Thursday, July 12, 2018

Unfortunate Headline of the Day -- Or -- The Stifling of Stagnation

The headline reads:
China's Trade Surplus With the US Grew In June
Yep, that's an unfortunate headline indeed! Unfortunate in its wording, that is.

Such a headline exacerbates present misconceptions; it throws fuel on the fire, so to speak.

If only the media's (and the politician's) aim was to inform, rather than sensationalize, I believe more folks would get their heads around the reality of global capital flow -- and I believe protectionism would be far less politically effective.

Allow me to offer up an alternative headline that might exacerbate in the opposite direction:
The U.S.'s Investment (current account) Surplus With China Grew In June
Here's Matthew Rooney -- former senior official of the U.S. Department of State under presidents of both parties and director of the George W. Bush Institute’s Economic Growth program -- explaining the inevitability of trade:  emphasis mine...
"Dollars that flow out, flow back in..."
"....a current account deficit is the flip side of a capital account surplus. Dollars that flow out to buy goods and services turn around and flow back in as foreigners buy goods and services and invest in the United States — either way, employing Americans."
"To hear some people tell it, America’s trade deficit shows that our economy is failing. By this logic, America is a chump because our market is open while we let other countries limit our access to their markets.
Luckily for America, this way of looking at our trade balance is almost entirely wrong.
Trade is about people, not countries.
To understand why, it is important to recall that trade is about people, not countries. If an American goes car shopping and chooses a Kia instead of a Ford because she believes that her money is better spent that way, who are we to tell her she has made a mistake? If Ford buys a wiring assembly in Mexico that enables it to sell its car at a price that gets that sale, is that a good thing for America or a bad thing?
So let's expand on Rooney's Kia-vs-Ford example: The U.S. consumer chooses the South Korean automobile over the American, and let's say that its cost was twenty thousand U.S. dollars. We know that the person buying the Kia isn't a loser, she got what she wanted for her money. I guess you could say that, in this comparison, Ford is the loser, but that's not necessarily the case either (I'll explain in a minute). But we absolutely cannot (not if we know how the world works) say that the U.S. is the loser. In fact, we could argue that the U.S. is the winner, if we were to focus on the U.S. companies that export goods (like, say, almonds) and services to South Korea (the country in possession of those twenty thousand U.S. dollars), and on the U.S. equity and debt markets (if the end foreign holders of those U.S. dollars don't spend them all on U.S. stuff, the rest [in that they're U.S. dollars] would be invested in U.S. assets, such as, for example, treasury bonds [keeping interest rates low/competitive] and the stocks in your portfolio). Again:
"Dollars that flow out, flow back in..."
As for the notion that Ford is the loser in this exchange, we really can't know. After all, Ford happens to be one of those U.S. exporters who sells to South Korean consumers; it sold 10,700 cars there last year. And maybe those 10,700 new South Korean Ford owners are showing off what they got, which might inspire more South Koreans to buy a Ford. Or maybe some of those twenty thousand dollars that bought the Kia were used to buy stuff from China, supplying Chinese folks with U.S. dollars to buy Fords with -- which they did to the tune of 1.9 million vehicles last year (hmm!!). But what if the new holders of U.S. dollars didn't touch a Ford product, is that necessarily all bad for Ford in the long-term scheme of things? Well, perhaps not: Not if we consider that competition forever inspires innovation, or you could say stifles stagnation. Losing deals to other car makers, wherever they be domiciled, virtually guarantees that Ford will forever strive to produce the best, most advanced vehicle money can buy. And, of course, if you're a car company, you want to be that company!

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