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 It superseded another series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.