Kindergarten Arithmetic 101: Analysis of the Trade Debate

Mish

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

Comments (68)
No. 1-50
tedr01
tedr01

The wall is a good idea. Tariffs may not be. Time will tell. Hopefully if President Trump is wrong on both of these he will have the courage and intelligence to admit he has made a mistake and correct the problem. Again time will tell.

Kinuachdrach
Kinuachdrach

The world is a complicated place, and a simple-minded adherence to non-existent "Free Trade" confuses rather than clarifies the situation. Looking into steel imports & exports, I ran across this little report: "On May 25, 2017, the Canadian International Trade Tribunal (CITT) issued a decision, following a public hearing held earlier this month, that concluded imports of fabricated industrial steel components (FISC), from China, Korea (excluding FISC exported by Hanmaek Heavy Industries Co., Ltd.) and Spain (excluding FISC exported by Cintasa, S.A.) had injured the Canadian industry as a result of dumping and subsidization.
... All importers of FISC originating in China, Korea and Spain (with the exception of FISC exported by Hanmaek and Cintasa) will be required to pay anti-dumping duties ... the normal value will be determined by advancing the export price by 45.8%"

Kinuachdrach
Kinuachdrach

Strange, I do not remember the usual suspects whining that those awful Canadians were going to start a trade war which would bring the world to its knees.

flubber
flubber

There's two sides to every story.

Realist
Realist

Kinuachdrach; We agree on something. The world is indeed a complicated place. Fortunately, we have rules and governing bodies in place to help us resolve disputes between nations. Thank you for mentioning that Canada has used these trade organizations to help settle disputes. In fact, according to the Global Steel Trade Monitor, Canada has initiated 49 trade disputes through the WTO against 19 countries regarding steel. Notice that they do so without any public fanfare, and they do so with surgical precision so as to maintain good trade relations with these countries. Trump by comparison, acts like a bull in a China shop, destroying everything in his wake. He doesn’t want to follow any rules and he doesn’t care who he hurts (a lot of American businesses and their employees).

Snow_Dog
Snow_Dog

This time, though, the tariffs went the other way. “When they send a motorcycle to India, as an example, they have to pay 100 percent tax—100 percent,” Trump told U.S. governors on Monday. “Now, the [Indian] prime minister, who I think is a fantastic man, called me the other day. He said, ‘We are lowering it to 50 percent.’ I said, ‘OK, but so far we’re getting nothing.’ So we get nothing, he gets 50 [percent], and they think we’re doing—like they’re doing us a favor. That’s not a favor.”

https://www.theatlantic.com/international/archive/2018/03/us-india-trade/554321/

Kindergarten math for Trump? No, some real world math for Mish. India’s prime minister placed the call, by the way, not Trump. He promised to halve his tariff just at the rumor of getting himself a US tariff in return. It’s called negotiating and most don’t know it when they see it. They call our president names and that always helps, right? Let’s wait and see what happens.

Rayner-Hilles
Rayner-Hilles

Stuki pretty much hit the nail on the head with that key word: "recursion." I'm shocked at how many people on this site don't seem to be able to grasp the essential difference between a factor of production and an end consumer good. I can sympathise with tariffing consumer goods, but tariffing productive capital, I thought Trump was supposed to be a businessman? This is economics 101 for crying out loud.

Perhaps some high school business studies/human geography/economics to go with that basic arithmetic: a economically developed world power specializes in Tertiary and Quaternary industry! Why is it suddenly fashionable to protect primitive industries? I don't even understand how steel can contribute a significant amount to US employment in the first place! Goodness.

http://www.bbc.co.uk/schools/gcsebitesize/business/aims/aimsandactivitiesrev3.shtml

https://s3-us-west-2.amazonaws.com/maven-user-photos/mishtalk/economics/pY98QOHeFE2eAof6gA5bwQ/ffDHkwuaX0e977oqYxbOOQ

Abcdwf
Abcdwf

Mish has been wrong all the time I have read his blog. My god he is the opposite of reality. Plus he is selective (dishonest) in his supposed facts. Anyway your euro friends have created their list of items to tariff. It is a joke lol. Also it’s ok for countries to slap tarrif on the US (south Korea Brazil China India ) but bad for the us to do so. Who would I listen to? Trump (success businessman) or a blogger with a failed record?

