We will Tariff and Tax foreign countries to enrich our citizens. What America needs to do, that isn't just Tariffs... it's industrial policy in general. America's gone backwards for the last 25 years, and this is one of the reasons that Trump is justified to say... "We have to do something else." What are Trump's Tariffs going to do in the Real World? You can see it as Closing the barn door after the horse has bolted. Economists will make ludicrous assumptions and think they're describing the real world and build an elaborate model based on fantasies. Ignore Economists on trade policy. They don't know what they're talking about. The pros and cons of Trump on Tariffs. And now that Trump is back, Tariffs are back on the agenda. He's back. And guess what he's talking about? We will tariff and tax foreign countries to enrich our citizens. This is a surprise to no one because it's one of his favorite subjects. I do like tariffs. Tariffs. Tariffs. Tariffs. Tremendous Tariffs. Tariffs. Tariffs. Tariffs that are massive. To me, the most beautiful word in the dictionary is Tariff. If you ask an economist what the most beautiful word in the dictionary is, they're not going to say tariffs. In fact, to them, it's the ugliest word... So America's gone backwards. For the last 25 years. And this is one of the reasons that Trump is justified to say we have to do something else. And then it's even more. So when you look in terms of exports, that's China's share of global markets from 1995 to 2022. You can see that textiles was the top one for China back then. Fast forward how it is now. textiles are still dominant, but look at electronics, 30% of that now. Back in 1995, that had 3%. So they've increased their share of electronics by a factor of 10X. What about America? Across the same time period. A decline. America used to have... 14.72% of electronics. Now, where are they? 6.13%. You can see the decline across the board. America has gone backwards for the last 25 years... Or 40 years if you take it right back to the beginning of China. What are Trump's tariffs going to do in the real world? Potentially, you can see it as closing the barn door after the horse has bolted, because all this industrialization of China and deindustrialization of America began right back in 1980. After 45 years, when you try to change direction, there ain't much left to change direction with. A huge part of trade is actually in between countries, but within the one company. But it's even worse than that, because now with the global supply chains, we have one item can find itself going through 4 countries before it's actually finally included in a product. So here's an example of a Michigan circuit board manufacturer buying a capacitor from a company in Colorado, which has imported it from Asia in the first place, then it's shipped to Mexico for re-work, then it's sent down here to evade some of the regulations for laws, and then it's finally assembled up here into car seats and so on. If you whack Tariffs, Mexico and Canada and China and so on... That company is going to face tariffs at each stage. So it's going to damage that supply chain. And therefore, this policy might actually be more destructive then it is positive. But the positives are encouraging the relocation of manufacturing back to the United States. The US needs to do it. For 45 years... It's own corporations have hollowed out America's productive capabilities. Reversing

Globalization...

