Feeds:
Posts
Comments

Archive for the ‘Trade’ Category

Notwithstanding dalliances in other fields, I’m a policy wonk.

But I will pontificate (often incorrectly) on politics when asked, which is what happened in this interview about the electoral impact of the coronavirus.

My basic point is that Trump is much better than the average Republican about “controlling the narrative.”

In other words, he doesn’t allow the media to frame issues in a way that is adverse to his interests.

Given Trump’s Jekyll-Hyde approach to economic policy, I have mixed feelings about his Jedi-like ability.

But I will point out why narratives are so important in public policy.

Since I’ve shifted to my comfort zone of public policy, I’ll also say something about trade.

One of the big risks from the coronavirus is that it will weaken global trade. Which led me to mention in the interview that hopefully Trump might learn from this growing crisis that expanded trade is good for prosperity.

Though I admit I’m not very optimistic given his mercantilist perspective.

P.S. Textbook discussions of “robber barons” and “sweatshops” are other examples of how bad narratives lead to distorted history.

Read Full Post »

Early last year, I shared a video explaining that trade deficits generally don’t matter. I even suggested trade deficits might be a sign of economic strength because foreigners who earned dollars were anxious to invest them in the American economy.

I’m recycling this video to make a point about trade and the economy for both Trump supporters and Trump critics.

For Trump supporters, I want them to understand that the trade deficit has increased under his policies. The data from the latest Commerce Department report show that the yearly trade deficit has increased from about $500 billion at the end of the Obama years to a bit over $600 billion during the Trump years.

And the reason I’m making this point is that I want Trump supporters to realize that they shouldn’t be upset about trade balances. Indeed, they should be happy because there’s a strong argument that the trade deficit is increasing in large part because Trump’s pro-growth tax reform and regulatory reform and making America more attractive for foreign investors.

For Trump critics, I want them to understand the same point, though from a different perspective. Many of them have been (correctly) critical of Trump’s protectionism. And they’ve been happy to point out that his taxes on foreign goods haven’t reduced the trade deficit.

But I would like them to contemplate why the economy has continued to grow. Hopefully, they will realize that pro-market policies in other areas are offsetting the damage of protectionism and therefore be more supportive of capitalism.

The Wall Street Journal opined on this topic last year.

President Trump can take a bow that his tax reform and deregulation are working as intended. …The trade deficit grew… This is not bad economic news. Imports grew faster than exports as the U.S. economy accelerated and much of the world slowed. The dollar grew stronger as capital flowed into the U.S., and the trade deficit grew to offset the larger capital inflows as it must by definition under the national income accounts. …a larger trade deficit is a benign byproduct of a healthier American economy. Supply-side policies revived animal spirits and gave the economy a second wind. …The best way to respond to a trade deficit is to ignore it.

From a left-of-center perspective, Fareed Zakaria made the same point in a recent column for the Washington Post.

Trump campaigned relentlessly on the notion that America’s economy was being ruined by large trade deficits. …He promised on the campaign trail in June 2016, “You will see a drop like you’ve never seen before.”In reality, the trade deficit has risen substantially under Trump. …when the United States has grown robustly, its trade deficit has tended to rise. If you want to achieve a sharp decline in the trade deficit, it’s easy — just trigger a recession. …while the United States has a deficit in manufactured goods with the rest of the world, it runs a huge surplus in services (banking, insurance, consulting, etc.). …The United States is also the world’s favorite destination to invest capital, by a large margin. As Martin points out, when you look at this entire picture, “the trade deficit should be something to brag about rather than denounce.” …Trump’s trade policy has been an enormously costly exercise, forcing Americans to pay tens of billions in taxes on imported goods, then using tens of billions of dollars in taxpayer funds to compensate farmers for lost income (because of retaliatory tariffs)… All to solve a problem that isn’t really a problem.

Veronique de Rugy of the Mercatus Center, writing for Reason, summarizes the issue.

