Trade Tariffs….. a Threat?... or a Promise?
The “trade bloc” journey to gain back prosperity!
Written by Nigel Southway, Take Back Manufacturing Author
Nigel Southway is based in Toronto, Canada, and is an independent business consultant and the author of Take Back Manufacturing: An Imperative for Western Economies, and Cycle Time Management: The Fast Track to Time-Based Productivity Improvement, an early LEAN thinking textbook.
The “trade bloc” journey to gain back prosperity!
We keep hearing warnings from economists about President Trumps approach to Trade Tariffs, but what they need to better understand is how he plans to use Tariffs as a reshoring and trade balancing tool to develop strong local trade blocs to gain back prosperity.
The history and the rational for Trump’s change in the USA trade policy is explained in detail in my book Take Back Manufacturing… an imperative for western economies.
In my book I explain that in less than one lifetime we have experienced the destruction of our manufacturing sectors in our western societies, and the significant loss of national prosperity, and why the imperative for western economies must be to ….Take Back Manufacturing!
The globalized manufacturing approach with efficient supply chains supported by liberalized global free trade agreements was toted as the way to go by many economists, and so this became the business norm in the last four decades with massive amounts of domestic industrial capacity relocated offshore, and this has been the prime reason for the “hollowing out” of our Western industrial base.
Experts have predicted that most western nations could experience further decline in their manufacturing and business sectors and become post industrialized societies, and experience further decline in citizen prosperity, unless action is taken.
President Trump is undertaking a trade policy journey to ensure this prosperity decline does not happen to the USA. He will strive with the correct political will and policy focus to provide national economic conditions that will provide an opportunity for the US economy to move back to a more localized trade bloc and undertake the reshoring of their manufacturing and business sectors.
The failed promise of global free trade
In 1995, the World Trade Organization (WTO) became the global supervisor of world trade liberalization.
The leading Politicos in power at the time declared and promised that adopting global free trade would bring all nations closer together, reduce wars and conflict, would improve the spread of democracy, and take us all to a new world order with improved global prosperity.
The economists of the day were positive that “all boats would rise together” economically.
But now thirty years later none of these promises have been kept.
Today…. Nations are far from closer together, we have even more wars and conflict, democracy as a political ideology has declined, with the ascension of new major powers such as China, Russia and others adopting a non-democratic political model that is increasing geopolitical tensions.
The notion of “all boats will rise together” is now a sick joke for most citizens in the western world that have experienced significant prosperity loss over the same time period.
Global Free trade has extended our supply chains and added waste to our businesses while reducing the value-added content of our western economies.
Also, the associated global free movement of capital, and the financialization of our economies, has upset the delicate balance between capital and labor, which has all contributed to the significant reduction in our citizen prosperity.
In retrospect we appear to have placed the drive for uncontrolled global free trade ahead of common sense and sound economic principals.
In future we must stop listening to economists married to the failed notion of free market comparative advantage ideology.
We must stop pandering to trans-national corporations and ensure that in the future they are better controlled within our economies so that they participate fully in the costs of doing business with our consumers.
We must encourage free enterprise and the spirit of entrepreneurs but avoid being manipulated by some self-serving global elites who have attempted through lobbying and financial leverage to maintain the global trade environment for their own advantage.
International Trade is not a God-given right. It must only be undertaken if it is a benefit to the national citizens, and not to serve some geo-political feel-good ideology at the expense of national prosperity.
Some economists still retain the religion of global free trade, but many are way past the point of arguing for the continuance of global free trade, as they accept that there is no such thing as free trade or fair trade, but only beneficial trade. And we need to continue to re-educate our economists away from the failed religion of free trade.
Localized trade blocs
Its clear that localized trade blocs will offer far better national security and the opportunity to avoid long and expensive supply chains, as well as mitigate the massive wealth transfer gradients that clearly exist between the west and the rest.
A localized trade bloc will add far more value to national citizens by mining making and growing far more of what they consume. The trade bloc will attempt to minimize imports and the need for exports to balance such imports.
Although trade outside the trade bloc will be allowed it must be discouraged with appropriate tariffs and controls. The goal is to group localized nations together into a localized trade bloc and create a trading zone that is large enough to become an autonomous balanced economy.
The best examples of this trade bloc approach would be the USMCA and EU zones, but they must learn to operate far differently than before, with no duplicitous trading agreements outside the blocs, so that trade and economic capacity is as much as practical contained within the bloc via tariffs and other trade controls. Although some raw materials may need to be imported where local materials cannot be provided from within the trade bloc, all value adding capacity must be encouraged through investment to be developed within the trade bloc.
