What’s Really Causing the Gigantic US Trade Deficit?

Ultimately, the issue is not China, Germany, Japan, or Mexico. The issue is much closer to home. And where are the efforts to tame it headed? (12 minutes)

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  76 comments for “THE WOLF STREET REPORT

  1. Sporkfed says:

    Tariffs on finished goods. Use the proceeds to
    lower the Medicare age and US manufacturing

  2. WES says:

    The real trade issue for Americans is the US Chamber of Commerce!

    Trump isn’t negotiating against China, Japan, Europe, etc. He is really negotiating against the US CoC!

    The CoC is just a nice legal front for an organized criminal organization!

    These criminals own every member of the House and Senate!

    That is how House members make $3 million per year while Senators make $6 million a year!

    DC Swamp runs deep!

  3. Howard Fritz says:

    Thank you for another report, Wolf, now he mentioned serious economic issues arising from the growing deficit, however economic performance appears to be “strong” for the time being.

    Therein lies the question of whether the world can afford to lose American homogeny.

  4. Laughing Eagle says:

    Great analysis, Wolf. The government continues to blame China for a problem Corporate America is reponsible for, only because our Politicians have no testoterone to go against Corporate America and their advantages via government laws and tax advantages.

    • Javert Chip says:

      So let’s see if I understand this:

      1) Profit-making corporations make cost decisions to send supply chains overseas;

      2) China is not forcing US corporations to do this – US corporations do it themselves

      3) US corporations are 100% the bad guys because they respond to (massive) incentives provided by…wait for it…the US government.

      QUESTION: If the proximate cause of “offshore supply chains” is US government policy & regulation WHY THE HELL ARE WE 100% BLAMING US CORPORATIONS?

      • Dale says:

        We’re blaming US corporations because they have successfully captured the apparatus of government, and for the last 35 years have written the laws and regulations relevant to them… pretty much as they have pleased.

        The answer of course, is to elect Representatives, Senators, and Presidents who actually will do the right things for America. But:
        1. While Congress is universally reviled, it turns out the average voter *loves* his / her Representative and Senator.
        2. The Business of America is Business.

        Personally, I believe that the corporation is possibly the greatest human invention. It enables much that would otherwise be impossible. But overreach… Maybe we need another Teddy Roosevelt.

        • Unamused says:

          =>Maybe we need another Teddy Roosevelt.

          What you need is another FDR, but there’s no way they’re going to let that happen again. They’re still undoing the last one.

        • Kent says:

          “While Congress is universally reviled, it turns out the average voter *loves* his / her Representative and Senator.”

          Not really. The issue is the design of the American political system. The US has a winner take all system. Meaning a guy who gets a small plurality of his party’s votes can win his party’s nomination, and his districts overall vote. So a guy with maybe 18% of the votes represents 100% of the voters.

          And the guy wins with that plurality because he will get almost all of the campaign financing. He will have the money to gain the name recognition, do the polling to understand what positions he should take on issues, and have the time off to attend various rallies and fund-raising efforts.

          Being an old democracy, we have had a lot of time to figure out all the little nuances to game the system and make sure the government represents only the right people.

        • Dale says:

          @Unamused — Unlikely a Teddy Roosevelt, though he got in the first time only through a fluke. We seem to have several would-be FDRs lining up in the wings, but as a result I believe I can hear CNN and other MSM gradually moving to the right.
          @Kent — Not disagreeing with your assessment of the voting system, just pointing out that voters on average like their politicians but dislike Congress overall. My sense is that is significant.

      • Unamused says:


        Because they’re to blame.

        Naturally corporatists want to deflect the blame onto the government, but corporations run the government and use it as their proxy – so they’ll have somebody to blame. After all, the whole purpose of ALEC is to enable corporations to write the laws and the regulations and make local, state, and federal governments the fall guys.

        Scapegoating has its limits. Yours have been exceeded.

      • No mention of where are the jobs that were supposed to return? Wolf makes a good point about the deficit, but if jobs return, the trade deficit is a non sequitir. Americans will buy more foreign made goods and US corporations will profit even more, but for that to happen we need something like the GND, because front loading the corporate food chain isn’t going to provide any degree of relief.

      • wkevinw says:

        I think the one situation that the founders didn’t foresee is the immense private sector wealth available today. Thus, it gets relatively easier to capture (bribe) government.

        Even so, officials do take an oath, etc., and are not supposed to do this kind of thing (take bribes to get rich on government “service”), legally. Ethics also figure greatly in our government and society, which is difficult to “quantify” or even hold people responsible for.

        The confusing thing is that people say the corporations are causing government to malfunction, so they want to give more authority to the government(?).

        There are so many quotations and famous statements from economists, historians, etc., about a government (often USA is held out as an example), needing to not be corrupt or unethical, I won’t even post one.

