He is 94. No matter how much experience he has, I question the value of anything he might say these days, at least in comparison. There should be other people to listen to by now - probably even from his same organization, if you want to.
It’s much easier to measure physical goods crossing customs. It’s very difficult to measure whether that guy in your restaurant was a tourist or not. And that’s the simple case believe it or not…
This is one of the reasons service oriented economies seem to run huge deficits…
I software and IT services (cloud) etc. "goods" or not here? As far as I know that very large sector is not included in that calculation. A follow up question is how US company subsidiaries located in Europe are counted - the gains all end up in the US eventually (or at the very least the money streams are under US control), but it does not count as a US export? I have sooo many questions.
Everything is Microsoft and Co. in Europe and elsewhere, both the OS and things like AWS or Office 365 subscriptions.
It's made me reconsider visiting. ATM, if I do go, I'll most likely go via Ireland where most of the border checks are done before getting on the plane rather than when getting to the states.
However, the article you linked to states its not an offical travel warning, more like an advisory.
> But they also stressed that this change does not count as an official travel warning
The Ireland tip is a great shout. My brother-in-law holds passports for the UK and another country that is not on the USA's christmas card list, he does all his US business flying via Ireland.
HP oscilloscopes were pretty good too, back when . But I haven't been there for many years, and I guess you can get good, cheap, LCD ones today for much less money.
And rotating rusty hard drives, I suppose. But still all gone.
A lot of international trade is other goods. Think of how much the UK has paid for things like American aircraft, ships, machinery, or materials used in manufacturing. Our armed forces use a lot of American stuff, and often even British made things have American parts (and a lot of it is covered by ITAR, to an even greater extent than the rest of Europe).
People also tend to hugely underestimate the amount of British manufacturing for the same reason, and because of lot of it is Foreign branded (e.g. Nissan cars).
I certainly don't need planes, war stuff nor ships and machinery. The food I eat mostly come from my country, my car is made in countries close to mine and so are the materials used to repair my house... And my gaz is Poutine's.
How much American media do you consume? Things like movies, tv shows, or music? Or is it mostly home grown? That's America's export, along with software.
As a UK non-citizen resident, my observation is that our economy is pretty much involved with USA (and the global economy more generally).
I just looked up the latest trade and investments factsheet[1] and there are some interesting deets. If you're wondering about direct investment in the US as well as imports:
- Total UK imports from United States amounted to £111.5 billion in the four quarters to the end of Q3 2024 (a decrease of 5.1% or £5.9 billion in current prices, compared to the four quarters to the end of Q3 2023).
- In 2023, the outward stock of foreign direct investment (FDI) from the UK in United States was £494.1 billion accounting for 26.7% of the total UK outward FDI stock.
In addition to direct investment I would also count portfolio investment since we're sort of involved at an individual level through our workplace pensions (and/or personal), savings, stocks and shares ISAs, and so on. A preliminary report[2] foreign holdings of US securities as of June 2024 puts the UK as the top holder at over 3 trillion USD.
>Total UK imports from United States amounted to £111.5 billion in the four quarters to the end of Q3 2024 (a decrease of 5.1% or £5.9 billion in current prices, compared to the four quarters to the end of Q3 2023).
Also "Total UK exports to United States amounted to £182.6 billion in the four quarters to the end of Q3 2024 (a decrease
of 0.5% or £889 million in current prices, compared to the four quarters to the end of Q3 2023);"
Which is why the current government is being particularly cautious at the moment.
I think that's what they're trying to fix. They want stuffs around you that says "Made in China(PRC)" to instead say "Made in USA", and everyone is saying that that is a really weird hill to die on, but they want to.
I was thinking about this, outside of services the only thing I do buy is Park Tool bike tools (which are excellent).
I suppose I could include Apple products on the basis that the majority of the profits go to the US rather than the country of manufacture. Apple sells £1.5b of goods and services in the UK although that won't appear in the UK-US trade figures.
A long time ago, Britain was the dominant economic power in the world.
Britain had a massive trade deficit with India. It imported far more from India than it exported to India.
But what Britain did was import massive amounts from India and made high value goods at home and provided high value services that couldn't be provided elsewhere.
Should it have flipped the other way? In 1800, should Britain have suddenly shifted gears and started massively exporting to India in order to balance the trade?
Sure, India was a colony and not a mere trading partner, so no need to argue about that. But the US is also an empire that has bases around the world and has many countries in an economic chokehold. The situation is similar in a modern context since official colonization is kind of gone. The US takes in lower value products from around the world and sells them back to the original country at a higher price due to some sort of added value.
Should America do the opposite? Should we drop all of our high value scientific and medical research, drop our engineering, and go all in on making t-shirts to balance the trade deficit? Because we very well could do this. We could steal away the fine industry of Cambodia and Bangladesh and have them buy all our t-shirts and balance the deficit pretty quickly. But is that a long term benefit?
Cambodia and Bangladesh are countries that can't really afford to buy massive amounts of American high tech exports or foods. But they're essentially colonies that export goods to other countries, and through accumulating wealth through that development, more people can afford to buy American high tech products. But we're demanding that these countries buy lots of American products now with money that they don't have. The only way to balance that is to make things they can afford. Which means low value items.
- Basic electronics: circuit boards, USB devices, .. (China)
- Auto parts (Mexico, China, Germany)
- Generic drugs (India, China)
The reality is that the US is not the ultimate global hegemon anymore and therefore offshoring industries cannot simply be viewed through an economic lens.
What's funny is the tariffs announced a couple day sago explicitly excluded semi conductors and pharmaceuticals. We are literally about to tariff t-shirts but not those more strategic industries.
>> the US is not the ultimate global hegemon anymore
The hegemon concept is also out of date. World trade is not dominated by countries but by multinationals. For instance, there are no real "US" car companies. There are a handful of huge conglomerates who can choose to operate wherever best suits their needs. These respond to edicts from individual countries but operate at a level above nation states.
This is why international cooperation on things like taxation or environmental protection is so important. And it is why petty bickering by individual nations will be so damaging.
That is the case for western economies. China controls nearly all levels of its supply chain. In the past, they didn't have the skills for design, but over time has gained that skill set (china now creates nearly a third of the worlds new engineers per year) and is now capable of designing and manufacturing world class products all in-house.
