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I’m for free trade because I want more jobs and more prosperity for the United States.

Indeed, I’ve argued we should copy that incredible economic success of Hong Kong and Singapore by unilaterally eliminating all trade barriers.

But some people complain this is akin to disarmament in a hostile world. I reject that analogy. If my neighbor shoots himself in the foot, I’ve never thought I should “level the playing field” by also shooting my foot.

That being said, we all should agree that the ideal scenario is for nations to adopt free trade agreements in order the maximize the economic benefits for all consumers and businesses.

And the good news is that nations have been building on the multilateral success of the WTO by also adopting free trade agreements.

The United States, for instance, has 14 FTAs that govern trade with 20 nations, most notably NAFTA. And while I grouse about some of the E.U.’s statist tendencies, there is genuine free trade among member nations.

But there is some bad news. Politicians and bureaucrats are slowly but surely hijacking FTAs and undermining their pro-growth impact with red tape.

It’s become so much of a problem that some free traders are questioning whether the current approach is worthwhile. For example, Iain Murray of the Competitive Enterprise Institute explains why he isn’t losing any sleep about America backing out of the Trans-Pacific Partnership.

The Trans-Pacific Partnership is an example of why free trade came to have such a bad reputation with the American public. Rather than a simple agreement to lower tariffs for mutual benefit, it morphed into a massive international regulatory regime over 5,000 pages long. It was weighed down by numerous non-trade provisions aimed at appeasing non-trade special interests. …the TPP went down the road of regulatory harmonization.

He makes sure to point out that the TPP may still have been worthwhile when using cost-benefit analysis.

This is not to say that…the TPP’s tariff reductions would not have outweighed the regulatory burden.

But he argues that a much better approach is FTAs based on regulatory competition.

…there is an alternative to 5,000 pages of regulatory harmonization. …regulatory competition may be a better solution than harmonization… Regulatory competition works best by mutual recognition. For instance, Australia and New Zealand have formed a single economic market based around the Trans-Tasman Mutual Recognition Agreement, whereby…Goods legally sold in one country can be sold in the other.  This principle operates regardless of different standards, or other sale-related regulatory requirements between New Zealand and Australia. …Such an agreement would probably work very well between the U.S. and Canada – and, indeed, between the U.S. and both Australia and New Zealand in the Trans-Pacific context. …Australia, New Zealand, Canada, Chile, Singapore, and Hong Kong…A series of mutual recognition agreements with these former TPP countries would effectively form the nucleus of a Global Free Trade Association.

I would add the United Kingdom to Iain’s list (assuming it manages to extricate itself from the European Union).

Indeed, just yesterday I submitted a comment to the United States Trade Representative on a proposed FTA between the U.S. and the U.K.

Here’s some of that analysis.

A trade agreement between the United States and United Kingdom would be a chance to increase prosperity in both nations by eliminating all forms of trade barriers… It’s also an opportunity to refocus trade agreements in ways that recognize sovereignty and promote pro-market policies. More specifically, a free trade pact between the U.S. and U.K. would offer a much-needed opportunity to discard the clutter of exceptions, long phase out periods, and non-trade issues, which has characterized recent agreements, and instead go with a cleaner approach that would allow the simplicity of unfettered commerce. The ideal trade pact should seek to make trade between the U.S. and the U.K. as simple as trade between New York and Pennsylvania. That type of trade agreement doesn’t need to be cumbersome and doesn’t require a detailed thousand-page document.

I give my two cents on the benefits of mutual recognition and the value of reorienting FTAs in a pro-market direction.

…such a pact should be based on the principle of “mutual recognition,” which means that nations can have their own laws governing economic activity inside their borders, but they recognize that other nations have the same right. Most important, they also agree that there should be no restriction on the ability of consumers to buy from producers in the other nation(s). …Under such a regime, a company in the U.S. wouldn’t have to produce separate products for U.K. customers since there would be no policy restricting a consumer in, say, London, from buying a product made in, say, Cleveland. …A pact for free and open trade between the U.S. and U.K. could become a new role model for agreements between industrialized, high-income nations. If based on mutual recognition, such a free trade agreement should reverse the unfortunate trend of deals getting saddled with extraneous and/or harmful provisions.

And explain that FTAs based on mutual recognition produce an added benefit.

This approach respects national sovereignty and also would have the added benefit of encouraging policy competition between nations. If either the U.S. or the U.K. was over-regulating in a certain sector, it would mean a loss of sales to the other country, which surely would create pressure for regulatory relief. Very similar to the way tax competition puts pressure on governments today not to impose excessive tax rates.

By the way, we also shouldn’t have regulatory harmonization since that increases systemic fragility.