        It is relatively easy to do something unethical that might be legal (or at least perceived to be legal), and make a catastrophic mess out of things.

        • If there were another Tea Party, the slogan would be “No More Representation without Taxation!” We spend money we don’t have, and the politicians have no constituency. Loyalty Oaths to foreign governments are just the tip. We do have a trade surplus in energy, which is based on low interest rates and a vibrant corporate bond market and if you pinch that off, consumer will pay more for everything with no visible offsets.

      • John Taylor says:

        Short version – tariffs against China will only influence US corporations to source goods in other countries such as India, Vietnam, Indonesia, and so on.

        US Corporations source goods to maximize profits, by design.

        The US Government must work with US corporations to find what policies and incentives will work in keeping some manufacturing done here. These corporate decision makers will know much better than government officials what incentives will work.

        The change must come from the government rule makers however … Corporations are just players, following the rules with goals to maximize profits, regardless of economic fairness, national security, or other concerns.

      • Panamabob says:

        US government policy and regulations are driven by lobbyists hired by US corporations, it’s a pretty simple path to follow.
        Hence the blame, thanks Wolf.

  5. Bankers says:

    Though I am not sure that prices are completely market set based on corporations maximising their margins in relation to demand and so creating their own ideal price points which have much room for readjustment downwards , the effect of running trade deficits is as if a tax on dollar earnings by “regular Americans” , at its simplest being a transfer of wealth into foreign hands that is reinvested as competition. The US service and financial industry looks to maintain a position of control and profit from that evolution. It is not possible to approach the topic without recognising the concept of national wealth and that that concept has a profound meaning on the wellbeing of a country, the alternative being a globalised framework that does not hold the same priorities in terms of benefitting or protecting any coherent identifiable group, at worst looking at any solely as exploitable . In the neo-liberal global agenda there is little room for traditional organisation orientated around local stability or continuity of meaning. The apparent increasing wealth in real terms is questionable, the reduction in costs are not witnessed due to insistance on inflation, and the ability to consume more is as representative of a silent transfer of wealth abroad or a devaluation at wider expense. It is quite insidious, and its evolution to some kind of balance or as being to eventually provide a benefit for all is very questionable, unless sponsored or ordained benefit were the order planned . Where anyone stands on this will depend on their worldview, but I think enough people recognise that ever increasing corporate power is not a beneficial state of affairs.

    Sort of off topic and enough to set me wondering are a few coincidences that sprang out at me today. From the web

    “Related to this issue of central bank hoarding of gold is the fact that on March 29 the BIS will permit central banks to count the physical gold it holds (marked to market) as a reserve asset just the same as it allows cash and sovereign debt instruments to be counted.” (Jay Taylor)

    March 29 1897 was the date Japan joined the gold standard, and March 29 1798 was the creation of the Helvetic republic under French governance.

    And of course it is marked as Brexit day.

  6. fred flintstone says:

    Unfortunately…….for the first time in my life I no longer believe there are enough patriots to save the US. Approximately 30 years from now when our debts begin to exceed our total national net worth the citizens who choose to stay in the US will face a bleak choice. Accept a very high inflation rate or accept a depression. They will accept the inflation and our standard of living will decline substantially.
    Until then the party continues…..of course fusion power or some other technology could change the equation. Sadly, given the level of entitlement in this country right now we would probably manage to squander the benefits of a new technology anyway. Goodbye middle class.

    • smallerworld says:

      Entitlement is growing everywhere. In every country on earth the fastest growing political constituency is free infinite FIAT printed to promise free Cash to the voter, dispensed by an ATM. Every GOV on earth is now playing this game. Those that work are pissed, those that don’t work are pleased.
      This is not going to end well. Most likely its the outcome of this trend of producing crap rather than quality, until the point is reach where nothing at all is produced. Will the ‘robots’ produce? I somehow doubt, as the amount of entitlements given the public is generally just enough for food & shelter.

      • Daedalus says:

        What on earth do you mean by ‘entitlement’? It sounds like a Newt Gingrich mantra.

        A working person is ‘entitled’ to the fruits of his labor. I have a small garden, and when my investment in it bears ‘fruits and vegetables’, I am ‘entitled’ to them because I am not a serf.

        Now, I also draw a social security check and I’m ‘on Medicaire’. Both of these are insurance programs. They are officially called ‘insurance’ because that’s what they are. I paid in to a large pool, and now I’m taking out. However, I also know that some folks never collect, and some folks become disabled and collect far earlier than I did. I don’t begrudge those who get more than I because that’s how insurance is supposed to work.

        It’s funny how some people are perfectly happy with being forced to buy car insurance, however are almost ballistic about Social Security.

