Another Look at NAFTA
One of my readers proposed that problems US balance of trade issues started with NAFTA. Wrong!
Please consider Disputing Trump’s NAFTA “Catastrophe” with Pictures: What’s the True Source of Trade Imbalances?
Explaining Balance of Trade
Trump’s Mission Impossible
It is impossible for tariffs to fix problems caused by making the dollar the world’s reserve currency then removing the last constraints on global deficit spending!
If you support Trump’s tariffs as some sort of cure to trade imbalances, please read the above sentence over and over again until it finally sinks in that Trump is on a foolish path.
Historic Balance of Trade
From 1866 to 1968 the US generally had a trade surplus.
The US had huge trade surpluses during and just after WWI and WWII.
Why?
The productive output of Europe was destroyed. US production was not harmed in either war.
Although no US production was destroyed in the Korean War or the War in Vietnam, in both cases US production was diverted from productive uses to asinine uses, especially true for the Vietnam war.
Other nations were not stupid enough to get involved in a significant way, if at all.
Chinese Imports
Tut tut some may say. Harsh words indeed.
Their argument is that Nixon established trade relations with China in 1972.
OK let’s take a look.
US Imports from China did not soar until after China joined the WTO in 2001.
The US current account stared sinking well before NAFTA.
So, what is the cause?
No Enforcement Mechanism
Gold provided an enforcement mechanism against mercantilism, massive deficit spending, and huge government subsidies.
Starting August 15, 1971, when Nixon closed the gold window, there has been no enforcement mechanism.
That’s a problem that tariffs cannot possibly cure.
Why the Delayed Response to Nixon?
Nixon said it was “temporary”.
Guess what? It wasn’t.
Tariffs cannot possibly fix this issue.
Tariffs can only make matters worse by increasing costs on consumers and industries.
Trump is barking up the wrong tree, and loudly.
Mike “Mish” Shedlock
The author is wrong. He is proposing free trade on the same basis most economists do – and that is on the outdated theory of comparative advantage. But Ricardo was wrong! China is a much wealthier country, and its primarily because they base their economics in real time, without massive red-tape, in the moment, and with clear objectives that benefit the individual. Modern economists in the west have been wrong for a long time now and thats why you are seeing a tremendous transfer of wealth. Any article to the contrary is propoganda. They want to transfer the wealth because it benefits them, not you. Dont let them do it.
China: “that benefit the individual”
Are you joking? Communists hate the individual. It is totally collective. The Nomenklatura benefit. The “people” are nothing. Read Lenin, dude.
Excellent article Mish! Gee, I really wonder when ZionHedge will publish this…
Of course ZionHedge won’t post anything that is critical of Trump, because Trump is the best POTUS that AIPAC Dollar could buy!
“Best economy ever.” /sarc
If you haven’t been able to make money in the last 3 years, that’s your fault. Other than the Reagan era, these are some of the best years for Americans. Low unemployment, finally some wage growth and a growing economy.
The negatives are all where government has exerted the most control – education and health care.
In case you didn’t notice, ZH posted Mish’s article a few hours after you predicted they would not.
“Looks like my post disappeared (may be because of a link in it)”
Posts don’t disappear because of links. Hopefully it has reappeared. Thanks for noting the problem. I will report the problem.
Bring back the gold standard and let the chips fall where they may. Sure some people will get hurt in the short run but it is for the greater good. It might also be a good idea for the average American to learn to stop depending on the government for jobs, food stamps, medical care, public housing, government subsidized jobs, student loans, and all the other government giveaways that cause the government to borrow money from other countries and run huge budget deficits. It is time for the American people to learn to depend on themselves and return this great nation to a constitutionally correct government.
Pointless article.
Make an assumption and then find charts to support it. So what? We are where we are. What do we do now?
How about we set trade policy to benefit American citizens? Can we agree that that should be the goal?
Maybe if we can agree with that, we can have discussions on what policies are best.
“We,” as in you and me, can never arrive at the “best” trade policy for someone else, by “discussing” it. Instead, the only way to arrive at the best trade policy for America, which is after all noting more than a simple aggregate of Americans, is for each American to decide what is the best trade policy for himself. Me and Mish can never “discuss” our way to the best trade policy for you. Something which doesn’t magically change, even if we, OMG, like, vote on it and have, like, democracy and, like, stuff!
Did you even read the article? Mish actually is examining the assumption made by Trump and many others that tariffs have been deployed unfairly, and that new tariffs can fix the problem. The charts—ie the actual history of US trade & tariffs!—show that the assumptions are patently false. And that the event by which trade balance began to worsen coincided with the closing of the Gold Window.
The man who led China from Mao suits, cultural wars and Great Leaps Forward was Deng Xiaoping, starting in 1979. When he died in 1992, the stage had been set for future success of the Chinese mercantilist model still in use today.
In 1980, a good rule of thumb for manufacturing cost of a mainframe-class product was 80% unburdened material and an additional 20% burdening cost, most of that, labor.
If you had done a good job in technology development, strategic planning, etc., you could reasonably expect 50% gross margins in the marketplace, leaving 50% with which to pay for Engineering, Marketing, G&A, Service, etc. and post a profit to keep the doors open.
A typical, fully burdened North American corporate cost per manufacturing hour was around $23 in 1980; China’s was less than $2. That cost delta set off the stampede that NAFTA and WTO magnified.
When Deng opened China north of Hong Kong up for manufacturing, the local roads and infrastructure were primitive. Sixty miles over rutted dirt roads was not uncommon. BUT, their brains and work ethic were just as good as ours.
