Can Anyone Win A “Trade War”?

Can Anyone Win A “Trade War”?

In the famous movie “War Of The Roses”, Danny DeVito plays a divorce attorney who imparts some incredibly insightful advice:  “In a divorce there are NO WINNERS, just degrees of losing”.  He might as well have been talking about Trade Wars.  If you enjoyed and absorbed our piece yesterday called “The 9 Laws of Markonomics” (, you can easily answer the question that seems to be on everyone’s mind.  What will be the impact of raising tariffs and moving toward protectionism?

Of all the economic issues being debated, “Free Trade” stands out as among the most confusing-not because of the issue itself, but the “spin” that is put on it by those who seek to exploit the emotionally charged situation in order to further their own individual agendas.

We can understand quite a bit about trade simply by reviewing JUST 2 of the 9 Laws of Markonomics:

Law 2:   The Economy is The Aggregation of “Mutually Beneficial Transactions”

The Economy is the aggregation of all the “Mutually Beneficial Transactions” (MBTs) between parties to an exchange: including 1) The swapping of one’s time and labor for money (also known as “work”), 2) The purchase of goods such as toilet paper or motor oil, or 3) the purchases of services such as haircuts or airline transportation.

Law 3:   Greater Choice = More Mutually Beneficial Transactions = More Prosperity

Choice is the key determinant of both the Quantity and Quality of MBTs. More choice is virtually always a positive for an economy in that it can only INCREASE the number of MBTs.  Any act of government that RESTRICTS choice CAN ONLY have a NEGATIVE impact on the ECONOMY by serving to REDUCE the number of Transactions.

Knowing only the 2 Laws cited above, we can now answer some key questions. First, since anything that restricts choice will have a negative impact, it is inescapable that any increase in taxes or tariffs on imported goods will reduce the number of those goods purchased. That has ZERO possibility of being beneficial. That would be true REGARDLESS of whether the “offending country” retaliated. Every move to restrict choice of trade will be negative. PERIOD. Placing tariffs on imported goods is not just equivalent to shooting ourselves in the foot, but because it invites retaliation, it’s more like shooting yourself in both feet.

The beneficiaries of increased tariffs on imported goods are limited to the non-competitive domestic suppliers of those goods. The losers are everyone else. A portion of the lost MBTs that result from greater tariffs will be re-directed domestically, but those will be fewer in number and at much higher prices than would have taken place otherwise.

“Free Trade” Agreements such as NAFTA have been controversial in that detractors claim that the deal favors Mexico. Without actually having read all 1000 pages or so of the actual agreement, all we have to do is see the impact on the quantity of trade between Mexico, Canada and the U.S.  In 1993, when NAFTA was enacted, 3-way trade totaled $290 Billion. In 2016, it was $1.1 Trillion ( The bulk of the increase was US/Mexico Trade which is hardly surprising. Mexico SHOULD be a huge trading partner because they are close. China or Japan, on the other hand,  must transport their goods across the world thousands of miles at great expense.  This ought to represent a huge advantage for the US but hasn’t.

Presumably, the increase in Transaction values offer clear cut evidence of the fact that substantially more MBTs have been generated.  So, while arguments that have been made and continue to be, that somehow the US is being cheated are not proven out by the numbers.  Yes, some workers have lost their jobs. But far more people have benefitted from lower prices for imported goods.  Yet, arguments against NAFTA are everywhere to be found. An example of the negative case made against NAFTA being anything but true “Free Trade” can be viewed in this piece: (

But ask yourself this question? What if the United States were broken into 50 Separate Nations or “Nation States”? Would ANY of those states make an argument for trade barriers with other States? No. In fact, the very structure of open and truly free trade within the United States PROVES that less restriction is better. Otherwise California would place tariffs on Florida oranges. They don’t!

The rationale for making the argument has everything to do with the fact that the losers are concentrated into inefficient domestic industries, who do suffer job losses and plant closures. The benefits, on the other hand, are spread over the entire United States. Thus, no constituency exists with a vested interest so great as the folks whose jobs are threatened. The people benefitting from NAFTA don’t even really know it. The people hurt by it are very hurt, very aware and very politically noisy!  Nonetheless, they are typically working for an inefficient and dying industry.

But what are the facts, Jack?

On a Worldwide basis, global Trade has consistently grown much faster than World GDP. According to the World Trade Organization Fact Sheet (  from 1963 to 2016, World Trade grew from approximately $160 Billion to  nearly $16 Trillion or 20% of World GDP!

During the same period, World GDP has grown from roughly $2 Trillion to nearly $80 Trillion a 40-fold increase, but at a rate less than half as fast as world trade. The growth in World trade has been 2 ½ times World GDP ( . This shouldn’t be a surprise as exporters continue to identify new markets for their goods. This creates MBTs that would not have existed before, so this represents true growth.