        • Retired CPA says:

          No, you are wrong, social security is a PAYROLL TAX not an insurance program, so said the Supreme Court decades ago. Medicare is also a payroll tax. The net unfunded debt of social security is twenty trillion dollars. The net unfunded debt of Medicare is thirty trillion dollars. When the bough breaks, the safety net will fall.

        • Wolf Richter says:

          Retired CPA,

          SS and Medicare are payroll-deducted retirement and insurance programs, just like the federal and state unemployment insurance your employer pays.

          Do you think your health insurer has the cash sitting in an account to cover the next 100 years of claims if no money comes in from premiums? That would be nuts. Health insurers take in money all the time via premiums and they pay claims all the time. It’s a flow. That’s how insurance works. Sure, they have a little cushion. Beyond that, future claims are always unfunded in private-sector health insurance. And no one loses any sleep over it.

        • Petunia says:

          You forgot to mention that workers are “forced” to contribute to the “insurance” program, making them more “entitled” to the money.

    • Kent says:

      “Approximately 30 years from now when our debts begin to exceed our total national net worth the citizens who choose to stay in the US will face a bleak choice.”

      Those who owe the debts have a liability. Those who own them have an asset. Total national net worth includes both those assets and liabilities. As the national debt increases, so does the national assets. So net worth will be fine, as long as the substantial majority of those debts are owned and controlled by Americans.

      Which they currently are. And there is no need for that to change. You can imagine that as the government borrows and spends that money into the economy, that money is going into the pockets of Americans. Those Americans can then turn around and purchase and hold those debts. And, I can assure you, those with the wealth to own those debts, have the power to ensure that you pay them without inflating their value away.

      We’ve been voting for this system since Reagan.

      • Bobber says:

        The debt has a clear value, while the assets do not. It’s not fair to say that debt is balanced against assets at all times. Does the debt change when the stock market tanks 50% or your social security and Medicare are cut?

        The fact is, much of today’s debt is created to produce no assets. The government deficits we see today largely produce current spending that leaves no productive asset to generate enough income to pay off the debt, let alone service it.

  7. smallworld says:

    Pleeeeeze if ya’all want to see the enemy look in the mirror.

    ‘Made in USA’ was pride when I was a kid, Sears Craftsman was a tool that was guaranteed for life. Blah-Blah

    I think the problem is more like the fact that the US dollar is worth less than nickel from the great depression time. In order for the GOV to keep product/food flowing in a consumer market economy ( corporate welfarism ), they had no choice but to ‘go cheap’ on everything.

    So back 50+ years ago, when you bought something you bought the best, now USA is just like Africa or China ( poor people ) when you buy something, you buy it knowing its only going to work just one time, there is no thought about ‘lifetime’, there is ony ‘cheap’.

    I remember when I was doing some special forces training years ago, and the commanding officer on day-one said to us “USA is just a third world country with nukes”. Certainly today that’s an obvious for everyone. All you got to do is travel and see that Asia is like “Tomorrow-land” compared to USA today.

    In summary the FED/GOV destroyed the purchasing power of the currency, in order to perpetuate the mercantile economy the GOV bought from the lowest bidder on earth, in time all domestic production was eradicated, we all know, hell Ross Perot predicted such.

    • Daedalus says:

      This decrease in quality is a planned situation, planned by those who ‘own’ the means of production.

      If a tool lasts a lifetime, one only need buy it once (and not lose it). Therefore, in a short time the market is saturated and it’s necessary for a ‘company’ to make something else. On the other hand (as P&G figured out long ago), if you make a ‘disposable’ item, you’re in business forever. This has nothing to do with the “Fed/GOV” and everything to do with sociopathic greed.

      Once, about 1975 or so, I visited a ‘modern’ International Harvester plant and was informed that, “computers are being used to design new tractors”. At the time, I was using two ‘Farmall’ tractors that were over 30 years old and still going very strong. A neighbor was using a John Deere that was 50 years old!. As soon as I heard about the ‘computers’, I knew that the goal was to make a machine that would use the least amount of metal, one at the very verge of not functioning in order to not only cheapen the product but induce turnover. I was right.

      • RD Blakeslee says:

        ” A neighbor was using a John Deere that was 50 years old!”

        Well, count me as a friend and you have a friend who used a John Deere model R (Deer’s first diesel) to produce hard red winter wheat near Little Fork, MN, in the late 1960s.

    • RD Blakeslee says:

      “…now USA is just like Africa or China ( poor people ) when you buy something, you buy it knowing its only going to work just one time, there is no thought about ‘lifetime’, there is ony ‘cheap’.”

      Not universally true. I own a Crescent 36″- throat bandsaw made in Ohio about 120 years ago. It came to me with a flat drive pulley for a belt from an external engine, typically a factory pulley drive complex run by a steam engine.

      After I replaced the pulley with a modern electric motor, the bandsaw contributed to the building of my house and subsequent projects.