President Donald Trump hates the trade deficit. …If elected, he promised, he would “end our chronic trade deficits.” …free traders…explained, a country’s trade balance is determined overwhelmingly by factors such as the U.S dollar serving as a reserve currency, the ratio of savings to investment opportunities at home and abroad, and the relative attractiveness of that country’s investment climate. As long as the United States is growing and remains an attractive place to invest, we Americans will continue to run trade deficits with the rest of the world. …They want these dollars, in part, to buy American exports. …More important, and often overlooked: Foreigners want dollars also to invest in America’s powerful economy. …the current-account deficit is a mirror image of the capital-account surplus. This is why Mark Perry of the American Enterprise Institute describes imports as “job-generating foreign investment surpluses for a better America.” It is thus no surprise that as the American economy grew, the trade deficit also grew.

I’ll close with a chart that’s in the video because it reinforces the three columns cited above.

As you can see, the link between the trade deficit and an investment surplus isn’t just a theoretical construct. It’s an accounting identity.

The bottom line is that people on both sides of the political debate should ignore the trade deficit and instead focus on the tried-and-true recipe for generating prosperity.

Read Full Post »

At the beginning of the Trump era, many of us (including me) warned that his statements on trade were nonsensical.

And when Trump shifted from bad rhetoric to bad policy, Johan Norberg pointed out why trade wars are very misguided.

As you might expect, Johan is correct. More government intervention in global commerce has led to bad consequences.

Trump’s tax increases on trade have produced bad results for the American economy. Consumers have been hurt, businesses have been hurt, exporters have been hurt, and specific sectors such as farming and manufacturing have been hurt.

All of this was very predictable.

Indeed, the Trump Administration’s own economists warned back in 2018 that a trade war would backfire. Here are some excerpts from a report in the New York Times.

A White House economic analysis of President Trump’s trade agenda has concluded that Mr. Trump’s tariffs will hurt economic growth in the United States… The findings from the White House Council of Economic Advisers have been circulated only internally and not publicly released… The administration has hit Canada, Mexico, Japan and the European Union with steel and aluminum tariffs and…tariffs on a range of Chinese goods. In return, many of those countries have either imposed or threatened reciprocal tariffs on everything from steel to pork to orange juice, a move that economists say will depress economic growth. …many economists have been warning that the administration’s trade approach will undercut economic growth and partially offset any boost from the $1.5 trillion tax cut that Congress passed and Mr. Trump signed… Wall Street research firms have warned that those tariffs, and the retaliatory tariffs that trading partners have threatened in response, will slow growth in the United States. …In a…survey of an expert panel of academic economists assembled by the University of Chicago’s Booth School of Business, no economist agreed with the statement, “Imposing new U.S. tariffs on steel and aluminum will improve Americans’ welfare.”

Needless to say, Trump ignored the good advice from his economists and imposed a bunch of tax increases on trade.

We now have some hard evidence about the wisdom of this approach. Economists at the Federal Reserve crunched the numbers as part of a new study.

While there are already vast theoretical and empirical literatures documenting the effects of changes in trade policy, …there are virtually no modern episodes of a large, advanced economy raising tariffs in a way comparable to the U.S. in 2018-2019. …these tariffs…were imposed, in part, to boost the U.S. manufacturing sector by protecting against what were deemed to be the unfair trade practices of trading partners, principally China. …This paper provides the first comprehensive estimates of the effect of recent tariffs on the U.S. manufacturing sector. …We measure the import protection channel as the share of domestic absorption affected by newly imposed tariffs. We account for declines in competitiveness associated with increased input costs as the share of industry costs subject to new tariffs.Finally, we measure an industry’s potential exposure to retaliatory tariffs by U.S. trading partners as the share of industry-level exports subject to new retaliatory tariffs. …We then relate the measures for these three channels of tariff exposure to monthly data on manufacturing employment, output, and producer prices.

And what did the experts find?

We find that tariff increases enacted in 2018 are associated with relative reductions in manufacturing employment and relative increases in producer prices. In terms of manufacturing employment, rising input costs and retaliatory tariffs each contribute to the negative relationship, and the contribution from these channels more than offsets a small positive effect from import protection. For producer prices, the relative increases associated with tariffs are due solely to the rising input cost channel. …we find that shifting an industry from the 25th percentile to the 75th percentile in terms of exposure to each of these channels of tariffs is associated with a reduction in manufacturing employment of 1.4 percent, with the positive contribution from the import protection effects of tariffs (0.3 percent) more than offset by the negative effects associated with rising input costs (-1.1 percent) and retaliatory tariffs(-0.7 percent).