I guess the only exception is semi-conductors, but we all know they are desperately trying to remedy that.
And Chinese companies may soon have to evolve too should they want to remain competitive. Being at the behest of a single country is a weakness. A strong company is one that can shift between countries and therefore does not need to bend to their will. The largest Chinese companies will, one day soon, have to step away from Chinese government control.
Come on, did you see the trade for goods and services deficit with EU? It's ludicrous. But hey, the president decided to focus only on goods. Why not on everything? Because it's unjustified. He needs money. A lot. And throwing out accusations at other countries is the only way he can get out of it fine. If he had just set a 10-15% tax on all imports "just because" people would have never approved. Now, on the other hand, look at those unfair European, Canadians, Mexicans, ... penguins :)
I was thinking, the UK and EU should set extra taxes on US tech companies to offset the tariffs. don't even need to fix the amount - just tie it to whatever the tariffs are.
FWIW: acquiescing and becoming Trump's bitch won't save your jobs either. See Vietnam - they dropped tariffs on the US, and still got hit with the highest American tariffs - even higher than the EU that's threatening to retaliate.
> The t-shirt metaphor is completely unjust - there is no value there for national security nor strategic autonomy.
And yet tariffs were put on countries where clothes are generally manufactured and imported into the US from, which is why companies like Nike got walloped on the stock market.
> The reality is that the US is not the ultimate global hegemon anymore and therefore offshoring industries cannot simply be viewed through an economic lens.
Trump et al put a 37% import tariff on Botswana. What national security interest is served by that?
Israel got a 17% tariff place on it, but Iran is part of the general 10% tariff list. If these are about national security, why does Israel have a higher number than Iran?
>high value goods at home and provided high value services that couldn't be provided elsewhere.
Eh, they were swiftly outcompeted in almost all fields, but protected that system of mercantilism, by disallowing their colonies to unload anything that was not flagged british. Monopolies work that way, they ruin things and are memorized in the empire center as "good times"..
Thanks for pointing that out. I knew this already, but if I didn't that would be exactly the kind of factoid that would stay stuck in my head for the next 30 years
> The only way to balance that is to make things they can afford. Which means low value items.
How about the US pays them well for their work so they can afford all these "high value" items?
Oh no, we economically enslaved all these people to our clothing in sweatshops for pennies an hour, but now they're not buying our...1000$ tablets that don't even have a calculator app...or whatever else the US considers "high value"... Oh how terrible!
I choose to buy more expensive clothing produced in places that pay employees a decent wage.
I think the US should pay them more. But the fact of the matter is people really want socks and shirts for a few dollars. People can choose to pay more and avoid sweatshops right now. But the fact is, most don't want to do that, and when given a choice, they won't.
What the US has traditionally done is make these countries then take Dollar loans from the IMF and World Bank to buy American defense and high tech products. When they naturally then default (right now there are more than 50 countries that cant pay back these dollar loans cause where the fuck are they going to get dollars from) their only option is to sell off their natural resources to Wall St/build a US mil base/hand over port etc.
This game has been going on so long (google super imperialism) the US with 5% of the worlds population has accumulated more than 50% of the worlds market cap value.
So the US starts overdosing on leisure/luxury and pace of innovation starts slowing cause they dont even need to be innovative. Try to build a ship in the US and its not possible anymore cause the experience is all gone. There is no great magic solution. When you talk about British history look at the 60s and 70s. There was major turmoil economically and socially post the Ww2 rebuild cause the entire system dependent on colonies had to restructure itself.
I get the sentiment, but using ship building is an unfortunate example with respect to substantiating your point. The US shipbuilders are alive and well (not to the extent they were in WWII era). Military ships, Jones Act compliant commercial vessels, ferries, tugboats, etc. All US made.
Separately, your first paragraph also seems problematic. Let’s take Vietnam and Cambodia as examples: neither has a US military base, port, nor sells natural resources to “Wall St”.
Finally, I’m not sure I follow how that would cause the US to accumulate 50% of the world’s market cap—especially because the vast majority of the companies in the S&P 500 have nothing to do with defense, shipping or natural resources. I haven’t done the math, but I would venture to guess that >50% of the S&P 500 market cap is tech or tech-adjacent.
This bit I see differently, though only with ~ 30% confidence.
> vast majority of the companies in the S&P 500 have nothing to do with defense, shipping or natural resources.
If you were evaluating the impact that a road has, and you looked at all the vehicles that passed over it every day, most of the vehicles you see would be in other industries — retail, industrial, commercial, domestic — very few of them are professional bitumen pourers who make roads. So clearly bitumen pouring only affects a low percentage of the city.
> Sure, India was a colony and not a mere trading partner, so no need to argue about that. But the US is also an empire that has bases around the world and has many countries in an economic chokehold.
That seems to resolve the question you put. Britain and India weren't independent, so talking about a trade balance between the two doesn't really mean anything. If it favoured India, that was good for the British Empire. If it favoured Britain, that was also good for the British Empire. It didn't matter who was favoured or by how much because the British capitalists and Imperial officers were in control of both sides of the trade.
I personally think the US trade deficit is a huge problem ... for the US's trading partners who just gave it real stuff for paper. But your argument for why Britain-India experience was relevant doesn't hold together.
Britain was not importing.
Britain was stealing resources from India.
It was beyond slavery.
The words plunder and pillage come to mind.
USA on the other hand has a completely different problem (perhaps opposite of what you describe - being the world’s gracious and benevolent trade partner).
The US does not have most countries in an economic chokehold - it's laughable even compare the US and its partners to India and Britain. India was forced to buy cheaper machine made cloth by the shipload in a concerted effort to kill off the traditional Indian man-powered textile industry. Meanwhile the EU and the rest of USA's trading partners choose to use American services or buy American products (granted, in Europe, we don't see much American product either). They could have switched away from American goods but chose not to, because of free trade. With tariffs in place, if there aren't severe switching costs, most countries will definitely move away from the US in the short-term, while drawing up plans to move away from US services in the long term.
Your examples of Cambodia and Bangladesh don't really fit in as American colonies. Both countries are already more dependent on China than on the US for imports. Only a fraction of their populations actually use American goods, what maybe an iPhone or some American brands tops.
