KOKOMO – United States trade imbalances and difficulties with our nation’s trading partners are complex and not subject to easy fixes. If it were as simple an issue as merely comparing tariffs, as President Trump has recently attempted with his explanation of Canadian dairy tariffs, then we could solve the problem by either charging identical tariffs or none at all. However, tariffs are just the tip of the trade iceberg. 

Barriers to free and fair trade raise their ugly heads in a variety of ways. Regulatory, taxation, customs, subsidization, dumping, preferential trading and currency barriers are just as potent and chilling in their effect on free trade as are tariffs. Sniffing out the barriers and the subtle nuances that either enhance exports or restrict imports of is more of an art than a science. As long as nation states exist, there will be no such animal as unrestricted free and fair trade. The idea is as romantic as it is illusive.

For those of you who are so easily moved to criticize President Trump for his tough trade positions with China, Canada, Mexico, Europe and, soon to be, India, you need to recognize this rather inconvenient fact about trade. You may call Trump a jingoistic “America Firster,” but every last one of our trading partners in this great big world are their “Country Firsters.” Let’s take a look at some of the non-tariff ways that countries wag the trade dog by using the tail:

Governmental regulations are a particularly onerous way of restricting competing trade. You can make the rules in such a way as to heavily tip the scale in favor of your country’s trade. For example, Europe regulates the amount of non-GMO beef that may be imported. In addition, you may exclude certain ingredients from products. Regulations such as these tip the scales in favor of the home team. As one Hungarian agriculture official told me, “You can’t get a good steak in Europe because of European Union trade regulations. All we get is tough Spanish beef.”

If the United States insisted that China meet the same wage laws, child labor standards and environmental regulations as we have in the United States, then we could kiss the trade imbalance goodbye. I’m not advocating this, but it makes you think when you see the recurring trade imbalance with a country that drains industrial waste straight into their rivers.

Taxation policy can also impact trade. There are numerous examples of taxes or lack thereof moving the trade needle. Our recent tax law change allowing the depreciation of capital investments over a twelve-month period instead of longer term depreciation just gave us a big advantage over other countries. Another favorite is an oil depletion allowance that gives our oil companies a whopper of a competitive break. Until our recent corporate tax rate cut, our businesses were at a distinct disadvantage to those domiciled overseas.

Subsidization of an industry by the government gives a big pricing advantage to the home team. Many French industries are subsidized by their government. This allows lower product pricing underwritten by Jean Q. Publique. Most airlines around the world are owned or heavily supported by their country’s government.

Lest we get too haughty, the United States has been the Emerald City of subsidies over the last 50 years. Farmers have been paid to not plant. Loans have been guaranteed by government, prices have been fixed and production has been capped. Remember years ago when the government handed out all that free cheese to poor people? Where did you think the government got the cheese and why did they buy it? This is largely why Washington, D.C., has become a swamp filled with creatures trying to get candy from the government.

In the United States, most industry will cut back production when sales slow. That usually results in layoffs, industry consolidation, plant closures, etc. In some countries, most notably socialistic ones, you just don’t lay off workers when business gets slow. You keep on producing and cut your prices on the surplus that you export. 

This strategy results in exporting goods at a price that is less than what it costs you to make. This is dumping in its purest form. In the 1980s, Japan did this with semiconductors and now Europe is doing it with steel and aluminum.

Customs is another chokepoint for free trade should a country wish to slow down imports to a crawl. The French have been notorious for singling out imports that have direct French competitors and then strangling the competition with an interminable customs process. Just picture a cargo container full of the latest Kanye West CDs. Since Kanye poses an existential threat to the hallowed memory of Serge Gainsbourg, each and every CD container must be inspected by French customs. By the time the last CD is opened and inspected, Kanye has already released a new album. The French have long had a history of using this tactic to slow down entry of imported tires and electronics.

Occasionally you will see a country attempt to protect an industry by creating artificial free trade zones or some other geographic government inducements meant to prop up a non-competitive industry. Many times, this is done to lower a domestic company’s costs by reducing American tariffs in a certain area. These are popular with politicians, organized labor and the Chamber of Commerce.

Finally, currency value differentials will substantially affect trade balances. Sometimes these currency fluctuations are market-driven and sometimes they are due to overt government manipulation.

Back in the 1980s, we used to read books about the marvels of Japanese manufacturing and how their miracle culture was going to eat our lunch. The red ink of our trade deficit piled up as millions of Hondas and Toyotas were unloaded at our ports for American consumption. American auto workers lost jobs and plants closed. Then just when you started to wonder who really won World War II, something amazing changed. No, our machinery didn’t get better, our workers did not increase productivity and our auto styles didn’t get any zoomier. What caused this change? The value of the U.S. dollar versus the Japanese yen declined significantly and, all of a sudden, our labor and manufacturing costs became significantly cheaper when measured against the yen. Next thing you know, we’re opening Japanese auto plants in Lafayette, Indiana and everywhere else in the United States.

This cheapening of the dollar drove up the cost of a Japanese auto when measured in yen and it made our vehicles far more competitive. American consumers raced back into American auto dealers and slapped that, “Be American, Buy American” bumper sticker on their new Chevette.

The decline of the U.S. dollar in the 1980s was a market-driven phenomenon as a direct result of large, American budget deficits and huge trade imbalances. That’s how it is supposed to work. But, what happens when a country acts in a way to intentionally drive down its currency’s value or to keep it artificially low? Hey China! I’m talking about you! Ever wonder how the prices at Walmart stay so low each and every year even though the United States piles up huge budget deficits and mounting trade imbalances with China? 

China is like a heroin dealer; their first and foremost duty is to keep you hooked. China keeps us hooked on cheap goods by artificially keeping their currency in a perpetual state of relative weakness so that prices in U.S. stores don’t rise. They can do this by purchasing dollars in the currency market, buying U. S. Treasury securities and U. S. stocks. Thus, the dollars return home like the swallows to Capistrano. This gives me the ability to purchase the same squirt gun at Walmart year after year for 99 cents. And, there is absolutely no way and no risk to Chinese industry that an American company will be able to manufacture a squirt gun for nine dollars, let alone 99 cents.

When it comes to trade negotiations with the Europeans, Canada, Mexico, India, China and others, you will hear a lot about average tariffs charged by each country. You won’t hear much about the 270% dairy tariff in Canada or the 350% tobacco tariff in the United States. You’ll hear that the European tariffs only average 6.5% overall versus the United States average of 1.5%. That doesn’t sound like that big of a disparity does it?  These averages only tell one small part of the overall trade story.

Make no mistake about it, every country in the world does and should act in its own self-interest. What has sent the media of the world into a state of extreme anxiety is that for the first time in many, many years, the United States has declared that it is going to act in its own self-interest. The last time this happened was in the spring of 1987 under Ronald Reagan, when he imposed large tariffs on Japanese semiconductors being dumped in the United States. 

This is the essence of President Donald Trump and what has infuriated his detractors. Donald Trump defeated Hillary Clinton because he promised to put America first again. When he actually puts America first, there should be no surprise! 
 
Dunn is the former Howard County and 4th CD Republican chairman.