Lots of folks are hyperventilating about the possibility of a trade war with China. I see this as a result of wide-spread misunderstandings about the economics of trade between countries.
So let me start from the basics. There are three and only three ways to create wealth. What is wealth? It is the stuff that we use, that we eat, that we build with. Cars. Medicines. Clothing. Tools. Vegetables. Oil. Fish. Electronics. And there are only three ways to create them.
1) We can grow wealth. Start a farm. Get seeds and begin growing vegetables in the backyard. Plant acres of trees.
2) We can extract wealth from nature. Dig an oil well. Go fishing. Cut down trees. Mine for gold.
3) We can manufacture wealth. Build a car manufacturing plant. Knit sweaters. Build houses. Make electronic gear.
Let me refer to these three ways to create wealth as “farms, fishing boats, and factories”. And of these, the most important is manufacturing—you cannot generally triple the amount of food from an acre, or triple the amount of oil coming from a well.
But you can triple the output of a factory without breaking a sweat—so manufacturing should be looked after and cared for and promoted at every opportunity.
Everything else is services—bankers, barbers, bookkeepers, surgeons, stylists, singers. They are important, some are life-and-death important … but they don’t create any wealth.
Now, if a country is smart, it will do everything it can to build and strengthen the part of their economy that is “farms, fishing boats, and factories”. Unfortunately, somewhere around 1985, the US got really stupid and bought into the “free trade” and “globalism” fairy tales … and since then, our manufacturing sector has gone to hell.
And why not? When a company can move a factory to Mexico and pay their workers $3 per hour with no workmen’s compensation insurance and no tariffs when they sell their goods in the US, why not? They’d be foolish to do anything other than move … and as a result, the “Rust Belt”, the industrial heart of our country is either dying or dead. With the factories gone to Mexico and China, the towns have nothing to keep them going.
Signing on to agreements like the North American Free Trade Agreement (NAFTA) and the World Trade Organization (WTO) is one of the stupidest things that the US has ever done … and it has cost us greatly. Here’s Presidential Candidate Ross Perot, who like President Trump was a businessman rather than a politician, speaking very presciently on the subject in his inimitable style:
Now, this objection to “free trade” and “globalization” is not a new idea. In 1684, an economist named Philipp von Hörnigk wrote a short essay with the lovely title of “Nine Points on How to Emulate the Rich Countries”. Here are some of his prescriptions for how a country gets rich, recommendations that are even more important today than they were in 1684. First, here is his recommendation about manufacturing. In all cases, the emphasis is mine:
… all commodities found in a country, which cannot be used in their natural state, should be worked up within the country; since the payment for manufacturing generally exceeds the value of the raw material by two, three, ten, twenty, and even a hundred-fold, and the neglect of this is an abomination to prudent managers.
Manufacturing is the easiest way to produce wealth, and thus we should do it ourselves and not farm it out overseas.
And that long ago, Philipp foresaw the huge trade deficits that our economic stupidity have brought us:
… the inhabitants of the country should make every effort to get along with their domestic products, to confine their luxury to these alone, and to do without foreign products as far as possible (except where great need leaves no alternative, or if not need, widespread, unavoidable abuse, of which the Indian spices are an example).
Unfortunately, we have ignored this excellent advice and addicted ourselves to foreign products. He goes on:
… in case the said purchases were indispensable because of necessity or irremediable abuse, they should be obtained from these foreigners at first hand, so far as possible, and not for gold or silver, but in exchange for other domestic wares.
In that paragraph, the author is warning against running up a trade deficit as we have foolishly done. He says that we should sell the same amount of goods overseas as we buy. He then says
… such foreign commodities should in this case be imported in unfinished form, and worked up within the country, thus earning the wages of manufacturing there.