      It will remain serviceable indefinitely.

      • alex in san jose AKA digital Detroit says:

        Those old factories were really something. They had a number of shafts driven, originally by water power and then by various engines, up near the ceiling. Belts were used to transfer power from the shafts to whatever tool you needed to power. You can see this plainly in old photos, and if you read about Edison there’s always that story about the guy who got caught up in a belt and whipped up to the ceiling, “wiping” it and leaving a cleaner spot. (The guy didn’t really get hurt, according to the story.)

        A now-departed friend of mine had a drill press, I wanna say Turner or something brand, that he’s replaced the motor on with one from a washing machine. The darned thing sounded like a washing machine! I’m not sure where it is now but it’s surely still going strong.

  8. Eurodollar says:

    Of course the trade deficit remains a tail risk for the value of the dollar on the international market because of companies reliance of off shore labor, but I think another thing that I think one must consider is that the trade deficit gives the world a supply of dollars that it uses for international trade between other countries ex-US.

    Until more countries start engaging in trade denominated in their currencies (and all of the political/technical details that entails), it isn’t realistic to expect the deficit to decline as it will starve countries of much needed dollar supply (“Its all about the eurodollars, baby!”). Even in 2018, when you hear of big deals between countries on trade in EM’s, it usually some type of commodity swap (bartering) rather than fx settled, and very much a one off kind of thing. As a US citizen living overseas for nearly half a decade in Asia/SE Asia, I am continually disappointed with the lack of market depth/liquidity or structure to support trade of asset classes for non USD transactions, yet everywhere I go everyone always seems starved for more USD…

    • Bankers says:

      It doesn’t occur to you that this is the result of aggressive US foreign policy and finance since the second world war ? Globalist ambitions are nothing new, large scale international control of trade and politics, and by association currency, goes back at least to Roman times. It is also argued whether the “peace” installed then truly brought about the flourishing of trade often described, as there is plenty of evidence that that existed previously. The Euro is just an adjunct to this direction, and obviously is more stable than francs or pesetas which no longer even exist. The Euro countries joined it because they were promised something for free by its adoption (literally) , and there it sits at zero interest…and they still cannot get enough…they “need” Euros. While they keep thinking it will still save them, in real terms they are sinking… sinking….sinking. The dollar also is “other people’s problem” – until they decide it isn’t. The point ? Much of the international trade initiative is simply not locally inspired, it is imported with dollars attached.

      • Eurodollar says:

        Seem like you glossed right over this: “Until more countries start engaging in trade denominated in their currencies (and all of the political/technical details that entails)”…

        Did I need to elaborate more on the political and the technical? Or are you just venting about the current state of affairs?

        • Bankers says:

          No I didn’t miss that, and my reply was not meant as antagonistic towards your statement. The point I was making is that dollar and euro policy is to purposefully diminish the effectiveness of using local currency, it also aims to control and manage the political and technical frameworks , there are countless examples that could be used, some blatant, some subtle, and some that verge on conspiratorial.

          The geopolitics involved is complex, in some cases trade and financial hegemony allows exchange where it would not otherwise occur, but for the most part I think it is displacing whatever other (probably lesser) orders would be, and does not pretend otherwise. A lot of countries just are not up to this level of organisation, do not have the mindset that would keep it functioning, so they are subject to it instead. I think it is making other countries weaker and more dependent also, their evolution not being as organic, but the biggest question to me is how far this can all go on, and what is going to be the result, and there we are guessing…but I am not very optimistic on that, and do not like a lot of what I observe.

          So for own abilities to develop, first they are going to have to find or make space, if they are allowed and able to.

        • Eurodollar says:

          >A lot of countries just are not up to this level of organisation, do not have the mindset that would keep it functioning, so they are subject to it instead. I think it is making other countries weaker and more dependent also, their evolution not being as organic, but the biggest question to me is how far this can all go on, and what is going to be the result, and there we are guessing…

          I don’t disagree with this assessment. I think as long as the Federal Reserve is pressured to maintain low interest rates, more foreign investors will be less incentivized to reach for yield in US debt (and thus reduce demand for USD).

          I think part of what you allude could call for the need for countries to shore up their domestic monetary policy/systems, and I think that will have to be the first stepping stone, and I admit that I do see some evolution towards those ends in domestic markets in some EM’s, but a lot of it is very top down and lacking any sense of urgency/incentives (combined with very protectionist policies towards fx flows as apposed to thinking about how they could structure their markets for investors to have some “delta-neutrality” in regards to price movements).

        • Bankers says:

          Maybe I am more cynical than yourself, and if so probably because my perspective is based more on knowledge of political process and cultural directions regarding economy than on the technical initiatives that are at work. I understand what you are saying without problem though, as well as being broadly aware of the existing financial frameworks.

