There is a lot of disagreement about trade deficits and their impact on our lives. The current administration in Washington would have us believe our national security is threatened by large trade deficits.
I’m not an economist, but I’ve done research to sharpen my recall of Economics 101, and I absolutely verified two things. First, the subject of economics, as my dad would say, is drier than a popcorn fart and second, it is true what economist Edgar Fielder said, “Ask five economists and you'll get five different answers — six if one went to Harvard.”
Harry Truman vented his frustration by saying, “Give me a one-handed economist! All my economists say, ‘On the one hand, on the other’.”
I’m not writing to be humorous, rather to share an unambiguous lesson I learned during my working life.
I was fortunate to have a private conversation with a high-level automotive executive who later became chairman of his company. I will paraphrase the exact conversation, which occurred over 20 years ago, however I haven’t forgotten the clear message.
This wise man told me that his company had no power to set the selling price of their vehicles; the consumers set the price. He explained that the manufacturers in the marketplace had to contend with the consumer’s “perceived value” of competitors’ products. The value in the buyer’s mind was a comparison of what they took home in terms of quality, gas mileage, performance, design, standard features, etc., versus the money they parted with.
His message: Since a manufacturer could not set the price, the only way to make a profit was to focus on the costs involved with manufacturing.
I later found that all manufacturers adopted the same philosophy with varying degrees of success. The survivors were the best at continually improving their cost, or at the very least, fighting off cost increases.
So what does this have to do with you?
The answer is in the unmentioned (inconvenient? covered up? ignored?) certainty that consumers will feel in our pocketbooks the current policy emphasis on fighting international trade deficits with import tariffs on steel and aluminum, and renegotiating NAFTA.
Businesses cannot fight off cost increases created by government interference in trade represented by mandated tariffs. To survive, businesses have no recourse but to pass that cost on to the next person in the supply chain, until it is absorbed by the final consumer — you and me.
Are you thinking about a new vehicle, a new appliance, new lighting fixtures, a new electric toothbrush or anything else that has steel or aluminum in it? Then expect to pay more for it. Recognize it for what it is: a trickle-down tax.
Equally threatening, if you look at the correlation between trade deficits and unemployment over the last 20 years, you will find that the relationship is the opposite from what the popular “trade deficits cause job losses” stories would suggest.
Call me one-handed, but I see bad policies, based on bad logic, that will have bad consequences.
Trade wars (bad policy), especially with our allies (bad logic), have negative effects that will come home to roost in our own neighborhoods, specifically in the form of inflation and job losses (bad consequences).
It behooves the 252,000 Kentuckians employed in manufacturing, (including 38,200 in Congressional District 6), and the community leaders of the approximately two-thirds of Kentucky counties that have an employer in the automotive segment to do some homework to understand how trade wars will trickle down on them.
I leave you with the words of another very wise man, Benjamin Franklin: “No nation was ever ruined by trade.”
Jim Brutsman, retired from a career in logistics, lives in Harrison County. Reach him at email@example.com