Why America can't be outcompeted
America can’t be outcompeted because America does not produce or trade anything.
Nations do not compete with nations. Individual firms compete with individual firms abroad. Ford competes with Toyota. America does not compete with Japan. Nations are trading partners, not competitors.
What would it mean for America to win the supposed economic competition with some other country? That American firms would take market share away from the other country? Market share . . . of what? Of all transactions between the other country and America?
Well, imagine a foreign country whose individual firms are so outcompeted by American firms that they import everything from us—cars, wheat, shoes, software, steel . . . everything.
[Big pause] With what do they pay for these things?
Imported goods have to be paid for by exported goods. But in this fantasy, the foreign country is outcompeted in everything, so they can’t sell us (export to us) anything.
Equally impossible is the case of 51% imports and 49% exports. Every gain for an American exporter is by that same fact a gain for foreign exporters in some other line of business. American exports are not giveaways or gifts, they are sales. Sales have to be paid for. Payment is some form of wealth that is exported from the other country’s firm to the American firm.
Couldn’t the American exporters be paid in money, not goods? Yes, but payment in money is only a waystation to payment in what that money buys: goods. Ford will accept yen from Japanese buyers—if and only if they can use yen to buy Japanese products, such as steel.
A wrinkle: the foreign exchange market allows the direct trade of dollars for yen, and vice-versa, but that’s only an intermediary trade. The reason for attaching value to a currency is the goods that that currency can buy. Someone takes yen in exchange for dollars because he, or the person he re-sells the yen to, plans to spend the yen to buy what yen buy: Japanese goods.
Foreigners can delay exchanging dollars for American-made goods. They do this when they want to invest here. Toyota may use its dollars to buy American stocks or American bonds.
When foreign firms invest their export-earned dollars here, it creates that treacherous accounting artifact: the “trade deficit.”
Contrary to what we read, an American trade deficit with another country is good for America. It means the foreign firms doing the exporting will defer their reward (American products) in order to invest in America.
A balance-of-trade deficit is a balance-of-investment surplus. The “deficit” expands the domestic supply of capital. That, in turn, means lower borrowing costs and expanded production.
Tariffs sabotage this, converting what would have been fuel for economic growth into revenue for the government.
Using the excuse of rectifying the “injustice” done us by other nations (i.e., investing in American businesses), the government erects a barriers to trade, violating the rights of both importer and exporter. Those who import find their prices rising; foreign firms that had been supplying goods to meet American demand for their products find it is less profitable to do so. Or unprofitable.
Tariffs are an obstruction of trade, an obstacle to production. And they raise prices for the unfortunate country that imposes this tax on its own citizens.
Why don’t Americans realize that a tariff punishes them, the citizens?
The reason they don’t is the cartoonish, image-dominated, Marx-inspired mental bumbling that takes the place of rational thought. The popular image—you can’t call it an idea— is that businesses here and abroad are sitting on mega-mounds of money, like Scrooge McDuck’s money bin in the old comic books. In these fevered imaginings, the only result of a tariff is a little less satisfaction of the fat cats’ greed—they have to absorb the extra cost by making do with owning one fewer racehorse or substituting a vacation in Paris for one in St. Moritz.
But there is no money bin. Almost all of the wealth of the wealthy is invested (a money bin would pay no interest). The billions of Musk, Bezos, et al. is in stock holdings in their companies. And the average rate of profit on sales is 7.7%.
Querying on Google, “What is the average rate of profit in the U.S.?” I got this:
While the average net profit margin is around 7.71%, a general rule of thumb suggests that a profit margin between 5% and 10% is considered healthy, while 20% or higher is considered a high margin.
Those willing to drop the comic-book approach can watch a few episodes of Shark Tank. That CNBC series features real venture-capitalists, such as Mark Cuban and Kevin O’Leary, trying to decide whether or not to put their own money into the business start-ups being pitched to them by fledgling entrepreneurs. Shark Tank spotlights the kind of considerations at play in real-life commitments of funds by capitalists.
One or two episodes should be sufficient to snap out of the delusion that capitalists or shareholders could “just absorb” a 10% tariff’s increase in costs.
(It also educates in the “risk-reward ratio”: since many of these ventures will fail, a high rate of return has to be earned on the ones that succeed in order for the investors to end up ahead on average.)
The Smoot-Hawley tariff of 1930 help turn the ’29 stock market crash into the Great Depression. And back then, foreign trade was a very small percentage of American trade. Now, in the age of globalization, the consequences may well be much worse.
Yet the rationale for tariffs is the collectivist notion that America is an entity that trades and competes with other nations. A return to sanity on trade would begin with the recognition that trade is between private parties, not between national collectives, and that the private parties engage in it because each judges that the exchange will benefit him.
And almost all the time, that judgment is correct.