In principle the future localized trade blocs will be a free trade zone as much as practical between the nations participating, but some unifying rules may be applied on certain commodities. And, its also clear that trade outside the trade bloc will be discouraged with tariffs.
The business world is also realizing that long global supply chains for many reasons are wasteful and unsustainable, and that being closer to the consumer is a better business model. This is why 85% of large corporations are undertaking a reshoring strategy inline with future recapitalization and investment strategies, with reshoring activity into local trade blocs doubling each year.
There is also an urgent need to reverse past trade policy mistakes, and disconnect our western economies from unfriendly global actors, and move us away from unsecured and uncontrolled global trade.
So, not only does this reshoring of industrial capability make sense to avoid the new geopolitical risks and protect national security, but these more localized trade blocs will also greatly improve citizen prosperity.
So, what Trump will be doing is energizing this reshoring transition with government trade policy using tariffs.
Its very clear that many western governments will be following his lead and will be making a reshoring / local trade bloc approach a national initiative.
How will tariffs be used?
Trump will use the Tariffs in two ways…
First …as a negotiating tool to get the attention of other western nations…
Then, after the negotiation process is completed with future trade bloc partners a reasonable but effective and agreed level of tariffs will be applied on trade outside of the localized trade blocs.
The tariffs will become a realistic and focused control tool on certain targeted commodities to restrain imports and generate an environment for local trade bloc capacity to be built to replace these imports. This will also generate significant short term tariff revenue.
In the same timeframe a reduction in internal taxation will probably be applied to neutralize the impact of any price pressure on the citizen population.
The remaining tariff revenue will be applied to support the reshoring process through subsidies for these focused commodities and for re-training and capital investment.
In the same timeframe efficiencies will be found in the public sector including public sector job capacity, and this capacity will be redeployed to provide capacity for producing the reshored commodities mentioned.
In the longer term the impact of the tariffs on commodity prices will be minimized as local supply becomes available and the tax burden overall is reduced.
Some tariffs will remain to ensure imports are kept to a minimum.
Where possible an export subsidy can also be provided for commodities that offer export activity that can add value to the national economy.
In this manner the tariffs are used to maximise the value adding revenue within the trade bloc economies, and control and minimize imports, so that imports and exports remain in better balance across the localized trade bloc.
The future approach to trade and its benefits
What follows is a punch list of the economic advantages of reshoring our industrial capability and benefiting from the significant reduction in “global waste” by moving toward a localized trade bloc approach.
Avoid Wealth transfer.
Past multilateral and uncontrolled global free trade deals has created wealth transfer from the west to the rest, which has created a death spiral for western citizen prosperity.
To put this into perspective, Global trade has increased 8 times since 1980, but global wealth has only increased 3 times and has flatlined or worse in western nations. So, its fair to say that global trade has been very poor at wealth creation, but very good at wealth transfer.
We need to learn how to avoid or cancel these so-called multilateral free-trade agreements that are never followed by the emerging nations at great expense to the mature nations.
This will include realizing that global free trade and international trade outside of local trade blocs such as the USMCA and the EU are way out of balance and must be avoided as much as practical. These import levels are currently at 15% and 20% of trade bloc GDP respectively with associated exports only half these import values. This trade activity is also having a negative effect on GDP growth.
Reduce non-value adding imports and exports.
Its clear that the globalization of trade has created excessive imports in most western nations that cannot be balanced with exports even when they are government subsidized. Further the imports from the emerging economies are mostly finished goods, and the exports from the western nations are mainly raw materials, which further reduces the value adding contribution of such trade to the western economy.
This massive trade imbalance has created the need to sell off national capital assets or support the imbalance with trans-national loans or currency manipulation.
Those that signed on to these past global multilateral free trade deals naively assumed trade reciprocity would be achieved, and this unplanned bartering mentality just has not worked. The only way to manage and balance trade is with national trade policies and well-planned border tariffs.
Also, such a trade imbalance problem cannot be solved with even more unilateral trade deals, which has been the foolish approach taken by many past western governments. This just does not help, and just digs the same hole deeper. It’s the definition of insanity by doing the same things and expecting better results.
The real solution is to minimize non-trade bloc imports by reshoring our industries and services. And, although we should encourage future exports, we must ensure that they add value to the national economy, and by reducing these imports we can eliminate the need to subsidize exports to pay for these excessive imports.
