Feeds:
Posts
Comments

Posts Tagged ‘Donald Trump’

There’s an ongoing debate about Trump’s endgame on trade. Is he simply a crude protectionist, or is he disrupting the status quo in order to force other nations to reduce their protectionist barriers?

I hope it’s the latter, though I fear it’s the former.

But one thing I can state with certainty is that the President misreads early American history. Here’s a tweet that he recently sent about how America became a strong and rich country during an era when the federal government relied on tariffs to generate revenue.

Trump is partially right. The United States became a rich country in the 1800s when tariffs were a primary source of revenue.

But I have argued that America became rich because of other policies.

  • The federal government was very small, with the budget consuming on average less than 3 percent of the economy’s output.
  • Prior to that awful day in 1913, there was no income tax, no payroll tax, no capital gains tax, no death tax, and no corporate tax.
  • There was no sprawling and intrusive administrative state imposing costly regulations that hinder the private sector.

No, the United States was not a laissez-faire paradise in the 1800s. I’m simply making the case that the economy had more than enough “breathing room” to generate ever-higher levels of national prosperity.

Meaning the economy grew, not because of tariffs, but because other bad policies didn’t exist.

And I’m not the only with this perspective. Eric Boehm’s article in Reason concludes with an offer to trade the income tax for a modest tariff.

After the ratification of the Constitution, the very first law passed by the new Congress was the Tariff Act of 1789. It imposed an 8 percent tax on pretty much all imports into the United States, with the revenue from the tariffs used to fund the new national government and to pay down debts accumulated during the Revolutionary War. …those early tariffs did solve a very practical revenue problem for the early United States government. In those days before H&R Block (indeed, before income taxes) collecting taxes was a difficult prospect. It was much easier to post-up customs officials at every port and collect taxes on the physical stuff that came ashore than to send tax collectors to every town and borough across 13 states to collect taxes from the populace—especially since many of those would-be taxpayers weren’t entirely sold on the idea of a powerful central government, and had a recent history of armed rebellion against excessive taxation. …If Trump wants to make the argument that America should use tariffs to raise revenue, like we did in the 1790s, he better have a plan to abolish all federal taxes on income, investments, and labor. If he wants to have that discussion, well, I’ll listen.

Brian Domitrovic, writing for Forbes, hits the nail on the head. He starts by agreeing with Trump’s assertion about strong growth in the era of tariffs.

…there is a general sense, among the American public, that previously in history, when the American economy really grew at great rates in the extensive stretch of time before the era of free-trade ideology after 1945, we had tariffs. Tariffs and American prosperity went together. Why not try to get that mix again? …This country’s economy regularly grew at rates double ours today, when the tariff was in force from 1789 until early in the 20th century.

But he points out that other factors deserve the credit. Especially the absence of any type of taxation on income.

…there was a condition that obtained in these years that is absent today. That condition is that the tariff was in the main the only form of federal taxation. There was no income or profits tax, no wage tax, no tax on investment gains… When the American economy really boomed under the tariff, over the first half of our history, financiers and entrepreneurs plowed money, energy, and ideas into businesses knowing that all receipts were available to recover costs and make a profit. …A company’s pay rates did not have to exceed the wage needs of the employees so as to cover their income and payroll tax obligations, as today. The money left to a company from sales after costs faced no corporate tax. And there was no inheritance tax.

And I’ll add one additional point. One of the good things about tariffs is that they are inherently self-limiting because of the Laffer Curve. As Alexander Hamilton pointed out, the government gets less revenue if trade taxes get too high.

Anyhow, the moral of today’s story is that tariffs are bad, but they are less bad than the modern welfare/administrative state.

But here’s the challenge.

If we want to solve the problems caused by the western world’s second-most-depressing chart, we’ll need to figure out how to reverse all the bad policies that produced the western world’s most-depressing chart.

Unfortunately, Trump has been making government even bigger, so the likelihood of returning to a tariff-only tax system has dropped from 0.00005 percent to 0.00001 percent.

Read Full Post »

It’s no secret that I’m a critic of Trump’s protectionism. He doesn’t understand the benefits of trade, misinterprets trade data, and – to coin a phrase – he’s “making cronyism great again.”

But, as shown in this interview, even I’m shocked that he’s “blaming the victim” by going after Harley-Davidson.

