Fiddling with Tinkertoys

George Will, a long-time conservative voice, penned an editorial called “Trade war shows the reality of ‘America First’ in action” that should be required reading. Three quotes from the article will give the gist of his concerns. The title of this post will reveal itself in the final quote.

“The Wall Street Journal reports that US farmers are purchasing fewer farm machines – (John) Deere’s profits from this business are down 24% from a year ago – partly because farmers’ incomes have suffered as a result of the tit-for-tat trade spat that Trump started with China…Some good news for John Deere might be ominous news for US farmers: Equipment sales to Brazil and Argentina are up, perhaps partly because China has increased purchases from those nations’ farmers, who are American farmers’ competitors.”

“The Financial Times recalls that ‘hundreds of US companies and trade associations said in a joint communique in June that the proposed duties would cause the loss of two million jobs and reduce US economic output by 1%.’ ….Hence, Trump’s tariffs make US goods more expensive, thereby dampening US consumer activity.”

The final quote contrasts the up and down tariffs to a similar fiddling in 1937-38 which caused a “recession within (the) Depression.” During that period, capital went on strike flinching from the unknown. Will notes the similarity to Trump’s trade war, “They fiddle with global supply chains, as though the world economy is a Tinkertoy that they can pull apart and reassemble with impunity.”

In short, when the supply and sales chains  are unsettled, companies find other avenues. Using the first quote as an example, China started buying product from farmers in other countries like Brazil and Argentina while “cancelling the purchase of almost 500,000 metric tons of soybeans from US farmers.”

Tariffs are unwieldy tools that have much greater consequences than intended. Using a tennis analogy, they are an unforced error. The tariffs have forced companies to find other options. And, when the tariffs are waived at some point, it is hard to put those Tinkertoys back in the same slots.

Relationships with countries are vital

There are no perfect people, so we cannot expect perfect leaders. There are also no perfect countries, so we cannot expect perfect agreements among countries. To respond to these short-comings, we must do our best to value relationships.

This works for people as it does for countries. An ambassador noted America’s strengths are its military might and its relationships with other countries. Our relationships predate the existing leadership team, so it is imperative to nurture them. This will help us resolve problems as they arise.

This is not just a US problem where its current front man acts rashly and chaotically, breaks commitments and agreements and lies more than he does not. He has made America less trustworthy and other countries are finding a need to seek better agreements with others that do not include the US.

The imperfect European Union is experiencing significant tension with the pending Brexit, the current difficulties in Italy and the growing nationalistic movements in EU countries. This is made worse by targeted social media efforts by countries that would benefit from a dysfunctional EU and US. Russia is one of those countries and they have been accused of such targeting.

A key part of these relationships is a financial one. The global economy is larger than it otherwise would be due to these relationships. If each country only tried to maximize its own profits in a zero-sum effort, the total pie is smaller and we all lose. This concept is called the Nash Equilibrium, which won John Nash a Nobel Prize in Economics.

Yet, it is more than that. These relationships make the world more secure and safe. The nationalists argue the opposite, but the more commerce is intertwined, leaders work harder to nourish those relationships. A strong EU makes Europe safer and prosperous. A strong relationship with the US and other countries does the same.

Yet, these agreements are imperfect. Not every citizen within a country may benefit equally from a global economy. There is a graph called the “Elephant Curve,” which is a silhouette of an elephant with its trunk raised. The body forms the rampant growth in income of the poorest workers around the world, while the trunk represents the even more significant growth in the highest income earners. The trough inbetween represents the middle income earners who are seeing stagnant incomes, who are in more flourishing economies. This trough has led to populist politicians who over-simplify the problems and come to short-sighted solutions.

Their needs must be addressed, but first we must understand the causes are more than the global economy. The larger threat is techonology advancements. Through our relationships we must invest together on addressing these issues. If we do not, we will create zero-sum contrasts, that will cause even more tension. The rise of fascism in Germany evolved out of dire economic circumstances after WWI.

This last example should inform us of why working collectively is so important. We must value our relationships and make them as beneficial as possible. Going it alone may seem like a good idea to some, but we need to think through the benefit of trade and mutual investment in each other.

If this concept sounds theoretical, let me explain it better by BMW, Mercedes, Hyundai, Toyota and Nissan making cars in America, with GM and Ford making cars around the world. And, Chrysler is owned by Fiat, an Italian company. Jobs are created as we invest in each other’s countries. This is true for other industries and suppliers. And, we may be less inclined to create war, when so much is invested in each other.

