Archive for the ‘Trade’ Category

At the risk of stating the obvious, I’m not a fan of international bureaucracies. The International Monetary Fund and the Organization for Economic Cooperation and Development are the worst multilateral institutions because of their promotion of bad policy, but I’ve also gone after the United Nations and World Bank for their periodic efforts to advance statism.

But this doesn’t mean I’m reflexively against international organizations. My criticisms of the IMF, OECD, UN, and WB are solely a function of their work to empower governments at the expense of people.

And this is why I generally like the World Trade Organization. The WTO is a Geneva-based international bureaucracy, but its mission is to empower people at the expense of governments by reducing import taxes and other trade barriers.

Which explains why I think President Trump will be making a mistake if he imposes unilateral tariffs on China. Yes, there seems to be strong evidence that China’s government is misbehaving, but I think that a positive outcome is far more likely if the U.S. government takes the issue before the WTO. Which is what I said in this short interview with Neil Cavuto.

And I’m not alone.

Bloomberg editorialized recently about this issue.

President Donald Trump…is…addressing a legitimate trade dispute: China’s alleged theft of intellectual property and forced technology transfers. …the U.S. alleges — with reason — that China has been stealing U.S. trade secrets, forcing American companies to hand over proprietary technology as a condition of doing business on the mainland, and providing state support for Chinese firms to acquire critical technology abroad. …Yet unilateral blanket tariffs of the sort the administration is considering are the wrong answer. In the first instance, they’d hurt U.S. consumers and producers even if they didn’t provoke retaliation (which they probably would). They’d undermine the World Trade Organization’s dispute-resolution system, perhaps fatally.

And the editorial points out that the WTO is a better place to settle the dispute.

…one can question the WTO’s effectiveness in resolving disputes of this kind: The process moves slowly. On the other hand, it works. The U.S. has won the great majority of the cases it’s taken there. The complaint against China’s practices would be stronger if it was coordinated with other governments. Japan and the European Union share U.S. concerns and would be willing to cooperate. As recently as last month, this seemed to be the strategy. …the U.S. needs to take the lead, once more, in global economic statecraft. Champion the rules-based order that has served the country and the world so well. Strengthen the WTO, don’t subvert it.

And the Wall Street Journal opined today on this topic.

…there’s no denying that Beijing’s mercantilism has fueled the political backlash against free trade. China’s increasingly predatory behavior, especially intellectual-property theft, poses a particular problem to a sustainable trading system. The question is how to respond in a way that encourages better Chinese behavior without harming the global economy and American companies and workers. …the danger is a tariff tit-for-tat that harms everyone. …Beijing is more likely to respond in kind at such a broad public assault on its goods.

The WSJ notes that China’s behavior has left something to be desired.

Beijing has turned to mercantilism over the last decade. …The government gives subsidies in several forms, including loans from state-owned banks on easy terms and low interest rates. …Along with subsidies and government help in acquiring foreign companies, the policy explicitly requires foreign companies to transfer intellectual property in return for access to the Chinese market. …Beijing has also stepped up its use of regulations to discriminate against foreign companies. …All of these policies violate WTO agreements. …The China problem now is the predatory use of government power to punish foreign competitors to benefit Chinese companies.

The WSJ doesn’t necessarily think the WTO is the right vehicle to respond, but it definitely supports a plurilateral approach.

…remedies should be based on the principle of reciprocity. If Beijing pressures multinational car companies to build electric cars in China, the U.S., EU and Japan could impose a tariff on Chinese-made vehicles and restrict the transfer of related technology. This would avoid the Trump Administration’s approach of tariffs on a wide variety of goods, a policy that alienates allies and raises the risk of a wider trade war. A targeted approach…could even strengthen the WTO as China would have an interest in modernizing and using the organization’s courts to resolve the disputes.

I’m a fiscal wonk rather than a trade wonk, so I’m open to the notion that perhaps a plurilateral approach is better than the WTO’s dispute resolution mechanism.

Though it’s worth noting that the United States has a very high batting average when bringing cases to the WTO.

Dan Ikenson, director of Cato’s Herbert A. Stiefel Center for Trade Policy Studies, reviewed WTO trade disputes involving the U.S. from 1995 to March of this year. He found that the U.S. prevailed in 91 percent of cases that it brought against other countries. “When the United States has been a complainant (as it has in 114 of 522 WTO disputes over 22 years — more than any other WTO member) it has prevailed on 91 percent of adjudicated issues,” he wrote.

I’ll close by noting that China’s bad policies don’t make it an enemy. The European Union is a semi-protectionist bloc and it isn’t our enemy either.

My goal is to simply point out that China’s approach to trade can be improved and should be improved. And since the country has moved in the right direction on overall economic policy (with very positive effects for the Chinese people), my hope is that coordinated opposition to Chinese mercantilism will have a positive effect.

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I’ve been very critical of Trump’s protectionism. I explained why he was wrong before the 2016 election and I’ve continued to argue he is misguided ever since he became President.

Most recently, I even expressed hope that Congress would overturn his new taxes on American consumers.

