If trade is poker, the US is the chump at the table

If trade is poker, the US is the chump at the table
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The president’s State of the Union address featured his views on global trade.

Whether you agree or disagree with him, before we decry the evils of global trade or conversely trumpet its merits as the miracle cure to all our economic problems, we need first to understand the following: The U.S. is nowhere near realizing its global trade potential.

In fact, there is a Grand Canyon-like chasm between its potential and current implementation of U.S. trade policy.  Just how far short are we falling from the potential? Let’s put it this way, in the world of global trade we are clearly the chumps.

Warren Buffett is reported to have said, “If you are playing poker and you don’t know who the chump is, then you likely are the chump.” Well, in the world of global trade that’s us. Every country loves to trade with the U.S. because they will likely win.

As of November, 12 of the 15 largest economies we traded with in 2017 sold more to us than we did to them. That’s right, we “lost” 80 percent of the time. And, it’s gotten worse over time. While still embarrassing, in 1992 our record with these same countries was 4-11, as opposed to the current 3-12.

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Source: U.S. Census Bureau, Solutionomics

With the Super Bowl upcoming, let’s put this in NFL terms. If we were an NFL team, our equivalent record would have been 3 wins, 13 losses. Do you think coaches with that type of record last long in the NFL? Yet, that is what our country’s “coaching staff” — our presidents and Congress — have achieved for us.

How do we change this? First, by facing the realities of global trade, which begins by replacing today’s damaging global-trade myths with global-trade reality.

The first trade myth assumes that the leaders of other countries negotiate trade agreements with the goal of free and open trade so that consumers can choose purely on the merits of each product. In reality, however, they’re trying to gain an advantage so they can sell more of their products to us than we do to them. 

Every country tries to tilt the playing field in its favor through disproportionate tariffs, quotas and other means, every country is protectionist — that’s trade reality. President TrumpDonald John TrumpEx-ethics chief calls on Trump to end 'monstrous' migrant policies Laura Bush blasts Trump migrant policy as 'cruel' and 'immoral' US denies report of coalition airstrike on Syria MORE expressed this reality during his World Economic Forum speech in Davos when he said, We expect the leaders of other countries to protect their interests.”

Despite this reality, some object to trade policies that would favor America on the grounds that they are protectionist — as if no other country is protectionist. If every other country is trying to get the best trade terms through disproportionately high tariffs, quotas or other means, why should we play by a different set of rules? 

Why should we carry the banner of free and open trade while other countries trade us into bankruptcy through their protectionist policies? This action is not only naïve, it is a dereliction of duty. What is the solution to this problem?

At a minimum, we should negotiate equal trade terms and, ideally, negotiate more favorable trade terms for the U.S. The president was correct in his speech at the World Economic Forum when he said, “We support free trade, but it needs to be fair and it needs to be reciprocal.”

Am I suggesting we suddenly overturn current trade terms?  Am I suggesting we abruptly pull out of current trade agreements? Of course not. That would create a significant disruption in global supply chains and global trade.

I am asking why can’t the U.S. start negotiating more favorable terms that are phased in over time? We have the largest, most affluent market in the world. It is the market every multinational company wants and needs to sell to. It is time we start leveraging this situation to negotiate at least equal trade terms with other countries.

Does this reality make global trade bad? Does it mean we should become isolationist? No. It does however make trading based on this trade myth naïve and ineffective. Going from the world’s global trading chump to the global trade champ begins with debunking many global trade myths and replacing them with trade reality including:

All countries want an unfair advantage. All countries are protectionist.

Chris Macke is the founder of Solutionomics, an economic think tank. He has advised the U.S. Federal Reserve by providing market updates and implications of monetary policy changes on asset valuations and market distortions, and he's a contributor to the Fed Beige Book.