Fast forward 40 years and China has come from mud hut poverty and a $250 Billion GDP to $13.5 Trillion GDP, but insists on continuing to be treated like it’s 1980. I don’t blame them…nor support them.
We, the world, need a new agreement, not blunderbuss tariffs, but if the blunderbuss will get their attention, load’er up.
Don’t forget to mention their unsustainable debt. China is BROKE.
Looks like my post disappeared (may be because of a link in it) but my point was that US had already issued too many dollars before Nixon went off the dollar standard. The balance of payments was bad, even through trade was balanced. But by the 60s, it was obvious that US will fall behind in exports as other countries had recovered. Trumps talks about tariff and too many US obligations. During Nixon time US took on too many obligations and struggled to increase export.
As evidence I quote from an article from that time:
I n THREE YEARS, 1958-1960, the United States
experienced deficits in its balance of payments averaging $3.7 billion per year. During this period an annual average of $1.5 billion of U. S. gold reserves was
transferred to foreign ownership. These recent U. S.
payments deficits and related gold outflows have
evoked considerable public concern both here and
abroad with respect to the gold position of the
United States
The economy the last decade is basically a dead mutant held to together with hundreds of trillions printed out of thin air to prop well…everything up,with an army of central bank maggots eating away at it’s rotting corpse,what has he got to lose?
Mostly makes sense to me, but can someone describe why a gold standard makes mercantilism difficult?
Didn’t know it did.
Speculation
I think Russian autarky combined with currency swaps could crash the US empire. If Russia/China can supply anything needed, then they don’t need the US/West. Further, with currency swaps, they might get goods cheaper than using the dollar. We could see nations in defacto alliance with Russia/China to gain independence from US hegemony.
Expect more chaos now that impeachment proceedings are underway. I don’t think using tariffs as leverage is a bad idea but Trump is a terrible negotiator and not a smart guy. Being self-reliant as a country is a good thing. Relying on possible enemies for your supply chain and logistics should a war break out is never a good thing.
You mean like the past five administrations dealing with China?
“Being self-reliant as a country is a good thing. Relying on possible enemies for your supply chain and logistics should a war break out is never a good thing.”
Exactly. And people accuse me of TDS. I voted for the guy and clearly understand what he is trying to achieve.
“Relying on possible enemies for your supply chain…”
Respectfully, can you tell me why so many are in such a hurry to go to war with China?
It is economic war. China is giving support to islands affected by hurricanes in the Carribean. In Sri Lanka they helped build a port and the terms of the loan were that China gets Sri Lankan land if Sri Lanka cannot make debt payments on time. If you don’t think China is trying expand their territorial footprint as a measure of geopolitical warfare you need to read more.
It’s ironic because this is the self-reliance America has now forced China to consider.
And yet, Germany actually has a trade surplus with China.
Germany is a very tough trade negotiator and fiercely protects their manufacturing base.
Maybe a lesson in there somewhere…
Germany hasn’t done any trade negotiations in 40 years. It is a member of the EU. The EU negotiates trade deals on behalf of its members.
There are things like import licensing, quotas and restricted goods that Germany does solely control. And they act just like tariffs.
“The US had huge trade surpluses during and just after WWI and WWII”
…
Cruise missiles + B-52s = problem solved
Yes indeed.
Im sure you have your disagreements with Rickards, but his book is pretty clear: while 1939 Smoot-Hawley tariffs were dumb, the tariffs of 1861, 1864, 1890 and 1922 only strengthened America. Perhaps the Nixon gold cut-off in 1971 changed that calculus. Generally speaking, tariffs arent the bad guy. The whole world uses them to this very day (Germany and Japan for starters). And, above all, since 1980, the real jobs in America have started to disappear. How, why, what would be nice to figure out, but since we cannot possibly compete with 10 cents an hour labor, I still see the Chinese government as the adversary …
Not true, there are plenty of countries where labor earns 1/10th as much as the Chinese. There are other factors in play than labor arbitrage alone. Labor arbitrage has changed the world since telecommunications became ubiquitous, true. But there are more factors at play. Japan and Europe have not outsourced their manufacturing to the same extent as has America, and many European countries and Japan have registered major trade surpluses long after America was going deeper and deeper into trade deficits. And those countries all import all their energy. So the story is not as simple as you make it sound.
“So the story is not as simple as you make it sound.”
…
Yes. Might as well model weather for all the factors in trade play.
The genesis of deficit trade, however, is simple imo. The owners of capital in US sold out American workers to increase their profit.
Abetted by Wall Street’s financialization / securitization of debt which allowed leverage to run amok and keep game going.
The intention was to break the back of private sector labor unions. American factory workers were making a decent income and could control the share of wealth created by industry between capital and labor. That had to end. Big Finance, Private Equity and Hedge Funds wanted to take over industry and load it up with debt to enhance their income. That couldn’t happen with powerful labor unions.
European countries have a different political system and labor has far more power over government decision making. So offshoring, while still happening, couldn’t happy at any level close to the American level.
Germany is part of the EU. The EU sets the external tariffs.
There are things like import licensing, quotas and restricted goods that Germany does solely control. And they act just like tariffs.
Have you read the document? These are the same rules as apply to everyone else in the EU.
Have you read the document? It is a list of the plethora of import restrictions that GERMANY imposes.
When do you understand that as far as trade goes the EU is one country? There is one boundary, one set of import Tariffs, one rate of import tariffs. If you enter Greece, you have crossed the border into Germany, France Italy and the rest. If something is banned, or subject to quotas in Germany it is exactly the same in Greece.