In other words, the small benefits that go to the industries that are sheltered from competition are very much outweighed by the damage to other sectors of the economy (a lesson that Trump could have learned if he studied real-world evidences, such as the Great Depression).

The Wall Street Journal opined about the Fed’s study.

One mystery of the Trump -era economy has been why U.S. manufacturing slumped sharply in late 2018 and 2019 after surging the year before. The Occam’s razor culprit is the onset of trade war… Federal Reserve economists Aaron Flaaen and Justin Pierce examine the impact of the tariff outbursts of 2018 on U.S. manufacturing employment, output and prices. This is important work because 2018 marked the start in earnest of President Trump’s campaign to change the world trading order, using tariffs as his preferred bludgeon. …Mr. Trump justified his campaign in part as a way to revive American manufacturing while protecting against unfair trade practices. So how has that worked out? …the economists have bad news for tariff lovers. …the higher costs from tariffs swamped benefits to specific firms from import protection. The tariffs cost more jobs than they created. …As the Fed economists conclude, “We find the impact” from protection “is completely offset in the short-run by reduced competitiveness from retaliation and higher costs in downstream industries.” ….A previous Fed study looked at uncertainty and found it has cut U.S. GDP growth by about a percentage point, which explains the deceleration to 2% from 3% in the last year.

At the risk of sounding like a dogmatic libertarian, we now have additional confirmation that it’s not a good idea to expand the footprint of government.

That’s true about taxes. That’s true about spending. That’s true about regulation. And it’s true about trade.

P.S. Wonky readers may be interested in this chart from the Fed study, which shows the impact of Trump’s trade war on employment, production, and producer prices.

P.P.S. Trump is right when he asserts that other nations have bad protectionist policies. Unfortunately, he wrongly thinks that reducing trade deficits somehow will address those bad policies. Instead, he should have targeted the specific bad policies (such as Chinese cronyism), ideally by utilizing the World Trade Organization.

Read Full Post »

Yesterday’s column was my annual end-of-year round-up of the best and worst developments of the concluding year.

Today I’ll be forward looking and give you my hopes and fears for the new year, which is a newer tradition that began in 2017 (and continued in 2018 and 2019).

With my glass-half-full outlook, we’ll start with the things I hope will happen.

Supreme Court strikes down civil asset forfeiture – It is nauseating that bureaucrats can steal property from citizens who have never been convicted of a crime. Or even charged with a crime. Fortunately, this disgusting practice already has attracted attention from Clarence Thomas and other sound-thinking Justices on the Supreme Court. Hopefully, this will produce a decision that ends this example of Venezuela-style government thuggery.

Good free-trade agreements for the United Kingdom – This is a two-pronged hope. First, I want a great agreement between the U.S. and the U.K., based on the principle of mutual recognition. Second, I want the best-possible agreement between the U.K. and the E.U., which will be a challenge since the political elite in Brussels has a spiteful desire to “punish” the British people for supporting Brexit.

Maduro’s ouster in Venezuela – I already wished for this development in 2018 and 2019, so this is my “Groundhog Day” addition to the list. But if I keep wishing for it, sooner or later it will happen and I’ll look prescient. But I actually don’t care about whether my predictions are correct, I just want an end to the horrible suffering for the people of Venezuela.

Here are the things I fear will happen in 2020.

A bubble bursts – I hope I’m wrong (and that may be the case since I’ve been fretting about it for a long time), but I fear that financial markets are being goosed by an easy-money policy from the Federal Reserve. Bubbles feel good when they’re expanding, but last decade should have taught us that they can be very painful when they pop.

A loss of economic liberty in Chile and/or Hong Kong – As shown by Economic Freedom of the World, there are not that many success stories in the world. But we can celebrate what’s happened in Hong Kong since WWII and what’s happened in Chile since the late 1970s. Economic liberty has dramatically boosted prosperity. Unfortunately, Hong Kong’s liberty is now being threatened from without and Chile’s liberty is now being threatened from within.

