THE EU AND INTERNATIONAL TRADE

Most US economists do not worry about US trade deficits to a large degree. They claim trade imbalances are affected by a host of macroeconomic factors, including the relative economic growth rates of countries, the value of their currencies, and their saving and investment rates.

However, they often fail to acknowledge, US trade deficits could also be due to the US having negotiated bad trade agreements for decades, that enable “trading partners” to limit their imports of US goods, while increasing their goods exports to the US.

Trade Surpluses, Good or Bad

Major US “trading partners” (China, Japan, Korea, the EU, Canada, Mexico, etc.) have trade surpluses with the US, and will fight to maintain and increase them, because they create: 1) well-paying, steady jobs in their countries, 2) profits on their exports and income on any assets held abroad, and provides 3) tax revenues for their governments. Their economists view trade surpluses as positive and trade deficits as negative. They view owning US productive assets as positive, but limit US ownership of their productive assets, claiming “national champion” status, i.e., a Chinese or US company buying Mercedes or Siemens would never happen no matter how lucrative the offer.

 

US economists, especially those associated with Wall Street, in essence, explain with all sorts of convoluted reasoning, that the US having decades of trade deficits and increasing debtor nation status is just fine, nothing to worry about. They mention some of the causes are:

 

1) The too low US savings rates and too high consumption rates.

2) Excessive federal deficits, much of it financed by foreign entities.

2) The too high US preference for foreign goods.

3) The US being a service economy,

4) US manufactured goods being less attractive than foreign goods.

 

They do not mention flawed trade agreements, foreign government rules and regulations, foreign governments encouraging the bashing of US goods. Because Wall Street has much influence, its self-serving views are widely echoed by academia, government and the media.

NOTE: Various EU countries, using their state-controlled mass media, were actively agitating for Clinton and against Trump within Europe and the US (election interference?), because he wanted to renegotiate trade agreements to achieve reciprocity and balance in international trade, and to restore factory jobs in the US, whereas they wanted to maintain/increase their lopsided, lucrative trade surpluses, plus not pay their fair share of NATO.

NOTE: The US trade deficit with China mostly is in consumer goods: electronics, housewares, etc., sold by Walmart, Costco, Best Buy, LLBean, etc. Those deficits have increased through concerted action by the Chinese government to increase exports, by holding down the value of China’s currency and directly subsidizing some exporting industries. When China was admitted to the World Trade Organization in 2001, it obtained access to markets around the world and in turn committed to opening its own markets to countries, such as the United States. China did not keep up its end of the bargain. It did not provide easy access to its own markets. And for a long period after the Asian financial crisis, 2000 - 2010, it gave itself a competitive advantage by holding down the value of its currency. The EU and Japan do exactly the same, plus they exploit the advantage of being “US allies”, which means even less US restrictions on their trading and ownership activities in the US.

https://www.nytimes.com/2018/03/05/us/politics/trade-deficit-tariff...

End Result of US Policies and Trade Negotiations

Foreign economists and countries love their trade surpluses with the US. Only US economists rationalize, by contortionist reasoning, decades of US trade deficits are just fine.

The US went from a $6.8 billion trade surplus in goods in 1964 (the last surplus) to an $810 billion deficit in goods in 2017; the deficits are mostly with industrialized nations. Each $1 billion in goods deficit means about 8000 less goods-producing jobs in the US. Foreign entities earned about 10%, or $81 billion on their export surplus in 2017.

 

US budget deficits are mostly financed by foreign entities. They obtained the funds from 1) the earnings on their trade surpluses with the US and from 2) the earnings of their US assets. This and other factors changed the US from being the largest creditor nation in the world to the largest debtor nation in the world. The 50 years of growing US budget deficits and trade deficits led to the value of US assets held by foreign entities becoming about $8.3 trillion greater than the value of overseas assets held by US entities by end 2016, a very large percentage of US GDP. The US was a creditor nation from 1910 to 1988. Foreign entities earned about 5%, or $415 billion on their net assets in 2016.

NOTE: In a Wall Street Journal op-ed in March 2017, Navarro argued that “running large and persistent trade deficits also facilitates a pattern of wealth transfers offshore” He warned “foreigners will eventually own so much of the US that Americans will wind up working longer hours just to eat and to service the debt.”

NOTE: The EU, not as pre-occupied with world peacekeeping as the US, quickly outmaneuvered the US, and quickly took commercial advantage of the Iran nuclear deal; the US was left in the dust. The value of trade between the EU and Iran increased from $9.2 b in 2015, to $16.4 b in 2016 after the deal was signed, to 25 b in 2017. No wonder Europe does not want the Iran nuclear deal to end.

https://www.theguardian.com/world/2018/may/09/eu-moves-to-protect-e...

