By Ben Trichilo
Continued media brandishing of the term “Free Trade” ignores the reality that the world has regulated, and not free, trade. Where there is free trade, trade deficits are self-correcting: the currency of the deficit country becomes devalued, making its goods more competitive, causing an increase in exports. Imports decrease because they become more expensive. Trade deficits therefore become self-correcting.Reality is much different. We have regulated currencies and interest rates. Currencies do not freely float. In the case of China, the value of their currency value is controlled by the State. Trade imbalances for strong, or manipulated currency countries can be perpetuated, and those benefitting from the imbalances become powerful lobbying/special interest groups. Dependence upon increasing quantities of foreign produced goods causes production/manufacturing jobs to be transferred overseas, resulting in the loss of many quality jobs.
Trade imbalances of the type being incurred annually by our Country (net of $500 billion per year) are not sustainable. Eventually, the net worth of America will be owned by other countries, and the erosion of production/manufacturing jobs will continue. Because the world has regulated, and not free trade, there is no self-correcting mechanism. Because lobbyists and multi-national companies profit from the status quo, the trade imbalances continue.
Frank Berlage’s article “Why Fixing Trade Deficits is Essential,” in the January 9, 2017 Barron’s addresses the consequences of not addressing the problem:
If we fail to mitigate our long-term trade deficits alongside our cumulative budget deficits, we will eventually destroy many of our remaining industries, as well as our military.
Berlage proposes automatic import limits when there is a trade deficit with any country for more than five years. There would be a mandated 20% reduction of imports until the trade deficit is corrected. Whether the mandate would go into effect immediately with a country where there have already been five years of consecutive trade deficits (e.g., China) is not addressed. But the remedy may be too little too late.
Why not allow the trade deficits, that have been occurring for 40 years, to continue? Some say they do not matter. But according to Berlage, and the historical record:
no country has incurred perennial trade deficits, imported and borrowed more than it exported or lent, and seen its currency live to tell about it.
We are sacrificing our manufacturing base in order to enjoy the transient benefits of cheaper goods from other countries. Sooner or later, there will be consequences: foreign ownership of businesses, farmlands, and other assets; the prices of the goods formerly purchased so inexpensively, will increase dramatically.Donald Trump is attempting to reverse a trend that is not sustainable, and will eventually bankrupt the Country. He seeks fair trade and is not opposed to free trade, currently a non-existent theoretical concept. His policies are a viable alternative to leaving future generations in a predicament that cannot be fixed.
Trump does not seek blanket tariffs. Companies that choose to locate production overseas, to avoid paying competitive wages and to escape environmental regulations, will be subjected to tariffs for the products that they attempt to sell in the United States. Based upon trends that have continues for far too long, I believe that is very sound policy.
Tariffs may be selectively imposed on countries that dump products or manipulate their currency. Such policies are not new but have become atrophied by administrations (Democratic and Republican) anesthetized by lobbyists and special interests. The risk of a trade war is minimal. The net exporting countries have much more to lose than us, and will not risk killing the goose that lays their golden eggs. And Trump is a master negotiator and deal maker. Successful business leaders get things done and abhor gridlock. Too many of our current leaders either do not understand, or do not know how to negotiate. Tough sounding positions are often the beginning, and not the end, of an agreement.
Trump’s policies will be pro-growth and will not cause a trade war. A country that requires a continuing trade imbalance is not a good long-term trading partner. Reduction of tax rates, coupled with reduction of job killing regulations will provide strong incentives for companies to remain here. Trump’s policies are long overdue and will provide a viable alternative to self-destructive trade.
We will be wise to follow the prophetic warning of Rudiger Dornbusch, quoted by Berlage:
In economics, things take long to happen than you think they will, and then they happen faster than you thought they wood.
Trump will reverse a long-term trend that benefits only special interests and produces short-term benefits to the detriment of the Country. Any increase in prices created due to restoring trade equilibrium and balance will be more than offset by the benefits: greater domestic productivity and increased employment opportunities.