The reshored capacity will create significantly more value adding economic activity and will better employ our citizens and will allow the wealth to multiply through our own local money supply and generate an improved level of prosperity.
Also, as the need for local industrial capacity returns this will re-mobilize the capitalization cycles and attract investments that have also been offshored for far too long.
Reduce supply chain waste.
As already mentioned, global supply chains are long and add significant waste in terms of additional transactions, delays, inventory, material obsolescence and energy usage as well as 3rd world pollution.
Also, as interest rates increase back to more normal levels then maintaining these long global supply chains will place additional financial burden on businesses due to the excessive cash trapped in these long supply chains.
When trade is conducted inside the local trade bloc this will avoid these wasteful long supply chains that have in fact assisted in driving the need for those ultra low interest rates.
Also, many imports from offshore providers are only possible when supported by the export of raw material from other global sources. So, these multi-path supply chains significantly add to the overall supply chain waste, and many of these multi-path supply chains can be eliminated if the western nations who already have the raw materials produce their own final products.
Some economists still believe that offshore economies offer lower product costs, but recent landed cost tipping point studies that compare all the supply chain costs show that many products can be reshored and produced locally with almost the same or even lower costs to their consumers if coupled with the latest automation and digital transformation technologies.
Reduce global energy waste & pollution.
Global supply chains and the 3rd world providers use far more energy and pollute far more than localized western supply chains.
The sea container ships, the associated support equipment, and all the trans-national cargo aircraft have a huge carbon footprint, and collectively pollute more than 6 times all the gas-powered private vehicles on the planet.
Recover economic value.
Its clear that a significant loss of value-adding direct manufacturing jobs has happened in the western economies due to globalized trade. But a bigger issue is the complete gutting of the capability to design, develop and provide the manufacturing technology to make our own products. This total loss of product capability in many sectors definitely qualifies as a massive national security issue. It significantly affects our food, cloths, transportation, energy, medical, and defence capability.
Also, many service jobs have been offshored, and these are also strong candidates for reshoring.
The future task will be to set policies to recover economic value and get these products, services, and the related jobs back home!
Revitalize local investment.
As already mentioned, due to the decline in many industries and the loss of industrial and general business growth opportunities we have seen significant capital flight to other parts of the globe. But as we rebuild our industrial capability, we will significantly attract our own capital investment back to our nations. Also, the significant past rent seeking of capital into real estate can be reduced and redeployed toward much more productive investment opportunities that will far better add value to our local economy.
The way forward…
Although we now have new political leadership that will be creating more useful policies that will move us in the correct direction, it will take ongoing trust and maturity and a coordinated team effort between all the national participants of these localized trade blocs. It will demand forming trade partners into rigid localized trade blocs with new policies that will certainly include tariffs to avoid the current elevated level of imports outside of that trade bloc. This must force reshoring and reduce the need for future imports and ensure exports add far more value to our trade bloc economies.
We need economists to review and update the measurement of national productivity and prosperity so that such performance measurements better relate to the true impact on the lives of our citizens.
An ongoing review must be undertaken with input from business leaders and industrialists to determine which commodities and related supply chains must be better managed with government controls to relocate them back into the trade bloc.
Next, a national plan to provide resources and capacity to support such reshoring must be undertaken.
The focus must be on synergistic alignment of trade across the trade bloc so that local strengths are better harnessed such as natural resources, skills, location, and growth capabilities.
Trade bloc border controls must be revisited to ensure the seamless movement of goods and services across the trade bloc borders while ensuring unplanned and undesirable movement of goods and people are better controlled to the benefit of the citizen population.
The journey to reverse the wasteful and dangerous global trade ideology and reinstall our overall economic capability within localized trade blocs will be worth it, and its now clear it’s the only option to restore western prosperity.
Nigel Southway, Take Back Manufacturing Author
Nigel Southway is based in Toronto, Canada, and is an independent business consultant and the author of Take Back Manufacturing: An Imperative for Western Economies, and Cycle Time Management: The Fast Track to Time-Based Productivity Improvement, an early LEAN thinking textbook.
He consults and educates worldwide on Business Productivity Improvement, LEAN business practices, Advanced Manufacturing Engineering, Future Supply Chain Management, Industry 4.0, National Sustainability, Global technology transfer projects and joint ventures and more.
He is a past chair of the Society of Manufacturing Engineers and the leading advocate and spokesperson for the Take Back Manufacturing Forum, and the North American Reshoring initiative in Canada.
Follow me on Facebook, LinkedIn, and visit my website for my book and more info!