Some people are arguing, however, that the situation isn’t quite so bad because Trump may have a clever plan to use tariffs as a tool to force other nations to reduce their trade barriers.

I very much hope that’s the case, as I noted in this interview with Fox Business, but I’m not holding my breath for a favorable outcome.

I’m not the only one who is skeptical.

In her column for the Wall Street Journal, Mary Anastasia O’Grady pours cold water on the hypothesis that Trump is playing a very clever game.

President Trump’s practice of staking out extreme positions on trade as a negotiating tactic is a sign of his brilliance. Or so we’re told. But that theory took on water last week, when Mr. Trump had to backtrack on a promise to hit Mexico and Canada with a 25% tariff on steel and a 10% tariff on aluminum, without any concessions from either Mexico City or Ottawa. …Mr. “Art of the Deal” figured out that his opening tariff bid was on track to blow up the two best foreign markets for American-made steel and significant markets for American-made aluminum. It’s a good bet that the same producers who are lobbying for protection asked the president to back off the neighbors. The gaffe exposes the Trump administration’s failure to grasp the complexity of the supply chains that interconnect the global economy.

Well said.

By the way, I’m not just picking on Trump. I’ve criticized other Presidents for protectionist policies, most notably Hoover.

And I even dinged Saint Ronald for trade barriers (though I also noted Reagan’s good policies regarding NAFTA and the GATT).

Unsurprisingly George W. Bush also belongs on the list. Professor Vernon Smith relates a story about Bush’s protectionism in the Wall Street Journal.

I was one of nine American Nobel laureates invited to visit the White House Nov. 19, 2002, by President George W. Bush. Each of us had a few minutes to speak privately with the president… Mr. Bush congratulated me on my award in economics. …I added: “You must be doing some things right, but you did two things wrong—your steel tariff proposal and the farm bill.” I startled him, but our exchange was not over. …Later in the Lincoln Room, Mr. Bush was talking with a group of my colleagues from George Mason University. Seeing me nearby, he raised his voice in a friendly retort: “Earlier, your laureate friend gave me a hard time about the steel tariff. I’m thinking that he should handle the economics, and I’ll take care of the politics.”

Professor Smith points out, however, that Bush was wrong on the politics as well as the economics (a lesson the GOP should have learned from Reagan).

His proposal collided with a widespread political backlash at home and abroad, and with retaliation from our foreign trading partners. The Bush steel tariff, imposed in 2002, was rescinded in 2003. It was not feasible. He recognized its unreality, and backed off.

Hopefully Trump will retreat as well.

The last thing the world needs is a repeat of the 1930s.

But if that happens, be prepared for very bad news. Here’s a report on how trade taxes would undermine America’s economy.

A full-blown trade war would erase any economic benefits from the Republican tax cuts passed last year, according to an analysis by the University of Pennsylvania. …The Penn Wharton Budget Model, a research center at the university, imagined the worst case — no US imports or exports crossing borders tariff-free. The United States has free trade agreements with 20 nations. Wharton’s model assumes those all disappear. Such a trade war would make US economic output 0.9% lower than otherwise by 2027, according to the analysis. …Over the longer term, the costs of a trade war would heavily outweigh the benefits of the tax cut. By 2040, the US would lose 5.3% of economic output in the worst trade-war scenario, compared with a 1.6% increase from the tax cuts, the university found. Put another way, a full-blown trade war would cost the economy $200 billion over 10 years, and $1.4 trillion by 2040. American wages would decline, too, falling 1.1% over the next 10 years.

Last but not least, Mark Perry recently shared three videos from Khan Academy on international trade and economics. All of them are worth watching if you really want to understand the issue.  But here’s the one that I think everyone should watch.

And Mark adds this chart, which reinforces the point from the video – and something I’ve also tried to explain – about a capital surplus being the necessary and automatic flip side of a trade deficit.

In other words, when foreigners get dollars, they oftentimes think the best use of that money is to invest in America’s future. That’s a sign of strength, not weakness.

P.S. If you think protectionism is a good idea, please review these five charts.

P.P.S. Though I’m willing to go back to 19th-century tariffs – assuming we roll back all the government that has accumulated since then.

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The biggest challenge, when I talk to politicians about the free-market agenda, is convincing them that they should restrain the growth of government. To be more specific, I think they often understand and accept the argument that ever-rising fiscal burdens are bad for a nation’s economic and moral health, but they are afraid that voters and interest groups will kick them out of office if they reduce the size and scope of the public sector.

I have a different challenge when talking to ordinary people about the free-market agenda. They’re quite comfortable (at least in theory) with the notion that it’s good to cap the growth of government spending, but there is a lot of skepticism about trade. And their doubts sometimes persist even after I share my eight questions and five charts showing the folly of protectionism.

In part, I think these skeptics share Trump’s mistaken belief that a trade deficit is a sign of weakness. But I’ve also found in my many conversations that some people simply are not comfortable with globalization.

But what does that concept even mean?

