Peter Thiel raised some questions about trade, capital flows, and tariffs at a recent talk at the Economic Club of New York. Specifically, why does capital flow in the opposite direction now than it did in 1900, when slow growing economies like the UK invested in fast growing economies like Russia and Argentina?
There is something really odd going on in the trade relations… The way you’d expect things to be working in a healthily globalizing world is that capital would flow from the slow growing to the fast growing economies, from the developed to the developing world. This was the way trade patterns looked in 1900, which was a relatively open, free trade world, where the UK had a current account surplus of 4{e1e765f6645cfe4995202f72094ad9c88a5cb669127c8020c4b88ace2386bb53} of GDP and the capital got exported to invest in Russian railroads or Argentina, or all sorts of other countries that had higher growth rates and promised a higher return on capital. That’s the way globalization is supposed to look.
Today, it’s quite the opposite, where capital is flowing uphill from China to the US and is the other side of these enormous current account and trade deficits that the United States has. And so, we are exporting $100 billion a year to China, importing $450 billion a year from China. And China, an economy that’s growing at, say, 6.5{e1e765f6645cfe4995202f72094ad9c88a5cb669127c8020c4b88ace2386bb53} a year is investing in an economy that is maybe growing at 3{e1e765f6645cfe4995202f72094ad9c88a5cb669127c8020c4b88ace2386bb53} a year, when the flows should be the other way around.
And so I think that tells you that something is incredibly off. It pushes you to have to ask questions, why it is off? Why does nobody in China want to buy anything from the US? Why are our goods so undesirable? Or, are there policies that skew things too much towards consumption in the US and more to investment in other places, and should we be rethinking that? Or, are there intellectual property things that are not being enforced? There are a lot of very granular questions that we need to be asking.
Even if free trade is good in theory, and that’s what you want to get to, I think the way you get there is, perhaps, by not being too dogmatic and too doctrinaire. And if you have people negotiate trade treaties who are doctrinaire about free trade, I always get the sense they won’t do that much work because if you negotiate a good trade treaty, that’s a good thing, and if you negotiate a bad trade treaty that still a good thing because we know that all trade is always good for everybody, in all times, in all places. And so we have to always be careful that free trade orthodoxy not become just a euphemism for the sloppiness or the laziness of the people negotiating these treaties.
Capital chases profit. There is more profit to be made in the US financial sector, which eats up about one-third of all profit in the USA, than there is in the non-financial sectors of other, faster-growing economies. That’s my initial thought, anyhow.