          So to me it looks closer to various claims and interests competing at national level with very powerful broader international influences able to exert on those or their choices of representation, the result being quite chaotic . Exactly how countries reform and build or establish a more solid national basis that is recognised between themselves, if they were to, to my view is going to be a political and cultural process – either they are more or less laissez-faire in a global format, or they must establish an apartness which is born of an own principle and good method respectable to others.

          There is so much liquidity available at present, and its influence is so penetrating in national economy, that I do not see how (beyond protectionist measures which often lead to local resentment or pariah status) any country is supposed to manage this. Added to this is that few governments will reject boom conditions and associated windfalls due to the standing it brings them, there is very little prudence and what of it there is can be issued in hindsight for use in blaming foreign influence when conditions deteriorate.

          I really don’t have answers for all of this, those offered range from gold standard right through to global mmt and technocratic economic and social management, maybe there are sensible intermediary options also, maybe the world will go back to being more isolationist, or even end up using private money and do away with most forms of governance altogether.

          There is no saying, but it is all fascinating as well as disturbing enough to watch unfold.

        • Eurodollar says:

          >There is so much liquidity available at present, and its influence is so penetrating in national economy, that I do not see how (beyond protectionist measures which often lead to local resentment or pariah status) any country is supposed to manage this.

          > Added to this is that few governments will reject boom conditions and associated windfalls due to the standing it brings them, there is very little prudence and what of it there is can be issued in hindsight for use in blaming foreign influence when conditions deteriorate.

          I think you are addressing two sides of the liquidity coin:
          There is a lot of liquidity available for domestic assets and markets via banks originating loans (which they are already taking huge Mark-To-Market losses on as Wolf has pointed out recently here, while liquidity for trading them is drying up because who wants to buy a corporate debt this late in the cycle???), however USD liquidity is tightening outside of the US because US consumers are tapping out (US consumers spend less -> US companies make less -> US companies spend less [layoffs, capex] USD overseas) which lowers the supply of USD overseas.

          In China, they can create a lot of yuan liquidity in their domestic market/assets, but they cant let it escape without devaluing the yuan agaisnt other currency pairs. (this is true of any country with tight fx controls), which is especially not good if they are truly trying to switch over to a consumer driven economy (which I think no one really believes they can even if they try considering how dependent they are on exports).

          In Europe, they can create a lot of euro liquidity but it has caused it to weaken significantly agaisnt the dollar in the past decade (no currency controls), but it wields great power against those in the blok who industries have been stagnant for decades leaving those consumers to be starved of euro liquidity compared to those in the block whose industries are still (but increasingly weakening in this next downturn) running.

          But yes, foreign inflows in is always accepted and cheerleader, and foreign outflows is always something to be made into a scapegoat for leaders in these kind of EM economies, but like you, I don’t have much hope when these easy political wins can keep the less astute occupied mentally.

          Where all of this goes politically, is anyone’s guess, but history says that nothing pretty is looking to emerge anytime soon. People will soon realized that this huge reserves-for-“illiquid” asset swaps central banks have been doing to create liquidity have only make the problems that much bigger for another day…

  9. Jake Bodhi says:

    That giant sucking sound you hear is the heads of the punditry class inploding upon hearing the truth of this analysis.

  10. Leo Clarke Sr. says:

    By definition the Tariffs are a tax. If in place, the corporation can make a decision to shift their supply chain “to the other side of the fence”. A decision to not shift production is a decision by the corporation to pass this tariff rate into the customer.

    But the first corporation to move or jump to the other side of the fence can have a market advantage which can dynamically cause industry followers to also seek lower taxes.

    Hence I do believe that the Trump administration is quite aware of the impact of the tariffs as a tax and I don’t understand your belief that the administration is not considering these trade tariffs as taxes. I hope you can expand your thought.

    • Wolf Richter says:

      Leo Clarke Sr.,

      Tariffs are a tax on corporate profit margins. In this manner, they act like an expense. But corporations cannot pass on expenses (including tariffs) to the next guy down the line because there is competition from other companies and resistance from buyers, and raising prices will cause sales to decline. So the way to deal with this for a company is to try to avoid this extra expense by looking at alternatives, such as US sourcing. If that doesn’t work, the company will pay a little extra in taxes (tariffs), but it just got a huge tax cut on net income, so it’s no biggie.

      The tariffs and the tax cuts should have been packaged together – in the sense of: Give a little at this end, and get a whole bunch at that end.

      The Trump administration has bungled its communications of those tariffs. Instead of creating support for them not only outside of the corporate world but inside too by using the tax cuts as an incentive to go along with the tariffs, its communications have triggered a huge amount of media push-back based on the fake news that tariffs are a tax on consumers — a campaign that carried the water of Corporate America.