A little bit of this and that

It is a rainy Sunday, so it is a great day to drink coffee and read. Since I am struggling for a longer post subject, here is a little bit of this and that for your reflection and thoughts. In no particular order:

There are many people who will tell you what is wrong with the Middle East, but I don’t believe it is a solvable problem. There are too many passionate religious and tribal differences that cross borders. Unless like minded people had control over their situation, did not need to rely on others and could respect the rights of others, peace is simply not achievable. In my simple view, the best anyone can achieve is to place lids on simmering pots on a stove.

The global economy is expected to grow by 3.9% each of the next two years, up from slightly lower results in 2016 and 2017. Yet, Christine LaGarde, the head of the International Monetary Fund, cautioned at Davos last week over concerns of socio-economic inequity and the rising debt in the US. Not everyone is benefitting from the growth which will cause greater uncertainty and unrest.

In a very interesting and not unexpected development, Canada and other nations completed the TPP, which is the Asia-Pacific trade agreement the US exited, When the US tried to negotiate a bilateral agreement with Japan, the Japanese trade leaders suggested the US reconsider the TPP instead. The US finds itself on the outside looking in. I find it interesting that the US President said in an interview which will air tonight that he would reconsider the pullout from Paris. It is hard to have a relationship when you are not in the room with others.

On a related subject, if Brexit follows through with the commitment to leave the EU, other cities will continue to benefit from EU headquarters migration from London. Paris, Dublin and Frankfurt are each benefitting from conpanies moving EU headquarters. A softer Brexit will help reduce the migration, but it will continue.

I guess if there is a theme to all of these subjects it is working together across country borders and regions within is more productive than going it alone. Yet, one thing remains true – collaboration is hard work. It requires give and take. If one party gets everything it wants, then the others will not, so detente is harder. So, when I hear someone who likes to win say an agreement is a disaster, I don’t put as much credence in those comments. Lifting all boats makes more money for everyone. A man won a Nobel prize for this concept. So, let’s work hard together for peace and prosperity for all. It beats the hell out of the alternatives.

 

You cannot shrink to greatness

I often borrow the phrase “you cannot shrink to greatness,” which I first heard when companies downsized to make their numbers. When leaders don’t know how to grow revenue or if market conditions do not support revenue growth, they cut staff. Lately, I have been using it to define the goal of nationalist thinkers who believe by restricting global trade, they can make things great.

On the whole, global trade is accretive to growth. Yes, we need to constantly review trade agreements to protect workers, but even trade agreements like NAFTA add value and jobs. If NAFTA were done away with, the state of Texas and the US would suffer, as would our key trading partners on our continent.

A venture capitalist said it succinctly. “Do you know what creates jobs? Customers.” The more trade, the more customers. It is that simple. As for the job losses which subtract from trade related gains, we do need to review the causes and effects. Many jobs have been lost dating back to the 1980s. Companies chase cheap labor, always have. So regardless of trade agreements, the companies were offshoring just as our President has done with his clothing lines and ball caps.

Also, where we are losing more jobs is to technology gains. We do much more manufacturing here, but with far fewer workers, than we did in the 1980s. These technology improvements will continue. So, before we blame trade agreements and throw the baby out with the bath water, we need to understand the metrics. What jobs are created, which ones are lost and why?

The other factor that does not get enough airplay is just as US companies are building products closer to customers, so are foreign companies here. Think of all the foreign cars and trucks made here in Tennessee, Kentucky, South Carolina, Alabama, etc. and think of foreign companies like Doosan, Mitsubishi, Michelin, Husqvarna, to name only a few, who have facilities here in the states. These are additive jobs to our economy.

Reducing trade is not conducive to growth. If you recall the movie “A Beautiful Mind,” about the schizophrenic John Nash, who won the Nobel Prize for Economics, ask yourself why he won? His theory called the Nash Equilibrium proved very useful in global deals in growing the pie bigger. The Nash Equilibrium says if we look to maximize only our own gain, while others do the same, the competition squashes trade. Yet, if we work together to make everyone benefit, the economic pie gets larger.

Reducing trade is also not conducive to greater security. The more commerce you do with countries that may not be an ally, the more you both will work to keep the commerce successful. So, military interventions would be harmful to that trade.

So, retrenching from the global markets, would not only be dilutive to growth, it would make us less secure. This is the argument that should be very visibly discussed as we look to improve agreements. Because no agreement is not a good course as it will cause a shrinking effect. And, you cannot shrink to greatness.

