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Since trade promotes prosperity, I want increased market-driven, cross-border commerce between China and the United States.

But you can see in this CNBC interview that I’m worried about achieving that outcome given protectionism from President Trump and mercantilism from President Xi in China.

There’s never much chance to elaborate in short interviews, so here’s some additional analysis on the key points.

1. China’s economy is weak because of insufficient liberalization.

I have written about how China got great results – especially huge reductions in poverty – thanks to partial economic liberalization last century. But those reforms were just a step in the right direction. The country currently ranks only #107 according to Economic Freedom of the World, largely because so much of the economy is hampered by subsidies, regulation, protectionism, and cronyism. Sweeping pro-market reforms are needed if China’s leaders want their country to become rich.

2. Trump’s unthinking protectionism hurts both sides, but China may be more vulnerable.

I mentioned in the interview that Trump’s protectionism meant that he was harming both nations. This is what always happens with protectionism, so I wasn’t saying anything insightful. But it is quite likely that China will suffer more because its economy doesn’t have the flexibility and durability of America’s more market-oriented system.

That is one of the conclusion from a recent news report.

Policymakers in Europe have spared no effort to emphasize that there can be no winners in an escalated trade conflict between the United States and China. But a fresh study shows there are several beneficiaries. …But a study by research network EconPol Europe suggests such an assertion isn’t quite true — in fact, it isn’t true at all. The survey analyzes the impact of tariffs imposed by the US on China and the effect of China’s retaliatory tariffs. …The EconPol Europe study calculates that Chinese exporters are bearing approximately 75 percent of the costs… in Asia, Vietnam has been gaining the most from firms relocating their production away from China. Malaysia, Singapore and India have also been profiting from this development.

3. China’s cronyism presents a challenge for supporters of unilateral free trade.

I’m a supporter of unilateral free trade. America should eliminate all trade barriers, even if other nations want to hurt themselves by maintaining their restrictions. That being said, it’s not genuine free trade if another country has direct or indirect subsidies for its companies. As I noted in the interview, some economists say we shouldn’t worry since the net result is a wealth transfer from China’s taxpayers to America’s consumers. On the other hand, that approach means that some American workers and companies are being harmed. And if supporters of free markets are upset when American workers and companies are hurt by domestic cronyism, we also should be upset when the same thing happens because of foreign cronyism.

The challenge, of course, is whether you can use trade barriers to target only cronyism. I worry that such an effort would get hijacked by protectionists, though Professor Martin Feldstein makes a good argument in the Wall Street Journal that it’s the right approach.

China’s strategy is to give large government subsidies to state-owned companies and supplement their research with technology stolen from American and other Western companies. …That is the real reason why the Trump administration has threatened tariffs of 25% on $200 billion of Chinese exports to the U.S.—nearly half the total—unless Beijing reforms its policies. …The purpose of the tariffs is not to reduce the bilateral trade deficit but to counter Chinese technology theft and forced transfer. …the U.S. could impose heavier tariffs and other economic penalties in order to force China to play by the rules, ending its attempt to dominate global markets through subsidies and technology theft.

4. Trump should have used the World Trade Organization to encourage Chinese liberalization.

I wrote last year that the President would enjoy more success if he used the WTO to apply pressure on China.

It’s not just me making this claim. Here are some excerpts from a story in the Washington Post.

Pressure from Europe and Japan is amplifying the president’s vocal complaints about Chinese trade practices… “it wasn’t a Trump issue; it was a world issue,” said Jorge Guajardo, …a former Mexican ambassador to China. “Everybody’s tired of the way China games the trading system and makes promises that never amount to anything.” …Germany and the United Kingdom joined the United States this year in tightening limits on Chinese investment. …In September, trade ministers from the United States, European Union and Japan issued a joint statement that blasted the use of subsidies in turning “state owned enterprises into national champions and setting them loose in global markets.” The statement…also rejected forced technology transfer… The United States did win E.U. and Japanese support for a complaint to the WTO alleging China has violated U.S. intellectual property rights. But rather than use the global trade body for a broader attack on China, the administration has demanded changes in the way the organization operates. To critics, the administration missed an opportunity to marshal China’s trading partners behind an across-the-board indictment of its state-led economy.

