Kindergarten Arithmetic 101: Analysis of the Trade Debate

One mish reader stands out. He offers a real world example of what happens when trade collapses.

Kindergarten Arithmetic 101

If Trump extends his wall to cover the entire border, instead of just the one shared with Mexico, and then bans or punitively tariffs every single good that uses steel as an input, recursively, as well; he just may succeed in driving up the domestic price of final goods, to the point where both nominal labor compensation and nominal raw materials prices can be increased at the same time.

In doing so, he will ensure that not a single American made product of any kind, will be internationally competitive over time. This is exactly what the Latin American import substituting “structuralists” did, back in the 50s and 60s.

The above analysis from reader "Stuki" is obviously correct.

Disappointingly, there is debate over the obvious. And that's not the only flaw of economic illiterates.

Mathematical Explanation of Deficits

For a mathematical explanation of trade deficits, please see Trump's Tariffs Show He's "Clueless About Trade".

Mike "Mish" Shedlock

Good point. But the so-called free-market adherents have their heads so far up Ayn Rand's two-ton... book(!) that they think that is the real world.

I hope we can agree that the equal enforcement of the rule of law is good. After all, the exponential increase we have witnessed in corruption and hubris is the direct result of the perpetrators believing they can get away with their behavior.

If countries believe they can take advantage of our consumerism without consequences, they will continue their behavior. How is it helpful for our products to be taxed and made less competitive? If we can stop them from taxing our products by imposing a reciprocal tax, why is this bad? If the consequence is some of the products that we don't need anyway become to expensive and keep us from buying the crap and save instead, then I call that a twofor.

Whether you are a free trade advocate or not, it is shocking that people would support this increase in costs for US manufacturers, which will make them less competitive against foreign manufacturers. The net result will be less investment in US manufacturing, and fewer jobs. This is not a job protection policy, it is a job killer in the US.

Realist -- it could end up that way, but not necessarily. Remember President Trump's earlier admonition to the German automobile manufacturers -- If you want to sell your cars in the US, then build them in the US ! One of the big problems in the past has been the extreme layer(s) of job-killing redundant & contradictory regulations and arcane tax rules, which made it very difficult to build a new plant in the US. Notice that while all the smartest people have been telling each other in loud voices that the President is an idiot, he has been assiduously removing some of those pointless regulations. Maybe this time the tariffs will result in more investment in the US, more jobs created, more people working, more taxes paid. Maybe !

What we know for sure is that what we have tried in the last 40 years, with unilateral disarmament on trade, has not worked. Maybe it is time for realists to try a different approach?