They do however manufacture final goods for the American market (and the overall worldwide market), so I don't see any losers here except for American consumers. Your average American clothing company isn't going to move away from these countries because they have the full supply chain in place, and your average overseas production facility isn't going to continue producing for an American company at a cheap price if tariffs are in place.
You're on the money with the last point though. The only way to balance it out is to make low value goods, but that was the whole point of outsourcing it to Bangladesh or Cambodia in the first place. Because that was low value production.
> The US does not have most countries in an economic chokehold
For most of living history, the US went out of it's way to ensure that crude oil is sold in USD, including oil that's extracted in oilfields halfway around the world. There's only one way to get USD is to trade with the US.
Yes, but in our very recent history, the US has enabled policies that have driven countries to purchase using currencies other than the USD.
Only if you're buying direct from the gulf countries or you're buying on the spot markets are you forced to pay with the USD. For example, the EU had a long standing agreement to pay for Russian oil and gas with Euros, India has recently begun paying for Russian gas with Indian rupee, as does China with yuan. While Saudi Arabia and the rest of the oil dependent GCC are forced to curtail production to force prices up, Russia floods the oil market to account for the shortfall.
> The US does not have most countries in an economic chokehold
Tell that to any country having trouble repaying USD denominated debts. The US loves lending money to other countries, especially via military goods, and then the US uses the debt as a hammer.
Let's talk about the all the software exports that got "converted" into a "service" i.e. SaaS / PaaS / IaaS 1st. Not to mention previously we'd have CD / DVD / etc that are now also "services".
> what Britain did was import massive amounts from India and made high value goods at home and provided high value services that couldn't be provided elsewhere
Does this story really describe a trade deficit? Trade is measured in units of currency, not in kilograms.
If I import a quantity of sugar from the West Indies for $1, turn it into rum, and export that rum for $10, then I have, net, produced $9 of exports.
Can someone explain to me how the US can reshore manufacturing without dramatically lower their standard of living? Maybe they can subsidize some essential industries but I can’t see a path to do it for everything.
I started believing that all these, are just side effects of Americans and their leadership not accepting the loss of their global leadership to China. They know they can’t pull a Plaza Accord like they did with Japan in the 80s to slow they down. Now hoping for some hail marys. In the worst case, a good chunk of people will be poorer, less women with jobs, which should result in a bump in birth rates.
I believe whichever party attempts to do this will be voted out in 2 years. It's really really hard to get people to accept a lower standard of living. The only scenario I can think of is during wartime, but the US is pissing off all of their allies.
Logical next move is to start the move. I’m just assuming that they will. I guess, the biggest problem is hoe vocal “the other side” is, compared to 10/20 years ago. Oh well, that’s what the citizens vited for, I guess.
> Can someone explain to me how the US can reshore manufacturing without dramatically lower their standard of living?
A (very) partial solution is to build the factories at places where the cost of living for the workers is low. This way, the workers can maintain a higher standard of living at a constant salary.
If we take out the money of the equation, it really is about what activities constitute good standard of living.
Is it better standard of living to be in a small apartment in the city working an office job or is it better standard of living being in a more rural area working manual jobs. (I honestly don't know, personally, I prefer to do thinking work)
Traditional manual work has disappeared and isn't coming back. I was watching our water company lay new pipe outside my house recently and there were no people wielding picks and shovels. There was a ton of technology involved though.
For rural employment to increase you would need to throw away all the technological progress from the last century. The country and economy would be unrecognisable from what it is now.
If the answer is the end of - I'll call it - "Consumerism", and the industries we choose to subsidize are those that are more essential to a community driven life (e.g. food, shelter, health, education, transportation, communication, etc ...), I think it is possible to lower the "Standard of Living" as reshaping what the term means, undoing years of advertisement based conditioning.
Americans may no longer have an unnecessarily large or luxurious automobile, or a screen in every room, but I would argue excess becoming the standard is the problem and a major cause of the imbalance.
The solution doesn't feel very democratic or free though, values that have been critical to the identity of the USA.
Not to mention this is almost certainly not what will happen in the USA. Trump and the GOP have no interest in reducing wealth inequality, and the vision you have laid out would be immediately labeled "communism"
Foreigners are always good as a target for blame, but much more wealth has been transferred from American workers to the Oligarch class than via trade deficits. What we have here is a class war, not a war against other working class people in other countries, but the wealthy are winning it without firing a shot.
So who’s to blame for the trade deficit? I’ll tell you who. It’s all the companies he invested in and made billions of dollars off of.
Because they all wanted to maximize their profit, so they ship their production overseas and now we have no choice but to buy “foreign goods“ from corporations that say they’re from the United States.
Corporations don’t care about countries, they care about profit. Countries are prisonsfor the workers.
So, you don't want to have "the world" own shares of american companies?
Okay, let europe just sell all their stocks and ETF. But also, let them build alternatives to all american products. Let them keep the money they are spending for their Windows and Office licenses, their Netflix and Disney plans. Let them no longer create ad revenues on youtube. Let them buy korean Samsung phones instead of american iPhones.
Would that be a good deal for the american people?
Yes? If the American consumer can benefit from more competition and has the ability to subscribe to British Netflix (Brit box?) and French HBO, and the existing monopolies had to work a bit harder for subscribers, that could be an improvement.
Interesting take. I would love to see more competition in the smartphone OS market for example, but the problem is that at the same time, the tariffs kill international competition…
This would be true for any other country, but the dollar is the world's reserve currency. The US can simply go 'money printer go BRR' and create money out of thin air, without devaluing the dollar too much, which it can exchange for physical goods.
The US creates a 'trade deficit' by swapping things that have imaginary value for things that do not. Under these circumstances they'd be foolish on not running a trade deficit.
But if Trump gets his way, that world will be soon over, and people will trade in whatever they have so will no longer be compelled to hold USD.
I don't understand how nobody in the media is talking about this. The world accepts the US as the producer of currency, trades energy in dollars, etc. The US gets to print money for free, how is that bad for the US?
So far I can only see 2 reasons why Trump wants this:
1. He believes the US can force others to pay even more, via tariffs, and they will just accept it. No retaliatory tariffs. Kind of like how he says Greenland will be handed to the US no problem. Dishonest? Delusional? Bullyish?
