Friday, October 13, 2017

How We'll Remain Globally Relevant -- And a postscript on NAFTA

I know many of our readers sympathize with the notion that it's time to play trade hardball with the rest of the world. Regular readers and clients know that in my view this is a most dangerous notion.

I contend that it's actually our global outreach -- our exploiting the advantages other nations offer to provide us with affordable goods and labor -- that unleashes resources here at home to apply to what we do best, that makes the world a far safer place, and that bolsters our capital markets. Read this (please!) for a full explanation of what I mean.

China -- while I won't go so far as labeling it a free-trader (U.S. neither, but China less-so) -- is clearly following our lead:
China will "compel" Saudi Arabia to trade oil in yuan and, when this happens, the rest of the oil market will follow suit and abandon the U.S. dollar as the world's reserve currency, a leading economist told CNBC on Monday.
Carl Weinberg, chief economist and managing director at High Frequency Economics, said Beijing stands to become the most dominant global player in oil demand since China usurped the U.S. as the "biggest oil importer on the planet."
"Moving oil trade out of dollars into yuan will take right now between $600 billion and $800 billion worth of transactions out of the dollar… (That) means a stronger demand for things in China, whether it's securities or whether it's goods and services. It is a growth plus for China and that's why they want this to happen."
While we can debate the likelihood that the Saudis, our -- in some respects -- staunch ally, are prepared to abandon the dollar, the above speaks to my position.

Trust me, remaining globally relevant requires thoughtful, friendly and mutually beneficial relationships with our trading partners. And, contrary to some folks' opinion, we -- we 4% of the world's population commanding its largest economy (miracle!) -- collectively have been huge beneficiaries of existing trade relationships! In fact, international trade, in my view, goes a long way toward explaining our miracle!


P.s. As you may know, the North American Free Trade Agreement  (NAFTA) may be on the chopping block. The President has suggested of late that termination of the agreement, at the hands of the U.S., is likely. 

So, we should therefore expect "improvement" in the trade numbers between us and Mexico, right? 

(By the way, the U.S. presently has a trade surplus with Canada )...

Well, for starters, I put "improvement" in quotes because, frankly, accessing net more goods from Mexico and, thus, dispensing net more U.S. dollars into the global economy -- resulting in greater foreign investment into U.S. markets (good for your portfolio, and interest rates, btw) -- is not in my estimation something to fret about. Beyond that, no, we should not expect our trade numbers with Mexico to "improve". 

Scrapping NAFTA will likely (highly likely) tank the peso. I.e., suddenly U.S. goods will be exceedingly expensive for Mexican consumers, and, conversely, Mexican goods will become exceedingly cheap for U.S. consumers. If anything, it'll increase the trade deficit. Which, again, wouldn't be the end of the world -- just a shame in terms of the U.S.'s global positioning!

Click to enlarge....

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