I am writing about the human ignorance of “trade deficit,” the stupidity that humans exhibit when thinking about how humans share capabilities with one another to produce goods and services everyone needs in daily life. Just in case you’re wondering, by ignorant I mean someone that does not know a fact of life. By stupid I mean someone that faces ignorance and demonstrates no sense of learning and gaining knowledge to address the ignorance. When a human takes ignorance as all there is, dismisses his own stupidity, and takes action based on a mix of stupidity and ignorance, we arrive at “moronic behavior.” Sadly
that seems to be what Mr. Trump is doing when talking about the trade deficit. Let me explain.
All over the world and throughout history humans have shared their capabilities in the form of “trade” of goods and services. To exist, humans must trade—whether it is in the family, workplace, or at the corner store; locally, nationally, or internationally. It is through trade that humans get to have a car, a house, food on the table, medicine for ills, computer, and many more things needed in life. Without exception, every human is a trader. Every society is a trader.
Here are the foundational facts of trade: In every capability sharing, trade would not happen unless both sides benefit. Every trade, whether within a country or between countries, gets done based on two foundational factors. First, profit making, and second, satisfying a human need. In these two foundational factors “profit making” is primal. Without it, few needs will be satisfied through trade, and most needs, to be satisfied, have to resort to brute force—harming others and taking their resources—in order to get what one needs. In another blog I will tell you about how profit accumulates into “wealth” and the role wealth plays as operational essence of human life. Here my focus remains on trade and more specifically on ignorance that darkly pervades the concept of “trade deficit.”
Let us start with a simple example. Assume the US buys $1000 of goods and services from China and sells $200 of goods and services to China. Who is better off? On the surface this is a trade deficit of $800. Should we say, oh my God? If this is done year after year, say for five years, the trade deficit will balloon to $4,000. Does this require an OH MY GOD? Can we conclude that Americans are the dumbest and the Chinese the smartest traders? The reality, only an ignorant human makes the who-is-better-off judgment based on the “sales” numbers. The sales numbers are “revenue.” They say nothing about the “costs” involved in creating that revenue. More important, humans NEVER trade based on “sales” numbers. They ALWAYS trade based on “profit” numbers. The profit is determined from “revenue minus cost” and the question of who is better off is always determined by the wealth gained in the trade.
So let us assume that the Chinese make 5% profit on sales of $1000 and the Americans 40% on sales of $200. Who is better off? The Americans gain wealth of $80, the Chinese $50; both sides gain wealth and that is why the trade takes place. But in my simple example the Americans are better off because their net gain is $30. Neither the Americans nor the Chinese are dumb traders. It is only the ignorant human that remains dumb—the human that judges the trade based on the sales numbers and not based on the “wealth” gained in the trade.
Every month the US Customs reports on imports of goods and services and every month the Census Bureau collects and reports the export data on goods and services. These are all “sales” numbers. The difference between the imports and exports is the “trade deficit.” It is a “sales deficit.” Neither the US Customs nor the Census Bureau has any knowledge of the corresponding profits. Since 1970s the trade deficit has been continuously increasing. The ignorant senators, representatives, and government officials cry “oh my God” at every monthly announcement of the trade deficit and the ignorant masses follow suit and buy into the hype, never recognizing that the US companies trading with other countries are not managed by morons and that the decision making is not based on sales but on profits. The numbers I have assumed in my simple model are hypothetical but they reflect the fact that unless both the US and China gain wealth, neither would engage in trade. The fact that across decades the trade deficit keeps growing signals that the US companies are gaining wealth from doing so.
Here is another factor overlooked when issuing “oh my God” exclamations on trade deficit and that is the “ownership” of companies that engage in trade. Many companies that produce in China are in part owned by the US. Similarly, many companies that produce in the US are in part owned by China. I can assign ownership to my simple model and note that gaining wealth is determined by both profits made and the degree of ownership in the trading companies.