2. The theory of him being a Russian asset is true, and this is the way for Russia to undermine the US while looking like Trump is rooting for the US. The real plan is for the world to drop the dollar. I don't like conspiracy theories but it just makes no sense otherwise
It seems like the way to "fix" a trade deficit is to create products the rest of the world actually wants to buy. The application of any reciprocal arrangement, whether tariffs or these ICs as proposed in the article only achieves "balance" through punishing others.
Aside from the obvious consumer technology and software I am hard pushed to think of any USA produce I would buy that would meet the standards we have in the EU.
The simple reality is that the USA consumes more than it produces.
> create products the rest of the world actually wants to bu
Exactly. Esp when you have the leader(s) of the US complaining that Europe doesn't buy US cars. Well in the UK smaller cars dominate the market where in the US larger cars do. On avg US cars are longer, wider, taller, and heavier.
A lot of our roads (Cities and urban areas) were not designed for larger cars, even a Tesla smallest car, the Model 3 feels big on the road, well it feels big on the road to me.
> The simple reality is that the USA consumes more than it produces.
Indeed, and the US can afford this because it has concentrated a lot of the world's wealth within its borders. So it is not really clear what they want to fix.
“Buffett likened the situation to a wealthy family gradually selling off parts of its estate to sustain its lifestyle”
Yet, actually the proper analogy, would be a wealthy family using their disposable income to buy products that make their life easier, and sometimes, even make them more productive so that they can have even more income.
I think we should expect the US to lose its reserve currency status if these tariffs continue and we should also expect its tax revenue to drop. The combination may make it more likely to see a US default on its debt as there will be less demand for its bonds around the world and less ability to pay high interest rates.
Seems unthinkable I know but we are in weird times.
If Trump doesn’t back down we may see a very interesting time in the US economy. I should point out that many oligarchs in Russia established themselves by making bold moves in the turbulent post Soviet times. This may be similar time period for the US where a new generation of winners emerge.
Interesting, and worrying at the time, but he clearly turned out to be wrong. The trend never stopped [1] and is not obviously responsible for any negative economic trend. The trend has continued [2]. The thing to worry about is probably not that it is happening, but who is holding these investments.
The way he views net investment and net foreign ownership seem wrong.
He uses the analogy of a farm owner selling bits of their farm to fund their trade deficit.
But in the real world, it's not zero sum like this. The pie isn't fixed to the size of the farm. New companies serving new needs can be created.
If you're a poor country wanting to escape poverty, you want FDI to be high because you realize it's not zero sum.
Yeah, foreigners now own 20% of your stock market due to negative net investment, but it's now 1.5x as big so your slice increased in size to 0.8*1.5 > 1 and everyone is happy.
Given this, I struggle to understand if his argument still has merit.
He has a point about national debt but it's not a new one.
This. There is a joke that Germany delivered Porsches in the 1990s and hot .com stocks in return, and then until 2008 they got CDOs in return. And t-bills -- the US has been a major exporter of TBills.
Fwiw, the US has a big surplus in services,so it'll be interesting to see if other countries retaliate against that.
Not only China but let us assume iPhones are made in China only.
China gets a modest share of the profits, because Apple pockets the rest. Reinvesting a fraction in US and stashing most of the profits in banks across the world that use this money as leverage to buy US bonds, among other things.
The physical phone is a "good" that is exported from china. But the majority of the value for an iPhone is in the "services" rendered to that phone, which may be sold/exported from the US but can likely be shifted to other countries in order to avoided taxation/tariffs.
> Prior to 20th-century monetarist theory, the 19th-century economist and philosopher Frédéric Bastiat expressed the idea that trade deficits actually were a manifestation of profit, rather than a loss. He proposed as an example to suppose that he, a Frenchman, exported French wine and imported British coal, turning a profit.
> He supposed he was in France and sent a cask of wine which was worth 50 francs to England. The customhouse would record an export of 50 francs.
> If in England, the wine sold for 70 francs (or the pound equivalent), which he then used to buy coal, which he imported into France (the customhouse would record an import of 70 francs), and was found to be worth 90 francs in France, he would have made a profit of 40 francs.
> But the customhouse would say that the value of imports exceeded that of exports and was trade deficit of 20 against the ledger of France. This is not true for the current account[, which] would be in surplus.
A major fundamental flaw in the concept is the assumption that goods have a fixed value. In reality, their value changes according to where they are, which is the only reason it's possible to make a profit by moving them around.
Note that in the same example, if the French wine is bought by a wizard instead of a merchant, and he transmutes the wine into 50-francs-of-wine's worth of coal for export to England (the ways of wizards are mysterious), the customs house will record the value of the coal as 90 francs. It's only worth 50 francs when it's going the other way.
And if he does the same thing, transmuting the wine into coal within France, and then sells it in France, the econometric body will be happy that French GDP has increased by 90 francs, making the people of France richer.
That sounds like a forerunner to Ricardian comparative advantage which is a major (really the major) reason for thinking international trade makes everyone better off.
Forerunner? Bastiat would have been 15 when Ricardo published.
But note also that the example doesn't make any use of comparative advantage. It's sufficient that the value of the coal is different in different places. This is about how water is more valuable when you're dying of thirst, not about how water is easy to produce if you live on an island in a freshwater lake.
Get this: China sends us all this great stuff, and the only thing they get is OUR FIAT CURRENCY, which is essentially worthless. And then, what do they do with that currency? They buy our treasury bonds, which pay them interest in our own fiat currency. Not only that, but every bond they buy is more encouragement to help us keep the US economy strong and stable. The trade deficit thing looks like a great deal for us when viewed from some angles.
My gut says the concern arose around the balance of gold, which would behave differently. But that really doesn't work with Bastiat's example, because there is no flow of gold (or other currency) in or out of either country.
But the fact that there is no flow of currency makes the problem look stupider. England is notionally benefiting because it has gained some wine "worth" 50 francs while losing some coal "worth" 70 francs. France is suffering because it's lost some wine worth 50 francs while gaining some coal worth 70 francs. With no francs traveling abroad, the matter is closed and France has ended up better off. What was the problem?
From this perspective, "trade deficit" appears to be synonymous with "gains from trade". (But note that the analogy falls apart immediately; England is also experiencing gains from trade, but it has a surplus instead of a deficit. The difference is driven by the artificial division of the trade into two legs, one of which happens first. If the import happens first, you get a surplus. If not, you get a deficit.)