Detractors of “Free Trade” cite “Unfair Trade”.  What’s that?  Both domestic steel companies and automobile manufacturers frequently cited the “Dumping” or selling of foreign made products here below cost.  Thank God they did.  The quality of US made autos, for example has steadily improved BECAUSE OF the perception of superior quality that foreign automakers had by comparison to the “planned obsolescence” that dogged US manufacturers.  So, how is that bad? Sure, if you’re a non-competitive unionized industry, you’re going to have pressure.  But, what if Saudi Arabia decided to “dump oil” here? Would anyone complain? “Damn those Saudis! Gasoline prices down another buck!”


What about the DEFICIT??? Oh yeah, the deficit. And the Chinese.

The deficit is fiction. The so-called trade deficit is nothing more than a misleading accounting convention, often used to justify government interference. A common complaint is that somehow as a country we are WRONGED when another country subsidizes exports (“DUMPS”) to the United States or puts tariffs on imports from the US.

Since the all the hand-wringing revolves around China, let’s see if the  numbers are consistent with the protectionist theme.  Let’s say China exports 1 Million Cell Phones to the United States at $500 each for a total cost $500 Million, but there is no Chinese interest in buying $500 Million of US Goods.  Our deficit with China has just gone up by $500 Million.

If the Chinese exporter buries the $500 Billion in the sand, we received $500 Million of cell phones and they got paper. They got paper. Our deficit with China could grow to extreme proportions if they sold us Billions of Dollars of Goods and did NOTHING with the money they were paid. Our trade deficit with them would be HUGE. Yet, we got goods, and they’re sitting on a bunch of paper. Is that bad?

But, that isn’t what happens. The $500 Million either is invested into US Denominated T-Bills or Bonds or it is swapped into the foreign currency market to a country that needs Dollars because they are NET BUYERS from us. If that country then uses the $500 Million to buy 10,000 cars from Detroit, aren’t we running a $500 Million surplus with them?

Trade HAS to balance globally, even if it doesn’t between any two specific countries. Furthermore, trade is not just limited to merchandise. It includes services and financing. Yes, China could run a huge surplus with the United States, but then it gets stuck with either owning a bunch of US Treasury Debt or it uses the currency to swap or buy.  Countries routinely run either surpluses or deficits against individual countries, but for every deficit there has to be a counterbalancing surplus. Unless of course, the exporter just buries the money. Wouldn’t that be nice?

Since there currently is no “inter-galactic trade”, the World MUST BALANCE! Deficits and Surpluses exist between every country and its trading partners, including the sub-categories of merchandise, services and investment. But, since the Earth is currently a closed system, the World Trade picture MUST Balance!

Some more facts, Jack!

According to the World Trade Organization ( who compiles world trade statistics, in 1963 the US accounted for 14.3% of World Export volume versus a scant 1.2% for China.  In the most recent period, the US accounts for 9.5% and China now ranks number 1 with 13.5 %. On the import side, the US accounted for 11.4% in 1963 versus about 14.3% now.  China is now the SECOND leading importer in the World with 10.0% of world trade.

According to Trading Economics (, China’s GDP is about $12 Trillion or 2/3rds of our $18 Trillion GDP. That would mean that China imports a greater percentage of its GDP than does the United States, so the notion that somehow they don’t play fair is not borne out by real numbers nor would it matter if they did. Either they spend the money, or they bury it under their mattresses. China does own more than $1 Trillion of US Treasury Debt, which sounds big but relative to the total outstanding amount is less than 10%.

To be sure. US/China trade balance is lopsided with nearly roughly $500 Billion imported from there to here and only about ¼ of that, or $130 Billion exported there.  But that doesn’t completely describe the trade issue. Whether intentional or not, the United States, by sending manufacturing to China, has also exported POLLUTION to China.  So much POLLUTION, that major cities are almost uninhabitable. For a fuller discussion, see “An Introduction To Incentivism Part 3, Regulations” (

I’m not sure how to put a price on that, but I’d rather have a cheap IPhone and clean air, than an expensive IPhone that I have to speak through using a gas mask.

All the data backs up the two relevant Laws of Markonomics as they pertain to Trade. More MBTs are always good. Fewer MBTs are always bad. More choice is always good; less is always bad.

While the markets have yet to really react violently to this unfortunate direction, and one can argue that the adversity is baked in, Trade Wars have a tendency to escalate. They will severely affect the huge multi-national corporations that make up our large capitalization equity indexes such as the Dow Jones Industrial Average, the Standard & Poor’s 500 and the Nasdaq 100 who derive much of their revenue from abroad and are susceptible to adverse moves in the Dollar as well as the free international transfer of goods.

This can not end well unless it DOES actually end.


One Comment

  1. DB
    Jul 10, 2018 at 8:52 am

    Excellent – easy to understand and very much to the point.

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