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Archive for the ‘Trade’ Category

At the risk of understatement, I’ve been rather critical of Trump’s protectionism.

But not always. Last year, I praised him for floating the idea of zero taxes on trade between nations (even if I didn’t think he was serious).

And I point out in this interview that he is right about protectionism hurting financial markets.

Just in case you don’t believe me, here’s what Trump actually said, as reported by Business Insider.

President Donald Trump said Wednesday that the Dow Jones Industrial Average would be thousands of points higher if it weren’t for the trade war with China, which he started last year in an attempt to address trade practices that officials said put the US at a disadvantage. “Let me tell you, if I wanted to do nothing with China, my stock market, our stock market, would be 10,000 points higher than it is right now,” Trump told reporters at the White House. “But somebody had to do this. To me, this is much more important than the economy … It was out of control. They were out of control.”

Incidentally, what Trump is saying at the end of the excerpt could be true. There are times when growth should be a secondary concern.

To take an obvious example, it’s perfectly reasonable to have laws prohibiting companies from selling advanced military technology to potentially hostile governments.

My concern is that the president is too fixated on China’s largely irrelevant bilateral trade deficit. After all, that’s simply the flip side of America’s enormous investment surplus with China.

Instead, Trump should be pressuring Beijing to get rid of subsidies, cronyism, and other mercantilist policies (ideally by using the WTO).

Such reforms would help American companies since they would be competing on more of a level playing field.

And China’s economy would benefit even more since there would be less government intervention.

In other words, there’s a potential win-win conclusion to this trade war. But I’m not overly confident that President Trump or President Xi have the right goal in mind.

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Earlier this year, I identified Trump’s “worst ever tweet.”

I was wrong. That tweet, which displayed an astounding level of economic ignorance, is now old news.

Trump issued a tweet yesterday that is far worse because it combines bad economic theory with horrifying support for massive economic intervention. Pay special attention to the part circled in red.

Huh?!?

Since when does the President get to dictate where companies can do business?

Unfortunately, whenever he wants to.

Congress has delegated to the President massive “emergency” powers over the economy. Specifically, the International Emergency Economic Powers Act (IEEPA) is a blank check.

Here are some excerpts from a report by the Congressional Research Service.

By the twentieth century, …Congress created statutory bases permitting the President to declare a state of emergency and make use of extraordinary delegated powers. …The International Emergency Economic Powers Act (IEEPA) is one such example of a twentieth-century delegation of emergency authority. …IEEPA grants the President extensive power to regulate a variety of economic transactions during a state of emergency. …Since 1977, Presidents have invoked IEEPA in 54 declarations of national emergency. On average, these emergencies last nearly a decade. Most emergencies have been geographically specific, targeting a specific country or government. …No President has used IEEPA to place tariffs on imported products from a specific country or on products imported to the United States in general. However, …such an action could happen. In addition, no President has used IEEPA to enact a policy that was primarily domestic in effect. Some scholars argue, however, that the interconnectedness of the global economy means it would probably be permissible to use IEEPA to take an action that was primarily domestic in effect. …Neither the NEA nor IEEPA define what constitutes a “national emergency.” …While IEEPA nominally applies only to foreign transactions, the breadth of the phrase, “any interest of any foreign country or a national thereof” has left a great deal of room for executive discretion.

You can click here for the actual legislative language of IEEPA.

You’ll see that the President has the power, for all intents and purposes, to severely disrupt or even block financial transactions between people and/or companies in the United States and people and/or companies in a designated foreign country.

And there’s no limit on the definition of “emergency.”

One could argue that an emergency declaration and a ban on the movement of money wouldn’t necessarily prohibit a company from doing business in a particular jurisdiction, but it surely would have that effect.

The economic consequences would be profound. In a negative way.

By the way, the White House Bureau Chief for the Washington Post responded to Trump’s tweet with one of his own.

He says the President, who criticizes socialism, is acting like a socialist.

He’s actually wrong, at least technically.

Socialism is government ownership and control of the means of production.

What Trump is seeking is private ownership and government control. And there’s a different word for that economic policy.

P.S. It’s a good idea for the U.S. government to have powers to respond to a genuine emergency. But it shouldn’t be the decision of one person in our separation-of-powers system. It was a bad idea when Obama was in the White House, and it’s a bad idea with Trump in the White House.

In peacetime, an emergency should require the approval of Congress. In wartime, it should require approval of the House and Senate leadership from both parties.

P.P.S. Trade laws are another example of Congress delegating too much power to the executive branch.

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I wrote two days ago about how the White House is contemplating ideas to boost the economy.

This is somewhat worrisome since “stimulus” plans oftentimes are based on Keynesian economics, which has a terrible track record. But there are policies that could help growth and I comment on some of them in this interview.

The discussion jumped from one idea to the next, so let’s makes sense of the various proposals by ranking them from best to worst.

And I’m including a few ideas that are part of the discussion in Washington, but weren’t mentioned in the interview.

  1. Eliminate Trade Taxes – Trump’s various trade taxes have made America’s economy less efficient and less productive. And, as I explained in the interview, the president has unilateral power to undo his destructive protectionist policies.
  2. Index Capital Gains – The moral argument for using regulatory authority to index capital gains for inflation is just as strong as the economic argument, as far as I’m concerned. Potential legal challenges could create uncertainly and thus mute the beneficial impact.
  3. Lower Payroll Tax Rates – While it’s always a good idea to lower the marginal tax rate on work, politicians are only considering a temporary reduction, which would greatly reduce any potential benefits.
  4. Do Nothing – As of today, based on Trump’s statements, this may be the most likely option. And since “doing something” in Washington often means more power for government, there’s a strong argument for “doing nothing.”
  5. Infrastructure – This wasn’t mentioned in the interview, but I worry that Trump will join with Democrats (and some pork-oriented Republicans) to enact a boondoggle package of transportation spending.
  6. Easy Money from the Fed – Trump is browbeating the Federal Reserve in hopes that the central bank will use its powers to artificially reduce interest rates. The president apparently thinks Keynesian monetary policy will goose the economy. In reality, intervention by the Fed usually is the cause of economic instability.

In my ideal world, I would have included spending cuts. But I limited myself to ideas that with a greater-than-zero chance of getting implemented.

I’ll close with some observations on the state of the economy.

Economists have a terrible track record of predicting twists and turns in the economy. This is why I don’t make predictions and instead focus on analyzing how various policies will affect potential long-run growth.

That being said, it’s generally safe to assume that downturns are caused by bad economic policy, especially the Federal Reserve’s boom-bust monetary policy.

Ironically, some people then blame capitalism for the damage caused by government intervention (the Great Depression, the Financial Crisis, etc).

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I’m worried. There’s a lot of talk in Washington about Trump trying to goose the economy with either Keynesian monetary policy or Keynesian fiscal policy.

It would be much better, as I discuss in this interview with Yahoo Finance, if Trump instead declared a ceasefire in the trade wars he’s started.

The interview largely revolved around trade policy and monetary policy, so I was mostly critical of Trump.

But I want to focus on the point I made midway through the discussion, when I said that Trump is undermining and offsetting some of his Administration’s good policies – most notably tax reform and regulatory easing.

As an economist, I’m frustrated by this inconsistency. It’s akin to a watching a kid get good grades in some classes and bad grades in others (and I worry his GPA is declining).

Though I suppose I shouldn’t be surprised. This is what the theory of “public choice” tells us to expect.

I can only imagine, though, how frustrating this must be for Republican political operatives. They’re focused on winning in 2020 and the President is sabotaging that goal with bad trade policy.

P.S. Toward the end of the interview, I pointed out that Trump should have gone through the World Trade Organization in his effort to curtail China’s protectionism. When the history of the Trump presidency is written, I suspect this will be viewed as a major mistake.

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In this interview with Fox Business, I make my usual points (trade barriers are misguided, China is protectionist, Trump’s not responding wisely, etc).

For today’s column, though, I want to discuss who actually bears the burden of Trump’s trade taxes.

All of us (including the host) pointed out that consumers will pay more. To be sure, the tax technically is paid by importers as goods enter the country, but there’s near-universal agreement that the cost is largely passed along.

But keep in mind that American consumers are not the only victims. As I pointed out last year, as well as earlier this year, there’s lots of secondary damage. Taxpayers, workers, retailers, exporters, manufacturers, and investors in the United States also suffer.

And in other nations as well.

From an economic perspective, the key thing to understand is that there are direct costs and indirect costs. The importer bears the direct costs of the trade tax (i.e., they’re the folks who actually send money to the government).

The rest of us bear the indirect costs because the economy is less efficient and productive.

  • As consumers, we pay more.
  • As workers, we get paid less.
  • As investors, we earn lower returns.

There also are added costs on specific trade-dependent sectors (agriculture, for instance), as well as future victims since protectionism by the U.S. triggers protectionism by other nations.

And this doesn’t even consider the potential harm of currency devaluations. Geesh, no wonder financial markets are spooked.

The bottom line is that Trump is playing with fire. I’ve been happy to give him credit for his good policies (tax plan, regulatory easing), but what he’s doing on trade is definitely doing a lot of damage (exacerbated by the reckless spending).

To be sure, China also is suffering. But hurting ourselves to hurt China is not a smart strategy.

P.S. Taxes on trade are like taxes on business. In the former case, politicians say they’re imposing taxes on other countries, but people (consumers, workers, investors) are the victims. In the latter case, politicians say they’re imposing taxes on corporations, but people (consumers, workers, investors) are the victims.

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As I explained last year, Trump is right and wrong about China and trade. He’s correct that China doesn’t play fair, but he mistakenly fixates on the trade deficit rather than going after China’s subsidies and cronyism.

And, as I note in this brief interview from yesterday, he’s making a mistake by not using the World Trade Organization to curtail China’s anti-market policies.

For further information, I wrote a column about the five things everyone should understand about the US-China trade squabble.

But I also think there are two points from the interview that deserve elaboration.

  • First, I should not have said the WTO was a “threat” to China. Yes, the Geneva-based organization almost surely would rule against many of China’s policies, but getting rid of subsidies and cronyism would be very beneficial for the Chinese economy. In other words, China would enjoy more growth and prosperity if it had to fix its bad policies in response to adverse WTO rulings. And, of course, the United States and other countries also would benefit as well.
  • Second, I want to explain what I meant in my closing point about whether China could “trick Trump.” The best outcome of negotiations is genuine free trade between the US and China, with no subsidies and cronyism to tilt the playing field. But since Trump wrongly fixates on trade balances, I worry that China might seek to preserve its bad policies and instead mollify the president by agreeing to something gimmicky (like purchasing X tons of soybeans or importing Y number of cars).

I’ll close by addressing a common complaint that the WTO would not be an effective vehicle for liberalization.

Given how trade taxes have dropped since the WTO was created, I think this is a very bizarre assertion.

Unlike other international organizations, which have dismal track records, the WTO has actually helped increase economic freedom around the world.

And that’s good news for America. And the rest of the world as well.

The WTO also is willing to stand up to China when it’s wrong. Here are some excerpts from a recent report by Reuters.

China has halted a dispute at the World Trade Organization over its claim to be a market economy, a panel of three WTO adjudicators said on Monday… One trade official close to the case said so much of the ruling had gone against Beijing that it had opted to pull the plug before the result became official. “They lost so much that they didn’t even want the world to see the panel’s reasoning,” the official said. …China had insisted that they treat it as a “market economy”, countering their view that the price of Chinese exports could not be taken at face value due to state interference in the economy. …the United States and the EU…said Chinese goods — especially commodities such as steel and aluminum — were still heavily underpriced because of subsidies and state-backed oversupply.

Last but not least, here’s a chart from the Peterson Institute showing how the United States has been the most active participant in the WTO’s process for dispute resolution.

The bottom line is that both China and the United States will benefit if there’s more economic freedom and less government intervention.

But Trump doesn’t understand trade and China’s leaders don’t want to give up their grip on the allocation of capital. So I’m not holding my breath waiting for a good outcome.

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For my annual Independence Day columns, I sometimes try to make serious points, such as last year when I shared the very wise words of Calvin Coolidge, who is probably America’s most-underappreciated president.

Or when I wrote about the proper meaning of patriotism, as I did in 2010 and 2014.

Other years, I celebrate July 4 with some humor, such as my sarcastic Declaration of Dependency in 2011.

Or some cartoons about Obamacare vs. American principles the following year.

For 2019, let’s mix seriousness and satire.

We’ll start with the former. John Stossel’s column for Reason explains what Americans should be celebrating.

We have reason to celebrate. The Fourth honors the founding of America. It’s the anniversary of the day in 1776 that the Declaration of Independence was approved. The Declaration was important. It didn’t say that America would be the best country because it would have the biggest military, toughest leaders, most government giveaways, or tightest borders. The great innovation that day in Philadelphia was the declaration that the United States would have a limited government, rooted in the idea that every individual has inalienable rights. …It was America’s emphasis on limited government—wanting to make sure no one in government would ever again wield power like that of the British king—that made our revolution the greatest and most lasting success of recent centuries. …France created revolutionary committees that murdered dissenters. Russia replaced its czar with a communist police state that confiscated farms, killing millions. …America happened—and continues to happen—spontaneously, when its leaders are smart enough to just stay out of our way. America will do best if we remember that the Declaration of Independence talks about limited government and reminds us that every individual has inalienable rights.

Amen.

Reminds me of what Reagan said.

One of the key takeaways is that American ideals are inspiring, but government policies often leave much to be desired.

Harry Stewart, one of the famed Tuskegee Airmen, has a great essay in the Wall Street Journal on patriotism even when your government is flawed.

On June 27, 1944, I graduated from Tuskegee Army Flying School, established in Alabama shortly before America’s entry into World War II to train young African-American men as Army combat pilots. …The train ride down South was eye-opening for a teenager who’d never traveled far from New York. When the train crossed the Mason-Dixon Line, the conductor came by and pointed at me: “Move to the colored car.” It was disconcerting, but I saw it as an unavoidable hurdle to earning my wings. I swallowed hard and kept going. …You weren’t just learning to fly; you were serving your country, and you were going to fight. …I flew 43 combat missions with the 332nd Fighter Group… Our commander was the legendary Benjamin O. Davis Jr., who had endured four years of the silent treatment from white cadets at West Point but nevertheless managed to graduate 35th out of a class of 276. …His convictions were encapsulated in his statement: “The privileges of being an American belong to those brave enough to fight for them.” …I am proud that I contributed to the cause. We called it winning the Double V, victory against totalitarianism abroad and institutional racism at home. July 4 is my birthday, but I celebrate my country’s birthday too. America was not perfect in the 1940s and is not perfect today, yet I fought for it then and would do so again.

There’s a lesson in those words for Colin Kaepernick.

Now let’s enjoy some satire, though combined with a serious message.

Bryan Riley of the National Taxpayers Union has a July 4th-themed column on Trump’s destructive trade taxes.

…the next round of tariffs symbolizes just how un-American this trade war has become. …on $300 billion in imports, would include tariffs on tea and fireworks. They might as well be considering a tax on bald eagles. …the 1773 Boston Tea Party was a response to England’s 3 pence per pound tariff on tea imported from China. As President John F. Kennedy observed, “When the people of Boston in 1773 threw cargoes of tea into the harbor, the American Revolution was in effect under way, symbolized by this revolution against a tariff–a tariff which meant taxation without representation.” …As we celebrate our country’s 243rd birthday, let’s also celebrate the American patriots who are following in the footsteps of our country’s founders by opposing costly new tariffs. …As we celebrate our country’s 243rd birthday, let’s also celebrate the American patriots who are following in the footsteps of our country’s founders by opposing costly new tariffs.

Reminds me of the clever AAF visual on how government makes it more expensive to celebrate today.

Last but not least, here’s an alien learning about the long-term consequences of America’s fight for independence, which began as a tax revolt.

Taxation without representation wasn’t very appealing, but the cartoon makes a very good point about the downside of taxation with representation.

Which is a good opportunity to remind everyone why America’s Founders were wise to create a republic rather than a majoritarian democracy.

Too bad the Supreme Court, most recently with Obamacare, has failed in its job to protect economic liberty.

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