With fiat, I think there is a concern floating around that if some foreign party absorbs a lot of our currency, and then we print more to replace the loss (so that we continue to have an appropriate amount domestically), the foreign party could suddenly crash the value of the currency by deciding to spend it. That's true. It can't be the origin of the fear of trade deficits, though, because nothing similar appears in Bastiat's example, where currency never moves. It's more analogous to the traditional fear of seeing your country's supply of gold drained away by trade.
Unless I got it completely wrong, the beauty of this ambiguity is that one can make two radically different arguments based on it, depending on who we're trying to impress. Do you want to praise the USA? Here. Do you want to tax China? Also here.
Apple has internal transfer pricing which is dictated by accounting regulations and tax law.
Companies try and set transfer prices to minimize local taxes, but need to follow regulations.
A phone made in China is “purchased” by say Apple Canada for some fraction the price it sells for - regulation usually require the Value to reflect the cost of inputs.
So Apple Canada might purchase a phone from Apple China for $600 CAD then turn around and sell it for $1200 CAD in Canada.
It’s the $600 that counts as a Chinese export to Canada.
This is actually something that I think a lot about with tariffs. The price that you pay at the corner store for an item, even an imported item, is nowhere near the price that an importer pays at the border.
Most of that $600 is BOM inputs where most of high end components worth $$$$$ is ultimately captured by US / western suppliers (i.e. chips, sensors, screens for iphones). The actual value of export from PRC in terms of material and labour is $, but still counted as $$$$$+$. Though iphone/high tech unique since US plays hand - sanction $$$$$ PRC components so Apple can't integrate them and raise PRC share of Apple BOM, which IIRC grew to ~20% and on way 40%+ (prc memory + screen) and now <20%. This is something PRC stats has started adjusting for.
No, I should have been more clear relative to original comment. I was pointing out even % Apple charge customs, i.e. imports from PRC, large % is still ultimately not value captured by PRC.
For full priced iphone, i.e. $1200, Apple captures or offshores another big slice of $800 in Ireland for intangibles like software related IP. But within the $400-600 BOM for physical device / import unit cost for customs, ~80% are western components, i.e. western value capture.
OP, did you also read Gray Mirror this morning. Curtis Yarvin went onto defend the IC idea this morning as a way to defend nascent industries (new industries).
Interesting article, also presented the ideas of mercantilism of Friedrich List (originator of the Zollverein idea).
Economics likes to present the facade of a hard science with equations and rules - but macro economics simply doesn't work the same way as physics, and pretending that your equations are going to be a crystal ball has so far proved mostly bullshit.
Too many things depend on decisions made by actors acting under very complex and dynamic social constraints, rather than predictable rules.
The end result is that several decades after something happens - we're ok at examining the social/political influence of the time on macro economics, but that insight doesn't do much for us now because circumstances are changing at a pace that has rendered any intuition utterly obsolete.
That's a vague and unconvincing chicken little argument for not making models using the wealth of open and for-purchase data that's available and understanding the limitations.
This looks like the end of story is that the US will consume less, "more expensive" and home made.
I think it will have disastrous consequences for the U.S IF the rest of the world keeps trading free.
There will be more jobs in the U.S but in the end will become a more inefficient market.
I think the inequality could be even higher because the rich can simply move the investments aboard while the working people have no real choice but “enjoy” the local economy.
No need to "think". These policies are all magnifying stagflation. Recession if not depression. There won't be anything to buy because America doesn't have much of a manufacturing supply chain, isn't willing to pay workers enough, and prices are rocketing to the moon such that Americans won't buy domestic or imported goods. Domestic producers, having less international competition, will raise prices leading to a massive similar price-profit contributing 60% of inflation post-pandemic in the K-shaped recovery. The soonest manufacturing could be setup in America is 3 years, but this is work American corporations don't want to pay workers fair wages for.
199 comments
[ 2.7 ms ] story [ 202 ms ] thread(But still good.)
Or is it just goods, and in that case why focus on goods?
It’s much easier to measure physical goods crossing customs. It’s very difficult to measure whether that guy in your restaurant was a tourist or not. And that’s the simple case believe it or not…
This is one of the reasons service oriented economies seem to run huge deficits…
Everything is Microsoft and Co. in Europe and elsewhere, both the OS and things like AWS or Office 365 subscriptions.
If the USA wants tourists, they better ensure not to annoy tourists by their visa policy, or even by detaining tourists:
> Germany Issues Travel Warning for US
> https://www.newsweek.com/germany-issues-travel-warning-us-20...
However, the article you linked to states its not an offical travel warning, more like an advisory.
> But they also stressed that this change does not count as an official travel warning
For example, how to deal with Steam? most of the games I buy there (Baldurs Gate 3 for e.g.) are not made in the USA.
Do you see the word "physical" in my original comment? And me saying that I don't buy such things?
I will admit to buying Intel CPUs, but aren't they manufactured in the Far East?
P.S. Upon inspecting my memory, I think the other one was an HP cesium clock, but that was many years ago.
And rotating rusty hard drives, I suppose. But still all gone.
And don't get me started on American urinals!
A lot of international trade is other goods. Think of how much the UK has paid for things like American aircraft, ships, machinery, or materials used in manufacturing. Our armed forces use a lot of American stuff, and often even British made things have American parts (and a lot of it is covered by ITAR, to an even greater extent than the rest of Europe).
People also tend to hugely underestimate the amount of British manufacturing for the same reason, and because of lot of it is Foreign branded (e.g. Nissan cars).
So I fail to see why I need America at all...
Ah, yeah, one big exception: my computer. Argh!
You can probabl work out where the CPU was made: https://en.wikipedia.org/wiki/List_of_Intel_manufacturing_si...
So you would be happy for the Russians, the Chinese etc. to be able to overfly the UK and send ships into UK waters at will?
You want all the factories using American made machinery, or American inputs to close?
Not American ones I don't.
Is Trump suggesting tariffs on incredibly over-priced and under-performing military and civil aircraft, when we can buy from Europe, or make our own?
To me it seems that the only things the USA sells us are horrible foods, and crap cars for fat people.
Most of the software I use is open source, and again even if I pay for it, is there a tariff?