In his latest column for the New York Times, Bret Stephens points out that there’s no clear definition of what it means to be pro-globalist.

I grew up in Mexico City… Since then, I have lived in Chicago, London, Brussels, Jerusalem, New York and Hamburg. I suppose this makes me a “globalist” in certain eyes… To be a globalist means almost nothing — even “Davos Man” has to trundle home somewhere after the annual forum draws to a close. Rex Tillerson is as much a globalist as Samantha Power. Ditto for John Bolton and John Kerry, Charles Koch and George Soros, Mike Pompeo and Julian Assange. A term that embraces opposites has almost no explanatory power.

So he suggests a definition of what it means.

Maybe it’s time now to make “globalist” mean something after all. An earlier generation of globalists — they called themselves internationalists — had learned the lessons of the 1930s and understood that the U.S. could not cut itself off from the world and expect to remain safe from it. Successive generations of Americans — military and foreign-service officers, businessmen and teachers, humanitarians and entertainers — went out into the world and sought to make it a better place.

All of that sounds very appealing.

Especially when compared to what it means to be on the other side.

To be an anti-globalist…does specify something. …In short, anti-globalism is economic illiteracy married to a conspiracy mind-set.

Since I’ve written about the foolishness of protectionism and also explained why it’s silly to believe in conspiracy theories, I obviously agree.

But we have a problem. Globalism (or globalization, or internationalism, or the policies of “Davos Man,”, or whatever you want to call it) increasingly is perceived to be about more than free trade and comity between nations. In the minds of market-oriented people, it is getting linked with other policies that cause considerable angst.

  • Does globalism mean supporting the OECD’s efforts to undermine tax competition so that it’s easier for politicians to impose bad tax policy and more redistribution?
  • Does globalism mean agreeing with the IMF’s support for bailouts and higher taxes, policies which arguably are only for the benefit of politically connected big banks?
  • Does globalism mean adding regulatory harmonization to trade agreements, supplanting the much more market-friendly approach of mutual recognition?
  • Does globalism mean signing onto agreements that give powers to unaccountable and corrupt international bureaucracies such as the United Nations?
  • Does globalism mean siding with the European Commission in imposing one-size-fits-all rules for member nations notwithstanding the subsidiarity principle?

This is why I find this issue so frustrating.

Like Bret Stephens, I consider myself a globalist. To me, it’s a way of saying I want peaceful trade and investment flows between people in different nations. Heck, it’s also a way of saying I like and appreciate other peoples and other cultures.

But many of the other people who self-identify as globalists support policies that increase the power of governments over the private economy.

Here’s my simplified way to looking at this issues. All globalists are in favor of free trade and cross-border investment flows, but there’s then a division based on whether they want governments to compete or collude. And that’s basically a proxy for whether they favor small government or big government.

In this 2×2 matrix, the globalists are on the left side, but they’re divided between “Good Globalism” and “Bad Globalism.” Sort of the difference between Switzerland and Sweden.

I initially identified the bottom-right as “Anti Globalism,” but decided that “Statism” was the better label. After all, there should be a place for those who want global agreements to expand the power of government while also closing borders to trade and investment. Maybe India would be a good example of this bad approach.

But I couldn’t figure out a good label for the top-right. So I put “Irrationality” for the obvious reason that competition and protectionism are mutually exclusive concepts. And I have no idea what country belongs in this box.

P.S. This is my first stab at this issue. I’m open to suggestions on better labels and descriptions for my 2×2 matrix. And I also freely admit that there are aspects of the globalization debate – such as migration and military alliances – that aren’t included in my analysis. I’ll let others figure out how to create and classify a 4-dimensional matrix.

P.P.S. Not all global agreements are bad. Consider international pacts on air traffic control. Or certain anti-pollution treaties.

P.P.P.S. For more information on today’s topic, here’s my explanation of how borders can promote liberty, and here’s my explanation for why protectionism and tax harmonization are two peas in a pod.

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Every time I write a column criticizing Trump’s protectionism, I get pushback. Some of the resistance is from people who genuinely think trade barriers are a good thing, and I routinely respond by asking them to ponder these eight questions or these five charts.

But I also get negative feedback from people who point out that the United States imposed significant import taxes in the 1800s, a period when the United States transitioned from agricultural poverty to middle-class prosperity.

Doesn’t this prove tariffs are pro-growth?

That’s sort of what Brian Domitrovic asserts in a recent column for Forbes.

There is an indisputable chronological correlation between the tariff and phenomenal economic growth. From the late 18th to the early 20th twentieth centuries, the United States steadily developed into the most successful economy in the world.

Brian’s column explores how trade taxes worked in the early history of the United States, but let’s skip to the part that is relevant to today’s discussion.

From 1789 to 1913, the size of the federal government in the economy as a whole averaged about 3%, with variation in time of war. Today, that number is over 20%—a 7-fold increase. State and local government was another 3% back then, and is another 12% today. Where total government was 6% of economic output in the era of the tariff, it is five times larger at over 30% today.