5. The imperfect Trans-Pacific Partnership was an opportunity to pressure China to reduce cronyism.

Because of my concerns about regulatory harmonization, I wasn’t grievously disappointed when the United States chose not to participate in the TPP, but I fully recognized that the pact had very positive features. Including the pressure it would have placed on China to shift toward markets and away from cronyism.

6. Additional Chinese reform is the ideal outcome, both for China and the rest of the world.

Three years ago, I wrote that China needs a Reagan-style revolution of economic liberalization. That’s still true today. The bottom line is that China’s leaders should look at the progress that was achieved last century when the economy was partially liberalized and decide that the time is ripe for the free-market version of a great leap forward. In other words, the goal should be great economic success, not modest economic success.

I’ll conclude by pointing out that I don’t want China to copy the United States, even though that would be a step in the right direction.

According to data from Economic Freedom of the World, there’s a much better role model.

Indeed, I would like the United States to copy Hong Kong as well.

The recipe for prosperity is the same all over the world. The challenge is getting politicians to do what’s best for citizens rather than what’s best for themselves.

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I started my end-of-year “best and worst” series back in 2013, but didn’t begin my start-of-year “hopes and fears” series until 2017.

In that first year, I got part of what I hoped for (some tax reform and a bit of regulatory easing) and part of what I feared (no Medicaid and Medicare reform), but I mostly felt relieved that some of my fears (border-adjustment tax and an infrastructure boondoggle) weren’t realized.

For 2018, none of my hopes (government collapse in Venezuela and welfare reform) became reality, but we dodged one of my fears (Trump killing NAFTA) and moved in the wrong direction on another (a bad Brexit deal).

Time for third edition of this new tradition. It is the first day of the year and here are my good and bad expectations for 2019.

We’ll start with things I hope will happen in the coming year.

  • Hard Brexit – There is a very strong long-run argument for the United Kingdom to have a full break with the European Union. Unfortunately, the political establishment in both London and Brussels is conspiring to keep that from happening. But the silver lining to that dark cloud is that the deal they put together is so awful that Parliament may vote no. Under current law, that hopefully will lead to a no-deal Brexit that gives the U.K. the freedom to become more free and prosperous.
  • Supreme Court imposes limits of Washington’s power – I didn’t write about the fight over Brett Kavanaugh’s nomination to the Supreme Court because I don’t know if he believes in the limits on centralized power in Article 1, Section 8. But I’m semi-hopeful that his vote might make the difference in curtailing the power of the administrative state. And my fingers are crossed that he might vote with the Justices who want to restore the Constitution’s protection of economic liberty.
  • Gridlock – Some people think gridlock is a bad thing, but it is explicitly what our Founders wanted when they created America’s separation-of-powers system. And if the alternative to gridlock is politicians agreeing to bad policy, I will cheer for stalemate and division with great gusto. I will be perfectly content if Trump and House Democrats spend the next two years fighting with each other.
  • Maduro’s ouster – For the sake of the long-suffering people of Venezuela, I’m going to keep listing this item until it eventually happens.
  • Limits on the executive branch’s power to impose protectionism – Trade laws give a lot of unilateral power to the president. Ideally, the law should be changed so that any protectionist policies proposed by an administration don’t go into effect unless also approved by Congress.
  • Chilean-style reform in Brazil – Brazil recently elected a president who is viewed as the Trump of Latin America. But he might be the good kind of populist who uses his power to copy Chile’s hugely successful pro-market reforms.

Here are the things that worry me for 2019.