I just looked up the latest trade and investments factsheet[1] and there are some interesting deets. If you're wondering about direct investment in the US as well as imports:
- Total UK imports from United States amounted to £111.5 billion in the four quarters to the end of Q3 2024 (a decrease of 5.1% or £5.9 billion in current prices, compared to the four quarters to the end of Q3 2023).
- In 2023, the outward stock of foreign direct investment (FDI) from the UK in United States was £494.1 billion accounting for 26.7% of the total UK outward FDI stock.
In addition to direct investment I would also count portfolio investment since we're sort of involved at an individual level through our workplace pensions (and/or personal), savings, stocks and shares ISAs, and so on. A preliminary report[2] foreign holdings of US securities as of June 2024 puts the UK as the top holder at over 3 trillion USD.
1. https://assets.publishing.service.gov.uk/media/67b6f8efbd116...
2. https://home.treasury.gov/news/press-releases/sb0037
Also "Total UK exports to United States amounted to £182.6 billion in the four quarters to the end of Q3 2024 (a decrease of 0.5% or £889 million in current prices, compared to the four quarters to the end of Q3 2023);"
Which is why the current government is being particularly cautious at the moment.
I suppose I could include Apple products on the basis that the majority of the profits go to the US rather than the country of manufacture. Apple sells £1.5b of goods and services in the UK although that won't appear in the UK-US trade figures.
Britain had a massive trade deficit with India. It imported far more from India than it exported to India.
But what Britain did was import massive amounts from India and made high value goods at home and provided high value services that couldn't be provided elsewhere.
Should it have flipped the other way? In 1800, should Britain have suddenly shifted gears and started massively exporting to India in order to balance the trade?
Sure, India was a colony and not a mere trading partner, so no need to argue about that. But the US is also an empire that has bases around the world and has many countries in an economic chokehold. The situation is similar in a modern context since official colonization is kind of gone. The US takes in lower value products from around the world and sells them back to the original country at a higher price due to some sort of added value.
Should America do the opposite? Should we drop all of our high value scientific and medical research, drop our engineering, and go all in on making t-shirts to balance the trade deficit? Because we very well could do this. We could steal away the fine industry of Cambodia and Bangladesh and have them buy all our t-shirts and balance the deficit pretty quickly. But is that a long term benefit?
Cambodia and Bangladesh are countries that can't really afford to buy massive amounts of American high tech exports or foods. But they're essentially colonies that export goods to other countries, and through accumulating wealth through that development, more people can afford to buy American high tech products. But we're demanding that these countries buy lots of American products now with money that they don't have. The only way to balance that is to make things they can afford. Which means low value items.
Consider instead:
- Semiconductor low-end fabrication (Taiwan, Korea)
- Basic electronics: circuit boards, USB devices, .. (China)
- Auto parts (Mexico, China, Germany)
- Generic drugs (India, China)
The reality is that the US is not the ultimate global hegemon anymore and therefore offshoring industries cannot simply be viewed through an economic lens.
That’s why the logical thing to do is invest heavily in education.
Oh, wait.
Buffet's article and Trump's tariffs reflected antipathy to net trade deficits. Not specific strategic concerns.
They're "excluded" because they're coming later. It was announced they'd be specific 1s in that area.
The hegemon concept is also out of date. World trade is not dominated by countries but by multinationals. For instance, there are no real "US" car companies. There are a handful of huge conglomerates who can choose to operate wherever best suits their needs. These respond to edicts from individual countries but operate at a level above nation states.
This is why international cooperation on things like taxation or environmental protection is so important. And it is why petty bickering by individual nations will be so damaging.
I guess the only exception is semi-conductors, but we all know they are desperately trying to remedy that.
But then finally we proved Trump and all those evil Americans a point! *evil laughter...
We in EU could do that, if we dared investing in tech.
And if a more balanced trade relation arises, your current leadership is willing to destabilize the whole world, and threaten war.
And yet tariffs were put on countries where clothes are generally manufactured and imported into the US from, which is why companies like Nike got walloped on the stock market.
> The reality is that the US is not the ultimate global hegemon anymore and therefore offshoring industries cannot simply be viewed through an economic lens.
Trump et al put a 37% import tariff on Botswana. What national security interest is served by that?
Israel got a 17% tariff place on it, but Iran is part of the general 10% tariff list. If these are about national security, why does Israel have a higher number than Iran?
There are valid reasons for tariffs:
* https://www.noahpinion.blog/p/when-are-tariffs-good
The universal tariffs that have been acted don't seem to have been done for those reasons.
Eh, they were swiftly outcompeted in almost all fields, but protected that system of mercantilism, by disallowing their colonies to unload anything that was not flagged british. Monopolies work that way, they ruin things and are memorized in the empire center as "good times"..
https://www.investopedia.com/ask/answers/041615/how-did-merc...
PS: This is one of the reasons why the spinwheel is on indias flag- as a sign of clothing production autonomy.
[1]https://en.wikipedia.org/wiki/Ashoka_Chakra
How about the US pays them well for their work so they can afford all these "high value" items?
Oh no, we economically enslaved all these people to our clothing in sweatshops for pennies an hour, but now they're not buying our...1000$ tablets that don't even have a calculator app...or whatever else the US considers "high value"... Oh how terrible!
I think the US should pay them more. But the fact of the matter is people really want socks and shirts for a few dollars. People can choose to pay more and avoid sweatshops right now. But the fact is, most don't want to do that, and when given a choice, they won't.
What the US has traditionally done is make these countries then take Dollar loans from the IMF and World Bank to buy American defense and high tech products. When they naturally then default (right now there are more than 50 countries that cant pay back these dollar loans cause where the fuck are they going to get dollars from) their only option is to sell off their natural resources to Wall St/build a US mil base/hand over port etc.
This game has been going on so long (google super imperialism) the US with 5% of the worlds population has accumulated more than 50% of the worlds market cap value.
So the US starts overdosing on leisure/luxury and pace of innovation starts slowing cause they dont even need to be innovative. Try to build a ship in the US and its not possible anymore cause the experience is all gone. There is no great magic solution. When you talk about British history look at the 60s and 70s. There was major turmoil economically and socially post the Ww2 rebuild cause the entire system dependent on colonies had to restructure itself.
Separately, your first paragraph also seems problematic. Let’s take Vietnam and Cambodia as examples: neither has a US military base, port, nor sells natural resources to “Wall St”.