Sadly, we are doing the exact opposite of this excellent advice—we are exporting raw materials and importing manufactured goods, and rather than US workers, the Chinese workers are “earning the wages of manufacturing”. Here is the sad record of our current trade deficit in goods with China:
We are sending raw materials to China, importing manufactured goods, and wondering where our manufacturing jobs disappeared to … this is the exact opposite of Philipp von Hörnigk’s excellent advice. He said (emphasis mine):
…opportunities should be sought night and day for selling the country’s superfluous goods to these foreigners in manufactured form, so far as this is necessary, and for gold and silver; and to this end, consumption, so to speak, must be sought in the farthest ends of the earth, and developed in every possible way.
A country gets rich and stays rich by importing raw materials, manufacturing goods from the raw materials, and selling them as widely as possible … just as we used to do, and as China is doing today.
At present, as the graph above shows, we are sending about a third of a trillion dollars to China every year … and we wonder why their economy is booming? We fret and fuss because a border wall might cost twenty billion, and meanwhile, we are foolishly pissing nearly twenty times that amount down a Chinese rathole every year.
So let me bring this back to the title. I have no fear of a trade war with China, because the worst-case scenario of a trade war is that all trade between the two countries stops entirely … and that will put a third of a trillion dollars back into our pockets every year, year after year. In addition, it will totally revitalize our moribund manufacturing, because we will have to do what Philipp von Hörnigk recommended—live off of what we produce ourselves.
People object to this, however, saying things like “How can the poor consumer live without cheap Chinese goods?” But the reality is, if your factory just closed down and you are out of a job, cheap Chinese goods mean nothing. Next, that ignores the billions and billions of dollars that will be spent in the US and not overseas.
And there is a third consideration. Look at the history of our trade deficit with China:
Thirty years ago we had no trade deficit with China, or with Mexico for that matter, and our economy worked just fine. But then we signed on to NAFTA and the World Trade Organization, and just as Ross Perot predicted, we killed our manufacturing sector. Here’s the history of our trade with Mexico:
See when we went off the rails? As soon as we signed on to the NAFTA agreement. And here’s the history of our trade deficit with the world.
Note that our stupidity is currently costing us two-thirds of a trillion dollars per year, half of which is going to China.
So my third point is that a trade war is not dangerous to us because, as you can see, as recently as the 1980s we didn’t have a trade deficit with China, Mexico, or the world … and we got along just fine.
And since this is the worst-case outcome of a trade war, I would be overjoyed to see a trade war start. We are the suckers in this global game, and as a result, a trade war can only make our position better.
This is also the reason why our trading partners are screaming so loudly about the possibility that we might impose tariffs on their goods … because we are currently the losers and they are currently the winners in the deal. That means that they can only lose in a trade war, so of course, they’ll oppose tariffs with all their might … and we can only gain in a trade war. The fact that our economic competitors hate the idea of US tariffs is solid evidence that such tariffs are a very good idea.
Finally, here’s what passes for the “free trade” that everyone is so hyped up about.
The European Union charges a 10% tariff on all cars that come from the US.
China charges a 25% tariff on cars from the US.
And us? We’re the pathetic idiots in the game. We charge a pathetic 5% tariff on the importation of foreign cars … and people call this “free trade”??? Of course the EU and China don’t want us to rock the boat—they’re taking us for fools and they don’t want to stop.
The President is 100% correct. Our trade deals are a pathetic joke. We need to renegotiate all of them, we need to stop importing goods that we can manufacture here, we need to follow the excellent recommendations of Philipp von Hörnigk from 1684, and we need to impose tariffs on a wide variety of imported goods.
Which is why I say, bring on the trade war! It can only do us good, and it might just save us two-thirds of a trillion dollars per year. What’s not to like?
In closing, my best regards to each and every one of you. Hug your families, tell your friends that you appreciate them, walk in the rain, play in the sunshine, life is far too short …
FURTHER READING: I was a strong advocate of free trade until I read How Rich Countries Got Rich and Why Poor Countries Stay Poor. Erik Reinert lays out all of these points far better than I. I cannot recommend this book too highly. If you want to shed your economic innumeracy, this is the book that will do it.