      • yngso says:

        Ths is about politics, not economics. It’s about satisfying the base and reelection. It doesn’t make economic sense.
        The only way this could make sense if almost all production of everything would get onshored. That will happen as all production of everything except arts and crafts get automated.
        The political proces may speed up the automation somewhat…

        • Mickey says:

          Politics has reinforced itself as a game of those playing it.

          If optimizing the countries performance was important, pols would not be going out of country so much, nor pursuing bs investigations, and woulf have workrd on balaning the budget far earlier than when Simpson and Bowles identifid the problem and fix what pols did consistently earlier.

        • RD Blakeslee says:

          “… (offshoring) will happen as all production of everything except arts and crafts get automated.”

          “Arts and crafts” skills can build a house. It’s just not easy (or fashionable).

        • Wolf Richter says:

          Yes, I get it that from your point of view as someone who lives in a country other than the US, any efforts for the US to tamp down on its trade deficits is a bad policy because it’s bad for your country.

          There are quite a few people commenting here who live in other countries, and they just love the US trade deficits and despise any efforts to reduce them. It makes total sense from their point of view. I completely get that. But my trade commentary is from the US point of view.

  11. Mean Chicken says:

    Yes, this isn’t change, either. So we should conclude Trumps strategy is more of the same strategy as his predecessors, the “trade war” is another rouse.

    This has been my point (gripe) all along.

  12. timbers says:

    I wonder who created these incentives for America to transfer it production offshore….I guess it will mystery. A deep, dark mystery….because it names are given it will be censored by WolfStreet….

    • Wolf Richter says:

      These incentives were created by Congress over the decades. There is a very long list of names involved, including lots of people in the House and Senate.

      • yewtai says:

        The ruling elite from China and UK are in this together to transfer wealth from US to China.

        See the link below. It is all part of their globalism plan.

        China ex central banker PBOC, Mr.Zhou Xiaochuan get award from Chatham House in UK.

        Former governor of the People’s Bank of China (PBOC) Zhou Xiaochuan is set to win a lifetime achievement award by Central Banker magazine in London on Wednesday. Ahead of the ceremony, he gave an “icebreaker” lecture at international affairs institute Chatham House co-hosted by the Chinese chamber of commerce in the UK and the 48 Group Club which promotes UK-China trade.

    • Cambric Finish says:

      Yes, my question is what was the original intent of these incentives. In a company I had joined about 5 years before the Great Recession, one of my first projects was the new “Offshore Organization” project. I was in IT as a programmer and the company created a new “Offshore Organization”. I wrote programs that moved data, like Sales Orders, etc to this new organization. The whole project was not that difficult and required little change to the business but was recommended by some consultants to save the company on taxes. The Offshore Organization is one we are all now familiar, the Cayman Islands. The whole thing felt mildly dodgy to me in that the consultants assured us other corporations had been doing this and that the government had been allowing it. That doesn’t sound like Congress had specifically passed a law to allow corporations to so easily shelter profits from taxation.

  13. Jack says:

    Great report Wolf, thank you.

    If a small and genuine forum like this one consisting of rational people can put its fingers on the ailments of the trade system, one is left puzzled how the big wigs and Economists can’t reach these simple conclusions?!

    Sadly, this isn’t going to happen, as Wolf and few commentators here pointed out ( CORRECTLY). Why?!

    One could start with the US government that is so beholden to Corporate America, but it doesn’t end there.

    You can look at the average American consumer’s habits and you won’t be wrong either.

    Decades in the making, the Economic model of the major western societies have now reached a deadlock.

    – you can’t grow forever!
    – you can’t create a meaningful trading relationship with other nations by being the only beneficiary!
    – you can’t depress wages for the majority of your own population and except it to support your Local produce and services!

    This all sounds familiar now, question is how do we extricate ourselves from this quagmire?!

    The answer is up to you! The Voter.

    and I don’t think that Republicans or Democrats are up to the task.

    • stan6565 says:

      Of course that Powers That Be know that they are running people into the ground. They are not dumb.

      The problem is, Governments are a willing part of the scheme. There is no discernible difference between Governments and “Powers”.

      And if by some Schrodinger fluke, some uncorrupted persons/parties were to be voted into Government, the extent of deep state corruption is such that you could at the best have 10% clean hands inside a ruling apparatus. With those odds, one won’t get anywhere.

    • Unamused says:

      => how do we extricate ourselves from this quagmire?!

      You don’t. That ‘drain the swamp’ campaign promise was just cover for the real mission – to flood it. Now it’s quagmire as far as the eye can see.

      Betcha nobody saw that coming.

      • JZ says:

        I saw that coming. Trump represent “interest”. Nobody represent “principle” or “discipline”. If Trump represent “interest”, whether that’s national interest or party interest or lobbyist interest, Trump will NOT drain the swamp, height replace the swamp which represent other interest.
        The sad and corrupting part of all of this is that entire US voter base is all about “interest”. My interest, “national interest”. Nobody even touch sound principles nowadays.

