Worst in Class

BALTIMORE – People can believe whatever they want. But sooner or later, real life intervenes. We just like to see the looks on their faces when it does. By that measure, 2017 may be our best year ever. Rarely have so many people believed so many impossible things.

 

Alice laughed. “There’s no use trying,” she said: “one can’t believe impossible things.” “I daresay you haven’t had much practice,” said the Queen. “When I was your age, I always did it for half-an-hour a day. Why, sometimes I’ve believed as many as six impossible things before breakfast.”

Image credit: Disney

 

Automaker General Motors (GM) used to have an assembly plant in East Baltimore. Then one Friday in May 2005, at 4:30 in the afternoon, the last Chevrolet Astro van rolled off the assembly line at the Broening Highway General Motors Plant.

Some eyes misted up. Some were angry. Some laughed. The van hadn’t been updated in 20 years. It was widely seen as a safety hazard and voted “worst in its class” by the experts.

Peter Morici, a professor of business at the University of Maryland, summed up GM’s problem to a reporter for The Baltimore Sun:

 

“If you sell an inferior product and you expect a premium price, you’re going to go out of business.”

 

The rear end of the last Astro, and with it the end of the line for the Broening Highway General Motors Plant after seven decades of continuous operation. When the plant started assembling the Astro, it had actually been quite a coup, as the model filled an important niche in terms of interior size and towing capacity. But no-one ever thought to improve much on the original concept, aside from a few occasional touch-ups – and eventually, it was no longer competitive.

Photo credit: John Makely

 

In its heyday, the plant operated two shifts and employed 7,000 workers. Dundalk, the nearest neighborhood, boomed – with bar traffic ebbing and flowing as one shift took up work and another left off.

But by 2004, the shop was spinning its wheels. GM owed so much to the past – in the form of pension and medical benefits to retired employees – it had little money or attention available for the future. The company paid out more than $5 billion that year for retirees’ aching backs, high blood pressure, and other ailments.

A year later, the plant sputtered to a halt and went silent. The thousand-plus GM workers still on the job in Maryland grumbled. But no one, as far as we know, suggested punishing the company with a penalty tax on Michigan-made vans sold in the state.

For some reason – never explained – Marylanders may bristle at cheap imports from Mexico or China. But they seem to take imports from Michigan or California in stride.

 

Border Tax

But what’s this? GM now produces the Chevrolet Cruze, a cheap domestic automobile favored by the people left behind by globalization and financialization. It is assembled in Mexico. President-elect Donald Trump indignantly tweets that GM:

 

“…is sending Mexican made model of Chevy Cruze to U.S. car dealers-tax free across border. Make in U.S.A. or pay big border tax!”

 

Both of those options presume a higher sticker price for the Cruze. Neither the president-elect nor his trade guru, economics Ph.D. Peter Navarro, have revealed how forcing Trump supporters to pay more for a basic set of wheels would help them.

Of course, no one knows how or when such a choice would be imposed. But one thing is sure: Someone is going to be disappointed.

 

The 2016 Chevy Cruze model sleekly gleams in the setting sun of Guadalajara… and has thereby become an unexpected object of controversy. Maybe depicting it right in front of a wall wasn’t really a good idea. Meanwhile, GM had to explain that most of the Chevy Cruze models for the US market are in fact assembled in Ohio anyway.

Photo credit: chevrolet.com

 

It’s not what he doesn’t know that gets a man into trouble, as someone once pointed out; it’s what he thinks he knows that ain’t so. And, usually, he thinks he knows that someone other than himself is doing something he oughtn’t.

Mr. Trump, and apparently much of the U.S. electorate, thinks GM oughtn’t be assembling its autos in Mexico. Why not? Because it causes U.S. jobs to migrate south of the border. But why is a job north of the Rio Grande better than a job south of it?

That, too, has never been adequately explained. Only one person can have a job. If it is not you, what do you care if it goes to someone in Detroit or someone in Guadalajara?

Presumably, people in both cities are equally charming and equally worthy of employment.

 

What Exactly is a “Better Trade Deal”?

In addition to trying to preserve the past in the U.S., Mr. Trump says he is keen to negotiate better trade deals.

We understand free trade. But the exact nature of a “better” trade deal has never been explained, either. As near as we can tell, it is like a “better” calendar, with 100 days so it is easier to keep track of… a “better” election process, in which your candidate always wins.

China exploits its working people to undercut U.S. manufacturers, say the critics. Its factories don’t have to abide by U.S. safety, environmental, or labor rules. Pretty underhanded, isn’t it? Dastardly. Real capitalist pigs, those Chinese, right?

“Yes,” says the man about to get himself into trouble. “The Chinese are bad people… doing a bad thing. We have to retaliate.” In today’s Wall Street Journal, for example, Trump’s trade negotiator, Robert Lighthizer, says he wants to “level the playing field for American workers.”

 

Wouldn’t you know it, those darn Chinese workers were so  fast and flexible in the 1870s already that we apparently haven’t known “what we shall do with our boys” ever since!