I’m disappointed, though, that I only made part of the argument.

Harley-Davidson is being hurt by government because Trump’s steel and aluminum tariffs have raised the prices of inputs. But the company also is being hurt because other countries have responded to Trump’s protectionism with tariffs that will penalize the company.

Here’s some background on the story, as reported by CNN.

President Donald Trump said it’s “great” that consumers might boycott Harley-Davidson if it moves some motorcycle production overseas. …Trump’s remark came after the President hosted “Bikers for Trump” supporters at his golf club in Bedminister, New Jersey, over the weekend. …Tensions between the administration and Harley-Davidson have brewed for months. It started when Trump imposed hefty tariffs on steel and aluminum imports earlier this year in an effort to bolster domestic manufacturing. The European Union responded by pledging to raise tariffs on a list of goods that are imported from the United States, including Harley motorcycles. …Harley said it stands to lose as much as $100 million a year, and the company pledged to shift some of its production abroad so that it could avoid the added tariffs on motorcycles sold in the EU. …moving more production overseas was the “only sustainable option” in the face of a trade war.

Not that this is a sudden revelation.

The U.K.-based Financial Times reported back in June that the company was put in a bad position because Trump’s tariffs led to retaliatory tariffs from the European Union.

…Harley-Davidson announced it would move some manufacturing out of the US to avoid EU tariffs and Brussels prepared further retaliatory measures in case of new White House duties. The motorcycle maker is the first US manufacturer to scale down domestic production in response to the EU tariffs, which were imposed on Friday against $3.3bn in American imports as retaliation for US steel and aluminium duties.  Harley-Davidson’s decision illustrates why many pro-trade members of President Donald Trump’s own Republican party have raised concerns about the potential economic consequences of the multiple fronts he has opened in his trade offensive.

Kevin Williamson, writing for National Review, explained what’s really happening.

Harley-Davidson already operates facilities in Brazil, India, and Australia, and it has plans for a factory in Thailand. Avoiding protectionist measures drives some of that, but so do other factors, including proximity to customers — which is why Mercedes-Benz manufactures SUVs in the United States, where most of them are sold. Indians buy nearly 17 million motorcycles and scooters a year, and Harley-Davidson covets a larger share of that market. …its executives calculate that the Trump administration’s anti-trade policies will cost it as much as $100 million a year in the EU market alone. …What is Harley-Davidson supposed to do? Lose a few hundred million dollars while it waits for the Trump administration to get it right on trade? Because that day probably is not coming.

I’m not being a Trump basher, by the way. I noted in the interview that he’s also pushed through some policies that are good for both companies and competitiveness, such as targeted deregulation and lower tax rates.

But, as also noted in this Washington Post column, what’s frustrating is that the harm caused by Trump’s protectionism will offset the benefits of those good policies.

President Trump’s top economist defended the White House’s increasingly aggressive trade policies Tuesday, calling Harley-Davidson’s decision to move some operations overseas an exception to a broader trend of renewed corporate investment within the United States. Kevin Hassett, chairman of the Council of Economic Advisers, said foreign direct investment on American soil “has skyrocketed” in the year’s first quarter, a trend he attributed to a cut in the corporate tax rate that Trump signed into law last year. …Former White House economic adviser Gary Cohn, who resigned shortly after Trump  announced the tariffs, cautioned earlier this month that a trade war could wipe out the economic gains of the GOP tax law.

Let’s close by highlighting the oft-overlooked fact that the retaliatory tariffs against Harley-Davidson are not trivial.

Here are some excerpts from a Wall Street Journal editorial.

The company considers the EU a “critical market,” and last year it sold nearly 40,000 bikes to European consumers. But in retaliation for Mr. Trump’s steel and aluminum tariffs, the European Union raised its tax on American-exported Harleys to 31% from 6%, effective last Friday. That amounts to a $2,200 tax on each motorcycle exported from the U.S. to the EU. …Harley said “the tremendous cost increase, if passed on to its dealers and retail customers, would have an immediate and lasting detrimental impact to its business in the region, reducing customer access to Harley-Davidson products and negatively impacting the sustainability of its dealers’ businesses.” Translation for Mr. Trump: Unlike real estate, cars and motorcycles are a global market.

