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It's Convenient to Blame Bad Trade Deals for our Problems. It Just Isn't True.


Our trade imbalance is the result of voluntary choices made by free people. Even Donald Trump can't change that with a "better deal."

(Photo by Chung Sung-Jun/Getty Images)

The presidential nominating contests have once again brought the issue of trade front and center.

In Ohio the “free” trader, Gov. John Kasich, defeated the “fair” trader, Donald Trump. Trade likely had little to do with the outcome.

As is so often the case, the labels are meaningless. Nothing is “free” and what is “fair” to one is seldom “fair” to another.

Trump has argued that China is beating us out of $503 billion and Mexico is taking $58 billion from us in trade. He promises to make better trade deals.

At the risk of sounding remedial let me point out that our balance of trade is determined by voluntary choices you and I make every day, not the government.

We have a trade deficit with China and Mexico because our economy is relatively more robust than theirs and our citizens spend more than their citizens. We buy more from American manufacturers and we buy more from other nation’s companies too.

In 1979 we had a positive balance of trade with Mexico. Did we covet their economy? No, but our economy was in the tank and we weren’t spending money, at home or with Mexico. Our economy recovered in the 1980s, and we had a negative balance of trade with Mexico once again and that was a good thing. We had more money to spend than they did.

 (Photo by Chung Sung-Jun/Getty Images) (Photo by Chung Sung-Jun/Getty Images)

When we buy imports from China we pay for them in dollars. China workers are paid in Renminbi. So they are awash in dollars that have no value until they are spent in a dollar denominated economy.

Some of the dollars buy Caterpillar tractors and Boeing airplanes. Dollars not spent do not compete with our dollars putting upward pressure on prices, thus keeping inflation in check.

Some of the dollars are exchanged for gold or silver or Eurodollars. That only means that a different entity is holding dollars waiting to be spent in America.

Many are used to buy U.S. Treasury bills. We are grateful for that. That helps to keep our interest rates low. We owe $19 trillion and a one-half percent increase in interest rates has real consequences for our budget deficit.

Ultimately the Chinese will buy U.S. assets with their dollars. A Chinese insurance giant owns the Waldorf Astoria and just recently purchased a luxury hotel group from Blackstone Group LLP.

Nearly 40 years ago the Japanese were flush with U.S. dollars and bought Pebble Beach and Rockefeller Center plus homes and U.S. farmland.

Many Americans were threatened by foreign ownership of our assets. I wasn’t. They can’t vote in our elections – at least not yet – and they can’t take the buildings and land home.

Several years later Mitsubishi defaulted on its bank loan and walked away from its $2 billion investment in Rockefeller Center returning the control back to the Rockefeller trust.

Pebble Beach was sold two years after it was purchased for a significant loss and seven years later was purchased by a group of Americans led by Arnold Palmer and Clint Eastwood. Neither Rockefeller Center nor Pebble Beach was ever angrily shipped back to Japan.

For all of the bluster about “better deals” nothing is going to impact the balance of trade unless the government decides what we can and cannot buy and when we may to do so.

That will limit our choices and increase our costs, but it may have a temporary impact on that meaningless balance of trade that we demagogue about during campaigns,

Trade agreements are designed to do one thing and one thing only. Reduce barriers to trade. Some barriers are economic such as tariffs. Some are political or cultural. One nation may subsidize an industry more than another. (We protect sugar.) That will become part of the negotiation.

The liberals insist on adding provisions dealing with worker conditions and environmental impact. Those are political genuflections to the unions that live in constant fear that someone somewhere in the world is going to get a job without paying union dues.

Trump has insinuated politics into the equation by threatening Ford with a 35 percent tax on their cars made in Mexico and Apple with a 35 percent tariff on their iPhones made in China.

We have been down this road before. The Smoot-Hawley Tariff Act of 1930 was intended to protect American farmers from foreign competition. Europe responded in kind leaving our farmers with no markets for their crops and the result was the dust bowl of the 1930s that became the symbol of the Great Depression.

We have the lowest tariffs in the world. Other nations have access to our markets. It is in the interest of American producers and workers for us to enter into trade agreements to gain access to their markets.

Of course, it is easier to demagogue this issue and blame “bad deals” for our problems. It just isn’t true.

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