Rags to Riches

Jack Ma is an amiable fellow.  Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl.  At a moment of peak inspiration, he executed his first search engine request by typing in the word beer.

 

Jack Ma, founder and CEO of Alibaba, China’s largest e-commerce firm. Once he was a school teacher, but it turned out that he had enormous entrepreneurial talent and that the world of wheelers, dealers, movers and shakers was more his speed. Today he is one of the world’s small number of genuine self-made multi-billionaires.

Photo credit: DFIC

 

The search results had such a profound impact on Ma that he returned home to China and immediately started his first internet business.  After several tries he hit it big with Alibaba.  So much so that he’s accumulated a net worth of $27.1 billion USD – over 7.3 times more than President-elect Trump.  Not a bad rags to riches story for a poor Chinese school teacher.

Indeed, Ma takes a shrewd, yet casual, approach to business.  Back in 2014, he got a little sozzled up and bought China’s most popular soccer team from fellow Chinese billionaire Hui Ka Yan.  All in all, the soccer team purchase only cost Ma $192 million. As Yan recounted  of how the deal with Ma went down:

 

By accident I got him drunk.  I told him my Evergrande soccer team is planning to issue shares and raise money to support strategic development, will you join?  He said I will. We finished it in 15 minutes.

 

One of the great marvels of life is the direction in which money flows.  From whose hand is it given?  By whose hands is it received?  In general, money has flowed from West to East with nary an interruption for nearly three decades.

 

How to Create One Million New U.S. Jobs

On Monday, Jack Ma visited the Trump Tower in New York.  There he met with President-elect Donald Trump to talk business.  Namely, they discussed how to loop the flow of money back to the West.

Jack and I are going to do some great things together,” said Trump following the meeting.  Reportedly, they intend to create one million new U.S. jobs.  Obviously, this is no easy feat.

 

It’s a deal, mah man! The president-elect, who to our great delight continues to be the greatest troll alive, lands yet another surprising PR coup by striking a deal with a well-known businessman hailing from the lands of yellow peril. Everybody seems happy.

Photo credit: DPA

 

The business plan to pull this off includes a simple two-step approach.  As a matter of fact, it’s the sort of plan that was likely scratched out on the back of a cocktail napkin.

Step one involves signing up one million small and medium-sized U.S. businesses and farmers to the Alibaba platform.  Step two, the more organic of the steps, is predicated on Ma’s intuitive estimation that each company will subsequently hire a new person because of the added commerce.

Hence, that’s how Ma and Trump propose to create one million new U.S. jobs.  Given the track records of these two fellows, is there any reason to believe that this plan won’t work?

We know that U.S. consumers have a vast appetite for cheaply made Chinese goods.  On the flip-side, we’re discovering that Chinese consumers have a vast appetite for U.S. produce.  In fact, they’re already buying it via the internet.

U.S. produce sold on Alibaba’s platforms includes Pacific Northwest cherries, Washington State apples, and Alaskan seafood.”  Who would’ve thought?

 

Will you look at that… high quality Red Delicious apples from Washington State are sold in bulk at Alibaba (see blue rectangle highlights above). In fact, the US appears to be the largest non-Asian supplier of apples on the site – click to enlarge.

 

Trump’s Plan to Close the Trade Deficit with China

The U.S. has run a current account deficit, which reflects the amount of goods and services imported in excess of those exported, for the last 26-years.  In just the third quarter of 2016, the current account deficit was $113 billion.  In other words, the U.S. sent approximately $1.25 billion dollars more per day to other countries than it received through trade.

Much of this trade deficit, no doubt, is being racked up with China.  Perhaps the selling of cherries and apples on Alibaba by U.S. growers to Chinese consumers will help close the trade gap.  Unfortunately, it’s unlikely these trade volumes will be high enough to make a meaningful dent.

 

The US current account deficit: a reflection of the greatest credit bubble in human history – click to enlarge.

 

Another alternative to closing the trade deficit with China that Trump has mentioned involves jacking up tariffs on imports from China from about 3 percent to 45 percent.  According to Gene Ma, chief economist for China at the Institute of International Finance:

 

“The direct impact on GDP would be sizable.  The value added by export[s] is about 10 percent of China GDP, and [the] U.S. accounts for about one-fifth of China exports.” 

 

Of course, if Trump were to proceed with this tariff plan, China would likely impose its own tariffs on U.S. imports.  Thus Trump may succeed in closing the U.S. trade deficit with China.  But he’d do so at the risk of inhibiting trade and diminishing wealth.  That’s like cutting off one’s head to cure a headache.