NOTE: Dutch Royal Ahold and Belgium Delhaize Group merged to own and operate Stop and Shop, Giant, Hanneford, Food Lion, Bottom Dollar, Harvey’s, Reid’s, Martin’s, Peopod, Sweetbay Supermarket. They carry a multitude of European food products: cheeses, jams, cookies, etc. The US has no such equivalence in Europe, due to a multitude of rules and regulations and other obstruction tactics in each country.

The A to Z Value Chain

For decades, the EU, Japan, Korea, etc., have invested to build up the skills of their technical personnel to develop, design and operate complex facilities to manufacture products and systems for their own markets and for export. That is the front end of the A to Z value chain, which is the most profitable part. It pays good profits to owners, good wages and benefits to workers and taxes to home governments. It is the real wealth builder of an economy. Those countries develop, design, build and own the ships to transport products and systems all over the world. Those countries own parts-making and assembly plants all over the world.

 

The assembly of parts and sub-assemblies into end products, such as cars, is the less valuable part of the value chain. Usually it pays good profits to owners, but pays mediocre wages and benefits to workers. Clever transfer pricing avoids or minimizes paying taxes to host governments.

https://www.theguardian.com/business/2017/jun/05/hopes-of-eu-us-tra...

Transfer Pricing

Countries with trade surpluses with the US use transfer pricing to minimize profits in the US and to maximize profits in their home countries. For example, if the sales price of a Mercedes car is $50,000, US costs for assembly, distribution, etc., are $20,000, and German charges for imported parts, etc., are $30,000, the US profit is $0, and taxes paid to the US government is $0.

If the $30,000 consists of $20,000 of German costs and $10,000 of German gross profits, less US tariff of $750 (2.5%), then German gross profit is $9,250 and German net profit is $6,937. But, if US tariff is 10%, the same as Germany, then the gross profit is $7,000 and net profit is $5,250. See table. The tariff difference would affect Germany with respect to Japan and Korea, i.e., Japanese and German cars might obtain a competitive advantage, because raising Mercedes prices likely would not be an option. Germany, GDP $3.7 trillion in 2017, had a worldwide trade surplus of $306 billion in 2016 and $301 billion in 2017.

NOTE: Merkel: “Germany has a trade surplus, because our goods are in demand.” She implies, the US has trade deficits, because US goods are not in demand. However, the US has a freewheeling, consumerist society, hyped by advertising, unlike most other countries, which maintain protected markets as much as they can get away with to ensure trade surpluses.

 

Tariff	2.5%	10%
Sales price	50,000	50,000
US costs	20,000	20,000
German charges	30,000	30,000
US profit	0	0
US federal tax paid	0	0
Costs in Germany	20,000	20,000
US tariff	750	3000
German gross profit	9250	7000
German taxes paid	2313	1750
German net profit	6937	5250

The EU and Bi-Lateral Trade Agreements

The EU is the biggest importer of raw materials and of goods and services, and biggest exporter of goods and services in the world. The EU negotiates trade agreements as a bloc. No EU country is allowed to enter into bilateral trade agreements with a country inside or outside of the EU. A renegotiated NAFTA should include that provision.

 

The EU has at least 50 bilateral trade agreements with other countries. In case of Canada and Mexico, the EU gained privileged access, via NAFTA, to the US market, the second biggest in the world. The EU also has direct access to the US market via the WTO.

EU and Japan Bi-Lateral Trade Agreement

Much gets written about tariffs, but the real problem is reciprocity and balance, which means you buy my goods and services and I buy about the same dollar amount of your goods and services. In that manner, almost no country would have a trade surplus with another, and the issue of tariffs likely would not be applicable.

 

The EU has a bilateral trade agreement with Japan signed in December 2017; it took 4 years of negotiations. The core of the agreement aims to gradually reduce EU market barriers to increase the flow of Japanese cars to the EU and to gradually reduce Japan market barriers to increase the flow of EU highly profitable specialty food items to Japan.

- The gradual part will be monitored on a real-time basis to ensure the increase in dollar value of Japanese cars does not exceed the increase in dollar value of EU exports, i.e., reciprocity and balance are to be maintained at all times, to ensure the EU and Japan make simultaneous structural adjustments.

- Japan has a history of not freely opening its markets and flooding the markets of others. Korea and China do the same.

- Any future bilateral agreements the US or NAFTA might have with the others should include that reciprocity and balance provision.

