April 7, 2018

Trump’s War on Trade and Amazon: Dumb and Dumber.

by Hal Gershowitz

Comments Below

Of Thee I Sing Heading AuthorsHere’s what the Oval Office tweets tell us about President Trump. He doesn’t seem to understand trade or the US Postal Service.

He sees trade as a zero-sum game, sort of like he sees his former business deals. One side wins, the other side loses. Actually, robust trade has greatly benefited American consumers and American workers. Perhaps, not all workers in all industries, but most workers overall. When American consumers pay less for some imported goods, they have more spendable dollars to buy other goods and services from American producers. Where there is a trade deficit of dollars for services, products or commodities there will be an equilibrium of capital coming back to the United States as (1) investment, (2) credit or (3) capital to buy American goods or services. We, like all modern countries, need all three. But that’s complicated for someone who brags about not reading or taking his primary counsel from, well, himself.  If what one writes is a reflection of how one thinks, then we can assume our President formulates policy in 280-character thoughts.

Now, considering President Trump’s attack on Amazon and the online retailer’s contract with the United States Postal Service, we assume the President is parroting the loss-per-package estimate that others have bandied about.  We think that’s a very hard number to pin down, assuming there is any loss at all in delivering Amazon packages. Actually, we doubt it.  First, the so-called loss to the taxpayer is a myth, given that the Postal Service receives no funds or direct subsidies of any kind from taxpayers. Yes, those .50 cent stamps and other postage charges pay the freight. Well, most of it anyway. One reason the Postal Service loses money is that Congress saddled the quasi-private monopoly with a requirement to pre-pay the present-value of future pension health-care benefits for its current and former employees. Before 2006, when the Postal Accountability and Enhancement Act was passed, the Postal Service operated on a pay-as-you-go basis for retiree health care funding, like most business-provided health care plans. Today, the Postal Service must fund those estimated costs in advance. Today, pre-paid pension health-care costs are overcharged and overfunded, according to the Postal Service Office of the Inspector General.

The Postal Service is an immense fixed cost operation. These are costs that are fixed regardless of how much mail or how many packages are delivered. By law, the Postal Service must be capable of delivering mail to every residence and every business (in other words, to about 156 million physical addresses) in the United States every day, regardless of how often every residence or business actually receives mail.  Consequently, the Postal Service operates what might be the world’s largest vehicle fleet—nearly 300,000 vehicles. The cost of the vehicles is a fixed cost. The cost of operating those vehicles, however, is a variable cost. For every penny increase or decrease in the cost of fuel, the Postal Service incurs an estimated $8 million increase or decrease in its variable operating cost. There are over thirty-one thousand retail post offices in the United States. These structures also represent fixed costs. The Postal Service also employs over half million career employees as well as over 130,000 part-time (non-career) employees. As with any high fixed-cost business, incremental revenue can be very positive, with a substantial portion of every incremental dollar of revenue falling to the so-called bottom line. Currently, the Postal Service is required to cover 5.5% of its fixed costs with the revenue it derives from its contracts with package delivery businesses. In Amazon’s case, the online retailer delivers, pre-sorted by zip code, packages to the so-called last-mile post office distribution center. Amazon packages do not go through the entire postal system the way a package would that we might deliver to a mailbox.  Remember, the Postal Service is required to have the delivery capability to every address, every day regardless of the volume (or lack thereof) to every address. So, in effect, Amazon is piggybacking on a capability the post office must maintain anyway.

We don’t know the details of the contract Amazon has with the Postal Service and neither does President Trump. These competitive business contracts are, by law, highly confidential and sealed. We expect, however, that the Postal Service would be in much worse condition without contracts like Amazon’s. Amazon ships about 40% of its packages through the Postal Service. Amazon is not what is driving Postal Service losses. You and we are the real reasons the Postal Service is losing so much money. That’s because we, collectively, are sending less and less first-class mail, thanks to the nearly universal use of email.

President Trumps pique at Amazon, or, we should say, Amazon’s CEO, Jeff Bezos, is widely known. After all, Bezos, the adopted son of a Cuban immigrant, started with nothing and has become the richest man in the world.  And did we mention, he also owns The Washington Post which has the temerity to be critical of the President?  Rather than taking to Twitter to attack Mr. Bezos and Amazon we suggest President Trump just cancel his subscription to the Post. His tweets play needless havoc with the stock market and that really can hurt a lot of people.

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6 responses to “Trump’s War on Trade and Amazon: Dumb and Dumber.”

  1. Paul Silverstein says:

    In discussing Trump’s battle on Tariffs and in fairness to him, it’s important to include discussion of the significant illicit stealing of our intellectual property by some nations notably China. Some commentators believe that if any tariff deal is struck with China an agreement on this important element of “trade” would be implicit in the deal. Remember this is a negotiation and the final provisions of any agreement, if ultimately reached, is likely a long way off. Certainly any wise negotiator is going to present what may seem as outrageous demands at the initial salvo, only to soften them as negotiations precede. Let’s hope that’s the case here. Please temper your criticism until a deal is struck.

    • Initiating a tariff war with China and numerous other countries to address China’s theft of intellectual property seems to us to be a clumsy way of addressing
      a real problem. President Trump was a proponent of tariffs and protectionist trade policies long before he became President.
      We think tariffs and protectionist trade policies are regressive and, ultimately, represent a danger to American companies and we criticize them accordingly.

  2. Paul Silverstein says:

    No one can readily divine Trump’s mind but it is conceivable that he is using the threatened trade tariffs as one means to pressure China on the issue of the stealing of our intellectual property. You perhaps can gain some sense of this from his recent statement reported on MarketWatch on April 5. “On Thursday evening, President Donald Trump requested tariffs on an additional $100 billion of Chinese goods, escalating a trade battle with China. Here is the full statement released by the White House:

    “Following a thorough investigation under section 301 of the Trade Act of 1974, the United States Trade Representative (USTR) determined that China has repeatedly engaged in practices to unfairly obtain America’s intellectual property. The practices detailed in the USTR’s investigation have caused concern around the world. China’s illicit trade practices — ignored for years by Washington — have destroyed thousands of American factories and millions of American jobs. On April 3, 2018, the USTR announced approximately $50 billion in proposed tariffs on imports from China as an initial means to obtain the elimination of policies and practices identified in the investigation.”

  3. Dr. Lydia Axelrod says:

    Excellent article. Extremely informative.
    Thank you for your presentation of worthwhile facts.

  4. Steve says:

    Outstanding article… concise but complete… Today Trump stated we are making “great progress” in our negotiations with China, South Korea et al… I am uncertain that there is current negotiation over trade-related issues.

  5. Anonymous says:

    Anonymous

    President Trump … I’m not sure “he sees trade as a zero – sum game”, but I am sure that the
    preponderance of his highly successful real estate transactions were not concluded on “one side wins, the other side loses”. The mainstay of commercial real estate transactions are leases, and as the lessor it is not, absolutely not win or lose, it is make a deal.

    “We suggest President Trump just cancel his subscription to the Post”.
    So sorry to see you so angry…

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