In other words, the real lesson to be learned is not that trade taxes are good for growth, but rather that an economy can prosper if the public sector is very small. And Brian is right that the federal government used to be only a tiny burden in the United States.

Brian even makes the case that government may have stayed small during the 1800s precisely because import taxes were seen as naked cronyism.

The quid pro quo the populace made with the tariff is that Congress and its conspirators in business got their favors, but in turn Congress’s realm, the government, had to stay small. Therefore, the private economy was free… Boundless growth at the hands of entrepreneurs and a talented and ambitious workforce built up year after year as Congress got to curry its petty favors on the condition that government stayed limited in size.

He also explains that politicians back then were very cognizant of the Laffer Curve.

A tariff “for revenue” was one where a rate was set low enough for the good in question to flow into the country in sufficient quantity to bring in increasing receipts to the government. A “prohibitive” tariff was one that was so high, receipts would go up if a rate were lowered. The “Laffer curve” concept was the most discussed theorem in political-economic debates in the United States in the 19th century.

The same principle applies to the income tax today. A modest rate generates lots of revenue, whereas a punitive rate can actually cause a drop in tax receipts.

And, speaking of the income tax, the introduction of that awful levy actually gave Hoover and other politicians the fiscal leeway to impose “prohibitive” tariffs…with very bad results.

After the income tax was put in place in 1913, the tariff shed its revenue purpose and became exclusively a vehicle for cronyism. Therefore it got very high—so high, in 1930, that…the…system was ruined and the result was the Great Depression.

For what it’s worth, I think there were lots of other bad policies from Hoover and Roosevelt that caused – and then exacerbated – the economic damage of the 1930s, so high tariffs don’t deserve all the blame.

But let’s not digress from our main topic of whether trade taxes can be justified.

Brian’s column doesn’t say that tariffs are good, but he does point out that such a system was only capable of financing a very small government. And that meant the private sector had lots of breathing room to operate.

But a “sin of omission” is that he also could have elaborated on the economic benefits of having no income tax. During the 1800s (with the exception of Lincoln’s income tax during the Civil War and an income tax in 1894 that was declared unconstitutional in 1895), there was no personal income tax. And no corporate income tax. And no payroll taxes. Or death tax. Or capital gains tax.

Dean Clancy highlighted these benefits when considering the conditions that would be necessary for him to support trade taxes.

I sort of agree. But I hope Dean would agree to a friendly tweak to his tweet, so that it read “McKinley-size tariffs were a less-worse option because of…”, and then list the polices that actually were good, such as no taxes on income and very small government.

Sadly, I don’t see any practical way of unwinding all the bad policy of the past 100 years.

So the case for trade taxes is very similar to the market-friendly case for a value-added tax. Yes, there is a theoretical argument to replace all income taxes with a VAT, but it’s not realistic.

Likewise, I’m open to the argument that higher tariffs might be acceptable, but only if someone first shows me a practical plan to 1) shrink the federal government back down to what the Founding Fathers envisioned, and 2) get rid of the IRS and all taxes on income.

P.S. Alexander Hamilton, writing about tariffs and excises in Federalist 21, clearly appreciated the insights of the Laffer Curve: “It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed, that is, an extension of the revenue.”

P.P.S. The Cayman Islands is the closest example of a successful modern economy that finances a big chunk of government with import taxes. But that example is somewhat limited since almost all goods are imported. For such an economy, tariffs are basically the same as a sales tax. For what it’s worth, I would argue Cayman’s fiscal system has more in common with Monaco today than with the United States in the 1800s.

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I wrote last month about the risk of Trump harming American workers, consumers, and producers by pulling the United States out of NAFTA.

That’s still a danger to the U.S. economy, but it’s been pushed to the back burner by a more immediate threat – the President’s unilateral decision to impose big tax increases on steel and aluminum imports.

American trade law (specifically the Trade Expansion Act of 1962) does give Trump the authority to impose such taxes, but it’s worth noting that Congress has the power to change the law and negate the President’s short-sighted actions.

To be sure, such a change presumably would require two-thirds support to override a Trump veto. And I have no idea how many congressional Republicans are loyal to free markets rather than Trump, and I also don’t know how many congressional Democrats would vote against Trump’s protectionism, either because they support trade or because they simply don’t like the President.

But I do know that there would be lots of support. In today’s Washington Post, Charles Koch makes a principled case for open trade and condemns the President’s protectionism.

Countries with the freest trade have tended to not only be the wealthiest but also the most tolerant. Conversely, the restriction of trade — whether through tariffs, quotas or other means — has hurt the economy and pitted people against each other. Tariffs increase prices, limit choices, reduce competition and inhibit innovation. Equally troubling, research shows that they fail to increase the number of jobs overall. …History is filled with examples of administrations that have implemented trade restrictions with devastating results. At the dawn of the Great Depression, the Smoot-Hawley Tariff Act raised U.S. tariffs on more than 20,000 imported goods, which accelerated our decline instead of correcting it. More recently, President George W. Bush’s 30 percent steel tariff led to increased consumer costs and higher unemployment. And President Barack Obama’s 2009 decision to raise tariffs on Chinese tires ultimately burdened consumers with $1.1 billion in higher prices. The cost per job saved was nearly $1 million , not considering all the lost jobs that went unmeasured.