All of which underscores the main point from the interview, Harley-Davidson is the victim.

I mentioned in the interview that some people think Trump is playing a clever game to force other countries to lower trade barriers. Since other nations generally have higher trade barriers than the United States, he’s right to have that as a goal. Assuming, of course, that really is his goal. I’m skeptical, but would love to be proved wrong.

Read Full Post »

I often discuss the importance of long-run growth and I pontificate endlessly about the policies that will produce better economic performance.

But what about short-term fluctuations? Where are we in the so-called business cycle? I don’t think economists are good at forecasting the ups and downs of the economy, but I did mention the factors that might contribute to a downturn in this interview with Dana Loesch.

Dana isn’t the only one interested in this topic.

The New York Times opined today about the state of the economy.

…the American economy has a lot more power…, and it’s making a lot of noise. …While Mr. Trump praised himself effusively…the stock market seemed unimpressed. …That’s because if you look down the line, there are few clear reasons to be so enthusiastic.

I suspect the editors at the NYT are somewhat motivated by a desire to make Trump look bad, but I don’t necessarily disagree with some of their analysis.

Though I think they are wrong on tax policy, which is the best thing that’s happened since Trump took office.

…the initial jolt of the Republicans’ $1.5 trillion tax cuts, mostly for corporations and the wealthy, is wearing off. Corporations have bought back $437 billion of their own shares, which leaves them that much less to invest in new production, or wages.

By the way, there’s nothing wrong with stock buybacks. It’s a way for companies to return profits to shareholders. And those shareholders generally then reinvest the money, so the NYT screwed up on that bit of analysis.

But they raise a very legitimate issue when looking at the impact of monetary policy.

Then there’s the flattening yield curve, which the St. Louis Federal Reserve’s president, James Bullard, warns could invert late this year if current conditions persist. That means short-term rates, such as those for two-year Treasury bonds, run higher than long-term rates, like the 10-year bond, a sign of pessimism that is a well-known red flag.

Though I would add that we wouldn’t be in the position of having to raise rates if the Fed hadn’t pushed rates artificially low in the first place (the same mistake they made last decade, by the way).

In other words, the best way of avoiding “tight money” is to not engage in periods of “easy money.”

The NYT editorial also looks at consumer spending, which is fine if the goal is to see whether retailers are happy. But if the issue is whether the economy is doing well, it’s much more important to see whether personal income is rising or falling.

Consumers were in a spending mood this spring, an attitude that won’t necessarily continue. …A recent Reuters analysis found that the bottom 60 percent of income-earners have been fueling their spending, and thus the economy’s, by using their savings or credit cards. They almost have to, because wage growth is expanding at a disappointing 2.7 percent annual clip.

I fully agree with this excerpt about trade. Assuming he wants to run for reelection, Trump is being very foolish to push for more protectionism.

…consider the administration’s effort to apply the sledgehammer to the economy’s toes via a trade war and ensuing tariffs on imported steel and aluminum, among other products. …Not only have the tariffs contributed to $1 billion in higher costs for General Motors, they are now contributing to rising prices of everything from Cokes to vacuum cleaners as companies pass along those costs to consumers.

Last but not least, I don’t necessarily agree that expansion have to end. After all, the economy is largely capable of self-correcting.

But a “business cycle” is probably inevitable so long as government has so much power to intervene.

None of these issues by themselves will put the brakes on an economy that is powering along with a 3.9 percent unemployment rate. But the friction is building. …economic expansions — and this one is in its 10th year — eventually run out of gas. …Mr. President, while you like to take credit for positive economic trends that are well beyond your control, you will own the downside, too.

For what it’s worth, I think misguided monetary policy usually deserves blame for short-run economic instability.

I mentioned in the interview that the central bank is trying to “normalize” interest rates. I hope the Fed is successful, though I worry that financial markets (and housing markets) have become dependent on easy money and will take a hit.

I’ll close by pointing out that the pundit class is focusing on whether the economy is growing faster under Trump than it grew under Obama.

I don’t care about that contest. I’m much more interested in whether we can get the kind of free market-driven prosperity we enjoyed under Ronald Reagan or Bill Clinton.

We didn’t get that growth during the Obama years.