    • yngso says:

      There’s a great levelling of the playing field going on. The developing world is developing rapidly. and we’ll all be forced to share the finite resources on Earth.
      Growth is over in the developed world. The debt load has become so heavy that we’l be forced to deal with it in the next decades. I don’t envy the next generations after us.

    • RD Blakeslee says:

      A possibility that us counter-culturists embrace (admiitedly, not a universal solution for a whole nation nor even without personal costs for its adherents) Is to avoid the quagmire. Live as independently of it as possible, “under the radar”.

  14. J.M.Keynes says:

    – Nope.
    – A growing (US) trade deficit is a sign that (US) demand for imported stuff/products is growing as well.
    – The Trade Deficit WILL shrink when the US enters its next “recession”. It’s a sign the US consumer is cutting back on spending/consumption.
    – We saw something similar when the US entered the “Great Recession” in 2008. As a result of both falling (US) demand and falling (e.g. commodity) prices the TD collapsed.
    – The larger the (US) Trade Deficit, the larger the Current Account Deficit and the more the US is subsizided by foreigners. In that regard we should increase the Trade Deficit even more !!!!

    • Wolf Richter says:

      “In that regard we should increase the Trade Deficit even more !!!!”

      You’re posting this from another country. So from that non-US point of view, it makes sense. Other countries want the US to have as large a trade deficit as possible because it gives them an opportunity to sell stuff to the US. Other countries have gotten fat off the US trade deficits.

  15. Lance Manly says:

    I think for this a better idea is the Border Adjustment Tax (BAT). Since is a tax on where the goods are consumed rather than where they are produced it acts much like a tariff making US goods more competitive. But given the way it is structured the tax, like the VAT, would pass muster from the trade organizations. The BAT was considered for inclusion in the 2018 tax cut, but the corporate lobbyists did that in. Hence tax cut vs. tax reform.

  16. bigworld says:

    Today Trump is DEMANDING that GM open back up the OHIO plant, wouldn’t that be JUST WHAT WOLF is calling for here?

    This is a lot like Steve Jobs response to OBAMA when O said “Can you bring Apple Manufacturing back to USA?”, and steve said “NOPE, it ain’t going to happen”

    The problem among a lot of things is the USA is now with “Trumps Wall” a prison colony, not exactly a nation of free people with free disposable wealth to purchase autos.

    GM is building plants near the customer ( purchaser ), I think every CEO knows this and TRUMP is just playing along, that said given that Trump is a life-long salesman, he may not even know or care who makes the stuff.

    The problem with this entire story is like an onion has to be peeled back many layers, but ultimately the deal about good paying jobs, is not going to happen in a nation of debt-slaves.

    TSLA can make fantasy cars for a small market, but a company like GM needs to be near its base.

    Just like UK in the 1950’s “A dying State”, the USA is in the same situation, its a consumer economy of ‘tapped out’ consumers, who can’t swallow any more debt, what’s a mother to do?? Reset, but then we already know the reset, just means Ivanka & Chelsea running the IMF the next 40 + years, what’s new? Nothing.

    • MD says:

      The UK in the 50s was corpulent because of the effects of WWII…rebuilding took a long time.

      It was/is the de-industrialization mantra of neoliberalism and its monomaniacal demand for [short-term] ‘stockholder returns’ (ie the turn to running of the country’s economy for the wishes of the wealthy financial speculator) which has put the country on its a$$.

      Same as the USA in the latter respect, basically…

      China on the other hand has planned its industrial policy for decades, rather than letting ‘the markets’ sort it out (which they mostly do by offshoring production to slave-wage economies) – the difference is all too clear to see.

  17. yewtai says:

    The main contributor to US trade deficit is Yuan ultra cheap currency pegged to USD, which force other exporters from south east asia nations to track Yuan (ie not to be too strong against Yuan) after the Asia Financial crisis 1997-1998.

    US$1 = 4.5 Yuan in 1994
    US$1 = 8.8 Yuan in 1996
    US$1 = 6.9 Yuan in 2017

    The biggest game changer in Yuan peg happen in 1994-1996. This sudden change to cheapen the Yuan drastically, is the force that make China exporters competitive.

    China is the biggest currency manipulator (with Kissinger help and advice) in the world.

    If say, China peg Yuan US$1 = 2.5 Yuan, China exporters cannot compete anymore. Therefore China trade surplus with US will almost disappear.

    America overall trade deficit may be reduced by 20%.

    America will still have trade deficit with Vietnam, Bangladesh, Mexico, Thailand, Malaysia, Burma, India etc. but not so severe anymore.