Illustration by: George Frederick Keller

 

But perhaps he should get out one of those new laser levels. Who breathes polluted air? Who works 12-hour shifts in unheated factories? Who makes $1 an hour without complaining so that someone on the other side of the planet can get an “everyday low price” on some gewgaw at Walmart?

Currently, Americans get useful gadgets and gizmos made in China and shipped here at Chinese expense. In return, U.S. shoppers give the Chinese pieces of green paper (or the electronic version thereof).

The sellers, who already have plenty of our currency, are at a loss as to what to do with more of it. Typically, they sell their dollars for Treasury securities. In other words, they trade one IOU for another from the same issuer.

Since 1990, the accumulated U.S. trade deficit with China has topped $4 trillion and is now running at about $1 billion every 24 hours.  Americans have gotten autos, computers, TVs, and the other paraphernalia of modern life here in the U.S. In return, the Chinese have gotten precisely nothing.

 

We wouldn’t say they have gotten nothing out of it, given that the thing you mostly don’t see in the background above is known as Beijing on clear days. The problem is that such clear days have become rare. Anyway, free trade always benefits those taking part in it, otherwise they wouldn’t do it.  The voluntary nature of buying and selling decisions ipso facto proves their beneficence and this is not magically altered by the presence of borders. Modern-day “managed trade” agreements are certainly deserving of critique in many ways, but most of today’s trade critics are frankly economic ignoramuses. Good economic analysis requires one to look beyond the superficial to things not immediately seen (a lesson taught by French economist Bastiat in the mid 19th century, apparently to little avail). It is not free trade that has impoverished certain communities; it is the fake fiat money system with its unfettered expansion of money and credit that is at the root of the problem. It is easier though to just point fingers at foreigners than to truly think matters through. Contrary to what many people seem to think, economics is not just easily explained in a few soundbites, which admittedly makes the defense of sound economic concepts a thankless and difficult task.

Photo credit: Stringer / Reuters

 

The IOUs have never been redeemed. And never will be. One of the amusements of the year ahead will be to see how Team Trump improves that deal!

But wait. This fake money system – not free trade – is the real problem. It may be a great “deal” for U.S. consumers. But it is a disaster for the U.S. Main Street economy.

More to come…

 

Image captions by PT

 

The above article originally appeared as “Trump Can’t Beat THIS Trade Dealat the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.

 


 

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3 Responses to “A Trade Deal Trump Cannot Improve”

  • CG23:

    Yes!, Chinese slave-wage earners are more “efficient”! Imagine how much more “efficient” we could be if we brought back child labor! Or, maybe even actual slavery! Either way, trying to give average American workers a decent living is a crime against the “shareholders”…and serving the “shareholders” is the reason America was founded in the first place, right? And oh yes, recycle that tired old propaganda about the Smoot-Hawley tariff “causing the Great Depression. As most readers of this site already know, the Depression was caused by the Federal Reserve’s 1st disastrous attempts at monetary policy and by mammoth, unpayable debts from war reparations, international loans to Germany, and the disastrous attempts to pretend that they were actually payable. If you like Chinese workers better than Americans, go live there.

    • jks:

      Here’s how free trade works:
      Susan in Iowa buys a sweater made in China and saves $8 over the price of the American-made sweater. The “slave labor” in China now has money to buy something American made. Maybe a GM auto someday (China is the biggest auto market in the world and they love GM autos). Maybe a ride on a Boeing jetliner. The point is, every dollar that goes offshore in trade has to come right back to the US in the form of trade or loans. Susan saved $8 that she can now spend on a restaurant meal or a movie.
      Outcome:
      Susan wins. Her money bought more; effectively making her wealthier.
      The “slave labor” in China wins. Chinese now have money to buy something US-made that they didn’t have before.
      The US company exporting to China wins and those working for the China exporter win.
      The restaurant or movie theater wins. They made a sale they couldn’t have before.
      The American sweater maker loses.

      Here’s what happens when you sabotage that process with high tariffs or import bans:
      Susan buys the expensive US-made sweater.
      Outcome:
      Susan is poorer. Her money didn’t go as far and she has fewer choices.
      The restaurant or movie theater loses.
      The “slave labor” in China loses.
      The US China exporter loses and so do his employees.
      The US sweater maker wins.

      In the tariff scenario there is a net loss to the US economy and to US jobs. Americans are made poorer and have fewer choices. The competition that forces US manufacturers to improve quality and/or value is gone so US-made products suffer.

  • jks:

    Demagogue Trump is manipulating a common economic fallacy. There’s even a name for it: single-entry bookkeeping or single-entry accounting. A factory goes south of the border and so jobs were lost. The fallacy ignores the fact that now those workers south of the border have dollars with which to buy something American made. Those dollars that went south have to come back to the US in trade or in loans, both of which are good for the US economy. If there were economies gained by moving the factory then consumers get increased value for their money and now have more money to spend on something else which is great for the economy and great for the consumer.

    The Smoot-Hawley tariff of the 30s greatly prolonged and deepened the depression by sabotaging the many benefits of free international trade. Trump wants to take us down the same road again.

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