 

The EU and Japan can make such profitable agreements, because they do not play the “NATO or ally” card against each other, and they do not need to worry about world peacekeeping and paying for it, as the US is doing that peacekeeping for them (while they are safely making profits in trade) and paying for most of it.

https://en.wikipedia.org/wiki/Japan–European_Union_relations

US Ill-Advised Buying of Allied Support is a Slippery Slope

As allies in NATO, etc., “trading partners” claim the US cannot claim “national security” as a reason for imposing tariffs, because “we are are US allies”.

 

The US wants our help with a) the Iran nuclear deal, b) North Korea, c) fighting terrorism, d) increased NATO spending to contain Russia. The list is long.

This ill-advised “buying” of their support (be my friend and we will let you have trade surpluses, give you weapons, etc.) is of benefit to maintain US world hegemony, however, it has hurt US workers, created US rust belts and dysfunctional communities with a host of social problems.

 

Rules-Based/Open Markets and Reciprocity and Balance

“Trading partners” maintain trade should be a rules-based system with open markets. They fought long and hard to have trade surpluses with the US and do not want to give them up for the sake of reciprocity and balance. The EU turns a deaf ear to “reciprocity and balance”, as it would blow up its lucrative surpluses. “Trading partners” claim they have had decades of trade surpluses with the US, because:

 

1) They happen to be the “natural outcome” of “rules-based/open markets” free trade.

Natural outcome, my foot! US car import tax is 2.5%, EU 10%, China 25%, plus non-tariff barriers. The EU, etc., are free to slight/belittle US goods, and have rules and regulations which make US products not qualified, not marketable.

 

2) The EU emphasizes, “rules-based/open markets”, as the rules have been stacked in its favor since the 1950s. The EU, etc., turn a deaf ear to “reciprocity and balance”, as it would blow up lucrative surpluses; there are 102 countries with trade surpluses with the US.

 

Trump agrees to “rules-based/open markets”, but emphasizes WITH reciprocity and balance, i.e., you buy x dollars of goods and services from the US and the US buys x dollars of goods and services from you. There would never be no trade predators, no issue of tariffs and no issue of the US not getting its products in.

The rules were set in favor of Europe in the 1950s, when Europe was an economic basket case and the US could afford to be generous. Subsequent trade agreements were built on those skewed rules, and the US naively agreed to them, as it proved hard to reset skewed rules, and the US wanted to have allies to fight Communism.

 

NOTE: Trump Claiming "Reciprocity and Balance" at Davos in 2018: “We will enforce our trade laws and restore integrity to the trading system. Only by insisting on fair and reciprocal trade can we create a system that works not just for the United States but also for all nations. The United States will no longer turn a blind eye to unfair trade practices. We cannot have free and open trade, if some countries exploit the system at the expense of others.”

 

NOTE: Trump, during an ITV News interview: The European Union’s trade policy with America is “very unfair. We cannot get our products in. It’s very, very tough. And yet, they send their products to us – no taxes, very little taxes (because of clever transfer pricing). It’s very unfair.”

 

NOTE: The US, which has relatively more open markets compared to the EU and Japan, does not have bilateral agreements with the EU and Japan, and thus has to make do with the much less privileged market access under WTO rules.

Negotiating Flawed Trade Agreements

The General Agreement on Tariffs and Trade, GATT, became effective on 1 January 1948, superseded by the World Trade Organization, WTO on 1 January 1986. The average tariff levels for the major GATT participants, about 22% in 1947, were 5% after the Uruguay Round in 1999; averages can be deceiving. Experts attribute part of these tariff changes to GATT and the WTO.

https://en.wikipedia.org/wiki/General_Agreement_on_Tariffs_and_Trade

 

The US had become a new world power after WW-II. The US, as part of building its “Free Enterprise World Leadership versus Communism” structure to contain Russia and China, negotiated a series of generous trade agreements with impoverished allies in the 1950s that set the patterns for later agreements, which ultimately proved to be disastrous for the US economy and grossly beneficial for the economies of others.

 

Primary Reasons for the Unfavorable Outcomes for the US Economy

 

1) US generosity after WW-II, which was gratefully accepted by “trading partners” and exploited at every opportunity, such as by not paying their fair share for NATO expenses for decades (5 of 29 NATO nations pay 2% of GDP for their OWN defense), and by the US opening its markets to “help them recover”.

- They kept their market more or less closed in one form or another, pleading weakness, hardship and excessive social-economic disruption, as excuses for not making structural changes, i.e., much lip service to reciprocity, but too little effective action of benefit to the US.

- “Trading partners” restricted US access to their markets by claiming “helping to fight Communism” (the EU), “developing nation” status (China), or “ being a reliable ally for Pacific Rim security” (Japan).