 

Our next President may want to give more attention to the larger economies

It seems our President-elect is more consumed with Russia than he should be. Why the undue dalliance is something that the analysts should evaluate. Yet, Russia is not even in the top ten economies in the world.

Of course, we should endeavor to have commerce with countries as bilateral trade breaks down barriers. But, I would be more concerned with our larger partners – China, Japan, Germany, UK, France, India, Brazil Canada, and Italy. These and other trading partners like Mexico have a major impact on the US economy and job markets.

I would be more concerned with impacting trade with China than anything else. That could have a huge bearing on US jobs. Like the mistake with Brexit, we must not forget the jobs created here by foreign companies. Companies wanting to tap the US market have figured out it is more cost effective to build big things here rather than ship them from abroad – think Nissan,  Honda, Mercedes, BMW, Volvo, Hyundai, Husqvarna, Doosan, etc.

An economist said in 2015, China’s slowing growth has a bigger impact on the economy than similar percentage declines elsewhere. Yet, we should seek trade with other partners as well, to diversify and tap other markets. More commerce with Russia is a good thing, just as more commerce with Cuba and Iran is. Conducting trade creates relationships and builds more unity. Countries will be less inclined to upset applecarts. And, in Iran  the median age is 35, so the opportunity to change the future relationship in a positive way exists.

I recognize fully that there are leaders and countries we need to be highly skeptical of such as Russia, Iran, The Philippines right now, Syria and North Korea, e.g. Duterte is a thug, Putin is conniving and Little Kim is bat shit crazy, so we need to be leery of these folks

So, before our President-elect accepts Putin’s offer as a prom date, he may want to consider dancing better with our other successful partners.

 

Two misconceptions need to be challenged

“Innovation is portable,” said David Smick, an economic advisor to Congressman Jack Kemp and Presidents Ronald Reagan and Bill Clinton, in his book “The World is Curved.” In essence, innovation will occur where it is welcome and the initial jobs will be created around it. We should not lose sight of this observation as we discuss our economic future.

Smick surprised many when he noted in his book the similarities in Bill Clinton and Ronald Reagan, who were the number one and three best job creating Presidents, in that order. They both loved global trade and hated deficits. And, they were known for their collaboration with Congress, even with an opposite majority in power. Collaboration is essential to getting buy-in and understanding of the problem and possible solutions.

With this context, we need to challenge some notions that do not tell the whole story and, as a result, could lead us down the wrong path. We need to look at holistic causes to problems, so that we can address them effectively. Our problems are not solvable by bumper sticker solutions, no matter how loudly and forcefully they are espoused.

Here are two of those simplistic notions and challenges to think about:

Immigration is taking jobs away. This is far too simple a statement. Our history has been built on immigration, who have tended to be hard workers and spawned a higher relative percentage of entrepreneurs. As noted in the famous play “Hamilton,” by Lin-Manuel Miranda based on the book by Ron Chernow, immigrants tend to work hard to make it in our country, as they did not have such opportunity from whence they came. Our economy actually flourishes more with immigration. But, as we look to better govern immigration, we should look at the whole picture. And, on the subject of illegal immigration, a concerted study of the impact of curtailing such on certain industries – housing construction, landscaping, agriculture harvesting, etc. – is critical as we move forward with better governance.

Global Trade is bad for domestic jobs. Global trade is actual good for a domestic economy creating more jobs around the world and here. The downside is companies tend to chase cheaper labor and always have, but an even greater threat to jobs is technology advances. A CFO said in the book “The Rich and the Rest of Us,” an employer will hire no one if he could make it work. Yet, what creates jobs more than anything else is “customers,” per Nick Hanauer, a venture capitalist. And, more trade means more customers. When we look to better govern trade, we need to look holistically at the jobs created domestically versus the ones lost. The ill-fated Brexit decision failed to consider all of the foreign companies who have European Headquarters, distribution and manufacturing sites in the UK. These companies are now reconsidering locations should Brexit move forward.

Of course, we need to better govern immigration and global trade, but we must guard against throwing the babies out with the bath water. Let me close with three thoughts.

First, we cannot shrink to greatness. Retrenching from your global market share makes little sense.  Second, think of all of the foreign companies who employ people in the US like Michelin, BMW, Mercedes, Husqvarna, Doosan, Volvo, Nissan, etc. who do so to keep manufacturing near distribution of its goods to their customers. Third, as an example, Steve Jobs is the biological son of Syrian immigrants. Had he not been in America, would Apple exist today at all or as an American company?

We cannot govern off bumper stickers. Our issues are complex. People who tout such ideas are doing a disservice to the problem and citizens through false promises.