TRADE POSTURING, TRADE DEFICITS AND A LOTTA WIND
Will the U.S. play the Section 301 card against China? Doubtful. To refresh your memory, Section 301 is an unfair trade enforcement provision of the 1974 U.S. Trade Act. These things mean little to China and more likely even less to President Trump. Both Xi Jinping and Trump know that in the high stakes game of trade negotiations, geopolitical events and concerns–such as North Korea—can quickly become the tail that wags the dog. The Chinese are incredible negotiators and hold many aces in that region of the world. It’s difficult to know exactly where they stand on North Korea but the bigger deal we make out of it, the stronger they will feel their hand is in trade negotiations.
I may be wrong, but 90 percent of President Trump’s trade rhetoric may just be pre-negotiating posturing. Keep in mind that developers are master negotiators. For example, if building a 700,000-square-foot project, they may ask approval for 1 million square feet knowing that the other side feels like they scored a “win” by chiseling the project down to 700,000 square feet. But if the developer started out asking for 700,000 square feet, he or she may only end up getting permitted for 500,000. Could that be what’s on President Trump’s mind when he declares NAFTA is going to need major rewrites?
I’d like to think so. We import $59 billion more in goods from Mexico than they import from us. More importantly, Mexico imports $143 billion more in aggregate
from other nations than they import from the States. Assuming they can source these same goods from the U.S., this means that there is $84 billion in wiggle room for Mexico to increase their imports from the States. Now, if you are President Trump, what are “best practices” for negotiating an increase in that delta? Answer: You first have to get them to think you are serious about cutting off their exports, otherwise they have very little incentive to play ball.
Interesting to note is that for this strategy to work, people have to work themselves up into nothing short of a “trade hysteria,” which they have. And the irony of ironies is that the media have played right into the president’s hand. By running around with their hairs on fire, the media have set the stage Trump may have hoped they would, namely that Mexico (and some in the trade industry) actually believe he will go through with it, which may be the scenario he needs to successfully negotiate. We have never had a president who is as skilled in business—or the art of the deal—as President Trump. As they say in China, this is his rice bowl. Now if President Obama had said these things, I would have been worried because he had zero business experience and did not believe in American exceptionalism. My prediction? U.S. exports to Mexico will grow by $20 billion over the next several years.
The Wall Street Journal is my favorite newspaper, but it was wrong on its trade deficit commentary. In their op-ed piece, they maintained that a trade deficit is no big deal and, in fact, it can be a good thing in that it’s a sign a nation’s economy is healthy as evidenced by its citizens’ robust spending on consumer imports. But all this ignores the 600-pound gorilla in the room. At its very essence, a trade deficit is empirical evidence that at least some sectors of the country’s manufacturing industries are in decline, and not necessarily from lack of talent or innovation or unwillingness to take risks or work hard. No, the decline can be from over-regulation and taxation.
Now you can argue that a trade deficit simply means that other countries are able to produce certain manufactured goods–like flat screens—more efficiently and hence, why not import if the price and quality are right? But that ignores the fact that America is unable to produce the same product at the same price point and quality. Why are four out of five flat screens sold in the U.S. from imports? Can’t we make flat screens just as well and be the world’s low-cost supplier of them? Of course we can. It’s not all about labor costs. We do have the technology to automate. And creating the machines that automate manufacturing can create American jobs all the way through the supply chain. Trade deficit numbers are true indicators of the overall health of our manufacturing and the regulations and taxes that can inhibit.
Let go the top-gallant sheets! In a strange Back to the Future twist, Maersk Lines is going to experiment with partially powering one of its ships by rotor sails. The project will be the first installation of wind-powered energy technology on a product tanker vessel, providing insights into fuel savings and operational experience. Expectations are that it could save 7 to 10 percent of fuel costs. It’s not exactly a return to the glory days of trade in clipper ships, but it will add a bit of fresh wind to the industry.
Relax. China Isn’t Taking Over!