Who wants to get more for less? I know what you are thinking: Who doesn’t want to get more for less? Evidently one answer is Peter Navarro, and any other economist who believes that a trade deficit is a bad thing. For those who are less familiar, Mr. Navarro is one of President Trump’s advisers and the one most responsible for Trump’s idea that tariff is a “beautiful word.”
The new administration is moving so fast on seemingly every front that it is hard to keep up. However, our modern economy reacts quickly these days. Just last week the Atlanta Fed’s GDPNow measure of real-time GDP was saying the economy was growing at 2.3 percent. As I write, the same measure says the economy is shrinking at a rate of 2.8 percent. Yes, we have gone from +2.3 to -2.8. That is an enormous change in a very short time; what could be the cause?
The largest factor in that sudden reversal of fortunes is net exports (in other words, exports minus imports), which fell to -3.70 from -0.41. In plain English, we have imported a lot more stuff thus far this year. Most likely people are trying to get their foreign goods before tariffs go into effect. This means the so-called trade deficit has exploded, and in the mathematical calculation of GDP, that is input as a negative. As a result, some, including Navarro, will argue that having a trade deficit – importing more than you export – is a bad thing. But is it?
Before answering that question, I think it is important to understand why we subtract imports from GDP. Gross Domestic Product, or GDP, is a measure of everything that is produced domestically, so by definition we do not wish to count items produced in other countries. So, what we want is for imports to not be counted one way or the other. The natural reaction to that desire might be to not count them at all, but there is a problem with that: The main item in the GDP calculation is consumption. When one goes to her local Toyota dealer and purchases a new car, that is measured as consumption. The money spent on that car was produced domestically, and much that goes into the transaction is also domestic. The car itself was imported from Japan. So, we subtract the car from GDP because it was captured in consumption, and we don’t want it to be in the calculation one way or the other.
In the real world, imports do not subtract from domestic production. They also do not add to production; they are simply neutral. To reflect that in the GDP calculation, they must be subtracted. Navarro would argue that if we didn’t buy that car from Japan, then we would have bought one made here. That could be true, but is that actually a better outcome?
The best way to understand macroeconomic issues, such as trade, is to remember that the macroeconomy is nothing more, or less, than all of our microeconomies put together. So, do you make everything you consume? Would you be better off if you did?
The answer to the first question is an obvious no. If that were not the case, you would not be reading this. You would either be cleaning your cave or hunting your dinner. My family has the good fortune of knowing the answer to the next question. My wife’s grandfather built a hunting camp in the Shenandoah Valley region in Virginia 75 years ago. We still enjoy using it to this day. There is a simple cabin that does provide good shelter, electricity, running water, and indoor plumbing. Heat is provided by a fireplace and a wood stove. Meals can be prepared on the wood stove or the charcoal grill outside. We stop and get groceries a little more than an hour from the camp, and we lose cell coverage about 30 minutes out. Modern satellite devices such as Starlink still do not work there for reasons that are not clear to us.
When we are there, we are completely on our own and can rely only on what we brought in. It is a great escape for a few days. Then, you realize that having to chop wood so we can have dinner means starting not long after lunch. An entire day can be spent just doing the necessary work to put the next meal on the table. We have deep conversations about how our ancestors even survived and eventually feel the longing to make the hour-long trip for a civilization break to check in with the outside world and eat in a restaurant. The best two restaurants in the closest real town are Mexican and Italian. Yes, the word “best” is relative, and that should speak volumes about whether we would be better off without trading with other countries and other cultures.
I have spent my entire adult life helping others reach their financial goals. I could simplify those down to having the biggest personal trade deficit possible: It is our human desire to do only the things we really want to do and to allow someone else to do everything else for us. We work our jobs for the purpose of gaining money to pay for the things we don’t have the time or desire to do for ourselves. We ultimately plan on retiring, at which time our personal trade deficit will equal 100 percent of our consumption.
The more financially successful people are, the larger their personal trade deficits. I guarantee you that Donald Trump’s personal trade deficit is enormous. I will wager my entire net worth that he doesn’t mow the grass at Mar-a-Lago. Does he believe that his grounds crew (I am positive it requires a crew) is taking advantage of him by denying him the ability to mow his own lawn? Does he think he is a loser because his personal trade deficit is far larger than 99 percent of people in the world?
Of course not. When we bring it down to the personal level, the answer becomes obvious. We are made richer by trade, not poorer. When we run large trade deficits we are winning, not losing. We are getting more for less.
The economic data backs this up. Trade deficits expand during economic expansions and shrink during recessions. What about the countries that do not fight fair? The ones who subsidize their manufacturing. Once again, take it down to the personal level. If a grounds crew is willing to work for less than market rates, then who is taking advantage of whom?
What about the manufacturing jobs in the U.S.? We have to be honest: manufacturing as a percentage of real GDP has held steady in this country since 1947. There is no decline in manufacturing. Have factories closed in the rust belt? Yes, and factories have opened in places like South Carolina and Alabama. According to data from the St. Louis Fed, manufacturing has stayed in a range of 11.3 percent to 13.6 percent of GDP since 1947. Manufacturing jobs have been replaced not by trade, but by technology. They have gone the same way as agricultural jobs. The fact that very few Americans work on farms does not mean that we are not producing food.
Once one understands that a trade deficit is not a bad thing, then she will understand why the word tariff is not in fact beautiful, no matter how many times Trump says it is. People want more for less, they want a trade deficit, and tariffs are not beautiful – but tariffs are in fact, as The Wall Street Journal has said, dumb. At least that is my perspective.
Warm regards,
Chuck Osborne, CFA
The opinions expressed on this blog are solely those of the author and not those of AssuredPartners Investment Advisors (APIA).