What does this mean? It means that trade among nations is always a complex network of wealth flow. Not a single company will engage in trade unless it gets its piece of wealth. The sales information is TOTALLY irrelevant to trade decision making. Totally to the contrary, it is wealth and ownership that determine each trade. Why is the public not informed on wealth and ownership the way it is informed on “sales” every month? Because wealth and ownership are competitive pieces of information that every trading company guards as secret. As a source of competitive advantage each company keeps it to itself. It is only the ignorant and the stupid that focus on “sales” numbers and make decisions based on “sales differences” that create the so-called trade deficit.
Why is Mr. Trump so adamant at using the “trade deficit” especially as a method of destroying trade relationships between countries? Two theories stand out. The first theory: Mr. Trump and those around him are ignorant and stupid humans engaging in moronic behavior. The second theory: Mr. Trump, by purposeful design, is the “destroyer” of the United States and destroying the trade relationships is a direct way of destroying the United States. To read more about Mr. Trump as destroyer, read my other blogs and dig into my books.
You think I am finished, but I am not. I am a professor and love giving tests to see if those that interact with me have learned what I am telling them. So here is a test. I make $50,000 a year and someone you know is making $100,000 a year. Which one is going to have more money in his savings account at the end of the year? If you said the one making $100,000 you have not learned a thing from what I have told you so far. The two numbers I have given you are “revenues” of two individuals. Savings is “wealth,” defined by “revenue minus expenses.” Therefore by knowing only the revenue there is no way of knowing what the year-end savings will be. If we are told that my expenses are $30,000 per year and the other person’s annual expenses $95,000, only then you can know that my savings of $20,000 will be greater than his savings of $5,000. The wealth position of an individual, an organization, or a nation is not decided by the “revenue” but by “revenue minus cost.” Only the ignorant will moan and groan about “revenue” and only a moron will make decisions on revenue alone.
Here is your final test. I know a company that has annual revenues of $5 million and I can buy it for you for only five thousand dollars. Would you buy the company? I repeat; you only pay $5000 and own a company that has annual revenues of $5,000,000. I hope your answer is, “No.” I hope you would want to know what is the “cost of operating the company.” I hope you would want to know what is the company’s “current wealth position.” If the company has annual operating costs of $7 million, it is losing $2 million every year. By paying $5000 to become its owner, you become responsible for $2 million of debt every year. On top of that if the company has already accumulated losses of $10 million, it means that its current owners receive your $5,000 and YOU become liable for paying $10 million of accumulated losses. You could only pass the final test if you would not make any decision based on revenue information alone. You need more information. You need cost and profit information.
When making decisions, there is another important factor to keep in mind. It applies to everything we humans do and you can learn more about it by reading The Choice Maker. In every aspect of our lives we should be most aware that “ignorance” can create logical-looking arguments. Out of ignorance, the human can always create seemingly logical theories. For example, one can argue that revenue and employment are related and that the trade deficit means higher unemployment and thus a loss of jobs. Do I hear any “oh my God” whimpers? But this ignorance-based logic totally misses the fact that no company comes into existence and creates jobs based on revenue considerations. Companies exist and create jobs based only on profit and wealth considerations. Thus, in my simple example of the US companies buying $1000 and selling $200 to China, the US investors would have little interest in creating companies (and jobs) that would make 5% profit. Moreover, because of competition it creates with the Chinese companies, doing so would lower the profit from 5% to 1 or 2 percent. Everyone would lose in wealth. Instead the US investors choose to stay with companies (and jobs) that make 40% profit. That is the decision making reality based on profits and yet, the ignorance-based logic of relating trade deficit to unemployment persists with Mr. Trump, his team, and his followers. The ignorance-based actions would continue to be destructive of trade and promoter of bad laws.
I hope Mr. Trump and those that sing with him the trade deficit woes gain the knowledge of not paying attention to trade deficit and instead focusing on making more trades possible. But sadly that is not the way of an ignorant human nor the intent of a destroyer. I also hope Mr. Trump and his team would visit www.savinghumankind.com and learn about the foundational knowledge in my books. But that’s not going to happen either.