Sporkfed
Sporkfed

A tariff is just a tax on foreign productivity. I think a tariff should be placed on all

Sporkfed
Sporkfed

imported manufactured goods with the proceeds used to either reduce the tax

Sporkfed
Sporkfed

paid on wage income or to fund single payer healthcare. Just think how

Sporkfed
Sporkfed

competitive manufacturing in the US would be if US based manufacturers did not

Sporkfed
Sporkfed

have to include.

Sporkfed
Sporkfed

providing health insurance .

Abcdwf
Abcdwf

Shortage means it is a temporary issue. Industry follow the money so businesses will create a supply to match.

tedr01
tedr01

This is usually the case. Will be interesting to see how this plays out.

tedr01
tedr01

Many factors helped cause the Great Depression including a major banking crisis. Many banks failed. A stock market crash didn't help.

Greggg
Greggg

Politics lesson #1. Always reward your supporters: https://thinkprogress.org/trump-ichan-steel-imports-cf7deb8beaf0/

tedr01
tedr01

Like the Democrats don't? Give me a break please. I doubt Carl Icahn would be stupid enough to be involved in insider trading. He has to much to lose.

tedr01
tedr01

Btw Think Progress is a liberal news site. They are not very objective or have much common sense when it comes to reporting the news.

tedr01
tedr01

We know this much. Most Chinese companies don't provide health care benefits to their employees so you have a point.

Greggg
Greggg

tedro1 - It's common place. Everybody did it when they were on the inside. Meetings are a primary source of front running the game when you work for a large manufacturer. As far a government, remember Birdflu/Roche/Tamaflu?

AWC
AWC

In that scenario, smuggling steel could end up as lucrative as smuggling people and drugs across the borders. The higher the wall, the more profit to be made by the smugglers. Now, when Canada cuts off the oil, that northern wall might generate a bit of controversy. And what would American farmers do, catapult their products over the wall? Gonna be some busy air space over those obstacles. Or under them. Long Backhoes and Drones. ;-)

AWC
AWC

"Tariff being a tax on foreign productivity?" Yeah, OK, and American consumers will pay it.

truthseeker
truthseeker

Ok I tried mentioned wrong word I guess.....

Top-GUN
Top-GUN

Government and Trump picking winners and losers. Crony capitalism... Wish they would stop.. Let's start with sugar tariffs, corn subsidies, ethanol mandate.

TheLege
TheLege

OMG. Despite it being spelt out, people still defend tariffs! You can't fix stupid, quite clearly.

conscript
conscript

The controversy is probably not about the math. It's about the concept.

conscript
conscript

In a country where we are experiencing a non-adiabatic economy, not all people will have a chance at gainful employment relative to their tax and living cost burden.

conscript
conscript

The net result may be $50 shoes selling for $120 or going to walmart and only affording the 3-pan cooking set as opposed to the 5-pan set, but someone at a stamping plant in the middle of the country gets to work and feed his or her family and pay taxes.

conscript
conscript

enough said.

whirlaway
whirlaway

Good point. These so-called free trade experts have ravaged the country. The Rust Belt has that name for a reason. Jobs have been lost by the millions while these guys sit in Manhattan or Si Valley and pontificate and insult the average Americans. On top of that, they support things like "right" to work for next to nothing. It has now come to the point where 63% of Americans cannot afford even a $1000 emergency without going into debt. And all that these guys advocate is more of the same.