  18. KiwiinCanada says:

    The US trade deficit of 600 billion is approximately 1 percent of global gdp. The benefits of a globally accepted medium of exchange are spread globally whereas the costs are carried by the tradable goods and services sector in the US. The increase in global liquidity of 1 percent of global gdp annually support global gdp growth of 3 percent annually. The purchasing power of those entities in the US that are not subject to international competition is likewise increased by the extravagant premium attached to their medium of exchange by virtue of its acceptance as a global currency. Ideally a redistribution to compensate the losers by the winners would be implemented. Practically the winners “buy off” the systems capacity to do this. How this imbalance resolved itself is uncertain but there is obviously a strong political component to it.

    • The “benefits of a globally accepted medium of exchange” are being mediated by more diverse and acceptable mediums of exchange. If A has the best medium, and B writes debt denominated in A’s currency, they capture the benefit.

  19. KenM says:

    take away the ability for central banks to create money out of nothing and trade deficits would not exist

  20. joanrn says:

    My company just outsourced the workforce verification system to india. I am not joking, don’t laugh too hard. If you are insistent you can get a contact within the united states.

  21. Why doesn’t government provide subsidies for American made products and avoid the tariff carousel altogether?

    • Bobber says:

      There is no tax subsidy that can overcome the wage differences. Secondly, those types of tax subsidies are illegal under the world trade rules.

      • Lance Manly says:

        The BAT is legal from the way it is structured, from Investopedia

        “This tax is designed to even out imbalances in money flows across borders and reduce corporations’ incentive to off-shore profits. This makes the DBCFT a tax and not a tariff. Although it is a tax on imports and an export subsidy, the rate of border adjustments is paired and symmetric. Thus, the effects on trade of these two components – the import tax and the export subsidy – are offsetting. Applying them together imposes no trade distortions although adopting either separately would.”

  22. cesqy says:

    Once dominant American corporations saw the huge population and markets that existed overseas and felt they could make money (control) those markets like they do in their own country. The problem they ran into: the Chinese and Europeans are selfish and their political system can not be easily controlled. Globalization is a way for these increasingly global corporations to dominate in every market. The trade deficit is a symptom of a political and economic war that is being waged and who’s winning. We’ll see if Trump understands the Chinese are waging a long war and can still get elected for a second term in a short term America. Corporations are now bigger and more successful than many nations.

  23. Anom says:

    Supreme Court Case: Flemming vs. Nestor
    eg Social Security et al are federal government programs backed by politics.

    These programs are secured by public popularity.

    Some have said that the SS tax increases in the 80’s that created a nominal surplus shored up the federal budget by about 100 billion a year when 100 billion was a large percentage of the deficit.

  24. sierra7 says:

    I don’t see how any of this could have been avoided once “globalization” was given “free” reign. The one eyed man is kind in a nation of blind ones. Since there is no solution in the works say “bye-bye” to the idea of any American middle class…… another generation or so given the inevitability of AI (Artificial Intelligence) there may occur a huge societal conflict between the then have’s and have-nots. Not a pretty world at all.
    And, thx WR for pointing out there are lots of “out of country” commenters as you point out make the comments more sense from some.

  25. Just Some Random Guy says:

    America is the world’t biggest sucker. We allow the world’s goods/services in, with low or now tariffs. Meanwhile every other country puts up tariffs and taxes on our good/services. The Chinese go one step further by stealing all our IP as well.

    And when Trump says enough of this garbage, he’s the bad guy. Cuz God forbid we force the rest of the world to play by the same rules we play by. That’s racist or something.

    Look at NAFTA. In the late 80s and early 90s the US had a small trade SURPLUS with Mexico. Then NAFTA happened, fast forward to today and we have a $70B yearly deficit with Mexico. But that’s really good for the US, I’m told on a daily basis by the super duper smart people on CNBC and at the Wall St Journal.

  26. NICHOLAS M MAIER says:

    The elephant in the Room is the Federal Reserve who pursues an inflationary policy that drives up prices and labor prices. A corporation is faced with the dilemma of a) Going out of business b) reducing its labor costs by moving its supply chain overseas. A business cannot compete with labor at $2.00 per hour versus $25.00 per hour in the USA. This is the fault of the Fed Reserve and its inflationary policies. Don’t blame corporations for trying to survive.

  27. Kye Goodwin says:

    America didn’t have to move it’s industry to low-wage countries. It could have chosen the path that Germany took. I think it was shortly after the widespread unrest in the late 1960s, Germany gave their labour unions parity on the boards of all the major corporations, and the whole country started pulling together in the same direction. Now they run a huge trade surplus and have some of the highest wages in the world. One big disadvantage that the US has is that its just not as patriotic a culture as Germany, with bigger regional and class differences. Given the chance, American corporations abandoned American workers.

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