And he specifically condemns the new trade taxes Trump has imposed.

The administration’s recent decision to impose major steel and aluminum tariffs — on top of higher tariffs on washing machines and solar panels — will have the same harmful effect. …those who can least afford it will be harmed the most. Having just helped consumers keep more of their money by passing tax reform, it makes little sense to take it away via higher costs.

Mr. Koch also observed that we’ve become richer during a period when trade taxes fell.

It is no coincidence that our quality of life has improved over the years as the average U.S. tariff on imported goods has fallen — from nearly 20 percent in 1932 to less than 4 percent in 2016.

This is an under-appreciated point. I’ve argued – and shared evidence – that trade liberalization played a key role in offsetting the damage of higher fiscal burdens in the post-WWII era. Yet Trump wants to reverse some or all of this progress.

The Wall Street Journal also opined on this issue.

President Trump could reduce the benefits of his tax cuts and regulatory rollback with protectionism. This risk became more serious after the Commerce Department…recommended broad restrictions on aluminum and steel imports that would punish American businesses and consumers. …the wide-ranging economic damage from restricting imports would overwhelm the narrow benefits to U.S. steel and aluminum makers.

The protectionists try to justify tariffs on the basis of national defense, but this is a silly argument since we’re not relying on potential enemies.

Canada accounts for 43% of aluminum imports—more than twice as much as China and Russia combined. Steel imports are also diversified with Canada (17%), South Korea (12%) and Mexico (9%) accounting for three of the top four foreign sources. China accounts for about 2% of steel and 10% of aluminum imports.

The WSJ then lists some of the harmful effects of trade taxes.

About 16 times more workers are employed today in U.S. steel-consuming industries than the 140,000 American steelworkers. Economists Joseph Francois and Laura Baughman found that more U.S. workers lost jobs (200,000) due to George W. Bush’s 2002 steel tariffs than were employed by the entire steel industry (187,500) at the time. …Raising the cost of steel and aluminum inputs would impel many manufacturers to move production abroad to stay competitive globally. Does Mr. Trump want more cars made in Mexico? …Oh, and don’t forget that other countries could retaliate with trade barriers that hurt American exporters. …Why would Mr. Trump undercut his achievements with trade barriers that harm American workers and consumers?

Irwin Stelzer, writing for the Weekly Standard, also is quite critical.

…the president doesn’t like trade deficits—job killers as he sees it—and so he has put tariffs on washing machines and solar panels and now is deciding what costs and restrictions to place on imports of steel and aluminium. …Never mind that such measures will raise the costs of steel and aluminum-using industries such as autos, making them less competitive with imports that can keep their costs down by buying cheaper, un-tariffed metals. One economic study after George W. Bush imposed tariffs on steel in 2002 concluded that job losses in steel-consuming industries exceeded the number that would have been lost had the entire American steel industry gone out of business. …if that causes job losses scattered among a lot of other industries and states, then so be it. Trump figures that those voters won’t make the connection between the job losses and the steel tariffs.

Last but not least, Tom Mullen eviscerates protectionism in a piece for CapX.

When Adam Smith wrote The Wealth of Nations, it…was to refute the kinds of protectionist ideas championed by conservatives like Edmund Burke and Alexander Hamilton in Smith’s day, Abraham Lincoln eighty years later, and Trump today. Bastiat remade Smith’s case in 1848. Henry Hazlitt did so again in 1946. …What is unseen is the money American consumers no longer have when the tariffs are put in place. For example, the tariff may result in them paying $200 for the same pair of sneakers they previously paid $100 for. That means they no longer have $100 they previously had after buying the sneakers, which they could spend on other products. Whatever jobs they were supporting with that $100 are now lost. …When the ledger is balanced, Americans, in general, are far better off without the tariff.

Here’s more on the economic poison of protectionism.

The lower prices Americans pay for automobiles, clothing, Apple iPhones, and Bobcats allow them to patronise those American industries which operate more efficiently than their overseas competitors. That’s called “comparative advantage,” something else free market advocates since Adam Smith have been educating people about. …No matter what spurious arguments special interests make in favour of tariffs, they are, at the end of the day, just another tax. …And don’t forget, all the unseen, negative consequences of tariffs apply equally to foreigners. If they are taxing imports on automobiles, their citizens have less money to spend on other products. Their businesses that use imported materials must raise their prices and become less competitive. Any advantage they appear to gain in one sector, they lose in another, with the same overall net loss as we experience.


Protectionism is a no-win game. Politicians in Country A take aim at businesses in Country B, but the main casualties are inside their own borders. Consumers lose, taxpayers lose, and all the upstream and downstream businesses in the supply chain lose.

Which is why researchers inevitably find that trade barriers are associated with net job losses. In other words, the “unseen” losses are far larger than the “seen” gains.

Which is exactly what Bastiat warned about more than 150 years ago.

