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Posts Tagged ‘Trade’

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Here’s the table he put together.

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

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

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

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Earlier this year, I shared a short video about the benefits of the World Trade Organization.

Here’s a more substantive version (though still only four minutes).

I wanted to keep the video short, so I focused primarily on how the United States disproportionately benefits because other nations are pressured to reduce their trade taxes down to American levels.

Though I also pointed out that all countries benefit as global trade increases.

This is particularly relevant when you ponder President Trump’s trade spat with China. Yes, it would be good for the United States if China liberalized its economy and got rid of its mercantilist policies.

But it also would be good for China.

That’s why free trade is a good idea. It’s good if it’s unilateral free trade. It’s good if it’s bilateral free trade. And it’s good if it’s multilateral free trade.

Since we’re discussing the WTO, let’s look at some scholarly evidence.

An article by three Stanford political scientists for International Organization finds that the WTO has been beneficial for global trade.

The General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO) have been touted as premier examples of international institutions, but few studies have offered empirical proof. This article comprehensively evaluates the effects of the GATT/WTO and other trade agreements since World War II. Our analysis is organized around two factors: institutional standing and institutional embeddedness. We show that many countries had rights and obligations, or institutional standing, in the GATT/WTO even though they were not formal members of the agreement. We also expand the analysis to include a range of other commercial agreements that were embedded with the GATT/WTO. Using data on dyadic trade since 1946, we demonstrate that the GATT/WTO substantially increased trade for countries with institutional standing, and that other embedded agreements had similarly positive effects. Moreover, our evidence suggests that international trade agreements have complemented, rather than undercut, each other.

Meanwhile, a French think tank looks at some of the evidence in favor of the WTO’s rules-based approach to reducing trade taxes.

…the World Trade Organisation (WTO) which held a dominant position after WWII with its multilateral rules has lost influence…. From the point of view of a consumer or producer, the higher volatility of trade policy is nothing positive. …Handely and Limao (2015), Handley (2014), Pelc (2013) as well as Bacchetta and Piermartini (2011) also find empirical support for welfare gains from a rules compliant trade policy. …After WWII the average level of tariffs decreased constantly and predictably as part of the General Agreement on Tariffs and Trade (GATT), and its successor the WTO, which are based on member commitment and reciprocity. …multilateral agreements such as the WTO offer mechanisms which provide incentives even for mercantilist politicians to reduce barriers of trade.

Here’s a chart from the study, which shows how trade taxes have been falling in the post-World War II era.

In other words, the WTO process has been successful. President Trump’s tactic of escalating tariffs, by contrast, has not worked.

By way of background, the WTO is actually nothing more than a dispute-resolution forum for the GATT system (General Agreement on Tariffs and Trade) that was created back in the late 1940s.

And, unlike the International Monetary Fund or Organization for Economic Cooperation and Development, this is a part of the “post-war order” that’s worth preserving.

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According to the most-recent edition of Economic Freedom of the World, Brazil is only ranked #120, which is lower than nations such as Greece, Haiti, and China.

Brazil gets a horrible grade on regulation, and it’s also in the bottom half of all nations when looking at fiscal policy, quality of governance, and trade.

But things may be about to change. Voters elected a president last year, Jair Bolsonaro, who is best known for populist rhetoric, but he also expresses support for market-friendly reforms.

And even though he’s sometimes referred to as the “Brazilian Trump,” President Bolsonaro seems to have a much better understanding of trade than his American counterpart.

At least if this report from the Wall Street Journal is any indication.

President Jair Bolsonaro ’s administration is opening up one of the world’s most closed big economies, slashing import tariffs on more than 2,300 products and exposing local industries long accustomed to protectionism to the challenges of free trade. With little fanfare, the conservative government has since taking office in January eased the entry of ultrasonic scalpels, cancer drugs, heavy machinery and more, in some cases with tariffs reduced to zero from as much as 20%. The tariff cuts…reflect a significant shift in the world’s eighth-largest economy, where duties were twice as high as in Mexico, China and the European Union last year. The new opening is a central feature in Economy Minister Paulo Guedes ’s plans to make the country of 210 million more competitive, part of an effort to rekindle a moribund economy historically shielded from foreign competition and bogged down by bureaucracy. …“Brazil’s model of protectionism has failed,” Deputy Economy Minister for Trade Marcos Troyjo, one of Brazil’s chief trade negotiators, said in an interview. “It’s been 40 years without sustainable economic growth.”

Here are some excerpts about how Brazil has been hurt by trade barriers.

The problems created by protectionism are evident throughout Brazil’s economy. When Mauá University outside São Paulo imported American equipment last year that it couldn’t find in Brazil to upgrade its physics lab, for example, import tariffs doubled the price tag to $70,000, said Francisco Olivieri, a business professor and head of Mauá’s technology department. …Protectionism hurts businesses that need to import supplies or parts and face high tariffs and bureaucracy to do so, which pushes them away from global supply chains. Red tape related to tariffs at Brazilian ports mean imported supplies can take weeks to reach buyers, causing production delays. Fifty-five percent of foreign products require the importing companies to obtain permits from as many as six different government agencies, according to a recent study by the National Confederation of Industry, or CNI, a trade group that represents Brazilian factories. Importers are subject to steep fines if they fail to request a permit, but it is often difficult to determine from which agencies they must seek approval.

In other words, Brazilian companies are hit by a double-whammy of trade barriers and red tape.

This is why liberalization is so important.

Incidentally, the EFW data only captures what happened up through 2017.

And since Brazil (#87) isn’t that far behind the United States (#55) in the trade rankings, I won’t be overly surprised in a few years if Brazil jumps the United States given the combination of Bolsonaro’s good policies and Trump’s bad policies.

P.S. Brazil is also in the process of curtailing pensions and already has adopted a constitutional spending cap.

P.P.S. President Bolsonaro is quite good on gun rights.

P.P.P.S. A few years ago, I fretted Brazil has passed a tipping point of dependency. I’m somewhat hopeful that assessment was too pessimistic.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Huh?!?

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

Unfortunately, whenever he wants to.

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

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

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

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

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

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

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

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

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

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

He’s actually wrong, at least technically.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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