QTPie
QTPie

The US will probably relent when this issue goes to the WTO. Too much to lose if a trade war starts and the WTO goes against the US (which it probably will since this tariff is not well thought out).

whirlaway
whirlaway
(deleted message)

That's a strawman argument. The point is not about trading with oneself. It is about how the other countries put up trade barriers and tariffs and we should accept them but we should not do anything similar because that would be "mathematically wrong" or some crap like that.

QTPie
QTPie

It looks the Canadians investigated the situation, did some research, and went through a structured evaluation and decision-making process to come up with tariffs against selected bad actors. That’s good governance all-around. We have a guy in a bathrobe who woke up constipated in the middle night, pulled a blunt-instrument tariff against the entire world out of his @ $$ and announced it through twitter.

Eventually these type of actions go before the WTO. If you can make a good argument for dumping the WTO may back you and those foreign entities will suffer. If you can’t make a good case (likely in the case of the Twitter-tariff) then the WTO will rule against you and you will suffer.

There are processes that can help ensure you come up with good, actionable ideas but apparently those don’t interest our incompetent, right-hand-doesn’t-know-what-left-hand-is-doing current administration.

Kinuachdrach
Kinuachdrach

So the World Trade Organization is an entirely non-political body composed of the best & brightest people in the world, totally immune from cronyism? Have a chat to Realist -- he can probably tell you something about the real world.

QTPie
QTPie

Nobody says you HAVE to join the WTO, it’s completely voluntary to join. We’re in it though so we are obligated to follow its rules. If we don’t like it then we can leave. Now whether that’s a smart thing to do is a different story. Apperantly doing smart things isn’t in vogue anymore.

Blacklisted
Blacklisted

http://market-ticker.org/akcs-www?post=233065

Either follow Denninger's plan, or do a 10% across the board tarrif, but they must be indexed to the currency.

The biggest problem is not tariffs, but high and varying tax rates, unions, and the subversion of our education system, which are all the direct result of govt largess and career politicians. Maximum freedom and equal enforcement of the rule of law is all that's needed, but these are antithetical to the needs of govt.

The other issue that is important to understand is the way trade is measured, which looks at the total dollar value and not the quantity of goods. For example, China could buy gold in Chicago and sell it in London to improve their trade imbalance.

https://www.armstrongeconomics.com/armstrongeconomics101/economics/trump-to-impose-tariffs/

RonJ
RonJ

Is that third example from the left in the top row, the method by which the FED determines its dot plot for the future FED rate? /sarc

abend237-04
abend237-04

Trump wants to help, but attacking our trading partners won't do it. His guns should be trained on K Street, with it's 25,000 lobbyists, Congress with it's irresponsible, profligate spenders and an 80,000 page tax code that now occupies more of our smart people than all our police and fire departments combined.

Ambrose_Bierce
Ambrose_Bierce

It makes more sense to open the borders than close them. The population of Mexico is about 1/3 of the US, the immigration problem is backwards. Many many US citizens would love to emigrate to Mexico, but for restrictions.

Casual_Observer
Casual_Observer

If this was targeting China it was poorly designed. For the novices who don't understand, china has been dumping steel in Canada and Mexico and driving steel prices down globally to put competitors out of business. They are state run enterprises. Canada and mexico are trading partners but Chinese steel comes through those countries. This is why the
source matters. Putting a tariff on Chinese made steel would have made more sense.

Mike Mish Shedlock
Mike Mish Shedlock

Editor

"You can't fix stupid, quite clearly." even in these messages - so sad

Casual_Observer
Casual_Observer

Nowhere did I defend it. I'm purely stating what the Trump administration intended vs what was done. The problem with tariff free world is it doesn't exist. Kind of like free market nonsense.

Mike Mish Shedlock
Mike Mish Shedlock

Editor

No one said there was a "free market" - so what precisely is "free market nonsense"?

The only thing that's "nonsense" is not supporting a free market, and that holds true whether any other country cooperates or not.

Casual_Observer
Casual_Observer

We dont live in that world and never did. A free market never existed anywhere. It is and was always a myth. All governments are interventionists starting with the creation of money.


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