By Professor Ricardo Ulivi, Ph.D.
March 2017
What the American public, and our politicians, fail to recognize is that we have been living beyond our means for too long, and this has consequences. Here are some facts:
Why are tariffs so attractive to Trump?
The reason tariffs are appealing is because we have a horrendous trade deficit. For example, in January 2018 the U.S. trade deficit increased 5 percent to $56.6 billion, the biggest since October 2008, Commerce Department data showed Wednesday. Exports fell 1.3 percent from December, the most in more than a year, while imports were little changed.
Annually, we are running a trade deficit of around $500 billion and it looks like it will keep growing. That means we buy from everybody and few buy from us. For example, in 2017 alone, China sold us $276 billion more than they bought from us. Well, you might think, the Chinese have cheap labor and we want to raise their standard of living, so it’s OK to run a deficit with them. In other words, it’s OK to make us poorer and make them richer.
How about comparing us to the Germans? After all, they certainly don’t have cheap wages, and they have tough unions, so it would seem to be a fair comparison. Surprise! The Germans run an overall trade surplus of $300 billion per year, which means they sell to everybody and they buy very little from others. With respect to America, they also run a surplus. Last year, they sold us $65 billion more to us than they bought from us. We too are helping the Germans get richer, while we get poorer. Our generosity is amazing!
Peter Navarro, a Trump administration trade adviser, says trade deals have weakened the United States economically with the connivance of U.S. business. Navarro believes American company executives have aligned themselves with China’s agenda due to their “narrow profit-maximizing interests”. I agree completely.
America, wake up. We cannot continue to run these horrible trade deficits. So, is Trump right in imposing tariffs? I don’t think so, and here’s why:
Tariffs will raise inflation
Assume that Trump goes ahead and sets a tariff of 25% tariff on steel imports. How do you think American steel producers will react? Raise their prices too, which will affect everything that contains steel, from cars, to washers, to construction, and so on. There goes inflation.
How will China, Korea, Germany, Mexico, Canada, Europe and others react when we slap the products with tariffs? Will they acknowledge how generous we have been with them in the past, and start buying more from us, while selling us less? Suppose this were to happen; what effect would it have on the prices of goods and services in America? There would be more demand for them, and with more demand, normally prices increase. That’s more inflation!
What’s the solution to our trade deficit?
The solution is simple but the medicine is tough to swallow. All we Americans must do is spend less, and save more. Think about it: our national savings rate, under 5%, is a disgrace. However, what would happen if we were to save more and spend less? The trade deficit would disappear, because we would not be spending as much, and the inflation pressures would be reduced or eliminated.
On the other hand, a tough recession would occur because our economy depends on consumer spending. With less spending, unemployment would surge. It’s not a pain free solution, but we don’t have many others!
Why do we save so little?
We save too little because we sugar coat things and give a happy ending to most stories, so there’s no need to worry about the future. Here’s an example: the story of the three little pigs and the big, bad wolf. Remember the US version, which is syrup coated? The first pig likes to play, so he only builds a straw house, and the second little pig also likes to play, so he built a house of sticks. Both, therefore, have lots of free time to play and play. What does the third pig do? He works, works and works and never plays. In sum, when the big, bad wolf appears, the first two pigs run away and are sheltered, and safe, in the boring pig’s house! The moral of the story? Why save if someone else, i.e., the government, will bail you out? We learn to spend, and not save!
The German version of the story, which is in fact the original version, has it that the first two little pigs are EATEN by the wolf. The only one who is safe is the boring pig who worked, worked and worked. The moral of the story? If you want to have a secure financial future, SAVE and don’t play!
Trade wars or no trade wars, things are going to get tough in America
If we want to continue our spending, and keep our trade deficits, inflation will accelerate and that will reduce most families living standard. Inflation is ugly.
Best advice I can give you now is to save, and protect yourself from the coming inflation cycle caused by our profligate ways. To schedule an appointment with me, call me at 714-771-6000.
