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GELFAND’S WORLD - I know, everybody is obsessed with the Epstein files, but I'd like to digress from the scandal du jour for a day or two and talk about the trade war and the suddenly announced deal with the European Union -- such as it is or isn't -- and who gets hurt by it. And then there is one other factor, the 800 pound gorilla, the one that none of the press coverage has mentioned.
First of all, what is this particular trade imbalance, and why should any of us care about it? It turns out that the countries of the European Union and the United States do a lot of cross-trading in pharmaceuticals, machinery, appliances, and so forth. They sell us a lot of cars and we sell them a fair number of expensive airplanes.
If you add it all up, we imported about $606 billion from the EU last year and they imported about $370 billion from us. If you subtract the one from the other, you will find that they sent us about $236 billion more in these things than we sent them. There are a couple of ways to look at this number. One is that the Europeans are subsidizing our lavish lifestyle by providing us Audi's and injectable insulin in exchange for pieces of paper that are pretty cheap to print.
Of course the president has a different way of looking at things. To be honest, it's hard to know exactly what that way of thinking really is. If this were back in the year 1500, we would understand Trump's policy as mercantilist, meaning that he likes the idea of collecting gold, so that he (and American banks) have more of it than the other guys.
Ever since Adam Smith and the publication of Wealth of Nations, most deep thinkers understand that mercantilism isn't the best way to talk about economics, but Trump obviously is a different sort of guy. To put it bluntly, there isn't a lot of evidence that he is any good at economic thinking.
Nevertheless, everyone understands that you can't run too much of a deficit for too long before you get your country into deep trouble and suffer from runaway inflation. That's why we put well educated people in charge at the Federal Reserve and hope that the U.S. Senate will show some responsibility every now and then. I'm not seeing a lot of panic from serious economists about the trade imbalance, but it's not unserious to be thinking about it at some point. So we could give Trump some credit for thinking about the problem if only he weren't such a jerk, and if only he weren't about to create a serious recession by doing what he does.
And there is one more small point before we get to the big gorilla. At least some bankers and economists point out that when you take note of other factors besides trade in airplanes and drugs -- such as income that US interests gain from the IT industry -- the perceived trade imbalance isn't really an imbalance at all. Here is what Tim Sterk points out about that trade imbalance that may really be no kind of imbalance at all.
By the way, if you look at this trade imbalance (taking that $236 billion as the true value) and compare it to our GDP of more than $30 trillion, it's easy to see that this particular imbalance is well under one percent. On the other hand, if you add up the trade imbalances with all the different parts of the world, you will find that we have been running a deficit just under a trillion dollars a year -- roughly $900 billion over the last year. This seems like a lot -- and it is -- but there is no reason to think that creating a trade war is the best way or even the right way to go.
So now that 800 pound gorilla.
The countries of the European Union have their own separate and distinct healthcare systems and their own distinct ways of paying. What they have in common is two things: They provide universal access, and they have managed to provide pretty good healthcare (with better outcomes than comparable American measurements) for a lot less money.
If you look at the EU as a whole, it spends, on the average, about 10% of its GDP to cover healthcare costs. There are countries that go higher -- Switzerland and Germany are notably a point or so higher -- but most of the European countries do fine for less. If you look at the data more closely, you notice that European countries are able to provide excellent health care for a little more than $5000 per person -- maybe $6000 or so when you factor in the value of the Euro compared to the US Dollar.
Then there is the USA, which currently spends 16.7% of its GDP on healthcare.
In real money, that comes to more than $14,000 per person.
That's 4.3 trillion out of our 30 trillion dollar GDP that we are sending to insurance companies and hospital emergency rooms and clinical laboratories. The people who do these sorts of calculations point out that we are spending a thousand dollars in administrative costs for every man, woman, and child in the country. The Europeans spend a lot, lot less -- typically two-thirds less and for some of them, 90% less.
If you compare the healthcare costs for the EU vs those of the USA, you will find that we spend almost $2 trillion more, even though the EU has more people (about 450 million) to cover.
So there it is, kids: The United States has, in effect, a huge tax on every person and every business. Those healthcare costs add to salary costs in those jobs which actually provide benefits, but the result is that the costs trickle down through every other product and service, because even non-unionized jobs use tools and gasoline and raw materials, and every one of these things has some healthcare cost factored into it.
We are throwing away about 6% of everything we spend compared to European countries, and it shows in what we can produce and for how much. In other words, we have rendered ourselves uncompetitive over the past 70 years through our unwillingness to make the changes that every other western, industrialized country has made.
Who are the winners and losers in the proposed USA - EU trade deal?
It's easy to summarize, particularly if you believe that it's going to actually happen. Here is what James FitzGerald and Tom Geoghegan of BBC News say, and which you can read here.
"Ordinary Americans are already aggrieved at the increased cost of living and this deal could add to the burden by hiking prices on EU goods.
"While not as steep as it could have been, the hurdle represented by a 15% tariff rate is still significant, and it is far more pronounced than the obstacles that existed before Trump returned to office."
The authors summarize: "US consumers -- loser"
The net effect of the deal -- if it actually goes through -- is a national sales tax on goods imported from Europe which is first paid by importers and eventually passed down to consumers. On the other hand, the stock market and trading companies are happy because they finally have some respite from the chaos of past months. In this sense, it is considered a big win for Trump.
But there is still one issue for the U.S. to get past. The way the EU works, it will take unanimous consent from all 27 countries for this to go through. Any one country can say No. The authors summarize:
"The deal will need to be signed off by all 27 members of the EU, each of which have differing interests and levels of reliance on the export of goods to the US."
There are two possible scenarios. The first is that the world and the EU will see this agreement as the end of the negotiating process (admittedly a process that is different from what they are used to) and accept it as the best deal they can get during this final Trump administration. Under this scenario, they will sign on the dotted line and try to get a better deal come 2029.
But there is another possibility. The rest of the world sees Trump as a posturing bully and not to be trusted. Some countrys' leaders may decide that they don't want to play, and will simply dawdle on the agreement process. It could be six months before some countries get around to the discussion, and even longer before they take it to a vote. In the end, it may be impossible to get those 27 votes, and the deal will fall through.
If this is the case, then Trump just got played, and the deal will never go through.
The other point that we might think about is that the current deal doesn't have much to do with the Asian trade. Will there be a deal with China? What of the other Asian nations?
(Bob Gelfand writes on science, culture, and politics for CityWatch. He can be reached at [email protected])
