Saturday, June 9, 2018

A Consumer and An Economist Talk Protectionism

Experience compels me to preface the below with a statement about politics. I've found over the years that when I go to a place that conflicts with a position taken by the party in power I generally touch a few nerves. Thus, over the past few years I've devoted far less time herein than previously to topics other than those directly related to the business of investing. That said, some of the topics that tend to touch political nerves -- such as tariffs -- are indeed related to (impact) the business of investing. 

Speaking of tariffs (protectionism), this one, in terms of the pushback I receive, fascinates me the most. With all due respect, it seems that certain readers' views on the pros and cons of protectionism change as the party in power changes. I.e., during the previous administration, if I received any pushback with regard to my articles (and there were many!) condemning the then protectionist act(s) it was from the left, while folks on the right absolutely agreed with, and appeared to understand, my position. These days our readers on the left suddenly appear to understand the ills of protectionism, while some of those on the right have out of the blue become passionate protectionists...

As for me, frankly, I don't give a political hoot who's currently peddling protectionism, I'm going to continue to risk going there on occasionin that it's so destructive in terms of the economy as well as the markets...

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Conversation between a patriotic American consumer (C), and an economist not captured by a political party or special interest group (E):

C: We've been getting utterly killed on trade for years!

E: How so?

C: Our trade deficit is like $800 billion a year!

E: Well, not that it matters, but that would be in goods only. We actually have a $200+ billion annual trade surplus in services. In 2017 it was minus $811 billion in goods and plus 243 billion in services. So we're really talking a trade deficit of around $540 billion, and that's with the entire world, not any one country by the way. And you're saying that's bad?

C: Oh, okay, I keep hearing $800 billion, but I guess they're leaving out services. AND ARE YOU KIDDING ME! THAT'S HORRIFIC!

E: How so?

C: We're buying a ton more stuff from other countries than they buy from us!

E: So you're saying that, in a given year, we end up receiving more stuff than we end up exporting to other countries?

C: That's right.

E: But isn't that good for us?

C: Say what? That's crazy!

E: Really? Think about it: If you and I were trading stuff amongst ourselves and you walked away with, say, $500 more worth of stuff than I did, wouldn't you be the winner, big time?

C: Yeah, but there's no way that would happen. You wouldn't agree to such a lopsided transaction.

E: I agree. But in my scenario I'd be foreign countries and you'd be the U.S.. I mean, according to you, we end up with $540 billion worth of more stuff and services that they produce than they do of what we produce. You follow?

C: No! Of course not! We buy that stuff with our money. And we spend half a trillion more per year on their stuff than they do on ours!

E: So they're just taking our money? Not our goods and services?

C: Exactly!

E: So they value U.S. dollars that much? What on Earth do they do with them?

C: They buy whatever the hell they want?

E: From whom?

C: From anybody they want, but clearly not from us!

E: So other foreigners are willing to sell stuff to other foreigners in exchange for U.S. dollars? Why would they do that?

C: So they could buy other stuff of course!

E: From whom?

C: From whomever the hell they want! What are you driving at?

E: So when does the money end up back here?

C: Huh?

E: We're sending them U.S. dollars, aren't we?

C: So!

E: U.S. dollars are simply claims against U.S. stuff. No one would take them if there wasn't ultimately something here that they or someone they do business with wants. The money has to come full circle. Think about it...

C: But don't they just convert our dollars to their own currency and spend them there?

E: Sure, but who'd convert those dollars for them if there wasn't something they wanted from the U.S., or from someone else who wanted something from the U.S.?

C: Okay, I kinda get that, but what about the huge trade deficit. How do you explain that?

E: Honestly, I could just tell you that it's one of the greatest lies ever told to a nation's people, and, frankly, that'd be a legitimate statement. But, in truth, it has to do with accounting.

C: How so?

E: Well, again, the money has to come back. And if it's not all coming back in the form of purchases of goods and services (which shows up in the "current account"), the rest comes back in the form of investments; which is accounted for in the "financial account", which, by the way, along with the "capital account" (which captures certain other items) shows an annual surplus that virtually matches the trade (current account) deficit, it virtually has to.

C: So you're saying foreigners invest more in the U.S. than we do in foreign countries.

E: Exactly!

C: What are they investing in?

E: You name it: The stocks in your retirement account, U.S. treasury bonds (which fund our government and keeps interest rates reasonable), corporate bonds, property, private businesses, etc. Essentially bringing those dollars right back into our system to be utilized in myriad ways.

C: Interesting.

E: And imagine how bad it would be if that $540 billion stopped flowing each year into the stocks in your portfolio, into treasuries, into funding U.S. businesses, etc.. I mean, your portfolio would suffer, interest rates would rise, we'd have less capital investment overall, yada, yada, yada...

C: So why all of this tariff stuff, and everybody saying we've been getting killed for years?

E: That's the question my friend! And I'll leave that one for you to ponder. Just ask yourself who benefits from steel tariffs, for example? What U.S. industry? What industry groups, etc.? How politically powerful might that industry and its associated groups be? And so on...

C: Wow! I get it! It seems so simple the way you've laid it out. I can't believe I hadn't figured it out for myself.

E: Don't sweat it. I'll bet the majority of the folks you know feel the way you did at the beginning of our conversation, don't they?


Conclusion:

Folks, we seem to be wired with an us and them mentality; and in some areas that may be a legitimate debate. But when it comes to trade, it's not! When two parties get together and exchange freely, neither, under any circumstances, loses; they each get what they're after or there'd be no trade.

Countries who apply protectionist measures are simply abusing their own consumers, while fooling them into thinking they're helping them.

Those here who are presently pushing for America to apply tariffs to its trading partners complain that we've been open to free trade for years while other countries have been forcing all manner of trade restrictions onto us. But that's completely backwards thinking; other countries have been applying protectionist measures onto their own people, while we've had more freedom to buy from the outside world at outside-world prices.

Ask yourselves, in the end, who's better off? I mean where would you rather live, here or elsewhere? Could it be that our more open market is the reason we're more prosperous?





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