Repeal of the Illinois flat tax – The best approach for a state is to have no income tax, and a state flat tax is the second-best approach. Illinois is in that second category thanks to a long-standing provision of the state’s constitution. Needless to say, this irks the big spenders who control the Illinois government and they are asking voters this upcoming November to vote on whether to bust the flat tax and open the floodgates for an ever-growing fiscal burden. By the way, it’s quite likely that I’ll be including the Massachusetts flat tax on this list next year.

I’ll also add a special category for something that would be both good and bad.

Trump gets reelected – Because Trump is producing better tax policy and better regulatory policy, and because of my hopes for judges who believe in the Constitution’s protections of economic liberty, it would be good if he won a second term.

Trump gets reelected – Because Trump is producing worse spending policy and worse trade policy, and because of my concerns never-ending Keynesian monetary policy from the Federal Reserve, it would be bad if he won a second term.

Happy New Year, everyone.

Read Full Post »

Time for my annual column highlighting the “Best” and “Worst” policy developments of the year, a tradition I sort of started in 2012 and definitely did in 2013, 2014, 2015, 2016, 2017, and 2018.

I’m trying to be a glass-half-full kind of guy, so we’ll start with the best policy developments for 2019.

Boris Johnson’s landslide victory – I was in London for the recent U.K. election and was pleasantly surprised when Boris Johnson won a surprising landslide. That’s not a policy development, of course, but it’s first on my list because it presumably will lead to a genuine Brexit. And when the United Kingdom escapes the sinking ship of the dirigiste European Union, I have some hopes for pro-market policies.

TABOR wins in Colorado – Without question, the best fiscal system for a jurisdiction is a spending cap that fulfills my Golden Rule. Colorado’s constitution has such a policy, known as TABOR (the Taxpayer Bill of Rights). Pro-spending lobbies put an initiative on the ballot to eviscerate the provision, but voters wisely rejected the measure this past November by a nearly 10-point margin.

Macroeconomic strength – A strong economy also isn’t a policy, but it’s partially the result of good tax reforms and much-needed regulatory easing. This has pushed up the value of stocks (though I worry we may be experiencing a bubble), but I’m much happier that it’s led to a tight labor market and increased wages for lower-skilled workers.

Now let’s look at the worst developments of 2019.

An ever-increasing burden of government spending – The federal government is far too big, and it keeps growing in size. Entitlements are the main problem, but Trump added to the mess by capitulating to another budget deal that increases the burden of discretionary spending.

Missed opportunity on China trade – Because he foolishly focused on the bilateral trade deficit, Trump missed a great opportunity to pressure China to eliminate (or at least reduce) various cronyist policies that actually do distort and undermine trade.

Repeal of the Cadillac tax – I never imagined I would be in a position of stating that it was a mistake to repeal a tax increase, but the recent repeal of the tax on high-end health plans is such bad policy in terms of health care (contributing to third-party payer) that it more than offsets my long-standing desire to deprive Washington of revenue.

I’ll close by noting my most-read and least-read columns of the year.

We’ll start with the popular items.

  1. My most-read column from 2019 discussed a very impressive (and very understandable) example of tax avoidance from France.
  2. In second place was my piece that lauded a columnist for the New York Times who admitted gun control is foolish policy.
  3. Winning the bronze medal was my column from last week celebrating the dissolution of the Soviet Union.

By the way, my most-read article in 2019 was actually a quiz about political philosophy I shared back in 2015. Those must be popular items, because other quizzes (from 2014 and 2013) were actually the third-most and fourth-most popular columns for the year.

And here are the biggest duds.

  1. The column with the least clicks (perhaps because it was only posted a couple of days ago) revolved around the technical issues of economic sanctions, extraterritoriality, and the strength of the dollar.
  2. The second-worst-performing column was from late November and discussed the International Monetary Fund’s cheerleading for higher taxes in Japan.
  3. Next on the list is my discussion from a few days ago about how Washington imposes policies that encourage households to make short-sighted financial choices.

P.S. About 80 percent of readers are from the United States, and that’s been relatively constant over the years. But it’s been interesting (at least to me) to observe where other readers reside. In the very beginning, Canada provided the second-biggest group of readers, but then the United Kingdom took over for several years, only to be dethroned by Australia in 2017 and 2018. For 2019, though, the United Kingdom reclaimed second place, presumably because I kept writing about Brexit. If we go by readers as a share of the population, I’m actually most popular in small tax havens.