Finally, I’m not sure I follow how that would cause the US to accumulate 50% of the world’s market cap—especially because the vast majority of the companies in the S&P 500 have nothing to do with defense, shipping or natural resources. I haven’t done the math, but I would venture to guess that >50% of the S&P 500 market cap is tech or tech-adjacent.
I decry this misplaced pessimism.
This bit I see differently, though only with ~ 30% confidence.
> vast majority of the companies in the S&P 500 have nothing to do with defense, shipping or natural resources.
If you were evaluating the impact that a road has, and you looked at all the vehicles that passed over it every day, most of the vehicles you see would be in other industries — retail, industrial, commercial, domestic — very few of them are professional bitumen pourers who make roads. So clearly bitumen pouring only affects a low percentage of the city.
Not sure which one the parent means but this is what I found:
https://www.amazon.com/Super-Imperialism-Origin-Fundamentals...
https://en.wikipedia.org/wiki/Super-imperialism
That seems to resolve the question you put. Britain and India weren't independent, so talking about a trade balance between the two doesn't really mean anything. If it favoured India, that was good for the British Empire. If it favoured Britain, that was also good for the British Empire. It didn't matter who was favoured or by how much because the British capitalists and Imperial officers were in control of both sides of the trade.
I personally think the US trade deficit is a huge problem ... for the US's trading partners who just gave it real stuff for paper. But your argument for why Britain-India experience was relevant doesn't hold together.
Google tells this isn’t true.
The UK actually had a massive trade surplus because it received cheap resources from India, then sold back high value items.
All of this was controlled by strict trade rules.
I think the UK ran a deficit with India, but a surplus with (richer) countries that bought those high value items.
USA on the other hand has a completely different problem (perhaps opposite of what you describe - being the world’s gracious and benevolent trade partner).
And now it's apparent that even being a great ally will result in economic attacks.
So the world gives the US tangible goods. In exchange they get shittalked and more demanded of them.
Your examples of Cambodia and Bangladesh don't really fit in as American colonies. Both countries are already more dependent on China than on the US for imports. Only a fraction of their populations actually use American goods, what maybe an iPhone or some American brands tops.
They do however manufacture final goods for the American market (and the overall worldwide market), so I don't see any losers here except for American consumers. Your average American clothing company isn't going to move away from these countries because they have the full supply chain in place, and your average overseas production facility isn't going to continue producing for an American company at a cheap price if tariffs are in place.
You're on the money with the last point though. The only way to balance it out is to make low value goods, but that was the whole point of outsourcing it to Bangladesh or Cambodia in the first place. Because that was low value production.
For most of living history, the US went out of it's way to ensure that crude oil is sold in USD, including oil that's extracted in oilfields halfway around the world. There's only one way to get USD is to trade with the US.
Only if you're buying direct from the gulf countries or you're buying on the spot markets are you forced to pay with the USD. For example, the EU had a long standing agreement to pay for Russian oil and gas with Euros, India has recently begun paying for Russian gas with Indian rupee, as does China with yuan. While Saudi Arabia and the rest of the oil dependent GCC are forced to curtail production to force prices up, Russia floods the oil market to account for the shortfall.
Tell that to any country having trouble repaying USD denominated debts. The US loves lending money to other countries, especially via military goods, and then the US uses the debt as a hammer.
Let's talk about the all the software exports that got "converted" into a "service" i.e. SaaS / PaaS / IaaS 1st. Not to mention previously we'd have CD / DVD / etc that are now also "services".
Where's the trade deficit again?
Does this story really describe a trade deficit? Trade is measured in units of currency, not in kilograms.
If I import a quantity of sugar from the West Indies for $1, turn it into rum, and export that rum for $10, then I have, net, produced $9 of exports.
No data points, but I like to entertain this.
well, it is not surprising then that war seems to be a realistic possibility at the moment.
(doesn't matter with whom, we have always been at war with Eastasia).
A (very) partial solution is to build the factories at places where the cost of living for the workers is low. This way, the workers can maintain a higher standard of living at a constant salary.
Is it better standard of living to be in a small apartment in the city working an office job or is it better standard of living being in a more rural area working manual jobs. (I honestly don't know, personally, I prefer to do thinking work)
For rural employment to increase you would need to throw away all the technological progress from the last century. The country and economy would be unrecognisable from what it is now.
The question is how post-industrialism wealth redistribution looks like, when work does not seem to be a good key.
No it can't, not yet anyway.
But hey, changes take time!
Americans may no longer have an unnecessarily large or luxurious automobile, or a screen in every room, but I would argue excess becoming the standard is the problem and a major cause of the imbalance.
The solution doesn't feel very democratic or free though, values that have been critical to the identity of the USA.
Because they all wanted to maximize their profit, so they ship their production overseas and now we have no choice but to buy “foreign goods“ from corporations that say they’re from the United States.
Corporations don’t care about countries, they care about profit. Countries are prisonsfor the workers.
Okay, let europe just sell all their stocks and ETF. But also, let them build alternatives to all american products. Let them keep the money they are spending for their Windows and Office licenses, their Netflix and Disney plans. Let them no longer create ad revenues on youtube. Let them buy korean Samsung phones instead of american iPhones.
Would that be a good deal for the american people?
The US creates a 'trade deficit' by swapping things that have imaginary value for things that do not. Under these circumstances they'd be foolish on not running a trade deficit.
But if Trump gets his way, that world will be soon over, and people will trade in whatever they have so will no longer be compelled to hold USD.
So far I can only see 2 reasons why Trump wants this:
1. He believes the US can force others to pay even more, via tariffs, and they will just accept it. No retaliatory tariffs. Kind of like how he says Greenland will be handed to the US no problem. Dishonest? Delusional? Bullyish?
2. The theory of him being a Russian asset is true, and this is the way for Russia to undermine the US while looking like Trump is rooting for the US. The real plan is for the world to drop the dollar. I don't like conspiracy theories but it just makes no sense otherwise
Aside from the obvious consumer technology and software I am hard pushed to think of any USA produce I would buy that would meet the standards we have in the EU.
The simple reality is that the USA consumes more than it produces.
Exactly. Esp when you have the leader(s) of the US complaining that Europe doesn't buy US cars. Well in the UK smaller cars dominate the market where in the US larger cars do. On avg US cars are longer, wider, taller, and heavier.