Globalization was sold on the basis of comparative advantage, but it was really exploiting cheap wages and lower environmental standards and so on. We need something more sensible than globalization and not as prone to being broken down as we saw under COVID. And what America needs to do... That isn't just tariffs, it's industrial policy in general, like in China itself followed and America's believing in the free market and libertarian ideas ignored. Look who came out on top. And there are economists who are now arguing for a return to industrial policy to make up for the mistake of trusting economists on trade for so long. So what's the Neoclassical reaction to finding they've put forward a Theory Which is strongly contradicted by the facts? "Oh, it can't be the theory is wrong. Oh, no. It must be large transaction costs or things that we have somehow left out of the system." Now, let's get real. When you actually do a proper empirical examination of the data on international trade and economic growth, which has been done by... Harvard university professor, Dani Rodrik who A bit of a standout for actually criticizing the mainstream theory while being obviously in a very mainstream economics department. He found that countries that have done well are countries that have Played by very different Rules of the Game. He uses China, India, and Vietnam in particular as examples and said they maintained high standards. import barriers throughout. And it certainly was not the case that import liberalization preceded and ignited growth. Instead, growth gave room for the governments to later liberalize once they've dramatically industrialized their economies. And this is a paper called Trading and Illusions. This is a very useful graph from it where he shows on the horizontal, the average tariffs. And you can see that China's average tariffs is about 35% at the time and how much it outperformed what the theory predicted. That's a pretty dramatic outperformance. America, on the other hand, with lower tariffs... did less well than the theory predicts. That's the sort of gap you've got between a country which doesn't follow conventionally economic theory, which is China... and America, which did. Now also, another hole in the conventional theory... Trade is NOT between countries. It's between companies. And frequently also, it's often within the same company between countries. It's called transnational trade. Now, back in 1980, long time ago, I ran a conference called "Trade: To Whose Advantage?" Looking at Australia and Asia as the 1980s began. This is the cover, which was done by Australia's leading cartoonist at the time. You can see the irony here. You have a Taiwanese and an Australian businessman. Now in this conference, a neoclassical economist gave a paper called the case for trade liberalization, a brief statement, and he modeled a 25 percent cut in tariffs on Australia's most protected industries. And the model made these assumptions. Good macroeconomic management prevails throughout. And secondly, changes in capital equipment can be neglected. Now, he elaborated on what they actually mean when I questioned him during the conference. Assumption A meant he assumed the total volume of employment did not change. And Assumption B meant there's no impact upon capital, machinery or capital stock either. Now, he showed, if these assumptions are true, then he showed these lovely gains from trade. The losses on the left hand side. Perfectly balanced by gains on the right hand side. But they're manifestly false because the assumptions that economists make, assume away the problems that people are actually interested in. What's going to happen to total employment? What's going to happen to investment over time? Now, the real world questions are, will this policy increase employment? He couldn't answer it! He assumed employment didn't change. Will it increase economic growth? He couldn't answer that either! How can you know what to do when you've got a theory that is based on outright fantasies? What I did at that conference, as well as I presented a paper on transnational trade, within one company, between countries. Back in the 1980s... before China turned up on the scene... 32% of what's recorded as international trade for the United States Was actually transfers of goods inside the same company. This data is not maintained anymore, unfortunately. So that knowledge is gone. But on the aggregate level, take a look at the data. One third of American trade was actually transfers of goods within the same company, but across national borders. Now this breaches all the assumptions of neoclassical trade theory. For a start, financial capital is clearly mobile between countries. Machinery is mobile between countries. Those machines can't move. In fact, the way this type of, phenomenon occurred was companies would actually produce machines in one country and export them to another inside the same company to install it in factories that it owned in the new country. So I modeled that. Myself in that conference And what I had was a U. S. company that's producing in both United States and Australia. It establishes a new factory in Malaysia. I wrote this before China actually started to liberalize. And it then builds a new machinery in the United States. It ships it to Malaysia and puts it in the new factory. And then it shuts down its United States and Australian factories And repatriates the profits it makes from producing with much lower labor and capital and energy costs in Malaysia than it was facing in America or Australia at the time. So if you do a balance of what's the positives, what's the negatives here, you find that everything was negative for the host country, Australia, in this case, there was some positives and some negatives for Malaysia. The same for America. But overall it turns out that capitalists in the United States won, and workers in the United States and Australia lose. It distributes money not from Landlords to Capitalists, but from Workers to Capitalists. And global economic growth also slows down. Amazingly enough, I got a chance to see China's industrialization firsthand, because after I ran that conference, I ran another conference between Australian and Chinese journalists in Beijing in 1981-82. And that was the first conference Chinese journalists ever had with journalists from another nation. So this is the group of, it's myself down there with red hair rather than white. And a beard. These are the journalists I brought from Australia. There were a couple who came from Chinese bureaus of Australian newspapers in China as well

And this is the seminar in progress. The little guy standing up over here,

Now, we arrived at the Shenzhen, which is now one of the world's leading industrial centers. We arrived there when they were actually pouring the concrete for the site. And in fact, an Australian company called CSR And we met with the management and they'd learned from the failures of other countries in Asia, particularly Indonesia and Malaysia, when they tried to open up, free trade zones to encourage particularly American corporations to come in and base industries in their countries. But what the Chinese were doing was they knew there was a Loophole in the American trade law. That enabled the company not to pay tariffs when it exported goods for work in a third world country, then reimported them back. They didn't have to pay any tariffs on that. So that was a legal loophole they exploited. But intriguingly to qualify, to be able to set up on this free trade zone, the American subsidiary had to have a Chinese partner. So if Apple opened up there, Apple had to have a Chinese partner. And this is the amazing piece Within 5 years... the Chinese partner had to own 50% of the business, regardless of what capital they'd put in the first instance. What the Chinese were doing is not only encouraging American corporations to relocate... They were trying to build a Chinese Capitalist class. The American corporations are not known for being bleeding hearts. Imagine the advantage they had to get from the low wages and other low costs they faced to be willing to forego 50 percent of the profits and 50 percent of the ownership within five years of starting this thing and still expect to come out ahead. That's the scale of the advantages that the American corporations saw and the Chinese used this to industrialize. China got access to U. S. technology, and now in many ways it's surpassed that. It helped create that China's capitalist class. This is where Foxconn and companies like that

came from. It began China's industrialization, and it made America's rust belt even worse.