And given Trump’s schizophrenic approach to policy, I don’t have high hopes we’ll average 3 percent-plus growth during his tenure.

Read Full Post »

By starting a trade war, President Trump is playing with matches in a gunpowder factory. Other nations are retaliating, creating the risk of escalating tit-for-tat protectionism.

But is that really what’s happening? Is it possible that the President instead is playing hardball to get other nations (who generally have more trade barriers than America) to open their markets?

Depending on who you ask, you get different answers to those questions.

Steve Moore of the Heritage Foundation lavishes praise on Trump for being a de facto proponent of free trade.

Trump and the European Union reached a handshake deal that is designed to LOWER tariffs on both sides of the Atlantic. They agreed to shoot for zero tariffs on both sides of the Atlantic. ‎ Sounds like freer and fairer trade to me. …It gets better: the two sides also agreed in principle to find ways to combat “unfair trading practices, including intellectual property theft, forced technology transfers, industrial subsidies and distortions created by state-owned enterprises.” …Before Trump came on the scene most nations denied that this cheating and stealing were even happening.  Any progress in ending these unfair trade practices is an indisputable victory for the U.S.  Well done, Mr. President. You’ve accomplished something in 18 months that no president has in at least 30 years. …We have here more evidence that the American president is the master negotiator. …the key point: Trump’s tariffs are meant to force other countries to LOWER theirs.

Likewise, Marc Thiessen of the American Enterprise Institute argues in the Washington Post that Trump is playing a clever game designed to produce free trade.

Trump was roundly criticized for publicly berating allies over their trade practices and provoking a needless trade war. Well, once again, it appears Trump is being proved right. On Wednesday, he and European Commission President Jean-Claude Juncker announced a cease-fire in their trade war and promised to seek the complete elimination of most trade barriers between the United States and the European Union. …Zero tariffs. Wednesday’s breakthrough with the European Union shows that, contrary to what his critics allege, Trump is not a protectionist; rather, he is using tariffs as a tool to advance a radical free-trade agenda. …Trump’s hard-line trade strategy is being vindicated. …the E.U. negotiating zero tariffs… That’s three-dimensional trade chess. …If Trump succeeds in using trade wars to bring down European and Chinese trade barriers, he may end up being one of the greatest free-trade presidents in history.

Claude Barfield of AEI doesn’t agree with his colleague that Trump is a closet free trader.

…one cannot be counted a free trader if one subscribes to the flat-earth equivalent theory that trade deficits (or surpluses) can be changed dramatically by trade policy rather than by changes in a nation’s savings/investment ratio — or indeed that bilateral trade deficits are evidence of “unfair” trade practices or the US being “raped” by its trading partners. One cannot be a free trader if one supports, as the president does, a “Buy American” policy, no matter the ultimate cost to US businesses and consumers. One cannot be a free trader if one prostitutes the concept of national security by invoking it for purely protectionist trade actions against historical allies. One cannot be a free trader, or free market leader, if one compounds protection with outsized subsidies, as the president contemplates with a $12 billion farm bribe. …Thiessen made a valiant effort to craft a silk purse out of sow’s ear. But, given their vehement protests over Trump’s tariffs, it seems that even pig farmers aren’t buying it.

Veronique de Rugy also has a very jaundiced view of Trump’s actions on trade, explaining that higher tariffs aren’t the right route to achieve free trade.

…trade…is one policy area where he’s been remarkably consistent over the years. That’s why I’m always surprised whenever articles, TV commentators, or friends in casual conversations argue that his real goal in boldly imposing unilateral tariff hikes is to achieve freer trade. …Nothing in what the president has ever said suggests that he’s anything but a diehard mercantilist. …unilaterally increasing tariffs against other nations has never been an effective way to get them to lower theirs. Other government officials, often protectionists themselves, use the attack as an excuse to raise their own tariffs even higher to protect domestic interests. Retaliation from Mexico, Canada, China, and the European nations is proving this point once again. …Historically, the only way the United States has managed to get other countries to drop their trade barriers has been through multilateral agreements where everyone commits to behaving better. It is not a perfect process, but it beats pretending that Trump’s protectionism will do any good.

So who’s right, the Thiessen-Moore team or the Barfield-de Rugy team?