 

Henry Hazlitt’s excellent book Economics in One Lesson is one of the best books ever written for the purpose of introducing laymen to sound economic theory and concepts. As Ludwig von Mises once remarked: “Economics must not be relegated to classrooms and statistical offices and must not be left to esoteric circles. It is the philosophy of human life and action and concerns everybody and everything. It is the pith of civilization and of man’s human existence.

Photo credit: Nast Archive

 

As economist Henry Hazlitt explained many years ago, in Chapter 11 of Economics in One LessonWho is “Protected” by Tariffs:

 

“The effect of a tariff […] is to change the structure of American production.  It changes the number of occupations, the kind of occupations, and the relative size of one industry as compared with another.  It makes the industries in which we are comparatively inefficient larger, and the industries in which we are comparatively efficient smaller.  Its net effect, therefore, is to reduce American efficiency, as well as to reduce efficiency in the countries with which we would otherwise have traded more largely.”

 

Chart by St. Louis Federal Reserve Research

 

Chart and image captions by PT

 

MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.

 

 

 

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3 Responses to “Trump’s Plan to Close the Trade Deficit with China”

  • Bam_Man:

    “What if Trump decided to outlaw fractional reserve banking as fraud, end the Fed, return to a gold standard with gold reserves physically redeemable for dollars…”

    Answer: He would get the back of his head blown off – or worse – long before he could even begin to implement such a plan.

    • CG23:

      Yes, I wouldn’t want to be the one to take on the evil counterfeiters at the Fed and the other members of the global bankster cartel. Our totally unbacked, confetti money is truly unconstitutional but somehow it’s “legal”. (The better for Congress to spend, spend, spend!)

  • Miguelito:

    Someone needs to explain to Trump that the root cause of the trade problem is dishonest money. When trading one real thing for another, a trade imbalance in an item will reduce or increase its supply, resulting in an increase or reduction in price, respectively. If the people ruled by the criminals who call themselves US government were excessively exporting gold in exchange for imported goods, the supply of gold would diminish. Because of the economic law that any amount of whatever is used as money will service that economy, so long as its sufficiently divisible, the price (purchasing power) of the remaining money, gold in this case, would increase in the exporting economy. Prices, in terms of gold, in the economy with less gold would drop. Eventually, gold imports and exports, and all trade with that as the other half of the transaction, would balance. The reason for this natural balance of trade is the fixed supply of money through the use of something real that can’t be created at a cost significantly lower than its purchasing power.

    The reason for the trade imbalance is due to two things. First, the creation of money by means that are far less expensive than the current purchasing power of that money. Second, the people using this money are stupid enough to use it, in spite of the continuous deterioration of the value of it. The people in the land currently called USA are fools to allow degradation of their money due to the ability to create it cheaply through fractional reserve banking and the partnership between the US government and the Federal Reserve. The much bigger fools, presently, are all the trade partners around the world who accept this cheaply created money in exchange for goods that are much more expensive to create. When those receiving all this cheap “money” finally realize its real value, they will stop accepting it and try to buy whatever real things they can. This will happen in a flood, as mood swiftly changes toward the dollar and it won’t buy anything anywhere else than where it came from. All this “money” fill flow back into the USA where its supply will suddenly skyrocket and purchasing power collapse. That is when the biggest fools will be revealed as the citizens that allowed their money to be created cheaply. That will be the end game of the trade imbalance that Trump is so concerned about, if cheaply created money is allowed to persist.

    Now let’s consider another scenario. What if Trump decided to outlaw fractional reserve banking as fraud, end the Fed, return to a gold standard with gold reserves physically redeemable for dollars, and let the price of gold then find its free market value in terms of dollars. It would be understood that a portion of the gold reserves would be reserved for payment of entitlement commitments to the elderly and disabled, in proportion to the narrowly defined money supply expected to be redeemed. The US government debt, which is an illegitimate claim upon future theft by the government, would be defaulted upon.

    If Trump were to take these actions, people in the land currently called USA would become the low cost providers, in terms of gold, for many products. Much more so if the gold stolen from the people in 1933 by FDR has been squandered by the criminal gang who call themselves US government. Manufacturing would return to those places that can offer their customers the most value, instead of going to those stupid enough to accept cheaply created dollars in exchange for goods more expensive to produce. Trade would naturally balance when gold prices of goods balanced out around the world.

    Trade deficits would become history.

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