  • Trump – The President does not believe in small government, so I’m concerned we may get the opposite of gridlock. In my nightmare scenario, I can see him rolling over to Democrat plans for a higher minimum wage, infrastructure pork, wage subsidies, and busting (again) the spending caps.
  • Recession-induced statism – If there’s an economic downturn this year, then I fear we might get an Obama-style Keynesian spending orgy in addition to all the things I just mentioned.
  • More protectionism – Until and unless there are limits on the president’s unilateral power, there is a very real dangers that Trump could do further damage to global trade. I’m particularly concerned that he might pull the U.S. our of the very useful World Trade Organization and/or impose very punitive tariffs on auto imports.
  • Fake Brexit – This is the flip side of my hope for a hard Brexit. Regardless of the country, it’s not easy to prevail when big business and the political elite are lined up on the wrong side of an issue.

Sadly, I think my fears for 2019 are more likely than my hopes.

And I didn’t even mention some additional concerns, such as what happens if China’s economy suffers a significant downturn. I fear that is likely because there hasn’t been much progress on policy since the liberalization of the 1980s and 1990s.

Or the potential implications of anti-market populism in important European nations such as Germany, Sweden, and Italy.

Last but not least, we have a demographic sword of Damocles hovering over the neck of almost every nation.

That was a problem last year, it’s a bigger problem this year, and it will become an even-bigger problem in future years.

We know the right answer to this problem, but real solutions are contrary to the selfish interests of politicians.

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One of my annual traditions is to share the “best and worst news” for each year. I started in 2013, and continued in 2014, 2015, 2016, and 2017.

Looking back, 2016 clearly was the best year, though entirely because of things that happened overseas (the Brits vote for Brexit, Brazil adopting spending caps, abolition of the income tax in Antigua, and Switzerland’s rejection of a basic income).

What about this year?

Sadly, there’s not much to cheer about. Here’s the meager list.

Amendment 73 rejected in Colorado – As part of a plan to expand the burden of government (for the children!), the left wanted to gut the state’s flat tax and replace it with a so-called progressive tax. Fortunately, voters realized that giving politicians the power to tax the rich at higher rates would also mean giving them the power to tax everyone at higher rates. The proposal was defeated by 11 percentage points.

Deregulation – The Administration’s record is certainly far from perfect on regulatory issues. But big-picture measures of the regulatory burden indicate that the overall trend is positive. Easing dangerous Obama-era car mileage rules may be the best step that’s been taken.

Positive trends – I’m having to scrape the bottom of the barrel, but I suppose a drop in support for bad ideas has to count as good news, right? On that basis, I’m encouraged that the notion of universal government handouts became less popular in 2018. Likewise, I’m glad that there’s so much opposition to the carbon tax that some supporters of that new levy are willing to throw in the towel.

Now let’s look at the bad news.

Here are the worst developments of 2018.

Aggressive protectionism – It’s no secret that Trump is a protectionist, but he was mostly noise and bluster in 2017. Sadly, bad rhetoric became bad policy in 2018. And, just as many predicted, Trump’s trade taxes on American consumers are leading other nations to impose taxes on American exporters.

The Zimbabwe-ization of South Africa – My trip to South Africa was organized to help educate people about the danger of Zimbabwe-style land confiscation. Sadly, lawmakers in that country ignore me just as much as politicians in the United States ignore me. The government is moving forward with uncompensated land seizures, a policy that will lead to very grim results for all South Africans.

More government spending – Ever since the brief period of fiscal discipline that occurred when the Tea Party had some influence, the budget news has been bad. Trump is totally unserious about controlling the burden of government spending and even routinely rolls over for new increases on top of all the previously legislated increases.

The good news is that this bad news is not as bad as it was in 2015 when we got a bunch of bad policies, including resuscitation of the corrupt Export-Import Bank, another Supreme Court Obamacare farce, expanded IMF bailout authority, and busted spending caps.