For what it’s worth, I hope Thiessen and Moore are right, but I’m afraid that Barfield and de Rugy have a stronger argument (as illustrated by this scale that I recycled from two days ago).

Trump repeatedly has demonstrated that he has no idea how trade works. He actually thinks a trade deficit is somehow evidence of economic defeat. But that’s nonsensical. The “deficit” in trade only exists because foreigners are anxious to invest in the U.S. economy. In other words, it’s really a sign of a capital “surplus.”

Veronique mentioned this in her column, and also noted that this won’t change in a zero-tariff world. Indeed, the so-called deficit would probably increase since America would become an even more attractive place to invest.

Trump’s obsession with increasing exports relative to imports is misguided. The imports are a means to achieve what Mark Perry of the American Enterprise Institute calls “job-generating foreign investment surpluses for a better America.” That also means that a world with no tariffs will not necessarily translate to a lower U.S. trade deficit. …Thus the president would likely hate the outcome of a zero-tariff world, putting us back where we are today.

Moreover, let’s not forget that the tax reform legislation – particularly the lower corporate rate – also will make America more attractive to foreign investors. And that also will lead to a higher trade deficit.

So unless Trump learns that a trade deficit is not a bad thing, he’d probably react by pushing for more protectionism instead of more trade liberalization.

That being said, I’m going to conclude with some optimism. Not because I think Trump wants the right thing or believes the right thing, but rather because he a) doesn’t pay attention to details, and b) values appearance over substance.

Consider what happened with the big spending battle with Congress last year (which actually dragged into this year). Trump’s big issue was illegal immigration and building a wall, yet he capitulated to a spending bill that basically ignored his demands. Yet he signed it because he decided that more defense spending could be portrayed as a victory (even though the bill was larded with additional domestic spending).

Maybe the same thing can happen on trade. In this fantasy scenario, he’ll huff and puff about the trade deficit and then wind up agreeing to a good pact because the other side makes some splashy concession that Trump can portray as a win.

At least that’s what I hope will happen. Especially since I don’t enjoy thinking about the alternative outcome.

Read Full Post »

Earlier this month, I talked about the economy’s positive job numbers. I said the data is unambiguously good, but warned that protectionism and wasteful spending will offset some of the good news from last year’s tax reform.

This is what’s frustrating about the Trump presidency.

Good policies in some areas are being offset by bad policies in other areas, so it’s not easy assigning an overall grade.

And it’s also difficult to predict the effect on economic performance. If you look at the formula for a prosperous economy, there’s no way of predicting whether Trump is a net positive or a net negative. At least in my humble opinion.

As such, I’ll be very curious to see what happens to America’s score in subsequent issues of Economic Freedom of the World.

It would be nice if the United States got back into the Top 10. For what it’s worth, I’m guessing America’s score won’t measurably improve.

That being said, if there was a pro-con debate on Trump’s performance, some people would be quite confident about declaring victory.

Mike Solon, a former budget staffer on Capitol Hill, offers the “pro” assessment in the Wall Street Journal.

Are low taxes key to a booming economy? Their success is harder than ever to deny after Friday’s report that the U.S. economy grew 4.1% in the second quarter, bringing the average quarterly growth rate during the Trump presidency to 2.9%. …In the first five quarters of the Trump presidency, growth has been almost 40% higher than the average rate during the Obama years, and per capita growth in gross domestic product has been 63% faster. …The CBO now projects that additional revenue from this economic surge will offset 88.2% of the estimated 10-year cost of the tax cut. …The CBO’s April revision projected an extra $6.1 trillion in GDP over the next decade—more than $18,000 of growth for every man, woman and child in America. …the Labor Department reports that worker bonuses have hit the highest level ever recorded. The Commerce Department reports that wages and salaries are growing almost 25% faster under President Trump than under Mr. Obama.

Since I have great confidence that lower tax rates are good for growth and that Laffer Curve-type feedback effects are real, I want to applaud what Mike wrote.

And since I’ve also dissed the idea of “secular stagnation,” I also like this part of his column.

Perhaps the most important narrative discredited by the economic revival is the “secular stagnation” excuse. Throughout the Obama years, progressive economists said Americans had become too old, lazy and complacent to achieve the growth that was regular before 2009. But somehow American workers overcame all of these supposed weaknesses when Mr. Trump changed federal policy. The problem was not our people but our government. Stagnation is not fate but a political choice.

