Bill Poulos holds an MBA, with a degree in finance, from the University of Michigan. He additionally earned his bachelor’s in engineering from GMI. Bill is co-founder and president of Profits Run, Inc. He founded Profits Run with his son Greg. Poulos is an investor and financial educator. He was born and raised in Detroit, Michigan. Bill married his high school sweetheart and has three children who are now grown. Bill offers his observations and analyses on Medium.com as well as Yours.org. Below, Bill Poulos offers insight into the tariffs recently imposed on the United States by Mexico and the European Union.
Mexico recently stated that they are going to impose tariffs on U.S. exports to Mexico in retaliation for U.S. imposing tariffs on aluminum and steel imports from Mexico. The EU announced the same the following day.
Of course, this has the media in an uproar that, for them, confirms that this whole business of enacting tariffs in order to balance trade is a bad idea because it historically triggers trade wars and leads to a reduction in their national trade.
We have to look at the backdrop on all of this to make any kind of assessment as to whether this is a serious action (or not) as it would impact international trade.
The U.S. trade deficit has been running at about five hundred billion dollars per year for some time now. A lot of economists will tell you that that’s not important.
The trade deficit is not really important, however if you do the math, five hundred billion dollars probably equates to around two and a half million U.S. jobs lost as a result per year.
Now, that’s a big number!
So, in actuality, the U.S. trade deficit running at about five hundred billion dollars per year is significant.
So why is the trade deficit so high?
It has to do with Fair Trade practices including the valuation of currencies, which is near the top of the list.
For example, if the Mexican peso is undervalued by even 10%, then that’s like imposing a 10% discount. It’s like discounting Mexican products by 10%, as an example.
Then you have other government subsidies that are not so obvious that are manipulating the currency to control the competitive balance out of whack.
Ultimately, the United States really has been taken advantage of year after year.
No one seems to understand that or care about it or anything else because it doesn’t really trigger attention, getting excitable headlines such as Mexico putting tariffs on.
It’s important to look at these things with a comprehensive view.
So, where is this all going to lead?
Mexico’s slapped that tariff now on their cultural related goods—in this case hogs is at the top of the list, so that’s going to be a negative impact on the hog farmers.
In particular it will negatively impact the hog farmers in Iowa and that could throw people out of work. That’s what grabs the headline.
Well, I think a soberer assessment would be this is all part of the negotiation triggered by the United States to get a more equitable set of trade practices, not only with Mexico but around the world. So, this continues to be part of the strategy and part of the fallout of using tariffs as a negotiating tool.
In the end, the tariffs will disappear in favor of some more balanced trade agreement replacing the trend specific agreement, so I don’t get too excited about it.
Now to contrast all of this, you’ve got China for the last few years now collaborating with Russia, other Asian countries, and Europe to develop and build what’s called the Silk Road. (Read Bill Poulos – China as the 21st Century Global Economic Leader: The Chinese Petro-Yuan and The New Silk Road for more information on the Silk Road)
The Silk Road is a land bridge of sorts, whether it be highways or railways (or what have you), to accelerate and facilitate the movement of goods all across Asia right into Europe.
This might be the equivalent of putting Eisenhower’s highways that were built in the 1950s in the United States. The highways dramatically allowed the U.S. economy to grow much faster.
So here it is 60 years later, China is doing the same thing all across Asia and into Europe in collaboration with those governments. Everyone benefits.
International trade is enhanced dramatically, costs drop, transportation costs drop significantly, and it also ties the involved countries much more closely together economically. This means the potential for war amongst those countries dissipates accordingly, so it’s good all the way around.
In terms of promoting fair trade practices, what China is doing on a collaborative basis is far more effective, I believe (at least in the long run), than engaging in tariff induced trade war to get to the same end.
However, that’s in the long run.
In the short run, I think using tariffs to get the attention of countries that have been used to taking advantage of the U.S. for years might be the right thing to do.
However, it’s not the right thing to do in the long run, so we’ll have to see how it all plays out.
My guess is that it will all play out well in the end and you’ll see the United States get a square deal when it comes to international trade.
This will be to the benefit of all countries, though getting at it in kind of a more onerous, more clumsy way than what the Chinese are doing with the new Silk Road.