 

2) Europe and Japan recovering from WW-II damage much quicker, and becoming more formidable competitors than was understood by the US at the time, largely due to having a trained work force, pro-growth policies, and profitable access to the rich US market, with much fewer regulations, and with several hundred million, relatively well-off people, dedicated to the mass consumption of goods.

 

3) The US “business as usual” approach (which included an isolationist mindset and advertising-hyped consumerism, i.e., too much “borrow and enjoy” and too little “save and invest”).

 

4) By the time the US began to realize what had happened, about the mid 70s, foreign “trading partners” were eating our lunch, extending their technological reach into the US, and buying many large US companies, etc. They found it easy to do business in the US and to make money, whereas, by means of various protectionist rules and regulations and subsidies for domestic companies (“launch“ subsidies for the SST, Airbus 380, etc., are well-known examples), foreign countries were slowly but surely making things more difficult for US companies.

 

5) US trade negotiators:

 

- Likely were lacking the detailed understanding and experience of world trade of foreign negotiators who had acquired that understanding and experience over many centuries.

- Opened US markets, or failed to sufficiently protect them, especially in manufacturing (the valuable front end of the value chain), while foreign negotiators left themselves enough wiggle room to protect their own markets.

- Raised in the more open, free trade US economy likely were not intimately familiar with the nuances of that wiggle room.

 

The US cannot blame “trading partners” for taking as much advantage as possible to expand their exports to the US, buy US assets and make big money on their exports to the US and on their US-held assets; about $500 billion in 2016.

Trump calling for a halt to “business as usual”, and for a more fair and balanced US trade, likely is very upsetting for trading partners. They objected to Trump being elected President. They are not interested in bi-lateral trade agreements that would provide a glide path to lower US trade deficits, either by limiting their manufactured exports or increasing their manufactured imports, or both. After all, they already dug their way to the vault and do not want the vault moved. They continue to object to spending more money on their OWN defense.

Consequences of Flawed Trade Agreements and "Rules-Based" Trading

Trade Deficits: The US went from a $6.8 billion trade surplus in goods in 1964 (the last surplus) to an $810 billion deficit in goods in 2017; the deficits are mostly with industrialized nations. See URLs. The third URL has additional information.

 

	Goods & Services	Goods	Services
2000	-372,517	-446,783	74,266
2001	-361,509	-422,370	60,861
2002	-418,955	-475,244	56,290
2003	-493,890	-541,643	47,753
2004	-609,885	-664,764	54,879
2005	-714,247	-782,805	68,558
2006	-761,714	-837,288	75,574
2007	-705,376	-821,198	115,822
2008	-708,727	-832,493	123,766
2009	-383,776	-509,695	125,919
2010	-494,661	-648,681	154,019
2011	-548,626	-740,646	192,020
2012	-536,773	-741,171	204,398
2013	-461,876	-702,244	240,368
2014	-490,336	-751,494	261,157
2015	-500,445	-761,855	261,410
2016	-504,793	-752,507	247,714
2017	-566,031	-810,023	243,993

NOTE: Whereas small imbalances are acceptable from year to year, they should average zero over the years. That should be a clause in any bilateral and multi-lateral trade agreement. Had that clause been incorporated 50 years ago, there would have been significantly lesser US trade deficits over the years. Countries such as China, Korea, Germany, Japan, etc., would have been "on notice" to be much less mercantilist. See the egregiously flawed US-Korea Trade Agreement in this article.

 

https://www.census.gov/foreign-trade/statistics/historical/index.html

https://www.census.gov/foreign-trade/statistics/historical/goods.pdf

http://www.windtaskforce.org/profiles/blogs/cop-21-world-renewable-...

Creditor to Debtor Nation

The US went from the largest creditor nation in the world to the largest debtor nation in the world. The 50 years of growing deficits led to the value of US assets held by foreign entities becoming about $8.3 trillion greater than the value of overseas assets held by US entities by end 2016, a very large percentage of US GDP. The US was a creditor nation from 1910 to 1988. See table 1 and graph in fred.stlouis URL.

 

Earnings by Foreign Entities From International Trade

- Foreign entities earned at least 5% on the $8.3 trillion of assets, about $415 billion in 2016.

- Foreign entities earned at least 10% on that trade deficit, about $75 billion in 2016. See table 2.

- They used the $490 billion to make investments in their home countries, in the US, or elsewhere.

- They also had the benefit of owning and controlling the front end of value chains, the more profitable parts.

