Warren Buffett recently criticized our trade deficit. He must be a protectionist… an isolationist. He must favor high tariffs, and the Smoot-Hawley Act. He must be silenced. Treasury Secretary Henry Paulson must be dispatched to give us the facts on trade.
Buffett's transgressions, his anti-trade rantings, appeared in his recent letter to shareholders:
As our U.S. trade problems worsen, the probability that the dollar will weaken over time continues to be high. I fervently believe in real trade – the more the better for both us and the world. We had about 1.44 trillion of this honest-to-God trade in 2006. But the U.S. also had $.76 trillion of pseudo-trade last year – imports for which we exchanged no goods or services. (Ponder, for a moment, how commentators would describe the situation if our imports were $.76 trillion – a full 6% of GDP – and we had no exports.) Making these purchases that weren’t reciprocated by sales, the U.S. necessarily transferred ownership of its assets or IOUs to the rest of the world. Like a very wealthy but self-indulgent family, we peeled off a bit of what we owned in order to consume more than we produced.
"Pseudo-trade." This is a new term to add to the lexicon. I suppose it's true. If you just buy, you don't really trade.
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Much of the rhetoric about “trade” is enormously flawed.
It’s “pseudo-trade” because a great deal of what’s going on, perhaps even most, is “transfer of the factors of production” … using land, labor and capital offshore, rather than in the U.S. That’s not “trade” where you make something, I make something, and we trade.
And the most urgent current concerns are to end “reverse protectionism” … incentives to offshore work. There are many. See “How the U.S. Subsidizes Offshoring of Jobs” at http://www.exponentialimprovement.com/cms/offshoresubsidies.shtml. While stopping “reverse protectionism” won’t be enough to achieve balance, it would be a good start.
Finally, there’s an enduring myth that the Smoot-Hawley tariff contributed to the Great Depression. I’m not a fan of Pat Buchanan, but in The Great Betrayal (1998) he quotes an economist who points out that:
“… from 1929 to 1933, America’s GNP fell from $104 billion to $56 billion, a loss of $48 billion. However, net exports fell by only $700 million, and domestic spending declined by $47.3 billion. In other words, net exports decreased by 1.5 percent of the fall in GNP, as domestic demand fell by the remaining 98.5 percent! It is patently absurd to fuss over that 1.5 percent fall and overlook the other 98.5 percent.” p. 249.
The Smoot-Hawley myth is an example of Jay Forrester’s observation that in dynamically complex systems we are very adept at discovering a proximate cause of our problems that is obvious, logical, and wrong.