Part 1 of 2
Fueled in part by President Donald Trump’s tariffs and criticisms of trade agreements and deficits, stock markets have seen some wild swings from one day to the next — or even on the same day.
While about a half-dozen economists and trade experts told Insider that the president’s framing of the issue as a zero-sum game is, essentially, silly, some of them acknowledged that economists have not done a very good job of explaining the broad benefits of trade.
In addition, they said that, despite agreements, some unfair practices continue to hamper the global economy and that America needs to work harder to help workers whose jobs have been displaced.
And, the experts said that while Trump’s approach, focusing on tariffs and tough talk, has stirred a welcome national conversation, they wonder whether there might not be a better way to remedy or mitigate some of the detrimental effects.
For some of Louisville most prominent employers, including Brown-Forman and Ford Motor Co., the talk about trade is anything but a theoretical exercise.
When Trump last month threatened to include the European Union in tariffs on steel and aluminum, Europeans said that they would retaliate by imposing tariffs on American products, including bourbon.
Brown-Forman relies heavily on international sales, generating more than half its revenue outside the U.S., by selling consumers in 165 countries sought-after American-made products such as Tennessee whiskey and Kentucky bourbon made right here in Louisville.
“International trade is vital to Brown-Forman’s success,” said Phil Lynch, the company’s director of corporate communications and public relations.
“Therefore, we have consistently supported free trade agreements, including the reduction of tariffs against imported products (imported by non-U. S. markets) to help create a level playing field for our brands when competing against other global and local companies and brands,” Lynch told Insider via email.
The Europeans’ retaliation threat subsided when Trump on March 22 said he would exempt the EU from the tariffs, but the president rattled markets again the same day when he threatened tariffs on about $60 billion of Chinese imports. The Dow plunged nearly 3 percent on Thursday, and another nearly 2 percent on Friday. The index had its worst day in two years, falling nearly 5.7 percent.
The Dow bounced back last Monday, gaining nearly 3 percent, but fell again by 1.4 percent the following day. Intraday swings, too, have gotten wilder: On March 21, the day before Trump intensified his trade rhetoric, the difference between the Dow’s intraday high and low was 322 points. On the subsequent four trading days, the difference, on average, exceeded 600 points.
Through Wednesday, the Dow was still down about 1,000 points for the year, indicating that the Trump rally, which had pushed the Dow up 25 percent, has come to a halt.
Markets fell early Monday after news reports that China would retaliate for the steel and aluminum tariffs by imposing tariffs on its own on 128 U.S. products including fruit and pork, with investors fearing additional retaliation for the tariffs on $60 billion of Chinese imports.
Trump repeatedly has framed trade as a game that countries either win or lose, measured by whether they have a trade deficit. He also has turned his verbal attacks into increasingly powerful actions.
The moves reflect Trump’s attitude: When a country has a deficit — as the U.S. does with China, to the tune of $375 billion — it is “losing” at trade — and trade wars are “easy to win” because you can simply not trade anymore, as he said last month in a tweet.
‘Not how trade works’
“That’s a really silly argument” said Stephan Gohmann, director of the John H. Schnatter Center for Free Enterprise at the University of Louisville.
“That’s not how trade works,” agreed Erin Ennis, spokeswoman for the US-China Business Council.
The U.S. has a trade deficit with China? “So what?,” said economist Morton Marcus, formerly with Indiana University’s Business Research Center.
On a basic level, trade is an exchange of goods and services, and America’s trade deficit with China simply reflects that last year, American consumers bought $375 billion more in Chinese goods than Chinese bought in American goods.
But that, by itself, doesn’t tell you much, the trade experts said.
“I’ve got a trade deficit with Kroger,” Gohmann said. “I don’t feel like I’m losing.”
That’s in part, he said, because “I have a surplus with the University of Louisville.”
People trade, Gohmann said, because they want to exchange something they value less for something they value more.
Trade allows for buyers to acquire products and services from someone else who can produce them or provide them in a more efficient manner, he said. It allows for specialization and for people and companies to focus on providing products and services at which they excel.
“It makes everybody better off,” Gohmann said.
If a Chinese company can make a dress shirt of the same quality as an American company — but at a lower price — consumers benefit, because they have additional money, which they can spend on other products and services, which helps the companies that sell those products and services.
And, Marcus said, the money that Americans send overseas for the foreign goods often is spent on American movies and music, and it even often comes back when foreign tourists spend those dollars on vacation in American hotels, restaurants and shops. In other cases, the foreign governments buy American treasuries, which they deem to be secure investments and which enables the U.S. government’s deficit spending.
The trade deficit is only a portion of the trade story, the economists said.
For one, Marcus said, a goods trade deficit generally is balanced by a services surplus. American banks, for example, offer their services in the world’s largest cities. Those transactions aren’t reflected in the trade deficit.
Frank Raymond, economics professor and associate dean of Bellarmine University’s Rubel School of Business, agreed.
The U.S. economy may be importing steel, he said, but it may be exporting consulting and accounting services. People tend to focus on goods manufacturing because it’s a highly visible sector that has taken in hit in the last few decades.
American companies provide plenty of products and services that are sought-after throughout the world. One can hardly travel to a country where the hotel TVs don’t show American shows, he said.
“I think we worry too much about trade as an issue,” Marcus said. “It’s always easy to blame another place for our own problems.”
Ennis, of the US-China Business Council, said that rather than looking at trade as countries fighting for a slice of a pie, it helps to look at trade as a way to make the pie larger. The more countries participate, the better.
Stable overseas economies also reduce conflicts, and when the wealth of people in other countries rises, they may be more inclined to buy U.S. products, such as a handle of Woodford Reserve or tickets to a Jennifer Lawrence movie.
The trade relationship between the U.S. and China already supports about 2.6 million American jobs, said Ennis.
American companies sell about $400 billion worth of goods and services to China annually. The U.S. has only one bigger trading partner: Canada.
Given China’s continued strong economic growth, the number — and China’s share — are likely to continue to grow, Ennis said.
For Kentucky, too, the Chinese market is playing an increasingly important role. In 2016, Kentucky businesses exported $2.2 billion in goods to China and $399 million in services, according to the USCBC. Exports from Kentucky to China have more than tripled in the last decade, compared to a growth of just 65 percent for goods exports to the rest of the world.
Coming in part two: How to address trade challenges
UPDATE: This post was updated to reflect Monday morning market reaction to reports on retaliatory tariffs from China.