China was still largely a country of peasants at the time, and we certainly saw that in our tour. This is in Szechuan, literally a street scene in the capital of Szechuan. And when we walked into the town, we were told we were the first Caucasian since liberation. So not only the town, but half the people living in the surrounding countryside came and followed us around for hours. But this is what Shanghai looked like in 1980. Clothing on the left hand side, and that's the river, on the right, I think called the Bund river on the south hand side. as well as having the industrial scenes and very old factories, you can see there, and very old houses are also basically paddy fields, as far as the eye could see. This is China today. Uniforms are different, aren't they? And that incredible industrialization is on that same bend as the previous photo. And 40 years later, it's now the world's biggest manufacturer by far. It's also dramatically increased the complexity of the products that it can manufacture. There's a wonderful site called the Atlas of Economic Complexity, another initiative of Harvard University. In 1995, China ranked 46th in the world in terms of the complexity of the goods that its economy could produce. By 2022, it had risen to 18th. Now, across the same time period, United States fell from #9 to #14. And at some point, of course, the ranking is going to change and China is going to be on top. The history of change over time, you can see other countries, going up and down, but there's China from 46 to 18 United States from 9 to 14 going backwards, and it succeeded not by focusing on its comparative advantage, which back in 1981, you might have seen as being in rice, but by diversifying. and deepening its technological structure. And this is China using a pattern that Harvard has also developed to say, how close is one industry to another? This is a pattern that applies, all those circles apply to every country on the planet. And the filled in circles are the ones that China has exports in. Now you notice there's Nothing worth speaking of in terms of metal work and machinery. Some in electronics, but not a lot. Go through the 2022 and that's the change. And notice up here the total value of exports. In 1995, $147 Billion. In 2022... $3.3 Trillion. More than a 15X increase in the level of China's exports. That's adjusted for inflation. Look at America on the other hand. They relocated production to China, and the range of goods that America has reduced dramatically as a result. This is the United States in 1995, according to the same atlas. And you can see there's lots of activity in electronics, metal works, chemicals, and construction goods and so on. Fast forward now and there's been a significant decline in some of those areas. And the total value of trade has only gone up by a factor of less than 4X. $546 billion in 1995. $1.8 Trillion in 2022, and that change you can see just flick between the two, see the blue circles down the bottom in electronics disappear, see the ones in metals also disappear and also in construction. I have a bit of an anecdote on what it's like to deal with economists from a mathematician's point of view, because economists will make ludicrous assumptions and think they're describing the real world and build an elaborate model based on fantasies. My own personal work in economics is based on that of a mathematician, John Blatt, who was twice nominated for the Nobel Prize in physics in the 1950s. And he became interested in economics after he attended a research seminar at the University of New South Wales on neoclassical trade theory. And the presenter was actually a friend of mine, was nominated for the Nobel Prize in economics for his work on international trade theory. Now when Murray asked John what John thought of Murray's paper... Murray was a very polite man. Blatt was anything but. And what Blatt replied was basically the following. That is the greatest load of rubbish I have ever sat through in my academic career. If this is advanced theory, then there's something very wrong with economics. I intend finding out what it is. Good day. And he got up and walked out of the seminar, leaving Murray completely floundering. After doing very detailed research on the history of economic thought and modern economic theories, he wrote a book called Dynamic economic systems, a post Keynesian approach. It's still my most recommended book in economics. Realistic approach by a mathematician to economic theory. And this is the sort of rubbish that Blatt was reacting to when he made those cutting remarks to Murray. The first assumption that's made is that the two countries share the same technologies. They're identical technologies in the countries that are trade. Now that's not meant to be realistic. It's designed to eliminate that as a basis for trade. If you recall from the Ricardian model, we've already shown that differences in technologies are a basis for trade. So we don't need to have that in an additional complication in the Heckscher Ohlin model. Could set that aside. We also assume that there are identical tastes, identical demand conditions in the two countries. Not because it's realistic. But because we want to eliminate differences in taste as a basis for trade, so again, we're setting aside these alternative reasons why countries might want to trade. What you do assume is that countries have different relative factor endowments. Typically, the assumption is made in the neoclassical framework that there are 2 types of endowment, capital and labor. Ah, that's boring enough. Let's keep on going. how does the theory stack up against the evidence? This is another neoclassical economist reporting on just how well or badly the theory goes. By global standards, as you might expect, the United States measured as capital intensive. Yet, if you look at the content of American exports, in Leontief's paper, he found that the U. S. exports on net labor intensive goods. And it imports, on net capital intensive goods, and of course that's exactly the opposite of what the Heckscher Ohlin theorem would lead you to believe. Okay, the other things that are included in this particular video are what they call a sign test. So there's a sign of change correct. That normally fails. The rank test? It also fails. And there's actually far less trade than the theory predicts. And they say there's hardly any trade in net factor content... which is the basis of their theory! Ignore economists on trade policy. They don't know what they're talking about. Maybe Trump will come out ahead here, maybe not, but certainly economists are no guide at all to what you should do to industrialize an economy. Go for Complexity, not Specialization. The opposite of the advice that economists offer. If you're like many other trend seekers and want to learn 50 years of real economics from me in only 7 weeks, you'll love my new 7 week Rebel Economist Challenge as well. To apply, go to apply. stevecainfree. com. If you qualify, you can attend my lectures, ask me questions personally every week, and make friends with a great group of like minded people. So again, like many others, go to apply. stevecainfree. com to apply as well for the 7 week Rebel Economist Challenge. Good luck!