P.S. Shifting gears, I’ve periodically complained about the immoral and amoral actions of large corporations. Simply stated, big businesses oftentimes are perfectly happy to use the coercive power of government to grab unearned wealth.

Koch Industries is a noble exception. Here’s another excerpt from Charles Koch’s Washington Post column.

One might assume that, as the head of Koch Industries — a large company involved in many industries, including steel — I would applaud such import tariffs because they would be to our immediate and financial benefit. But corporate leaders must reject this type of short-term thinking, and we have. …We only support policies that are based on equality under the law and that help people improve their lives. This is why we successfully lobbied to end direct ethanol subsidies, despite being one of the largest ethanol producers in the United States. It is why we fought against the inclusion of a border adjustment tax in the tax-reform package, even though it would have greatly increased our profits by increasing costs to consumers.

I’m obviously pleased that the folks at Koch are on the right side of the ethanol and BAT issues, but that’s a secondary matter. What’s praiseworthy is that the company rejects all cronyism. Even when it would benefit.

If more businesses acted that way, there would be a lot more support for free enterprise.

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Government intervention is not good for economic prosperity. That general observation is both accurate and appropriate, but it might also be helpful to contemplate what sector of the economy suffers the most damage and distortion because of government.

Speaking of agriculture, let’s commemorate Valentine’s Day by exploring how politicians shower sugar producers with undeserved wealth every time one of us buys something sweet for a sweetheart.

Vincent Smith of the American Enterprise Institute shares some grim news on who is reaping unearned benefits.

Valentine’s Day is here again, and still the US sugar lobby has its hand in everyone’s wallet when they buy chocolate and other candy for their friends and families. For over four decades, the sugar lobby has managed to persuade Congress to maintain a Soviet-style supply control program that, by sharply limiting imports and curtailing domestic production, keeps US sugar prices well above free market levels. The program costs US consumers an average of about $3.4 billion every year, effectively a hidden annual tax of over $40 for a typical family of four, all to benefit fewer than 5,000 farm businesses. Further, the program raises production costs for the US food processing industry, damaging the food industry’s ability to compete in export markets and causing them to sacrifice a share of the domestic market to exporters from other countries. The impact of the US sugar program on employment for US citizens consistently has been estimated to be negative, costing the US economy between 10,000 and 20,000 jobs on a net basis. While the program creates employment for some workers in sugar refineries, it destroys far more employment opportunities in the US food processing sector by making the sector less competitive.

Two of his colleagues, John C. Beghin and Amani Elobeid, produced a detailed study on the topic for AEI. Here are the key findings.

The sugar program is a protectionist policy, which increases the domestic price of sugar above the corresponding world price. It restricts imports of raw and refined sugar, depresses world sugar prices, and substantially changes the mix of sweeteners used in processed food. Domestic markets are distorted, sugar users are effectively taxed by the program, and sugar producers are subsidized by it. The welfare transfer to sugar growers and processors is quite large in the aggregate, hovering around $1.2 billion. Losses to households are diffused, about $10 per person per year but large for the population as a whole, in the range of $2.4–$4 billion. …Gains to producers are concentrated in a few hands, especially in the cane sugar industry. Labor effects from lost activity in food industries are between 17,000 and 20,000 jobs annually.

For those who like the quantitative details, here’s a table with the most important numbers in the study.

Writing for the Federalist, Eric Peterson explains the high costs and inefficiency associated with this bit of central planning.

The history of candy canes dates back over 300 years… While this iconic symbol of Christmas saw its first mass production in America, Washington politicians have too often behaved like Scrooge, enacting policies that have sent all but one maker of this holiday classic fleeing abroad. One reason for the mass exodus is the little known U.S. sugar program. …Government interference in the sugar market comes in four flavors: Price supports, marketing allotments, import quotas, and the Feedstock Flexibility Program. …Although programs such as price supports (which mandate domestic prices for sugar at nearly double the world price) are fairly straightforward, programs such as Feedstock Flexibility are far more opaque. It allows sugar producers to sell sugar to the government at above market value, which the government then sells to ethanol producers at a loss. …Companies that need sugar for their products…can’t even import cheaper sugar from abroad thanks to import quotas that strictly limit foreign sugar. It’s no one wonder that some companies like Atkinson Candy Co have responded by moving some of their peppermint-candy production to Guatemala, where sugar is cheap and plentiful. …Consumers pay higher prices on everything from chocolate to cranberry sauce thanks to these big-government mandates, with the estimated annual costs to consumers and food manufacturers adding up to a whopping $3.5 billion annually. …Since 1997, for example, over 120,000 jobs have been lost in the sugar industry. It’s estimated for every job subsidies prop up, three are destroyed.

Notice, by the way, the consistent theme that subsidies and protectionism result in fewer jobs. This is not a surprising result for anybody who has looked at the fourth item in this column.

Let’s continue with some more analysis. The Foundation for Economic Education has a column by Ted Ellis on the program.

