Tuesday , March 21 2017
Home / SNB & CHF / Trump’s Plan to Close the Trade Deficit with China

Trump’s Plan to Close the Trade Deficit with China

Summary:
Rags to Riches Jack Ma is an amiable fellow.  Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl.  At a moment of peak inspiration, he executed his first search engine request by typing in the word beer. The search results had such a profound impact on Ma that he returned home to China and immediately started his first internet business.  After several tries he hit it big with Alibaba.  So much so that he’s accumulated a net worth of .1 billion USD – over 7.3 times more than President-elect Trump.  Not a bad rags to riches story for a poor Chinese school teacher. Indeed, Ma takes a shrewd, yet casual, approach to business.  Back in 2014, he got a little

Topics:
MN Gordon considers the following as important: , , , , ,

This could be interesting, too:

Keith Weiner writes Technical vs. Fundamental Analysis – Precious Metals Supply and Demand

George Dorgan writes Swiss Trade Balance February 2017: imports “outperform” exports

SECO writes Switzerland’s economic prospects remain positive

Mark O'Byrne writes The Best Ways to Invest in Gold Today

Rags to Riches

Jack Ma is an amiable fellow.  Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl.  At a moment of peak inspiration, he executed his first search engine request by typing in the word beer.

The search results had such a profound impact on Ma that he returned home to China and immediately started his first internet business.  After several tries he hit it big with Alibaba.  So much so that he’s accumulated a net worth of $27.1 billion USD – over 7.3 times more than President-elect Trump.  Not a bad rags to riches story for a poor Chinese school teacher.

Indeed, Ma takes a shrewd, yet casual, approach to business.  Back in 2014, he got a little sozzled up and bought China’s most popular soccer team from fellow Chinese billionaire Hui Ka Yan.  All in all, the soccer team purchase only cost Ma $192 million. As Yan recounted  of how the deal with Ma went down:

By accident I got him drunk.  I told him my Evergrande soccer team is planning to issue shares and raise money to support strategic development, will you join?  He said I will. We finished it in 15 minutes.

One of the great marvels of life is the direction in which money flows.  From whose hand is it given?  By whose hands is it received?  In general, money has flowed from West to East with nary an interruption for nearly three decades.

Trump’s Plan to Close the Trade Deficit with China

Jack Ma, founder and CEO of Alibaba, China’s largest e-commerce firm. Once he was a school teacher, but it turned out that he had enormous entrepreneurial talent and that the world of wheelers, dealers, movers and shakers was more his speed. Today he is one of the world’s small number of genuine self-made multi-billionaires. Photo credit: DFIC - Click to enlarge

How to Create One Million New U.S. Jobs

On Monday, Jack Ma visited the Trump Tower in New York.  There he met with President-elect Donald Trump to talk business.  Namely, they discussed how to loop the flow of money back to the West.

Jack and I are going to do some great things together,” said Trump following the meeting.  Reportedly, they intend to create one million new U.S. jobs.  Obviously, this is no easy feat.

Trump’s Plan to Close the Trade Deficit with China

It’s a deal, mah man! The president-elect, who to our great delight continues to be the greatest troll alive, lands yet another surprising PR coup by striking a deal with a well-known businessman hailing from the lands of yellow peril. Everybody seems happy. Photo credit: DPA - Click to enlarge

The business plan to pull this off includes a simple two-step approach.  As a matter of fact, it’s the sort of plan that was likely scratched out on the back of a cocktail napkin.

Step one involves signing up one million small and medium-sized U.S. businesses and farmers to the Alibaba platform.  Step two, the more organic of the steps, is predicated on Ma’s intuitive estimation that each company will subsequently hire a new person because of the added commerce.

Hence, that’s how Ma and Trump propose to create one million new U.S. jobs.  Given the track records of these two fellows, is there any reason to believe that this plan won’t work?

We know that U.S. consumers have a vast appetite for cheaply made Chinese goods.  On the flip-side, we’re discovering that Chinese consumers have a vast appetite for U.S. produce.  In fact, they’re already buying it via the internet.

U.S. produce sold on Alibaba’s platforms includes Pacific Northwest cherries, Washington State apples, and Alaskan seafood.”  Who would’ve thought?

Trump’s Plan to Close the Trade Deficit with China

Will you look at that… high quality Red Delicious apples from Washington State are sold in bulk at Alibaba (see blue rectangle highlights above). In fact, the US appears to be the largest non-Asian supplier of apples on the site - Click to enlarge

Trump’s Plan to Close the Trade Deficit with China

The U.S. has run a current account deficit, which reflects the amount of goods and services imported in excess of those exported, for the last 26-years.  In just the third quarter of 2016, the current account deficit was $113 billion.  In other words, the U.S. sent approximately $1.25 billion dollars more per day to other countries than it received through trade.

Much of this trade deficit, no doubt, is being racked up with China.  Perhaps the selling of cherries and apples on Alibaba by U.S. growers to Chinese consumers will help close the trade gap.  Unfortunately, it’s unlikely these trade volumes will be high enough to make a meaningful dent.

Another alternative to closing the trade deficit with China that Trump has mentioned involves jacking up tariffs on imports from China from about 3 percent to 45 percent.  According to Gene Ma, chief economist for China at the Institute of International Finance:

“The direct impact on GDP would be sizable.  The value added by export[s] is about 10 percent of China GDP, and [the] U.S. accounts for about one-fifth of China exports.” 

US Balance on Current Account

Trump’s Plan to Close the Trade Deficit with China

The US current account deficit: a reflection of the greatest credit bubble in human history - Click to enlarge

Of course, if Trump were to proceed with this tariff plan, China would likely impose its own tariffs on U.S. imports.  Thus Trump may succeed in closing the U.S. trade deficit with China.  But he’d do so at the risk of inhibiting trade and diminishing wealth.  That’s like cutting off one’s head to cure a headache.

As economist Henry Hazlitt explained many years ago, in Chapter 11 of Economics in One LessonWho is “Protected” by Tariffs:

“The effect of a tariff […] is to change the structure of American production.  It changes the number of occupations, the kind of occupations, and the relative size of one industry as compared with another.  It makes the industries in which we are comparatively inefficient larger, and the industries in which we are comparatively efficient smaller.  Its net effect, therefore, is to reduce American efficiency, as well as to reduce efficiency in the countries with which we would otherwise have traded more largely.”

Trump’s Plan to Close the Trade Deficit with China

Henry Hazlitt’s excellent book Economics in One Lesson is one of the best books ever written for the purpose of introducing laymen to sound economic theory and concepts. As Ludwig von Mises once remarked: “Economics must not be relegated to classrooms and statistical offices and must not be left to esoteric circles. It is the philosophy of human life and action and concerns everybody and everything. It is the pith of civilization and of man’s human existence.” Photo credit: Nast Archive - Click to enlarge

Chart by St. Louis Federal Reserve Research

Chart and image captions by PT

MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.


Tags: ,,,
0 0
About MN Gordon
MN Gordon
Making sense of the latest economic policy touted by the Federal Reserve or the U.S. Treasury is an exercise in befuddlement. No doubt about it, the economics trade is overcome with an abundance of nonsense these days. This is no coincidence. M.G. Gordon of Economic Prism looks to bring clarity to the muddy waters of economic policy.