear that the federal government even has the
power to do what Trump proposes — to lay on a punitive tax based on offshoring
decisions, as opposed to laying on a general tariff — but Representative
McCarthy has made it clear that congressional Republicans are not much inclined
to follow Trump down that particular rabbit hole, preferring to work on such
less exotic measures as corporate tax reform that would make investing in the
United States a more attractive proposition.
Of course, investing in the United States already is a
very attractive proposition, which is — almost everybody gets this wrong – the main reason why we have trade deficits.
Trade deficits are partly a question of consumer
preference — American consumers really do like Hondas more than Japanese
consumers like Buicks — but they are not mainly
a question of consumer preference. They are mainly a question of investor preference — and investors
prefer the United States, which is why there is almost twice as much foreign
direct investment in the United States as in China, even though China’s economy
has grown at a much faster rate over the past 20 years.
It works like this: Almost every advanced country does a
great deal of international trade. They have lots of imports and exports
because it is easier to grow sugar in Florida than it is in Norway and more
efficient to sew T-shirts in Bangladesh than it is in Switzerland. When Walmart
orders $1 million worth of flip-flops from a Chinese concern, those Chinese
gentlemen receive 1 million delicious U.S. dollars, which they are very happy
and grateful to have. But what can you do with U.S. dollars? You can buy stuff
from U.S. companies or you can buy assets from sellers who take U.S. dollars,
which ultimately means U.S.-based investments. (This is true even when you add
in all of the real-world complications such as foreign exchange.) If you are
that flip-flop entrepreneur in China, you probably have a very high rate of
savings, which is normal for people in poor, backward, and unstable countries.
There is lots of uncertainty in a place like China, and having a whole lot of
savings — especially dollar-denominated assets — is a rational response to
that.
But it isn’t only the Chinese. The Japanese, the British,
the Germans and the other Europeans, the Canadians, the Mexicans, and
practically everybody else in the world with a little bit of coin to invest
likes to buy American assets. And why wouldn’t they? The American economy is
the most wondrous thing human beings have ever managed to do, and all it takes
to get yourself a piece of it is a few greenbacks.
The mystery isn’t why so many foreigners want to invest
in U.S. assets but why Americans invest so little.
Trade deficits don’t happen because the wily Japanese
juke us on trade policy. They happen because intelligent people holding a
fistful of dollars very often decide to forgo the consumption of American consumer goods in order to invest in
American assets. In economics terms,
what this means is that the trade deficit
is a mirror image of the capital surplus.
A capital surplus isn’t necessarily an unalloyed good (everything in economics
is about tradeoffs), but it is a pretty nice thing to have around if you are,
say, an entrepreneur looking to build a new facility in Houston or Jacksonville
and looking for some investors to stake you.
If the economists are correct and trade deficits are
mainly driven by investment preferences rather than consumer preferences, what
would a big Trumpkin tariff actually do? Daniel Griswold of Cato considered the
case back during the 1990s trade panic: “Slapping higher tariffs on imports
will only deprive foreigners of the dollars they would have earned by selling
in the U.S. market. This, in turn, will reduce the supply of dollars on the
international currency market, raise the value of the dollar relative to other
currencies and make dollar-priced U.S. exports more expensive for foreign
buyers, thus reducing demand for our exports. Eventually the volume of exports
will fall along with imports, and the trade deficit will remain largely
unchanged.”
The trade deficit might remain unchanged, but there would
be a large cost attached: Without that foreign investment capital flowing into
the United States, money gets more expensive. That means entrepreneurs have a
harder time raising capital.
Having a fat taxman and starving entrepreneurs is not a
model for prosperity — the opposite is.
One of the problems, I suspect, is that people hear the
word “deficit” and they think of the trade deficit as being like the budget
deficit, i.e. a mounting debt that one day will have to be paid. It is
something closer to the opposite: We get more stuff in return for the stuff we
sell, and we get cheap investment capital on top of that. Foreigners get access
to a dynamic economy with a stable government (miraculously stable, considering
the jackasses in charge of it) and a stable currency. Everybody benefits.
But of course everybody benefits: Trade does not happen
between countries (which is why “trade deficits” are kind of a mirage, anyway,
a chimera of aggregation) but between buyers and sellers, each of whom stands
to gain from the exchange — if it were otherwise, the exchange would not
happen. That’s the really nifty thing about voluntary exchange.
Someone should explain this to the president-elect,
assuming it is possible to explain things to him.
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