Why is Trump fighting the trade war?
Why is Trump fighting the trade war? Here's why.
Critics of Trump's trade policies think everything is okay if we don't do anything. The chart below shows that everything is not okay if we don't do anything.
This is a chart of capital spending in the U.S. from 1968 through to the present. It is a straightforward presentation of monthly data from the Commerce Department. There is nothing clever, nothing tricky about this presentation or about the time frame chosen. The Commerce Department started this series in 1968. It superseded another series on capital spending.
Source: U.S. Department of Commerce.
Why is this chart important?
It is a death sentence for America.
Although it is a single series of data, the chart is essentially in two parts, split in the year 2000. There is no manipulation to achieve this effect. This is how the data lay out, which is why this chart is so significant.
From 1968 into 2000, you see beautiful, real-world steady growth (i.e., "steady" interspersed with recessions). The red trendline is a trendline of constant percentage growth year to year (i.e., exponential). When you calculate it, it turns out to be 6% per year. This is roughly twice GDP annual growth over the same period. There is no specific significance to that 2X factor except that we would expect capital spending to grow faster than the economy as a whole, as, in fact, it did.
Why is this growth in capital spending important? Even in our increasingly service-oriented economy, it is capital spending – the stock of capital equipment – that sustains our standard of living. Healthy capital spending is critical to – really identical with – a thriving economy. This is why the flat capital spending that America has experienced since 2000 is so grave a condition.
American Thinker readers will be surprised to learn that they are now the only people in the country, aside from this author, who have seen this chart. I could not be more serious when I say that.
Economists do not think of capital spending in terms of real-world numbers. They think of it as a concept in their models that self-equilibrates. There isn't an economist from Harvard to Stanford or anywhere in between who knows this chart. Believe me: I have worked with these people. If you as a reader are in business or in academe, try me out.
The only person in public life who understands this chart is Donald Trump. I cannot say he has literally looked at it, but he understands it.
Note that we are not talking about the "creative destruction of capitalism" here. We are not talking about no longer making buggy whips. We are talking about the staples of a modern economy, many of which we no longer have the capital equipment to manufacture.
We were the only country to emerge from World War II stronger than when we went into it, and our relative strength at the end of World War II was immeasurable. It became our policy, and then our unconscious attitude, to "help other countries get back on their feet." This attitude became a permanent part of our trade policy-making, wherein we essentially opened our markets to other countries while accepting that their markets were closed to us.
The chart shows that our ability to sustain the Lord Bountiful approach to trade ended forever in 2000, although nobody in power saw it until Donald Trump came along in 2016.
Among other things, this chart is the opioid epidemic – the despair created by permanent unemployment. The lack of capital investment is what has created the regions where people have dropped out of the workforce and thus are no longer counted as being in it.
The chart is a picture of the consequences of our defeat in the trade war. Only Trump – and American Thinker readers of this piece – know that we have experienced this defeat.
What happened that has resulted in no growth in capital spending in the U.S. for the last 18 years?
George W. Bush – and I voted for him twice – agreed, with other world leaders, to admit China to the World Trade Organization (WTO) in December 2001. This gave China access to world markets and particularly to the American market. Since our system is heir to the English Common Law tradition, when we sign an agreement, we carry it out. No other culture takes this view, certainly not China. The Chinese have practiced mercantilism after signing the WTO agreement and getting access to our market, while the whole point of the WTO is to keep mercantilism out of world trade.
Economists think mercantilism can never work, thus Trump attacking it as practiced by China is a fool's errand or worse. This is based on the early 19th-century Theory of Comparative Advantage developed by David Ricardo. It states that among trading parties, even if one party's production costs are greater in all goods than the other party's, the first party should focus on those goods where it has a comparative advantage – i.e., where its own cost of production is lower. If the two countries then trade, both will improve their welfare. If, under these conditions, a country practices mercantilism, it impoverishes itself. This is a substantial insight.
But it depends on a key assumption: that capital is fixed. Ricardo's example was that the British should raise sheep and the French should make wine, and they should trade these goods with each other. The example was based on climate, the ultimate in fixed capital.
With capital mobile, as it is now, mercantilism works. By forcing a trading partner to move its assets, technology, know-how, intellectual property, and R&D to the mercantilist country in order to participate in its market, a country can build itself up at the expense of its trading partner. Following its accession to the WTO, China has been strip-mining the U.S. economy of high value-added industries and high-wage jobs by doing this.
This is not due to any hatred of the U.S., but rather to advancing its own interests. It is a double loss for us because what happens is that as industry moves to China, we end up buying goods from China on borrowed money. The goods wear out, but the debt still needs to be repaid, and we have less of a production base to repay it.
This piece is not a valediction. It is not a counsel of despair. It is a discussion of the correlation of forces. In America, we don't give up. The other guy does that.
What we do in America when we find ourselves in a jam is roll over to the attack. That is what Donald Trump is doing in world trade. Trump is not attacking other countries; he is attacking trade policies pursued by other countries, which are to the detriment of the United States and which we can no longer let lie. Other countries are not used to being called to account by the U.S., so his doing so is an affront to them, is a transgression in polite diplomatic society.
So be it. The time for it has arrived.