…for taxpayers, …sweetness doesn’t come cheap. For decades, domestic sugar producers have been protected from fair competition. In recent years, their influential lobby has ensured producers’ inflated profits through $260 million worth of federal subsidies and restrictions on fairly priced imported sugar. …these handouts rarely accrue to anyone but the industry’s largest and most well-connected players. …The National Confectioners’ Association, a trade group, agrees…that “the benefits of sugar subsidies and protections go directly to just 14 sugar beet and sugarcane producers in a few states.” …inflated prices disrupt domestic supply chains, threatening thousands of well-paying American manufacturing jobs, all while nibbling away at American taxpayers’ wallets. …the sugar program costs American businesses and consumers more than $3 billion every year. …the cost of special-interest lobbying in the sugar industry is felt most heavily by US workers laid off by companies that have been forced to move abroad, where sugar prices are cheaper. A 2006 report by the US International Trade Administration found that as many as 10,000 American jobs were lost as confectioners such as Hershey Co. and Lifesavers were forced by government-inflated domestic sugar prices to move plants out of the US. The same report found that the many jobs lost on account of federal intervention in sugar production far outweigh the few jobs saved for growers. In fact, it found that “for each one sugar growing and harvesting job saved through high US sugar prices, nearly three confectionery manufacturing jobs are lost.”

If you’re tired of reading about the senselessness of sugar subsidies, here’s a video on the topic from Reason. It has a Halloween theme instead of a Valentine’s Day theme, but that doesn’t change anything.

Let’s conclude with some hard-hitting analysis by Jim Bovard, who explains the tangled web of cronyism for CapX.

…the federal government has maintained an array of sugar import quotas and/or tariffs for most of the last 200 years. The regulatory regime has provided windfalls for generations of politicians and jobs for legions of bureaucrats while destroying more than a hundred thousand private, productive jobs. …The sugar program illustrates why politicians cannot be trusted to competently manage anything more complex than a lemonade stand. In 1816, Congress imposed high tariffs on sugar imports in part to prop up the value of slaves in Louisiana. In 1832, a committee of Boston’s leaders issued a pamphlet denouncing sugar tariffs as a scam on millions of low-paid American workers to benefit fewer than 500 plantation owners. …Despite perpetual aid, the number of sugar growers has declined by almost 50% in recent decades to fewer than 6,000. Federal policy failed to countervail the fact that the climate in the mainland U.S. is relatively poorly suited for sugarcane production. …Federal sugar policy costs consumers $3 billion a year and is America’s least efficient welfare program. In the 1980s, sugar import restrictions cost consumers $10 for each dollar of sugar growers’ income. …producing candy and many other food products is far more expensive here than abroad. Since 1997, sugar policy has zapped more than 120,000 jobs in food manufacturing… More than 10 jobs have been lost in manufacturing for every remaining sugar grower in the U.S. …The sugar lobby showers Congress with money, including almost $50 million in campaign contributions and lobbying between 2008 and 2013. In return, members of Congress license sugar growers to pilfer consumers at grocery checkouts and rob hardworking Americans of their jobs.

That last segment is the key. Sugar subsidies are a class case of “public choice,” with special interests and politicians both benefiting while ordinary people pay the price.

There are many reasons to shut down the Department of Agriculture. But it’s hard to imagine a bigger reason than getting rid of handouts for Big Sugar. Maybe ultra-corrupt ethanol handouts are even worse, but that’s a judgement call.

P.S. Since today is Valentine’s Day, here’s a very topical explanation of why unfettered prices are desirable.

P.P.S. And here’s a Libertarian Valentine’s Day. Or, for my statist readers, here’s Obama’s vision of Valentine’s Day.

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On the one-year anniversary of his inauguration, I graded Trump’s overall record on economic policy and specifically observed that his trade rhetoric was worse than his trade policy. But I added a caveat about the North American Free Trade Agreement.

…he’s been doing a lot of saber-rattling, but fortunately not drawing too much blood. That being said, he is threatening to pull the United States out of NAFTA, which would be a very big mistake.

Unfortunately, this is not an idle threat. So let’s look at what some experts have said about the value of NAFTA to the American economy.

We’ll start with a column from today’s Washington Post by the CEO of Union Pacific. He worries that the good news on taxes will be offset by bad news on trade.

Freight railroads are the bloodstream of U.S. business, supporting the livelihoods of employees in nearly every sector of the economy. …From my vantage point, it is clear that the recently adopted tax-reform law will provide meaningful stimulus for the U.S. economy. …our economy is on the rise, and tax reform will help generate even more momentum. But America’s potential exit from the North American Free Trade Agreement threatens to undo much of that progress. …About 60 percent of U.S. imports are intermediate goods for U.S. production, so raising costs through what will be functionally higher taxes on production would make U.S. businesses less competitive — thwarting tax reform’s goal of allowing people and businesses to invest their money as they see fit. …executives who are excited about the economic benefits of the tax cuts are facing equal, if not greater, economic losses if NAFTA is eliminated. …At Union Pacific, …nearly 40 percent of our shipments now have an international component — coming from or headed to Canada, Mexico, Asia, Europe and beyond. …it will be critical for the United States to strengthen its most important trade partnerships, not abandon them. …the recent tax legislation is clearly a strong tail wind for future growth and expansion. Let’s not ruin the momentum by abandoning NAFTA.