I’ll close by sharing my most-read (or, to be technically accurate, most-clicked on) columns of 2018.

  1. In first place is my piece explaining why restricting the state and local tax deduction was an important victory.
  2. Second place is my column (and accompanying poll) asking which state will be the first to suffer a fiscal collapse.
  3. And the third place article is my analysis of how rich nations can become poor nations with bad policy.
For what it’s worth, my fourth-most read column in 2018 was a piece from 2015 about political and philosophical quizzes. And the fifth-most read article was some 2012 satire about using two cows to describe systems of government.

I guess those two pieces are oldies but goodies.

Now for the columns that didn’t generate many clicks.

  1. My worst-performing column was about how DC insiders manipulate so-called tax extenders to line their own pockets.
  2. Next on the least-popular list was a piece that looked at proposals to make taxpayers subsidize wages.
  3. And the next-to-next-to-last article explained how expanding the IMF would increase the risk of bailouts and bad policy.

I’m chagrined to admit that none of these columns reached 1,000 views.  Though I try to salve my ego by assuming that many (some? most?) of the 4,000-plus subscribers eagerly devoured those pieces.

The other noteworthy thing about 2018 is that I posted my 5,000th column back in July.

And I also shared data indicating that I’m relatively popular (or, to be more accurate, I get a lot of clicks) in places like the Cayman Islands, the Vatican, Monaco, Bermuda, Jersey, and Anguilla.

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I periodically try to remind people that you can’t explain or understand economic performance by looking at just one policy.

I’ve argued, for instance, good tax policy isn’t a panacea if there are many other policies that expand the burden of government. Likewise, bad fiscal policy isn’t a death knell if there’s a pro-market approach on issues such as trade, regulation, and monetary policy.

Which was the point I made, in this short excerpt from a recent interview, when asked about the Trump tax cut.

This obviously has implications for Trump. He wants the economy to grow faster, but he is sabotaging his good tax reform with bad protectionism.

Which is why I’ve also explained that Trump’s overall “grade point average” for economic policy isn’t very good.

And here are two other examples, but showing that tax policy – by itself – does not drive the economy.

  • The economy enjoyed good performance during the Clinton years because his one bad policy (the 1993 tax hike) was more than offset by many good policies.
  • Similarly, the economy didn’t get strong growth during the Bush years because his one good policy (the 2003 tax cut) was more than offset by many bad policies.

The same is true for policy in other nations. That’s why I always check the Fraser Institute’s Economic Freedom of the World before writing about another country. I want a dispassionate source of data that covers all the major types of public policy.

And that generates counter-intuitive results, at least for people who focus on fiscal policy.

  • I’ve crunched the data to show that nations such as Denmark and the Netherlands remain relatively rich because they have pro-market policies that offset onerous fiscal burdens.
  • Likewise, some nations in Eastern Europe continue to lag economically because the pro-growth effect of their flat taxes are offset by weak scores in other areas, especially quality of governance.

There are a couple of takeaways from this type of nuanced analysis.

First, don’t pay excessive attention to partisan affiliations. Yes, sometimes a Republican such as Reagan reduces the burden of government, but plenty of GOPers (Hoover, the first Bush, Nixon) impose lots of statism.

The same is true in other nations. Many of the pro-market reforms in Australia and New Zealand were initiated by Labour governments.

Second, let’s close by explaining why this matters. When people fixate on partisan labels rather than policy changes, it can lead them to very erroneous conclusions.

  • For instance, even though the Great Depression was mostly the result of government intervention, many people think it was caused by capitalism simply because a Republican president was in office when it started.
  • Similarly, even though the recent financial crisis was caused by government intervention, many people want to blame free markets merely because a Republican president was in office when it started.

P.S. In the interview, I said monetary policy might deserve some of the blame if the economy turns south. I want to stress, however, that I’m not blaming the Fed for trying to “normalize” today. Instead, the problem is all the easy-money policy earlier this decade.

