During an early episode of the TV sitcom classic Seinfeld, George Costanza developed his alter ego Art Vandelay. Among Mr. Vandelay’s professions was that of an importer/exporter. While researching the importer/exporter profession, I found the website Glassdoor that is utilized by primarily former employees to find jobs and review and evaluate their previous companies. While scrolling through importer/exporter, I found one familiar company – “Vandalay Industries.” The site had a picture of Vandalay’s office lobby, coffee cup with the company logo, and even a staff picture. Apparently, the Glassdoor staff does not get the joke.
The latest economic fear is a possible trade war between the United States and the rest of the world. Foreign trade is a pretty simple equation. The difference between American imports and exports is a trade imbalance. Trade almost never balances. Either imports exceed exports, or exports exceed imports. According to CNN Money, the U.S. trade deficit, in other words imports exceeding exports, is $566 billion.
While the trade equation appears simple, the economics of trade is anything but straightforward. While the deficit sounds high, the U.S. economy has never been healthier based on the numbers. Obviously, not everything is rosy, but unemployment is at a 40-year low, and the Gross Domestic Product, which measures the market value of all final goods and services, is steady, if not spectacular.
On the other hand, a net export position does not necessarily imply economic success. The last time exports exceeded imports was during President Ford’s administration. The 1973-75 recession was marked by high inflation, gas shortages, and economic stagnation and which led to Ford’s loss to Jimmy Carter in the 1976 presidential election.
The recent tariffs announced by President Trump throws a monkey wrench into the trade equation. Basically, a tariff is a tax added to particular classes of imports or exports. The first announced tariff was to be placed on steel and aluminum exports to protect our national security as well as steel and aluminum workers. Clearly, based on the stock market’s volatility, investors do not like it. It is also bad for consumers and hence bad for the nation’s economy.
Many of the countries that could be affected by tariffs buy U.S. Treasury securities. If those countries stop buying our Treasuries to retaliate against the tariffs, who then will buy our debt? The U.S. government would then be forced to raise interest rates faster to sell those securities which, based on history, will result in inflation. The combination of tariffs, huge federal debt, currently estimated at $21 trillion, and high interest rates could put us in another serious recession that could be worse than the so-called Great Recession ten years ago.
It is difficult to broadcast bad news that has not yet happened. The proverbial rubber band has been stretched to its limit and is about ready to break. We can only hope someone in charge sees this scenario and makes the appropriate adjustments, the most obvious one being getting rid of the tariffs. Otherwise, our government balance sheet will be as fanciful as Vandalay Industries.