William D Lastrapes, Professor of Economics, University of Georgia writes for The Conversation and the World Economic Forum on why Trade deficits are good for the country with the deficit in an article entitled “An economist explains why trade deficits aren't a bad thing”.
In this reply, I will explain why this article is dishonest and where Lastrapes’ logic fails through an omission of the consequences of the actions he prescribes.
Lastrapes’ main argument against a trade war is that this would create a rise in prices while he ignores that trade tariffs are used to protect domestic production and therefore not usually applied to produce imported because of a lack of [economics buzzword here] Comparative advantage. Thus prices for goods that are not produced domestically should not be changed, and prices of goods produced domestically should remain the same initially, and become lower over time, as we'll see later.
As an aside, if there is less competition for domestic produce then more produce is sold and the incentive to increase production rises and new entrants, with new production methods, come into the market. Prices for which there is no domestic production should not change due to tariffs and if production is increased due to demand we have more jobs and so those ‘at the bottom’ gain.
When Lastrapes’ claims the economy gets richer he fails to mention who in the economy actually gets richer and we will see how this works further down the chain of consequences. Spoiler alert, it’s not the little people. This is a critical point to come back to in other places in this website because things that are omitted are more important than what's said.
Using a classic economic example, he claims that “Grain grown in the US is exchanged for cars produced in Japan” however simplified claim ignores how many bags of grain each car costs to produce. A trade deficit is created when the number of bags of grain used to buy a car, costs more to produce than the car does (yes it's a little more complicated than that but this is how they bamboozle you).
He then goes on to explain that the profits from the surplus country are used to invest in the donor country (I say, donor, because if you are selling or swapping goods for less than their value you are effectively subsidizing the surplus country) which means that the donor country is giving away the ownership of its resources and a proportion of the future profits of those industries invested in. Take Hollywood, almost entirely Chinese owned (have you not noticed the amount of Chinese Propaganda in current Hollywood productions?).
So now the surplus country not only has P from the bad deal, but it also has assets I from investment and assets L from ownership of the means of production, which may be Land, factories and other space-based assets (e.g. Movie studios).
Now that the surplus country has P+I+L it can now invest this back into the donor country in the second year resulting in (P+I+L)2. Even accounting for deductions (D) such as taxes and profit taking we are left with (P+I+L-D)2 in the second year, which merely slows down the rate at which the surplus country owns the donor country not the overall effect of the trade surplus.
This can be seen clearly when we look at the Chinese bond holdings issued from the US. Which is reported today as 1.165 trillion dollars. Average bond holdings return at today’s rate 2.8% across all time periods. This gives the donor country the opportunity to purchase more of what it thinks will make more profit, and let me express my opinion that this isn't the poor people of the surplus country that receives this windfall.
This leads to the question “At what point does the donor country become a vassal state of the surplus country?” How much of UK London, or Canadian real estate is now owned by foreign investors? And why is this investment not two way? Why don't English Millionaires own property in Beijing or Moscow?
Simply, because Beijing and Moscow know that we, here, in the west have been lied to, by all our governments over the last 30 years. Our legacy is being sold down the line.
Using his own logic, I would like to swap my bike with Lastrapes’ car and tell him that the deficit is good for him and that I can now buy a share in his property. from the difference in value. After all, this investment is good for him, also when he sells I will be taking that profit out of his economic sphere (in addition to the principle).
So, now not only have I invested using the value he gave me when he made the swap of unequal value in the first place, but I am also able to claim ownership and then take profit when he makes a profit on his labour.
And all this is good for him.
Welcome to globalist economics.
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