A lot of our roads (Cities and urban areas) were not designed for larger cars, even a Tesla smallest car, the Model 3 feels big on the road, well it feels big on the road to me.
Indeed, and the US can afford this because it has concentrated a lot of the world's wealth within its borders. So it is not really clear what they want to fix.
Yet, actually the proper analogy, would be a wealthy family using their disposable income to buy products that make their life easier, and sometimes, even make them more productive so that they can have even more income.
Seems unthinkable I know but we are in weird times.
If Trump doesn’t back down we may see a very interesting time in the US economy. I should point out that many oligarchs in Russia established themselves by making bold moves in the turbulent post Soviet times. This may be similar time period for the US where a new generation of winners emerge.
Something to consider. Money can't buy you love.
[1]: https://www.bea.gov/data/intl-trade-investment/international...
[2]: https://fred.stlouisfed.org/graph/?g=1HrHY
He uses the analogy of a farm owner selling bits of their farm to fund their trade deficit.
But in the real world, it's not zero sum like this. The pie isn't fixed to the size of the farm. New companies serving new needs can be created.
If you're a poor country wanting to escape poverty, you want FDI to be high because you realize it's not zero sum.
Yeah, foreigners now own 20% of your stock market due to negative net investment, but it's now 1.5x as big so your slice increased in size to 0.8*1.5 > 1 and everyone is happy.
Given this, I struggle to understand if his argument still has merit.
He has a point about national debt but it's not a new one.
Fwiw, the US has a big surplus in services,so it'll be interesting to see if other countries retaliate against that.
But wouldn't literally selling the country imply the biggest possible trade surplus? It's all export and no import.
Something is not right with how we calculate these things.
China gets a modest share of the profits, because Apple pockets the rest. Reinvesting a fraction in US and stashing most of the profits in banks across the world that use this money as leverage to buy US bonds, among other things.
Should the entire price of the phone count as a Chinese export?
> Prior to 20th-century monetarist theory, the 19th-century economist and philosopher Frédéric Bastiat expressed the idea that trade deficits actually were a manifestation of profit, rather than a loss. He proposed as an example to suppose that he, a Frenchman, exported French wine and imported British coal, turning a profit.
> He supposed he was in France and sent a cask of wine which was worth 50 francs to England. The customhouse would record an export of 50 francs.
> If in England, the wine sold for 70 francs (or the pound equivalent), which he then used to buy coal, which he imported into France (the customhouse would record an import of 70 francs), and was found to be worth 90 francs in France, he would have made a profit of 40 francs.
> But the customhouse would say that the value of imports exceeded that of exports and was trade deficit of 20 against the ledger of France. This is not true for the current account[, which] would be in surplus.
( https://en.wikipedia.org/wiki/Balance_of_trade#Monetarist_th... )
A major fundamental flaw in the concept is the assumption that goods have a fixed value. In reality, their value changes according to where they are, which is the only reason it's possible to make a profit by moving them around.
Note that in the same example, if the French wine is bought by a wizard instead of a merchant, and he transmutes the wine into 50-francs-of-wine's worth of coal for export to England (the ways of wizards are mysterious), the customs house will record the value of the coal as 90 francs. It's only worth 50 francs when it's going the other way.
And if he does the same thing, transmuting the wine into coal within France, and then sells it in France, the econometric body will be happy that French GDP has increased by 90 francs, making the people of France richer.
https://en.wikipedia.org/wiki/Comparative_advantage
But note also that the example doesn't make any use of comparative advantage. It's sufficient that the value of the coal is different in different places. This is about how water is more valuable when you're dying of thirst, not about how water is easy to produce if you live on an island in a freshwater lake.
But the fact that there is no flow of currency makes the problem look stupider. England is notionally benefiting because it has gained some wine "worth" 50 francs while losing some coal "worth" 70 francs. France is suffering because it's lost some wine worth 50 francs while gaining some coal worth 70 francs. With no francs traveling abroad, the matter is closed and France has ended up better off. What was the problem?
From this perspective, "trade deficit" appears to be synonymous with "gains from trade". (But note that the analogy falls apart immediately; England is also experiencing gains from trade, but it has a surplus instead of a deficit. The difference is driven by the artificial division of the trade into two legs, one of which happens first. If the import happens first, you get a surplus. If not, you get a deficit.)
With fiat, I think there is a concern floating around that if some foreign party absorbs a lot of our currency, and then we print more to replace the loss (so that we continue to have an appropriate amount domestically), the foreign party could suddenly crash the value of the currency by deciding to spend it. That's true. It can't be the origin of the fear of trade deficits, though, because nothing similar appears in Bastiat's example, where currency never moves. It's more analogous to the traditional fear of seeing your country's supply of gold drained away by trade.
Apple has internal transfer pricing which is dictated by accounting regulations and tax law.
Companies try and set transfer prices to minimize local taxes, but need to follow regulations.
A phone made in China is “purchased” by say Apple Canada for some fraction the price it sells for - regulation usually require the Value to reflect the cost of inputs.
So Apple Canada might purchase a phone from Apple China for $600 CAD then turn around and sell it for $1200 CAD in Canada.
It’s the $600 that counts as a Chinese export to Canada.
> That’s not true.
You're right. It's not always the "entire" value paid by the consumer.
So if Foxconn is assembling a phone from components, they are paid for just that. The export is labor, not a fully valued finished phone.
No, I should have been more clear relative to original comment. I was pointing out even % Apple charge customs, i.e. imports from PRC, large % is still ultimately not value captured by PRC.
For full priced iphone, i.e. $1200, Apple captures or offshores another big slice of $800 in Ireland for intangibles like software related IP. But within the $400-600 BOM for physical device / import unit cost for customs, ~80% are western components, i.e. western value capture.
https://graymirror.substack.com/p/implementing-market-balanc...
Economics likes to present the facade of a hard science with equations and rules - but macro economics simply doesn't work the same way as physics, and pretending that your equations are going to be a crystal ball has so far proved mostly bullshit.
Too many things depend on decisions made by actors acting under very complex and dynamic social constraints, rather than predictable rules.
The end result is that several decades after something happens - we're ok at examining the social/political influence of the time on macro economics, but that insight doesn't do much for us now because circumstances are changing at a pace that has rendered any intuition utterly obsolete.