Read Full Post »

One of my big 2018 worries was that Trump would wreck NAFTA.

We dodged that bullet, but my two cents is that the new deal is underwhelming.

The bottom line is that his revisions to the pact – which is now called USMCA – create some new barriers to trade.

But there also are a few good parts of the deal.

And at least a source of economic uncertainty is now in the past. Indeed, that’s the real victory. There’s now presumably no risk that Trump will cause a meltdown of North American trade.

The Wall Street Journal‘s editorial hits the nail on the head.

Donald Trump is the most protectionist American President since Herbert Hoover, so one of our trade-policy goals of the last three years has been damage control. That’s the best case now for supporting Mr. Trump’s revisions to the North American Free Trade Agreement…  the new U.S.-Mexico-Canada trade deal puts to rest Mr. Trump’s threats to abandon the 1994 agreement and blow up continental trade. The new deal preserves most of the tariff-free trade in the original Nafta. …There’s particular political value in committing both Mexico’s President Andrés Manuel López Obrador, the left-wing economic nationalist known as AMLO, and Mr. Trump, the Republican mercantilist, to open trading rules for North America.

Sadly, the Trump Administration pushed for some European-style managed trade and regulatory harmonization.

The shame is that in many respects the new deal is worse than Nafta, especially its bows to politically managed trade. …This raises the cost of manufacturing, making North American products less competitive worldwide. Also reducing North American competitiveness is a new rule mandating that 40% of an auto qualifying for tariff-free trade in the region has to be produced by workers earning $16 an hour. Mandating wage rates ignores the relationship between productivity and output and sets a bad precedent for future trade deals. …The unions battered Mexico to allow a new enforcement process that will give American unions a new way to intrude in Mexican labor disputes. …North American auto production costs will also rise thanks to a new layer of protection for U.S. steel. The new deal mandates that 70% of steel used in North American vehicles must be made on the continent… Our concern now is that the deal’s concessions to politically managed trade will become the new baseline for future negotiations. …Senators will have to consider whether these bad precedents are worse than the benefit of saving most of the original Nafta.

I mentioned in the interview that the International Monetary Fund did an analysis of USMCA.

Here’s what the IMF set out to measure.

This paper uses a global, multisector, computable-general-equilibrium model to provide an analytical assessment of five key provisions of USMCA: (1) higher vehicle and auto parts regional value content requirement, (2) new labor value content requirement for vehicles, (3) stricter rules of origin for USMCA textile and apparel trade, (4) agricultural trade liberalization that increases U.S. access to Canadian supply-managed markets and reduces U.S. barriers on Canadian dairy, sugar and sugar products, and peanuts and peanut products, and (5) trade facilitation measures. In the context of successful ratification of USMCA, the paper also examines the effect of the removal of U.S. tariffs on steel and aluminum imports from Canada and Mexico and their reciprocal withdrawal of surtax countermeasures.

And what are the results?

Mostly nothing. There are  few good provisions and a few bad provisions, so the net result is trivial.

Indeed, it’s worth emphasizing that the the most unambiguously positive result will be the removal of Trump’s anti-growth taxes on imports of steel and aluminum.

At the aggregate level, effects of the USMCA are relatively small. According to the analysis of this paper, key provisions in USMCA would lead to diminished economic integration in North America, reducing trade among the three North American partners by more than US$4 billion (0.4 percent) while offering members a combined welfare gain of US$538 million. Effects of the USMCA on real GDP are negligible. …The results show that the tighter rules of origin in the auto sector and the labor value content requirement would not achieve their desired outcomes. The new rules lead to a decline in the production of vehicles and parts in all three North-American countries, with shifts toward greater sourcing of both vehicles and parts from outside of the region. …The three countries would gain much from ending the dispute triggered by the U.S. tariffs on steel and aluminum. USMCA scenario is extended to include the removal of U.S. steel and aluminum tariffs and a reciprocal elimination of Canadian and Mexican retaliatory import surtaxes. The extension would increase the welfare gain for the Canada, Mexico and the United States by $2.5 billion.

P.S. I mentioned an ideal free trade agreement in the interview. I also should have pointed out that unilateral free trade also is a good option. Assuming, of course, one understands the benefits of trade.

Read Full Post »

Because of Trump’s poor grasp of trade issues, I warned at the end of July that trade negotiations with China might yield “something gimmicky (like purchasing X tons of soybeans or importing Y number of cars).”

Well, Trump announced an agreement yesterday and I can pat myself of the back for being prescient.

The New York Times reports on the meager features of the purported deal.

President Trump said Friday that the United States had reached an interim deal with China… If completed, …Mr. Trump said the “substantial” agreement would involve China buying $40 billion to $50 billion worth of American agricultural products annually, along with guidelines on how it manages its currency, the renminbi. …The deal is far from the type of comprehensive agreement Mr. Trump has been pushing for, and it leaves some of the administration’s biggest concerns about China’s economic practices unresolved. …Mr. Trump’s defenders say China’s concessions will generate positive momentum for future talks… Mr. Trump and his advisers also did not mention any progress in areas that the American business community has identified as critical to its ability to compete with Chinese companies — including China’s subsidization of industries, the role of the government in the economy.

There are two things worth noting, one of them a minor point and the other a major point.

The minor point is that an agreement to buy $40-$50 billion of agricultural products is managed trade rather than free trade. Consumers in a competitive market should be determining how much is being purchased, not politicians.

The major point is that the Trump Administration has been following the wrong strategy. After nearly three years of bluster against China, we have a deal that is anemic at best. Just imagine, by contrast, where we would be if Trump had joined with our allies and used the World Trade Organization to go after China’s mercantilist policies. We’d be in much better shape today.

And with none of the collateral damage that Trump’s tariffs have caused for American farmers, exporters, consumers, manufacturers, and taxpayers!

To use a bit of economic jargon, failing to utilize the WTO is an “opportunity cost” – an approach that we overlooked and neglected because Trump preferred a trade war.

By the way, I realize that there are some people who viscerally oppose the WTO. I hope they can be persuaded to change their minds. But if that’s impossible, I want to point out that Trump’s approach is wrong even for those who advocate U.S. unilateralism.

There are things that the United States could do that specifically target China’s anti-market policies.

For instance, James Pethokoukis of the American Enterprise Institute, shares an exchange he had with Claude Barfield.

…there’s an alternative to the sweeping protectionism of the populists and progressives. …here is a podcast exchange from last April between AEI trade expert Claude Barfield and myself: Pethokoukis: As far as the enforcement mechanism, should the stick be tariffs? Should we be going after individual Chinese companies that we feel are breaking these rules, that are engaged in tech IP theft? What should be the punitive aspect? Barfield: In terms of intellectual property, if a Chinese company is found having participated in some sort of theft or — and here we have to be more vigilant in following this ourselves — using some technology or system that they’ve stolen, I would ban them from the US market. I would ban them and I would go after them in capital markets around the world. If the Chinese, for instance, continue to refuse to allow real competition and particular sectors are closed off for investment, I would ban the Chinese companies here and again, I would go after them in capital markets. In other words, I think it’s the investment side that is more productive and from the beginning has always been more productive, for me, than the tariffs.

And Derek Scissors, also from AEI, outlines additional options.

…there are many available actions which are more focused and, often, stronger than tariffs. But the Trump administration has neglected them… China’s centrally-controlled state-owned enterprises are very large and never allowed to fail due to commercial competition — the ultimate subsidy. It is thus impossible for the US to achieve balanced market access, much less free trade. …Chinese enterprises are not accidental recipients of protection from competition… These activities are orchestrated by the state. …The last step is what, exactly, to do. There are…many options.

Here’s the table he put together.

The bottom line is that there are plenty of tools available to specifically target anti-market interventionism (subsidies, cronyism, theft, etc) by China. Including options that are too onerous, or perhaps even not compliant with our WTO obligations.

Not that any of that matters. Trump wrongly thinks the bilateral trade deficit (i.e., investment surplus) with China is the problem. So we’ve wasted almost three years with a bad strategy, hurt the U.S. economy, and failed to get pro-market reforms in China.

P.S. If successful, the right approach (i.e., using the WTO or unilateralism to go after China’s anti-market policies) would produce benefits for America, and it would produce even greater benefits for China.

Read Full Post »

Older Posts »

%d bloggers like this: