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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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What’s worse, a politician who knowingly supports bad policy or a politician who actually thinks that bad policy is good policy?

I was very critical of the Bush Administration (I’m referring to George W. Bush, but the same analysis applies to George H.W. Bush) because there were many bad policies (education centralization, wasteful spending, TARP, etc) and the people in the White House knew they were bad policies.

For what it’s worth, I think it’s reprehensible when politicians knowingly hurt the country simply because they think there’s some temporary political benefit.

I’m also critical of many of Trump’s policies. But at least in the case of protectionism, he genuinely believes in what he’s doing.

But that doesn’t change the fact that protectionism is bad policy. Higher taxes on trade hurt prosperity, just like higher taxes on work, saving, investment, and other forms of economic activity are harmful.

And, according to the National Taxpayers Union, Trump’s various tax hikes on trade cumulatively represent a giant tax increase.

The Trump administration has imposed 25 percent taxes on $234.8 billion in imports from China under Section 301 of the Trade Act of 1974. This represents a nominal tax hike of as much as $58.7 billion — the third-largest in inflation-adjusted dollar terms since World War II ended. But things could soon get much worse. President Trump plans to impose a 5 percent tariff on imports from Mexico starting on June 10, possibly increasing to 25 percent by October 1. He is also considering adding a 25 percent tariff to an additional $300 billion in imports from China. Tariffs on washing machines, solar goods, steel, and aluminum add billions of dollars more to the burden on U.S. taxpayers. If the Trump administration follows through on all its tariff threats, the combined result will be far and away the largest tax increase in the post-war era in real dollar terms. …tax increases of this scale threaten to undermine the economic expansion that has driven unemployment down to levels not seen since 1969.

Here’s a chart from the NTU report. They have two ways of measuring Trump’s trade taxes. In either case, the transfer of money from taxpayers to politicians is bigger than any previous tax hikes.

The National Bureau of Economic Research also has some estimates of how Trump’s protectionism has undermined the U.S. economy.

Two new NBER working papers analyze how this “trade war” has affected U.S. households and firms. The recent tariffs, which represent the most comprehensive protectionist U.S. trade policy since the 1930 Smoot-Hawley Act and 1971 tariff actions, ranged from 10 to 50 percent on about $300 billion of U.S. imports — about 13 percent of the total. Other countries responded with similar tariffs on about $100 billion worth of U.S. exports. In The Impact of the 2018 Trade War on U.S. Prices and Welfare (NBER Working Paper No. 25672), Mary Amiti, Stephen J. Redding, and David Weinstein find that the costs of the new tariff structure were largely passed through as increases in U.S. prices, affecting domestic consumers and producers who buy imported goods rather than foreign exporters. The researchers estimate that the tariffs reduced real incomes by about $1.4 billion per month. …Pablo D. Fajgelbaum, Pinelopi K. Goldberg, Patrick J. Kennedy, and Amit K. Khandelwal adopt a different methodological approach to address the welfare effect of recent tariffs. They also find complete pass-through of U.S. tariffs to import prices. In The Return to Protectionism (NBER Working Paper No. 25638), they estimate that the new tariff regime reduced U.S. imports by 32 percent, and that retaliatory tariffs from other countries resulted in an 11 percent decline of U.S. exports. … They estimate that higher prices facing U.S. consumers and firms who purchased imported goods generated a welfare loss of $68.8 billion, which was substantially offset by the income gains to U.S. producers who were able to charge higher prices ($61 billion). The researchers estimate the resulting real income decline at about $7.8 billion per year.

Here’s one of the charts from NBER.

That is not a pretty picture.

Especially since Trump is using the damage he’s causing as an excuse to adopt additional bad policies.

Here’s some of what George Will recently wrote for the Washington Post.

The cascading effects of U.S. protectionism on U.S. producers and consumers constitute an ongoing tutorial about…“iatrogenic government.” In medicine, an iatrogenic ailment is one inadvertently caused by a physician or medicine. Iatrogenic government — except the damage it is doing is not inadvertent — was on display last week. The Trump administration unveiled a plan to disburse $16 billion to farmers as balm for wounds — predictable and predicted — from the retaliation of other nations, especially China, against U.S. exports in response to the administration’s tariffs. …The evident sincerity of his frequently reiterated belief that exporters to the United States pay the tariffs that U.S. importers and consumers pay is more alarming than mere meretriciousness would be. …So, taxpayers who are paying more for imported goods covered by the administration’s tariffs (which are taxes Americans pay) are also paying to compensate some other Americans for injuries inflicted on them in response to the tariffs that are injuring the taxpayers. …Protectionism is yet another example of government being the disease for which it pretends to be the cure.

A tragic example of Mitchell’s Law in action.

The trade issue is also another example of hypocrisy in action.

Back in 2016, I applauded the IMF for criticizing Trump’s protectionist trade taxes, but simultaneously asked why the bureaucrats weren’t also criticizing Hillary Clinton’s proposed tax increases on work, saving, and investment.

Now I spend a lot of time wondering why Republicans, who claim to be on the side of taxpayers, somehow forget about their anti-tax principles when Trump is unilaterally imposing higher taxes on American consumers and producers.

What’s ironic about this mess is that Trump very well may be sabotaging his own reelection campaign. As he imposes more and more taxes on trade (and as foreign governments then impose retaliation), the cumulative economic damage may be enough to completely offset the benefits of his tax reform plan.

If he winds up losing in 2020, I wonder if “Tariff Man” will have second thoughts about the wisdom of protectionism?

Since he’s a true believer in trade barriers, he may think it was worth it. I doubt other Republicans in Washington will have the same perspective.

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I periodically deal with people who generally sympathize with capitalism but nonetheless are supportive of protectionism.

In part, they incorrectly think that a “trade deficit” is a problem that must be fixed.

In other cases, they don’t understand the economic downsides of protectionism.

As I discuss the issue with them, I sometimes do a history quiz. I ask them a series of questions.

  • Why did the Union impose a blockade against the Confederacy during the Civil War?
  • Why did the British impose a blockade against the French during the Napoleonic War?
  • Why did the United States impose a blockade against Cuba during the Cold War?

In every case, the answer is the same. The blockade was imposed to weaken a country by denying it the benefit of trade. Simply stated, a nation will be poorer if it can’t take advantage of the fact that it makes more sense to import certain items.

I’ve never seen a meme that effectively captures the above principle, but Professor Don Boudreaux shared this image earlier today.

Given Trump’s promiscuous imposition of tariffs, it’s certainly timely.

And it does capture the essence of Trump’s trade policy.

Yes, he’s hurting Mexico, China, and other nations that are being hit with tariffs.

But the United States is the main victim. Tariffs are taxes on Americans who want to buy foreign goods and services. Tariffs are taxes that create inefficiencies in the American economy. Tariffs are taxes that create special advantages of cronyists at the expense of fair competition.

P.S. The little girl in the picture also is the star of a meme about Keynesian economics.

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I shared a video last year that pointed out that Americans live in a nation that became prosperous thanks to “creative destruction.”

That’s the term developed by Joseph Schumpeter to describe the economic churning caused by competition, innovation, and markets (international trade is just a minor part of this process, though it’s the part that generates the most controversy).

The bad news is that some people lose their jobs as the economy evolves and changes. And some companies go bankrupt. There are real victims and tragic stories.

But the good news is that other jobs are created. And entrepreneurs start new businesses.

And the better news is that our living standards increase. Especially over time. Even for many of those who lost jobs in the short run.

That’s why we’re much richer, on average, than our parents and grandparents.

Needless to say, a key measure of a healthy and dynamic economy is for the job gains to exceed the job losses.

So when I spoke to congressional staff earlier this week about trade and protectionism, I figured I should go beyond theory and include some numbers.

I went to the relevant website at the Bureau of Labor Statistics and found that more than 28 million jobs were lost in 2017 (final data for 2018 is still not available).

That sounds terrible. And for many workers, it was horrible news.

But the good news, as you can see in the screenshot below (click to expand), is that the U.S. economy created more than 30 million new jobs that year.

The obvious takeaway from this data is that the crowd in Washington should adopt policies that ensure we have strong growth so that people who lose jobs have lots of good options for new employment.

In other words, don’t impose the kind of policies that have created high unemployment and economic stagnation in many European welfare states.

For what it’s worth, that message seems to be lost on Bernie Sanders, who has a long list of policies that would turn America into a version of GreeceFrance, and Italy.

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When I want to feel optimistic about China, I look at data from Economic Freedom of the World to confirm that there was a lot of economic liberalization (triggered in part by some civil disobedience) between 1980 and the early 2000s.

Then I look at how that period of capitalist reform dramatically improved living standards and reduced poverty.

But I also look at the same data if I want to feel pessimistic about China. That’s because there hasn’t been any additional liberalization in the past 15 years. China is basically treading water, and that means it is actually losing ground as other nations reform.

Indeed, it is now ranked #107 after being ranked as high as #87.

Which is why I’ve arguedrepeatedly – that China needs a new period of free-market reform.

And that includes adopting better trade policy.

Which raises an interesting question: Is Trump’s saber rattling on China trade helping or hurting?

Here’s some of what I wrote for Inside Sources on this issue.

President Donald Trump has launched a new attack in his trade war with China… Is it possible…that his bluster will produce a good long-run deal to offset short-run costs? Let’s hope so, but it’s unclear…we all have a stake in the outcome of these trade negotiations. So here are five things to understand as discussions continue.

Starting with two reasons why there’s a trade deficit and why it doesn’t matter.

First:

Americans are much richer than their counterparts in China. …per-capita economic output in the United States is six times larger than it is in China ($60,000 compared to $10,000). This means Americans can afford to buy a lot more, including more goods and services from around the world. As such, a bilateral trade deficit with China is neither surprising nor worrisome.

And second:

The United States enjoys a far higher level of economic freedom than China. …the United States is ranked No. 6 while China is a lowly No. 107. This helps to explain why Chinese entrepreneurs who earn dollars by selling to American consumers often decide to invest those dollars in the American economy (the United States is the world’s top destination for global investment). This means the trade deficit is matched by a capital surplus.

I then explain China is guilty of protectionism and it would be good for both nations if these barriers were eliminated.

China has more protectionist barriers than America. …average Chinese tariffs are nearly three times higher than America tariffs. And China is also guiltier of using subsidies to help domestic companies. …people of both nations are the main victims of these bad policies, but it would be good for all of us if those trade barriers were reduced.

But what’s the best approach to encourage better policy from China?

I don’t think Trump’s unilateral protectionism will be successful.

Bullying and tit-for-tax retaliation is not an effective strategy. …tariffs hurt China, but they also hurt the United States by raising the price of consumer and intermediate goods. Taxes on Chinese goods also reduce incentives for America companies to become more efficient and better producers. Perhaps most important, there is little reason to think these taxes will have the desired effect of altering Chinese behavior.

I’d be much more hopeful if Trump used the World Trade Organization to push for good policy.

The WTO is an underused tool for trade liberalization. It has a dispute resolution process that has been successfully used to cajole and pressure nations into reducing trade barrier. The president has publicly criticized the WTO, but he probably doesn’t realize that the United States wins about nine out of every 10 cases when it challenges other nations’ trade barriers. …many other nations would have supported the United States if we had used the WTO as a vehicle to achieve more liberalization.

The bottom line, for what it’s worth, is that I’m not terribly hopeful.

It’s not too late for the president to select that strategy, of course, but that won’t be likely as long as he mistakenly sees trade as a zero-sum proposition.

Let’s close by looking at relevant excerpts from three other articles.

First, a columnist for National Review explains how cronyism infects the Chinese economy.

…just because China has many private companies, allows Communist-Party member Jack Ma to become a billionaire as head of Alibaba Group, and translates capitalist classics into Mandarin doesn’t mean it’s capitalist. The fact that few describe the Chinese economic system without putting a modifier in front of the term “capitalism” — “authoritarian,” “state,” “predatory,” “Communist,” etc. — should tell us something. …China has more than 150,000 state-owned enterprises, accounting for 40 percent of industrial assets. However, Chinese state capitalism is not just, or even principally, about the number and size of such enterprises; it’s about the central role the Chinese Communist Party (CCP) plays in virtually all aspects of economic life. …Chinese state capitalism is a system in which the purpose of firms — private and public — is to fulfill the goals of the Communist Party. …capitalism is…a system in which…property owners have considerable…freedom to pursue their goals without influence from the state. By this standard, China’s is far from a capitalist economy.

Second, here are some excerpts from an Atlantic column about why it is difficult to alter China’s misguided approach.

…the trade dispute is about far more than tariffs and deficits. It is a contest of two very different national ideologies. Though the Trump administration has deviated from this somewhat, the United States believes that openness—political, economic, and social—creates prosperity, resolves disagreements within society, and promotes the diversity that spawns innovation and progress. China—or, more accurately, its leadership—sees government control as critical to developing the economy, achieving social peace, and forwarding the best interests of the nation overall. Americans tend to think open, free markets that are operating in a fair regulatory environment produce the best economic results. Beijing, on the other hand, doesn’t trust market forces and instead wants the state to play a more direct role in achieving the economic outcomes it determines are necessary for the country. …As a result, what Trump is demanding is extremely difficult to achieve: a “level playing field” for American firms. In fact, nothing of the sort actually exists in China, even for Chinese companies. The state has a nasty tendency to favor its own, with government-controlled businesses enjoying a smorgasbord of official assistance, including tax credits, low-interest loans from state banks, and other subsidies that give them an undue edge in local competition. That leaves private Chinese companies and entrepreneurs often facing the same kinds of hurdles to doing business that foreign ones face.

Third, Professor Deirdre McCloskey has a more optimistic assessment, arguing that it is foolish for the U.S. government to fixate on China’s distortionary policies.

The White House is pursuing two stupid policies, trying to reduce the United States’ “balance of payments” with China and trying to protect “intellectual property” from China’s thievery. These policies are leading to a crash in the Chinese economy, which has been grossly ill-managed under President Xi Jinping. …when did you last feel the U.S. balance of trade? You feel only the idiotic policies advocated in reaction to it by Peter Navarro, a White House economist who never learned economics. (His Ph.D. is from Harvard. I’m thinking of turning mine back in.) It would be better if the government did not calculate and announce the balance of payments at all. It’s meaningless and an occasion for sin. What about China stealing intellectual property? Intellectual property sounds nice. …Patents and copyrights make things that are free in nature artificially scarce in order to cream off profit for the influentials. They are comparable to hack medallions, recently threatened by monopoly breakers Uber and Lyft. …Economists would be satisfied with a rough-and-ready rule of, say, a 10-year monopoly. But asserting an expansive right to intellectual property, which Congress then regularly extends in order to preserve the privileges of drug companies and the Walt Disney Corporation, is no solution.

I’ll add one final point.

We should support Chinese economic reform because it is good for the United States and good for China.

Here’s a chart showing 2017 World Bank data and 2019 IMF data on per-capita economic output in both nations.

In other words, notwithstanding all the growth China has enjoyed, it is still well behind the United States.

That’s the price the country is paying for insufficient reform.

Beijing should copy Hong Kong and Singapore if it wants to converge with America.

P.S. The last thing China should do is listen to the OECD or IMF.

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