As scholars from the Austrian School have explained, artificially low interest rates and other types of Keynesian monetary policy create the conditions for subsequent suffering.

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President Trump’s view of global trade is so bizarre, risky, uninformed, misguided, and self-destructive that I periodically try to maintain my sanity by reviewing the wisdom of one of America’s greatest presidents.

  • Ronald Reagan’s remarks in 1985 about the self-destructive impact of trade barriers.
  • Ronald Reagan’s remarks in 1988 about the economic benefits of trade liberalization.

Today, let’s travel back to 1982 for more wisdom from the Gipper.

What’s especially remarkable is that Reagan boldly defended free and open trade at the tail end of the 1980-82 double-dip recession that he inherited.

Many politicians, facing an unemployment rate above 10 percent, would have succumbed to the temptation for short-run barriers.

But just as Reagan did the right thing on inflation, even though it was temporarily painful, he also advocated good long-run policy on trade. He understood Bastiat’s wise insight about “seen” benefits vs “unseen” costs.

Trump, by contrast, has a very cramped and limited understanding of trade. Which is why almost all economists disagree with his approach.

…on Trump’s other point — that protectionism offers Americans the road to riches — most specialists in international trade would beg to differ. “Even by Washington standards, Trump’s tweet was profoundly wrong,” said Daniel J. Mitchell, a conservative economist. In a recent column criticizing Trump’s tweet, Mitchell wrote, “The last time the United States made a big push for protectionism was in the 1930s. At the risk of understatement, that was not an era of prosperity.” …said Lawrence White, a professor at New York University’s Stern School of Business…”tariffs, like any tax, generally introduce an inefficiency and makes the two sides of the trading relationship poorer — not richer.”

I appreciated the chance to be quoted in the story, and I also was happy that a link to one of my columns was included.

Though I gladly would have traded that bit of publicity if Politifact instead had shared my “edits” to Trump’s infamous “Tariff Man” tweet.

I’ll conclude by noting that Reagan’s record didn’t always live up to his rhetoric.

P.S. I winced when Reagan positively cited the International Monetary Fund in his remarks. Though maybe the IMF in the early 1980s wasn’t the pro-tax, anti-market, bailout-dispensing bureaucracy that it is today.

P.P.S. I noted that Reagan was one of America’s great presidents. I also include Calvin Coolidge and Grover Cleveland on that list.

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In this interview yesterday, I noted that there are “external” risks to the economy, most notably the spillover effect of a potential economic implosion in China or a fiscal crisis in Italy.

But many of the risks are homegrown, such as Trump’s self-destructive protectionism and the Federal Reserve’s easy money.

Regarding trade, Trump is hurting himself as well as the economy. He simply doesn’t understand that trade is good for prosperity and that trade deficits are largely irrelevant.

Regarding monetary policy, I obviously don’t blame Trump for the Fed’s easy money policy during the Obama years, though I wish that he wouldn’t bash the central bank and instead displayed Reagan’s fortitude about accepting the need to unwind such mistakes.

The interview wasn’t that long, but I had a chance to pontificate on additional topics.

The bottom line is that Trump has a very mixed record on the economy. But I fear the good policies are becoming less important and the bad policies are becoming more prominent.

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Both Barack Obama and Hillary Clinton have said really foolish things, but Donald Trump may have set a new record for economic illiteracy with this tweet.

This tweet contains an astounding collection of inaccurate and offensive statements.

Here my corrective commentary.

I’ll briefly elaborate, starting at the top left and going clockwise.

The bottom line is that Trump is playing with fire. Indeed, what’s happening in financial markets is a very worrisome sign that he’s putting the economy at risk.

To be sure, I don’t think all of the volatility on Wall Street can be blamed on Trump’s protectionist policies and statement (the Federal Reserve should be blamed for creating a fragile market with easy-money policies). But a trade war could be the trigger that leads to the next recession.

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