Amen to that final sentence. Stagnation is the result of bad policy.

But my problem is that Trump has some bad policies that are offsetting his good tax reform. So I can’t help but think Mike is being too optimistic.

Let’s look at another perspective. It would be an exaggeration to state that Jimmy Pethokoukis of the American Enterprise Institute is in the “con” camp, but he definitely is skeptical.

GOP hot takes will come as fast and furious as the economic growth. “The tax cuts worked!” “Trumponomics rocks!” …Celebrating a stronger economy is not a bad thing, of course. Over the long run, sustainable economic growth is what generates higher living standards and greater social mobility. But drawing sweeping conclusions from a single three-month period is problematic…it doesn’t necessarily tell you a whole lot about where the economy is heading. There were eight quarters of 3 percent growth or faster scattered across the Obama presidency, including four of 4 percent or faster and one of 5.2 percent. But there was never much follow-through, and overall the expansion muddled through at roughly a 2 percent annual pace. …even a very strong report won’t tell us whether the Trump tax cuts, passed in December, are “working.” It’s just too soon. …that process will play out over a numbers of years.

This is a very sensible perspective. I’ve repeatedly warned not to overstate the importance of short-run data. And I also fully agree that there’s often a time lag between the adoption of good policy and the evidence of good results.

But I have the same complaint about the Pethokoukis column as I did about the Solon column. There’s a sin of omission because both focused on the tax reform.

As I noted above, we also need to consider the other policies that have changed in the last 18 months.

I don’t know the answer, but maybe this image will illustrate why we should hesitate before making sweeping assessments.

And also keep in mind that we have no way of knowing whether there’s a Fed-created bubble in the economy. As I said in the interview, what if 2018 is akin to 2006? Back then, most people underestimated the possibility that easy money and Fannie-Freddie subsidies had created an unsustainable housing boom.

But even if we ignore that wild card, I can’t help but wonder whether Trump’s pro-growth polices and Trump’s anti-growth policies are resulting in a wash.

Read Full Post »

President Trump is a protectionist. He doesn’t understand the principle of “comparative advantage.” And he’s wrong about the implications of a “trade deficit.”

But that doesn’t mean everything he says about trade is wrong.

He frequently accuses other nations of “unfair” treatment of American products and China is one of his favorite targets.

Well, there’s some truth behind Trump’s bluster.

Here’s the World Trade Organization’s data on tariff rates imposed by the United States and China. As you can see, the United States has lower taxes on trade, which should be viewed as a net plus for the American economy (though we should be at 0.0, like Hong Kong).

Now let’s look at the trade data from the Fraser Institute’s Economic Freedom of the World.

As you can see, China moved substantially in the right direction in order to qualify for WTO membership in the early 2000s. And the American score has declined slightly since the 1980s.

Nonetheless, the United States still ranks higher.

So Trump is right, at least on the narrow issue of China being more protectionist.

But bad policy by China doesn’t justify bad policy by the United States. Especially when the main victims of Trump’s tariffs will include American consumers, workers, manufacturers, taxpayers, and exporters.

Instead, I explained in March that the United States should use the World Trade Organization to push China in the right direction.

The Tax Foundation has a similar perspective.

There is wide agreement that these concerns should be addressed, but the administration’s broad application of tariffs is not likely to change Chinese government policy, and will cause significant harm to the U.S. economy. The World Trade Organization’s Dispute Settlement Process is an alternative way to address trade disputes, rather than imposing unilateral actions, like tariffs, that damage economic growth and invite retaliation. …If an offending nation does not conform with the decision, the nation being harmed can request authorization for suspension of concession, meaning approval to increase its own tariffs, but only enough to make up for the damages caused. This avoids unilateral punishments and retaliations… The World Trade Organization’s Dispute Settlement Process should not be overlooked as an effective tool against harmful foreign trade practices. …The U.S. has allies in the IP dispute against China, and even some anti-dumping duties can be defended under WTO rules. But instead, the administration is pursuing a path of broad tariffs that invite retaliation, cause economic uncertainty, and damage economic growth.

Christine McDaniel of the Mercatus Center has a column in the Hill also explaining that the WTO option is far superior to unilateral tariffs.