 

Table 1	US holdings abroad	Foreign holdings in US	Net Inv. Position	Status
Year			$billion
1981			227.0	creditor nation
1984			140.1	creditor nation
1987			59.6	creditor nation
1988			21.5	creditor nation
1989			-33.7	debtor nation
2007			-1279.5	debtor nation
2014			-6980.2	debtor nation
2015	23352.4	30845.9	-7493.5	debtor nation
2016	23849.4	32167.8	-8318.4	debtor nation

 

https://en.wikipedia.org/wiki/Foreign_trade_of_the_United_States

http://www.aljazeera.com/indepth/opinion/2011/07/2011771074476381.html

https://fas.org/sgp/crs/misc/RL32964.pdf

https://www.commerce.gov/news/opinion-editorials/2017/08/free-trade...

https://bea.gov/newsreleases/international/intinv/intinvnewsrelease...

https://fred.stlouisfed.org/series/IIPUSNETIA

Here are some data of imports, exports and total trade for 2016. Clearly, China, Japan, and Germany are disadvantaging the US and US workers by deliberately not importing more US goods, especially manufactured goods.

 

Table 2	From country	To country	Total trade	US deficit	% of Total trade
2016	$billion	$billion	$billion	$billion
China	462	116	578	347	60
Japan	132	63	195	69	35
Germany	114	49	163	65	40
Canada	278	267	545	11	2
Mexico	294	231	525	63	12

China, a Particularly Egregious Trading Partner

China has a huge trade surplus with the US (exports to US, 461.1 b - imports from US, 116.7 b = surplus $344.4 b in 2017. Surpluses were 347.0 b in 2016 and 367.3 b in 2015.

https://www.census.gov/foreign-trade/balance/c5700.html

WalMart, Best Buy, etc., basically act as sales outlets for East Asian products. US foreign car dealers, which sell over 50% of all new cars in the US, basically act as sales and service outlets for European and East Asian car companies. China has been, and still is, notorious for:

- Raising barriers against foreign companies entering and competing in its markets; against WTO rules.

- Forcing technology transfers from foreign companies to Chinese companies; against WTO rules.

- Forcing foreign companies to have Chinese partners; against WTO rules.

- Committing intellectual property theft regarding trade secrets of foreign companies; against WTO rules.

- Committing intellectual property theft regarding the US defense sector; a US national security issue.

- Trying to buy US companies that make critical components for US weapon systems; a US national security issue.

 

Examples of Flawed Trade Agreements Increasing US Trade Deficits and Debtor Nation Status

 

1) The Trade Expansion Act (“Kennedy Round”), signed by Kennedy in 1962, significantly reduced US import tariffs, opened US markets to a flood of European imports. No wonder Kennedy was much loved in Europe. Subsequent GATT and WTO agreements cemented in place the Kennedy Round standards and extended similar opportunities for East Asia to access the US and European markets. Europe formed a trading bloc, the EU, complete with tariff wall, to protect its markets and jobs.

 

2) NAFTA, signed by Clinton in 1993, allowed the EU and East Asia to have bilateral trade agreements with Mexico and Canada, which, over time, became advantageous to them and disadvantageous to the US. Regarding US manufacturing jobs, Ross Perot called NAFTA “the giant sucking sound”. NAFTA, to its disadvantage, does not act as a trading bloc, unlike the EU.

 

In case of the car industry, NAFTA enabled EU and East Asian global companies to:

1) Build plants for manufacturing car parts, mostly in Mexico.

2) Import parts near-duty-free into Canada and Mexico (per bilateral agreements).

3) Assemble entire cars in Mexico and Canada for import, duty free, into the US.

 

By design, the US-made parts content of these cars, designed abroad, was kept minimal to maximize jobs in Europe, East Asia, Mexico and Canada, to the disadvantage of US workers. Any exported US-made car parts, or entire cars, would face European and East Asian tariff and regulation walls. Try importing a Harley Davidson into Italy, or a US car into Korea and Japan.

 

The adversities of NAFTA further increased the US trade deficits in goods from $132.4 billion in 1993 to $752.5 billion in 2016, and reduced well-paying, steady, US manufacturing jobs to lower levels than they would have been.

 

3) China into the WTO, signed by Clinton in 2001, enabled China to have the advantageous status of “developing nation”, i.e., allowed China to restrict its imports, while building up its exports and foreign currency reserves. China is far from being an underdeveloped nation. See URL.

https://www.chonday.com/27755/railchaiengi5/

This further increased the US trade deficits in goods from $422.4 billion in 2001 to $752.5 billion in 2016, and reduced well-paying, steady, US manufacturing jobs to lower levels than they could have been.

 

The US response effectively amounted to near nothing, as it became bogged down in the quagmires of Vietnam, Iraq, Afghanistan, etc., adventures that wasted several trillion dollars, instead of being invested in infrastructures to improve economic and living conditions.

 

History shows, the cumulative result of trade pacts, bilateral and multilateral, led to decades of increasing US trade deficits ever since 1971, the demise of US trade unions, and rustbelt conditions in many urban areas of the US.

 

Trump’s call to renegotiate trade agreements likely will be slow-walked by “trading partners” until he is out of office, as it would upset their present advantageous situation, relative to the US, which is producing lucrative gains.

4) US-Korea Trade Agreement, signed by Obama in 2012, enabled Korea to increase its exports to the US, whereas US exports to Korea were stagnant. See table 2A. Tens of thousands of jobs were created in Korea, whereas near zero jobs were created in the US.

http://www.epi.org/blog/u-s-korea-trade-deal-resulted-in-growing-tr...

 

US exports of motor vehicles and parts to Korea increased by less than $1 billion between 2011 and 2015, but U.S. imports from Korea increased $10.6 billion. As a result, the trade deficit in vehicles and parts increased $9.6 billion in the first four years.

 

The growth of the vehicles and parts deficit was responsible for 85% of the increase in the US-Korea manufacturing trade deficit, and nearly 63.7% of the increase in the total US-Korea trade deficit between 2011 and 2015.

Alarmingly, the agreement has not taken full effect and there still retain some important US tariffs that protect our domestic auto industry. When they expire in 2021, our trade deficit with Korea will undoubtedly worsen. 

It is utterly astounding, after decades of negotiating trade agreements, US/Obama negotiators again were completely outsmarted by Koreans, or they deliberately compromised US commercial interests, which borders on treason.

 

At 10,000 jobs per billion dollars of exports, Korea gained about 150,000 jobs, mostly in manufacturing, the more lucrative part of the value chain. The US further reorganized its economy to distribute, sell and service foreign goods, likely with no net gain in jobs.

 

Trump and others call it a horrible agreement for the US. In reality, it is much worse. It is completely abhorrent and unacceptable. It should be immediately renegotiated.

 

Table 2A	2011	2012	2013	2014	2015
Korea	56.7	58.9	62.4	69.5	71.8
US	43.5	43.3	41.7	44.5	43.5
Deficit	13.2	16.6	20.7	25.0	28.3

NOTE: The EU and Korea also have a bilateral trade agreement, which appears to work much better for the EU than for Korea. The EU knows how to negotiate. The EU's free trade agreements have been proven to spur European growth and jobs. One example is the EU-South Korea trade deal. Since it entered into force in 2011, EU exports to South Korea have increased by more than 55%, exports of certain agricultural products have risen by 70%, EU car sales in South Korea have tripled and the trade deficit turned into a surplus.

http://trade.ec.europa.eu/doclib/press/index.cfm?id=1723

Examples of World Trade Disadvantageous to the US

 

1) The Value Chain Regarding Cars: German companies make the materials, and design and build the factories to assemble cars. The design, engineering and testing of a Mercedes car and the parts and subassemblies are all done in Germany. Some cars are sold in Europe, and some are shipped, usually on European ships, to Mercedes-owned distribution centers in the US, and from there to foreign car dealers who sell the cars to end users.

 

The US gets involved at the tail end of the value chain. The real money and skilled jobs are at the front end of the value chain. The German response when pressed to import more US cars: “The US should build better cars”, or, regarding US trade deficits, “it is the natural development of markets”, or some other inane platitude.

 

Mexico has bent over backwards to accommodate car companies of Germany, Japan and Korea, and has big trade surpluses with the US as a result. German car assembly plants in Mexico use parts from the EU, US and elsewhere, to assemble cars, such as the Mercedes models, that are exported to the US duty free, because of NAFTA, and to the EU duty free, because of the bilateral EU/Mexico trade agreement.

 

- If that same car, using the same parts, were assembled in a Mercedes plant in the US, it could not be exported to the EU duty free, because of a lack of bilateral EU/US trade agreement; it would be subject to WTO tariffs.

- If that same car, using the same parts, were assembled in a plant in the EU, and exported to the US, it would be subject to WTO tariffs.

- If the US insists on more US content of imported cars (as part of a revised NAFTA), Daimler-Benz would merely ship an engine assembly plant to the US, send the engines to Mexico, and import cars as before. The US role would remain essentially unchanged, i.e., to sell and service the cars, a low-skill, low-margin part of the value chain.

 

2) Canada and its CSeries Plane Building Program: The CSeries program, started in 2004, $5.4 billion was spent as of February 2015 (likely much more by now), created three planes; the CS100 seats 108 - 133, the CS300 seats 130 - 160, and the CS500 seats 160 - 180, development date not yet determined. The CS 300 and 500 are direct competitors of the Boeing 737 and Airbus A320.

 

Bombardier had received a $3 billion “launch” subsidy from the Canadian government to develop and set up assembly of the CSeries planes in Canada. In the past, Airbus, a French “national champion”, had received similar “launch” subsidies from the French government.

 

Bombardier tried to sell 75 CSeries planes to Delta Airlines at a much larger than usual discount, made possible by the subsidies. Boeing objected. The US Commerce Department agreed with Boeing and imposed a 220% countervailing duty and 80% anti-dumping duty. In retaliation, Canada cancelled a planned F/A-18 fighter plane purchase; the planes were to be built by Boeing. Instead, Canada is buying similar fighter planes from Australia.

 

Airbus comes to the rescue! Airbus has acquired a 50.01% stake in the CSeries program (no money was paid). Bombardier will own 31%, and Investissement Quebec will own 19%. Airbus will provide the program with procurement, sales and marketing and customer support expertise. The agreement brings together Airbus' global reach and scale, and EU-backed political clout with the CSeries planes. Airbus could sell those planes all over the world and avert US tariffs, except may be in the US.

 

After the Airbus takeover of the CSeries program, Delta Airlines, a patriotic company, increased its order to 100 planes, and placed it with Airbus. The takeover, the Delta order, and the contested subsidy remain to be resolved by a US and/or an international court.

https://en.wikipedia.org/wiki/Bombardier_CSeries

 

The CSeries planes will be assembled with parts from Canadian, the EU (wings from Northern Ireland), China and the US (engines from Pratt & Whitney), etc., as before. However, final assembly will be in the Airbus assembly plant in Mobile, Alabama, to enhance US content (relatively low-skill assembly jobs), which likely would facilitate the sale of the CSeries planes to US, Canadian and Mexican airlines without having to pay import duties, an example of the EU, etc., taking advantage of Boeing and NAFTA.

 

This whole episode also is an example of Canada, the EU and Australia ganging up on the US. It would be preposterous for Canada to think Boeing would not object. Canada likely calculated, if push came to shove, the US would cave, as usual.

 

Trump had declared the time of taking advantage of the US is over, i.e., putting the US and US workers first. It should now be obvious why the EU, Canada, Mexico, etc., were so opposed to Trump being elected.

https://www.ft.com/content/d3094604-dc63-11e7-a039-c64b1c09b482

 

3) Massachusetts and Offshore Wind Systems: Massachusetts has a new energy law requiring utilities to procure electricity generated by 1,600 MW of offshore wind turbines (nameplate capacity) by June 30, 2027. The turnkey capital cost of such wind turbine plants, plus wiring to shore, plus onshore grid modifications would be at least $9 billion, and the electricity cost would be at least 18 c/kWh for the first year, escalating at 3.5%/y for 20 years, a gravy train for multi-millionaire owners. See URL.

 

NOTE: New England wholesale prices have averaged about 5 c/kWh for steady, 24/7/365 electricity since about 2008, primarily due to:

 

- Natural gas electricity; 50% of NE generation, low-cost (5 c/kWh), low-CO2 emitting, clean (no particulates), domestic fuel

- Nuclear electricity; 26% of NE generation, low-cost (5 c/kWh), low-CO2 emitting, clean (no particulates), domestic fuel

 

Construction would require huge sea-going tugs, cranes and other specialized vessels to assemble those 600-ft tall wind turbines. Europe has perfected that equipment, but the US does not even have it. Europe offshore wind capacity is 12,600 MW, versus the US 30 MW at end 2016.

 

European companies, such as Vestas and DONG of Denmark, Siemens of Germany, etc., will make big profits. Wall Street banks will make loans, and financial managers will collect fees for managing the tax shelters for the multi-millionaire investors. New England ratepayers will pay for the outrageously high cost of electricity.

 

Just another way for EU, etc., to hamstring the New England and US economy into higher cost structures and make them less competitive, all under the false flag of fighting global warming, and saving the world. See URLs.

 

The US has plenty of domestic low-cost energy. It does not need to build expensive offshore wind systems.

The EU imports most of its energy. It HAS to build expensive offshore wind systems.

The EU likely thinks, if the US does not follow the EU into high-cost renewable energy, the US would have a competitive advantage, and attract energy-intensive businesses, which must be avoided at all costs.

 

https://www.washingtonpost.com/news/energy-environment/wp/2016/08/0...

http://www.windtaskforce.org/profiles/blogs/a-very-expensive-offsho...

 

Recent US Trade Policy Goals

The tax reduction law signed by Trump in December 2017 has provisions to accomplish goals, such as:

 

1) Reduce the outrageously high US trade deficits

2) Have millions more manufacturing jobs in the US

3) Eliminate the incentive for US companies to locate their headquarters abroad for tax reasons

4) Eliminate the incentive for US companies to hold abroad profits earned abroad for tax reasons

5) Attract companies to the US, because of low tax rates on corporate profits.

The Poor Prospect of EU and Japan Having New Bilateral Trade Agreements with the US

Sadly, the US has given away too much over the decades, has not protected itself enough, and others have been gaming the system. Hence decades of huge US trade deficits.

To rectify that situation would mean the others would have to make unilateral concessions to the US so trade would be reciprocal and balanced; tit for tat, give and take. That is likely never going to happen, as shown by the bitter wrangling during the current NAFTA renegotiations.

 

The EU, Japan, etc., like things just the way they are, and do not want to change one iota, because they are making the big bucks; they have the US by the short hairs. They are not interested in new bilateral trade agreements with the US, because those agreements likely would require:

- Increasing the US-made content percent of US imports.

- Increasing the manufacturing jobs in the US.

- Moving the more valuable front end of the manufacturing value chain to the US.

Renegotiating NAFTA and Returning Jobs to the US

Ross Perot, a multi-billionaire businessman running for President, called NAFTA “the giant sucking sound”, because it would move US manufacturing jobs to Mexico and Canada. He was right. See URL, page 24.

 

- The US exports parts to Canada. Most of them are used for assembly into cars exported from Canada to the US. Canada makes parts for 1) cars assembled in Canada for export to the US, and 2) parts for export to the US.

 

- The US exports parts to Mexico. Most of them are used for assembly into cars exported from Mexico to the US. Mexico makes parts for 1) cars and trucks assembled in Mexico for export to the US, 2) parts for export to the US.

 

- Mexico’s numbers in the below table are about 2 times the numbers of Canada.

https://www.census.gov/foreign-trade/Press-Release/current_press_re...

 

First 10 months of 2017	Total	Cars	Trucks	Parts
US Exports	$billion	$billion	$billion	$billion
Canada	52.403	11.865	14.266	26.272
Mexico	28.922	2.548	1.057	25.317
US Imports
Canada	51.540	35.592	2.416	13.532
Mexico	97.633	24.661	25.557	47.415
Trade
Canada	0.863	-23.727	11.850	12.740
Mexico	-68.711	-22.113	-24.500	-22.098

 

- Minus means US trade deficit, + means US trade surplus

- Car parts imports into the U.S. nearly doubled in the past five years.

 

- Minus means US trade deficit, + means US trade surplus

- Car parts imports into the U.S. nearly doubled in the past five years.

Cars, made or assembled in the NAFTA area, are required to have, on average, 62.5% NAFTA-originated content; 37.5% from non-NAFTA areas, such as the EU, Japan, Korea, etc. Recent data gathering and inspections showed this requirement is not met. No country-of-origin percent was specified, which can be attributed to

 

1) Inexperience of US negotiators

2) Pressure group tactics

3) Democrats wanting to do poor Mexico a favor; As predicted by Perot, and others, US car parts workers lost their jobs, mostly to Mexican workers, as US and other parts manufacturing companies moved their operations to Mexico where wages were much lower than in the US.

 

Trump wants to rectify this gross disadvantage to US workers. He wants to renegotiate NAFTA and, regarding cars, has demanded the NAFTA content be increased to 85% (15% from non-NAFTA areas), and that 50% of the 85% would be US-made. Because the US car market is many times greater than the combined car market of Mexico and Canada, the US demand of 50% parts content is being very modest and entirely proper.

 

However, the modest US demand led to much howling and protests from Mexico and Canada, because they think they likely would lose jobs to the US. However, because the NAFTA content would increase from 62.5% to 85%, Mexican and Canadian jobs may actually increase, because parts from non-NAFTA areas would significantly decrease from 37.5% to 15%. The howling should have come from the EU, Japan, Korea, etc. It should be clear why those foreign countries did not want Trump to be US President. See table.

 

	NAFTA content, %	Non-NAFTA content, %
At present	62.5	37.5
- US, assumed	26.0
- Mexico, assumed	24.0
- Canada, assumed	12.5
After renegotiation	85.0	15.0
- US	42.5
- Mexico	26.0
- Canada	16.5