In other words, it’s not a good idea to put all your eggs in one basket.

Let’s close with a picture that powerfully captures what’s wrong with the current approach to free trade agreements. Does anybody think the new Singapore-E.U. pact is really about unfettered commerce?

Looks to me like it’s really about politicians and bureaucrats micro-managing economic activity.

My FTA would fit on one page, or a scrap of one page: “There shall be no restrictions on commerce between Country A and Country B.”

Sort of like my version of a tax system compared to the mess we have now.

P.S. It goes without saying, but I’ll say it anyhow, that Switzerland should be high on the list for a pro-market FTA with the United States.

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Time for the final installment in my four-part video series on trade-related topics.

  • Part I focused on the irrelevance of trade balances.
  • Part II looked at specialization and comparative advantage.
  • Part III explained trade and creative destruction.

Here’s Part IV, which looks at the very positive role of the World Trade Organization.

My basic argument is that it is a good idea to get other nations to reduce trade barriers, but tit-for-tat protectionism is not the right approach.

As I explained when writing about Chinese mercantilism, the U.S. would have far more success by using the WTO.

Let’s look at what experts have said.

Writing for the Wall Street Journal, Greg Rushford explained why the WTO is good for the United States.

President Harry S. Truman and Secretary of State George Marshall successfully pressed America’s war allies to create the General Agreement on Tariffs and Trade more than 70 years ago. Leaders across the globe, mindful of how economic nationalism in the 1930s had contributed to the devastation of World War II, wanted to open the world up again. The agreement focused on slashing of tariffs and other barriers to trade—bringing unprecedented prosperity to hundreds of millions of people. The GATT, which evolved into the World Trade Organization in 1995, became the world’s most successful international economic experiment. …Despite Mr. Trump’s assertion that the WTO has been “a disaster” for the U.S., Washington has won 85% of the 117 WTO cases it has brought against foreign trading partners. Japan complained in 2003 that WTO jurists had stretched the law by determining that Japanese health officials used phony science to ban American apples. The real U.S. gripe is that foreign governments have won most of the 145 cases that they have brought against American protectionist policies. …Both political parties would be well-advised to consider the wisdom of Truman and Marshall. They understood that true national-security imperatives meant resisting protectionism.

And here’s some more background information from a column in the WSJ by James Bacchus, who served as both a Member of Congress and as a Chief Judge at the WTO.

…let’s say Mr. Trump managed to get his way and pull the U.S. out of the WTO. The consequences for the world and U.S. economies would be immense. Among them: diminished trade growth, costly market and supply-chain disruptions, and the destruction of jobs and profits, especially in import- and export-dependent U.S. industries. The resulting trade barriers would compel some American companies either to downsize or move offshore. The global economic spiral set in motion by Mr. Trump’s reckless trade actions on steel, aluminum, Canada, Mexico, China, and Europe would accelerate. …WTO membership provides goods and services produced in the U.S. with protection against discrimination in foreign markets. Nondiscrimination rules are the heart of the WTO trading system, which currently applies in 164 countries and to 98% of all global commerce. …Instead of waging war on the WTO, the U.S. should help modernize it by making it more effective in addressing digital trade, services, subsidies, sustainability and intellectual property. Internationally agreed rules for international trade—and a process for resolving disputes about those rules—are an indispensable pillar of national prosperity.

I agree with everything in both columns.

And I’ll add one very simple – and hopefully very powerful – point.

Here’s a chart from the WTO showing that the United States is one of the world’s most pro-trade nations, with average tariffs of only 3.48 percent. Not as good as Hong Kong (0.0 percent) or Singapore (0.1 percent), but definitely good compared to most other nations.

In other words, it would be good if we could convince other nations to lower their trade barriers to our level.

Yet that’s exactly what’s been happening thanks to the WTO (and GATT, the predecessor pact). Here’s a chart prepared by the Confederation of British Industry, which shows how trade barriers have been continuously dropping. And dropping most rapidly in other nations, which is something Trump should be happy about.

The bottom line is that the WTO unambiguously advances U.S. interests, as I noted in the conclusion of the video.

But it actually advances the interests of all nations by gradually reducing global barriers to trade.

Is it as good as unilateral free trade? No, but it is a big win-win for America and the rest of the world.

Which is why, despite my usual disdain for international bureaucracies, I’m a big fan of the WTO.

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

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

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

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

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

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

Here are the things that worry me for 2019.

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

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

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

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

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

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

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

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

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

What about this year?

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

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

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

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

Now let’s look at the bad news.

Here are the worst developments of 2018.

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

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

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

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

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

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

I guess those two pieces are oldies but goodies.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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