Trump is claiming that the 4.1% growth in the USA’s GDP for the most recent quarter (3 months) is at the highest level in decades. To be honest, I don’t remember his exact words but he is contending that this 4.1% increase is the largest in a long time.
He also claims the this rate of growth is sustainable over time. To be honest, at first glance, I ain’t willing to say, one way or the other, but a quick look at a major factor responsible for this economic upturn would seem to indicate that this is a temporary phenomenon which may not be sustabinable in the long term.
For those of you on Facebook, check my page for a graph showing the increase in GDP since 1990
The problem is this: He talks in terms of dollars and cents, winning and losing, but countries are not businesses and should not be administered as such. He discusses negotiations in terms of negotiating “against” other countries; I would refer to it as negotiating “with”.
He states that the USA has a trade deficit of some $91 billion with Canada – he calls it “losing” $91 billion with no regard for the economic effects on the American economy resulting from importing goods which used to be cheaper than those made at home – when the fact of the matter is that Canada is in a deficit position with the USA to the tune of $9 billion. He is probably just looking at Visible Exports and Visible Imports which deals with merchandise exports and merchandise imports. While it is true that American manufacturing is increasing, we have to look at what is behind this manufacturing boom, what’s fueling it in other words.
It’s Trump’s tariff time,
It’s just a waste of time.
Because of the imposition of tariffs on foreign imports into the United States which makes these imports more expensive, the quantity demanded for imports has fallen in the States and, consequently American manufacturing concerns blew in and picked up the slack. This process is called “import substitution” and occurs when a country substitutes for imports from other countries by producing the good at home thus increasing domestic production. That is what’s fueling the boom in American manufacturing.
What is important to remember from this point forward and to understand is that Exports = $ IN
and that Imports = $ OUT
In other words, when we buy a good or service from the United States, this is a Canadian import because money is exiting Canada to purchase that import. Alternately, when Americans buy goods and/or services from Canada, the cost of these goods go into the Canadian export column because money is coming into our country.
Now getting back to the subject at hand, there is however a problem associated with import substitution and that is that these domestically produced goods, not as efficiently produced as in the previously exporting country will be more expensive, which in fact explains why, given equal quality of production, the Americans were importing the good in the first place rather than making it at home.
We see in this case, and in most if not all others where tariffs exist, the protection of an inefficient domestic industry rather than employing a more global approach by engaging in free trade where countries are forced to produce for both domestic and foreign consumption what they are most efficient at while importing those goods which are made more efficiently “abroad”.
In his contention that Americans have a trade deficit with Canada, Trump is most likely referring only to Visible Trade – see above – while ignoring Invisible Trade e.g. the money spent by Canadian tourists in the US, for example, is classified as an invisible import due to the fact that money is leaving Canada headed for its being spent south of our border, as well as making no reference to the Capital Account. (see below)
There are a number of other components of imports and exports classified as Invisible. When we invest money in American corporations including banks, the interest and dividends we receive in return for our investments would be considered an Invisible Import from the USA’s point of view – money out, and as an Invisible Export for Canada – money in.
As for the third component of our Balance of Payments, the above-mentioned Current Account, this includes, among other components, international investment. For example, American investment in Canadian corporations is classified as a Capital Export for Canada – money in – and a Capital Import from the American point of view – money out.
It’s all about trade and the trade war started by Trump with the imposition of a 25% tariff on American imports of steel and aluminum. What this means is that if Harley-Davidson decides to import $50 million worth of aluminum for use in their manufacturing of motorcycles from Canada, for example, that corporation would have to pay an additional 25% or $12,500,000 to the American government as a tax because they have imported aluminum from another country instead of purchasing it at home.
Other countries have reacted to the American imposition of tariffs with tariffs of their own on American exports to their country, like on soybeans which will hurt American farmers just like Harley Davidson, from our above example, gets hurt in two ways by the newly-imposed tariff on imported aluminum. First, no longer can HD rely on cheaper aluminum imports which are now more expensive due to the tariffs.
Second, due to the tariff, Harley will be forced to either move its operations out of the United States to Canada, for instance, thereby avoiding having to pay the tariff, or to raise the price of motorcycles as a result of increased production costs due, in part, to the fact that Harley-Davidson must now use American-made aluminum which is more expensive than the imported aluminum used to be pre-tariffs. Also, now that the Americans no longer have to compete with foreign imports, they are free to possibly cut corners during the production process, producing as a result an inferior product which, in turn, will hurt Harley-Davidson’s finished product by creating a substandard piece of machinery or motorcycle, depending for what the aluminum will be used.
Like I’ve said, if it decides against moving it’s operations elsewhere, Harley will have to increase the cost of its bikes which will have a negative pull on the quantity demanded for these motorcycles, thus injuring HD’s bottom line.
Now to return to the subject at hand which is one reason for that 4,1% GDP increase: remember that nations have placed tariffs on imports from the States as a reaction to the Americans having done the same thing to them. Farmers have apparently been exporting tons of soybeans and other products to other countries to beat the date when the tariffs will be imposed.
I think it’s August 1st but that doesn’t matter as long as we agree that they have yet to click in. So this enormous increase in agricultural exports right now has had a positive effect on the growth of the US’s GDP, but, this obviously is a one-shot deal making the aforementioned rise in GDP unsustainable.
Unfortunately, Trump supporters don’t fact check either because they don’t want to or because they don’t know how.
We live in interesting times, I will say that, without a doubt.