Commentary: Trump’s fake trade deficit problem

A recent letter by Andy Andrew (DSN Aug. 15) and a followup (Aug 30) by myself discussed China, some reciprocal covert activities, the U.S.-China trade deficit, and Trump’s trade war. There is actually a little more to this story and it is important. And, I think many readers will be enlightened by the additional material below.

I picked up my knowledge from reading — in my retirement — a couple dozen books on the subjects of economics, trade and economic history.

Yes, Americans buy more Chinese stuff now than vice versa. How does that work? And how does a Detroit car company build a car plant in China?

The way it works — in this simplified but valid example — is we buy Chinese stuff by writing a check from our checking account in our U.S. bank, in U.S. dollars, which gets deposited into a Chinese checking account in the same U.S. bank.

Then the Chinese central bank (the Bank of China) owns that money but that money is still possessed by the U.S. bank. The BoC, in China, then gives a check — in Chinese Yuan — to the Chinese company making stuff for us. For every U.S. dollar BoC gets, BoC gives about seven Yuan to the Chinese company (this is the exchange rate “manipulation” by the BoC; it is not a “free market” convertible).

Since the cost of everything in China is lower, it is no wonder they can make stuff cheaper than we can. The U.S. car company does the same thing: money goes from its checking account in the same U.S. bank to the BoC account in the same U.S. bank.

In China, the BoC gives the branch office, in China, of the U.S. car company the Chinese money to hire Chinese employees. What is left out of this explanation is the fact that the U.S. dollars in the U.S. bank actually stay in that U.S. bank. It means the U.S. bank continues to loan out that money to make interest on money it possesses but does not own. The dollars really never leave the USA! Its a neat “trick” that almost never comes up in newspaper articles or even books on economics or banking.

This “trick” is not new and I am not inventing it. Dig deeper on your own, on the internet or in serious deep books on international finance (all but two chapters in “International Finance,” by Heather Gibson, c 1996, are easy to read and need no mathematics), and under the terms “Eurodollar” (eg. for U.S. payment of bills from foreign countries such as Japan, the “Tigers,” the “BRICs,” etc.) and “petrodollar” (mainly, paying Arabs for decades for petroleum) and learn that these terms came into use decades ago and way before I did some digging on my own.

We had trade deficits going back decades. And — for another example — the Arabs would take their petrodollars and buy American cars and ship them on American ships back to them; this helps our economy a second time around so it is almost like getting the oil for free. These dollars also always stayed in the USA. Indeed, I have read, over decades, many op-ed pieces by economists that say trade deficits are not that important and I think they are right.

American ownership of companies located in foreign countries is comparable to foreign ownership of companies located in America and those details can be found on the internet, too. Working out the question of whether one party or the other is winning (the trade deficit war, or some other metric) might take more effort than the result is really worth.

But it is a fact that about 80% of all the world’s business transactions are conducted out of U.S. dollar accounts (see my example above) in U.S. banks and what that means is that any “economic sanctions” this country feels like puting on another (eg. Iran, Russia, Cuba, etc.) will put a very serious hurt on their weaker economies. I would venture to say that U.S. economic power is quite a bit greater than U.S. military power, which also swamps that of any other country, too.

What all this means in terms of Trump’s trade war with China is that Trump is making a mountain out of a molehill and making a very public show out of a problem that he wants a quick, simple, heroic and theatrical solution to so he can get a lot of public credit and put a notch on his belt.

The problem with Trump is that his actions also add to the forces now building up to sooner throw our economy into a recession and recent business news is showing a lot of concern about this. Trade economics rules and dispute resolutions now almost always fall under the jurisdiction of the World Trade Organization (as long as a country is a member) and can take many years to process.

These things are best left to the WTO and the governments and their departments that bring complaints to it. A great deal of wrangling goes on behind closed doors to make trade economics cases for the WTO and very large flows of money — and the existence of many thousands of jobs — hinge on these deliberations.

My impression, over the decades of my life, is that most politicians — regardless of party — have a very poor grasp of the whole economic picture and most people should not have to be responsible for spending a couple extra hours every day trying to keep up with highly knowledgeable and experienced specialists who work in teams and make their livings doing this work full time.

But Trump promotes himself as having “magic answers” for all problems. When I think about that, the first thing that comes to my mind is the promotion of the steamship RMS Titanic as “unsinkable.” Look how that turned out.

Arthur E. Sowers is a resident of Harbeson.

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