…tariffs do self-inflicted harm. Imagine being in a gunfight in an old wooden ship, with every shot fired at your enemy putting a hole in your own hull. Eventually, you start to sink. …as for taking our complaints to the WTO, this is a decent bet. We have won most of the cases we have brought, including those against China, which does eventually oblige.

But Ms. McDaniel wants to be even bolder. She’s urging market-oriented nations to create a broad free-trade agreement that goes above and beyond the WTO. China would then feel significant pressure to fix its bad policies to be part of this new club.

…best option is to…Team up with our allies, who are just as frustrated with China as we are. Form a pact in which signatories commit to open trade and investment regimes, sufficiently strong intellectual property rights and enforcement, and legal recourse mechanisms. Most importantly, signatories commit to not engage in trade or investment with state-owned enterprises or those with close ties to state-owned enterprises. This would effectively leave China the odd man out. …China should implement reforms…: a more open trade and investment regime, phasing out state-owned enterprises, stronger patent rights, and legal recourse mechanisms. These policy shifts — a shift in thinking, really — would help put China on a more sustainable path to economic growth.

She’s right that China would benefit. But such a free-trade agreement also would put other participating nations on a better growth trajectory.

The United States is far from perfect on trade, after all, and the same is true of most of our allies.

So if we all formed a free-trade pact to encourage better policy in China, an indirect benefit would be better policy in America and other nations.

That kind of win-win scenario would be great news for the global economy. And it would be much better than a potentially dangerous tit-for-tat trade war, which seems to be where we’re heading now.

P.S. The United States also is more free-trade oriented than the European Union.

Read Full Post »

There were many policy mistakes that contributed to the Great Depression.

Monetary Policy presumably deserves the lion’s share of the blame, but politicians also increased the fiscal burden of government and radically expanded the amount of regulatory intervention.

And a tit-for-tat trade war, mostly caused by the United States (Hoover’s Smoot-Hawley tariff), also contributed to the economic destruction of the 1930s.

Sadly, history may be repeating itself, at least with regard to trade. That was my message in this recent discussion with Charles Payne.

This is why Trump’s protectionism is so alarming.

Let’s explore this issue.

Peter Coy, in a column for Bloomberg, explains the dangers of Trump’s approach. Simply stated, it’s not a good idea to let the protectionist genie out of its bottle.

…the president has instigated a trade war…his actions are eroding trust among both allies and rivals. Once gone, trust is hard to reestablish… U.S. corporate leaders soft-pedaled their criticisms of his trade policies in the past because they hoped he’d come around to their point of view. …Now they worry that waiting for the squall to pass may be a mistake because real damage could be done in the meantime. …the threats and counter threats create uncertainty that may induce businesses to hold back investment in new plants and equipment, known as capital spending, or capex.

We’re already seeing some blowback against the United States. But as I stated in the interview, the big concern is what comes next. The economic damage can be significant.

And all bets are off if the trade war goes hot. Fink warned that stocks could fall 10 percent to 15 percent if the Trump administration approves tariffs on an additional $200 billion of Chinese imports. …In the longer term, trade barriers make the global economy permanently less efficient because sheltered economies produce things that could be made more cheaply elsewhere. …if countries restored their tariff rates to their 1990 levels, wiping out almost 30 years of reductions, world average living standards in 2060 would end up about 14 percent lower.

Sadly, Trump seems oblivious to these concerns. So, just like 80 years ago, we’re heading down the tit-for-tat path.

What’s instructive for today is how the U.S. extracted itself from the beggar-thy-neighbor spiral that started with the Smoot-Hawley Tariff Act of 1930 and helped deepen the Great Depression. President Franklin Roosevelt lobbied for and got the Reciprocal Trade Agreement Act of 1934, in which Congress ceded some authority over international commerce to the president… To Dartmouth College economist Douglas Irwin, a historian of free trade, one lesson of the 1930s is that “it’s not as easy to snap back as you think” from a trade war.

Irwin’s argument is similar to the point I made in the interview about needing an adult to take charge before things spiral out of control.

P.S. Since I’ve referenced the Great Depression, I can’t resist reminding people that FDR was so awful that he actually tried to impose a 100 percent tax rate by executive fiat.

Read Full Post »

Older Posts »

%d bloggers like this: