What
if they had a Trade War and Nobody Came, by David Goldman, 2/10/17
For
those of us who cut our teeth on classical economics, it does seem a bit
unusual for global stock markets (including Asian markets) to rally right after
a new US administration pulled the plug on decades of Asian trade diplomacy. It
also seems unusual for the Mexican peso to rise against the US dollar a day
after the White House rumored a 20% tariff on Mexican imports to pay for a
border wall. Back in the day, antiwar activists used to ask, “What if they had
a war and nobody came?” The same applies to the supposed trade war.
“US
Edges Toward Trade War as Trump Clash With Mexico Escalates,” Bloomberg News
blared Jan. 26. Like all the other 293,000 stories about “trade war” listed by
Google, this is fake news. The mainstream financial press presumes that the new
U.S. president is a dangerous trouble-maker and that his machinations will
bring down the world economy. The trouble is that stock prices are going up
rather than down, and the price of risk (for example option hedges against
stock prices) is going down.
Ignore
the fake news from the mainstream media and watch the markets. Of course,
everyone is entitled to an opinion, but there are two kinds of opinions. The
first is the kind you talk about, and the second is the kind you bet money on.
People like to ridicule Donald Trump when it costs them nothing to do so, but
they put their money on his success.
This
isn’t a trade war. This simply is a different kind of negotiation than we have
come to expect from an American president. Mr. Trump does not want a trade war
with Mexico or with anyone else. He wants to win, and he wants to be seen to
win.
Whether
the Trump Administration’s boisterous style will produce better results than other
kinds of negotiation or not remains to be seen, but it is a negotiation, not a
war.
Trump
wants to add 25 million US jobs during the next decade. Under the best of
circumstances, shifting employment from Mexico to the United States might
account for about 1% of that total.
According
to its official data, Mexico has gained about 1 million industrial jobs during
the past ten years, an increase of perhaps 10%. The Mexican data include
estimates for a lot of small-scale manufacturing and almost certainly exaggerate
the total, but the trend probably is right: Mexican manufacturing employment
has grown at about 1% per year. 900,000 Mexicans are employed in auto parts
manufacturing or assembly. The US meanwhile lost nearly a fifth of its
manufacturing jobs. Nothing Mexico might do can move the needle for US factory
employment.
American
workers earn much more than their Mexican counterparts (who average about $8
per hour), but labor costs are just a tenth of the overall cost of a car. By
easing emission standards and allowing US automakers to make more profitable
large cars and trucks, the Trump Administration easily could offset the
additional expense of hiring more expensive American workers. It could restore
some jobs without squeezing automakers’ profit margins or forcing up car
prices.
There
are more worrying issues for the United States. By most estimates Mexican drug
cartels make $30 billion or so per year selling cocaine, crystal meth and
marijuana to Americans. $20 billion of that probably is profit. To put this in
perspective: that’s roughly a fifth of the $100 billion in total profits earned
last year by Mexican companies represented in the country’s broad stock
exchange index. $30 billion is about a tenth of Mexico’s legal exports to the
United States. Big exporters like Cemex or Grupo Alfa have a gross margin of
20% to 30%, and the gross margin of the drug trade is closer to 300% –which
means that the profitability of the illegal drug trade is in the same ballpark
as the profitability of all of Mexico’s legal exports to the US combined.
No
Mexican government has been able to root out the drug traffic: it provides
employment directly and indirectly for very large numbers of people with poor
economic prospects, and can draw on a vast army of prospective soldiers willing
to die trying if not to get rich, then at least to eat regularly. Mexican
officials whom I have consulted off the record say that there is nothing to be
done except to legalize drugs in the United States to eliminate the cartels’
profits. This is something the United States should not and will not do, for it
would lead to vastly more drug consumption.
The
intractability of the drug traffic mirrors the problem of illegal immigration:
Mexico has failed to offer a livelihood to tens of millions of its citizens.
According to the authoritative Pew Survey, there were 6.9 million Mexican
illegal aliens in the US at 2007, a number that has declined to 5.6 million
(due to shrinking job opportunities in the US).
Building
a wall won’t stop Mexican drugs coming into the US or American money and guns
coming into Mexico. They are not carried by illegal aliens in their hand
luggage, but packed into tractor-trailers carrying seemingly legitimate goods
into the United States. The way to reduce the drug traffic is to wage
relentless and brutal war on the drug traffickers. That would entail horrendous
loss of life and a prolonged period of civil instability in Mexico. If that is
what the United States wants, there are ways to accomplish it, none of them appetizing.
The Mexican government is outgunned and outspent by the traffickers. By way of
example, in 2005 I had dinner in Mexico City with an old friend, the then chief
of Mexico’s foreign intelligence service, the Centro de Investigación y
Seguridad Nacional (CISEN). At the time I headed fixed income research at Bank
of America. Comparing notes, we found that both of us had roughly the same
budget — about $70 million a year.
Otherwise
the economic and social benefits to be gained by shifting the marginal job from
Mexico to the US and reducing the already-shrunken count of illegal aliens are
tangible but relatively small.
Although
illegal immigration from Mexico has declined, it is an important symbol of
elite disregard for the interests of ordinary Americans. Because its impact is
highly visible, it became an acid test issue in the Republican primaries. Trump
the candidate promised to deal with it, and Trump the president feels obliged
to make good on these promises — even if the expenditure of energy seems out of
proportion to the potential benefits.
China
understands that Trump wants a deal, not a war. That is why Alibaba’s Jack Ma
came to Trump Tower in early January to promise a million new American jobs
among small businesses exporting to China via his e-commerce platform. There
will be many more such Chinese proposals. China has been attempting to shift
its economy away from export dependency to domestic consumption for the past
five years, in what may be the best-publicized and most-discussed economic
policy shift in modern economic history. Like B’rer Rabbit in the Tarbaby
story, China will tell Washington, “Please don’t throw me in the brier patch!”
There will be plenty of body blows and flying kicks, but the contending parties
will emerge as intact as the stuntmen in a Kung Fu movie. The negotiation
between Washington and Beijing will look something like this.
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