I fully agree. It’s worth noting that trade policy is just as important as fiscal policy according to Economic Freedom of the World.

Which is why it makes no sense for Trump to undermine his achievement on tax reform.

Here are some excerpts from a study by a Dartmouth professor. He starts by outlining some of the benefits that have been produced by NAFTA.

U.S. trade in goods and services with Canada and Mexico has nearly quadrupled under NAFTA—from $337 billion in 1994 to about $1.4 trillion in 2016. …NAFTA partners have become the largest destination for U.S. small-business exporters. In 2014, more than 125,000 small and medium-sized businesses (SME) exported to Canada and/or Mexico: this was over 95 percent of all U.S. exporters into the NAFTA market. For these small U.S. exporters that year, Canada and Mexico were the top two export destinations. The total value of these 2014 exports was $136 billion, fully 25 percent of all U.S. SME exports. Under NAFTA, cross-border investment among the three member countries has surged as well: from $126.8 billion in 1993 to $731.3 billion in 2016. …A reasonable conclusion from…studies is that NAFTA in its entirety has elevated U.S. GDP by somewhere between 0.2 percent and 0.3 percent of GDP. …boosting U.S. GDP by between 0.2 percent and 0.3 percent means U.S. output and income is somewhere between about $40 billion to nearly $60 billion higher than it would be without NAFTA. …representative studies calculated that NAFTA raised average U.S. wages by somewhere between 0.2 and 0.3 percent–a boost to workers’ wages that, like the boost to national GDP, recurs every year.

Needless to say, wrecking NAFTA would unwind all these benefits.

…studies that have carefully modeled the United States withdrawing from NAFTA share a central estimate of withdrawal damages of about 0.3 percent of GDP. In 2017, a loss of national output approaching 0.3 percent of GDP would have been a loss of about $50 billion. …Withdrawing would reduce trade, lower national output and income, and destroy U.S. jobs and lower average U.S. real wages. In an increasingly competitive global economy, many U.S. companies and their workers would suffer, not win.

Another study had a similarly grim assessment.

…termination of the North American Free Trade Agreement (NAFTA) would have significant net negative impacts on the U.S. economy and U.S. employment, particularly over the immediate years after termination. Termination would re-impose high costs of tariffs on U.S. exports and imports, which would reduce the competitiveness of U.S. businesses both domestically and abroad. U.S. exports would drop, both to Canada and Mexico and globally, as U.S. output becomes more expensive and therefore U.S. businesses would be less competitive in these markets. Foreign purchasers would shift away from U.S. goods and services in favor of lower-cost goods and services made in other international markets, particularly those made in Asia.

This study calculated the economic damage in each state, including estimated job losses.

Mark Perry of the American Enterprise Institute put that data into a map.

Let’s close with Veronique de Rugy of the Mercatus Center, who echoes the observation that Trump may be about to sabotage the benefits of tax reform by throwing sand in the gears of international trade.

…for the first time in decades. U.S.-based businesses can now compete against their foreign counterparts without starting from an immediate disadvantage… The change should result in faster growth, higher wages and more jobs. Unfortunately, those gains may be undone this year with a wrong step on trade. …NAFTA has benefited American business. …But ramping up economic protectionism would undermine these gains and harm the economy. Many U.S. manufacturers have global supply chains, meaning they import materials and other inputs, even if the final product might then be exported. Raising the prices of these goods with tariffs makes it harder for U.S.-based businesses to compete. …Canada and Mexico are our top trading partners. If they were to increase foreign tariffs on U.S.-manufactured goods — absent a free trade pact or as retaliation for new tariffs imposed by Trump — that would significantly harm U.S. exporters.

So why is Trump threatening to do something so foolish?

Based on his public statements, he simply doesn’t understand trade. He thinks it is a contest between countries and whichever one has a trade surplus is the winner. And to fix this supposed problem, he wants to wreck NAFTA unless politicians and bureaucrats somehow have the power to dictate equal levels of trade (sort of like the way class-warfare advocates want to dictate equal levels of income).

This is wrong on many levels.

  • There is zero evidence that a trade deficit is an indication of economic weakness. Indeed, since wealthier people can afford to buy more goods and services than poor people, a trade deficit oftentimes is a sign that a nation has a prosperous economy.
  • Moreover, the flip side of a trade deficit is a capital surplus. In other words, foreigners who earn dollars by selling to consumers in the United States sometimes decide that investing in America is the best use of those dollars. That’s a positive indicator.
  • Last but not least, it’s worth noting that countries don’t trade. Instead, trade is between consumers and businesses and those transaction are – by definition – mutually beneficial. Interfering with those transactions is pernicious government intervention.

The bottom line is that I’m still waiting for someone to successfully answer my eight questions for protectionists.

P.S. Unlike the current president, Reagan had the right approach.

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