There have been a lot of people pushing back lately on some of President Trump’s trade policy proposals, stating that it will be bad for business to impose tariffs or renegotiate trade agreements. I find this amusing because that’s pretty self-explanatory. However, most of the people I hear pushing back in a public forum seem to be speaking from their own agenda – either corporate executives concerned it will hurt their business in the short term (and thus their stock price and cushy stock options package) or economists from the post-WWII Bretton Woods institutions and status quo.
I think it’s important to look at things from an objective point of view to understand why they’re happening, instead of just being for or against something. So, I’ll offer my humble view on why this is happening and why I think the unwind of globalization is inevitable (the “bad” form of globalization in terms of outsourcing and currency wars).
The post-Bretton Woods system has created a huge divide in society that has enriched the few at the expense of the many. Globalization has exacerbated this divide and greatly explains the rise of populist movements. It has benefited capital (i.e. money, like stockholders) at the expense of labor (worker’s wages). Profit margins have expanded while median incomes have remained flat for decades and it appears society has finally hit its breaking point – not just in the US, but also Europe with Brexit, the Italian referendum, etc. Labor in the developed world cannot compete against labor in the emerging world because the cost of living is substantially less in emerging nations. This is why incomes have not risen but unemployment has (along with automation and other things).
The main issue is not that companies want to operate globally. That’s fine. The issue is that US-based companies make the same product overseas for cheaper than it would cost to produce at home, and then ship it back home to sell for the same price (thus boosting profit margins at the expense of their workers). This works until you hollow out your entire customer base and have no one left to buy your product because 1) no one can find a job, and 2) wages don’t rise overtime. Anything made overseas needs to be kept and sold overseas. If US companies want to exploit the system to receive the highest selling value at home, then a tariff should be imposed on goods produced overseas to balance the system. This should have been implemented from the start decades ago.
Yes, unwinding globalization will be a painful process that reduces global economic activity and trade. Yes, it could even cause a recession. But the alternative is that we continue to hollow out the middle class core of our country for the sake of continuing down a flawed path because vested interests don’t want things to change.
Sir James Goldsmith explains this predicament in what has got to be the most prophetic interview of all time (hosted by Charlie Rose in November, 1994). It’s comical to see the typical government economic advisor come in with her vague terms about how “good paying jobs” will be created while offering no specifics. Looking back, we can clearly see who was exactly right and who was dead wrong. I highly recommend you watch the entire interview if you want to better understand these issues.
Trump is attacking this process in a very aggressive manner. Will he start a trade war and tank the global economy in the process? Possibly… But his view is that it will benefit America by no longer allowing the rest of the world (and US corporations) to exploit us and our workers.
In other news, Trump’s top trade advisor, Peter Navarro, just said Germany is using a “grossly undervalued” euro to gain an advantage over the US and its EU partners. This is kind of the reverse but pretty much the same issue as discussed above. Germany has been exploiting the system through globalization and it’s why a breakup of the EU is inevitable, as I’ve written about many times before. And then you have EU bureaucrats responding that Trump is a threat to the EU (instead of recognizing the fact that the EU has some serious structural flaws). You will see many more aggressive comments like this over the next year. The unwind will take a long time and it now becomes a question of how smoothly we can make the transition.
-Nick