Feeds:
Posts
Comments

Posts Tagged ‘Trade’

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 »

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 »

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 »

I get offended when I hear people argue that Donald Trump is another Ronald Reagan. I’m not saying that out of animosity to the President. I also got offended when people compared Bush 41 or Bush 43 to Reagan.

I realize Reagan was not perfect, but I think he genuinely believed in free enterprise and he moved the country in that direction. Other GOPers, not so much.

That’s especially true on the issue of trade. Reagan’s goal was to expand markets. Trump, by contrast, seems inspired by Herbert Hoover.

So when CNBC asked for my thoughts on the President’s protectionism, I wasn’t overly optimistic.

Based on eight simple questions, I explained the economy-wide argument for free trade back in 2011. Simply stated, if it’s bad for prosperity for governments to impose taxes, regulation, and intervention on trade inside a country, then it’s also bad for prosperity for government to impose taxes, regulation, and intervention on trade that crosses national borders.

But maybe the case for free trade is easier to understand if we consider how various specific groups are harmed by protectionism.

Taxpayers – Tariffs are taxes. So when Trump imposes $13 billion of tariffs on Canada and $37 billion of tariffs on China, what’s really happening is that he’s increasing taxes by those amounts on American consumers. Trade taxes technically are paid by importers, but the real burden is borne by individuals, just as individuals bear the cost when a business writes a check for the corporate income tax.

Workers – The “seen” effect of protectionism is that a few jobs are saved in a certain sector. But because the economy-wide cost of saving those jobs is so high, the “unseen” effect of protectionism is that overall employment falls. To cite just one example, Trump’s proposed taxes on auto imports are projected to reduce net employment by 195,000-624,000 jobs.

Consumers – When tariffs are imposed, selected special interests are shielded from competition and they respond by raising prices. This is bad news for households. Consider the case of washing machines. In the opening salvo of his war on trade, Trump imposed higher taxes on imported machines earlier this year. This headline from Mark Perry at AEI shows the consequences.

Retailers – As trade taxes ripple through the economy, one obvious adverse effect is that stores have to raise prices, which leads to lower sales. But that microeconomic impact just part of the damage. The combination of trade taxes and higher prices also put a dent in household budgets, and this macroeconomic impact leads to less overall spending on other items.

Exporters – When Trump unilaterally imposes higher taxes on trade, other nations almost always respond with tit-for-tat protectionism. And when these other nations target American products, that necessarily reduces exports.

Manufacturers – One of the big buzz phrases in business is “global supply chains,” which is simply a way of saying that companies have developed intricate networks to ensure the best inputs at the best prices. Trump’s tariffs have disrupted these networks by raising the prices of certain inputs. But the damage isn’t just higher prices.

Investors – At the end of the interview, I said Trump’s latest protectionist measures were akin to going from 1 month pregnant to 3 months pregnant. Except we’re talking about Rosemary’s Baby, not a bundle of joy. At the risk of mixing my cinematic references, continued 1930s-style protectionism eventually could produce Chucky after 9 months.

Hmmm…., maybe I should stick to economics and let movie critics develop analogies.

Since investors were my last category of victims, it’s very appropriate that we conclude today’s analysis by looking at some passages from a very good column by the Chief U.S. Economist for Morgan Stanley in the New York Times.

A protracted, escalating cycle of trade tensions has begun. In the latest action, the United States has proposed a 10 percent tariff on $200 billion in Chinese goods. …Even if all the proposed actions don’t go into effect, prolonged uncertainty alone can have a measurable impact on economic growth, and we should not underestimate the risks. …Just the threat of trade actions, even if there is no follow-through, is enough to dent business sentiment and investment. …roughly half of the growth we are seeing now is a result of a side effect of trade tensions — “doomsday prepping.” Global companies are stockpiling raw materials, intermediate goods and finished goods before tariffs take effect and raise the prices of those goods.

But the damage of protectionism will show up in other ways as well.

While the most direct effects will likely come from retaliatory measures that dent American exports, those impacts are just a fraction of what should be considered. Economists also need to consider the indirect effects of tariffs on consumer demand. Of the first $50 billion of announced tariffs, less than 2 percent apply to consumer goods. So the spillover effect on consumer demand — tariffs passed on as higher prices to consumers — should be quite small. But consumer goods represent more than 30 percent of the latest round of tariffs…firms can absorb the tariffs and cut costs elsewhere, but labor is the largest line item, which means layoffs or slower hiring. …At some point, investors will start to question whether global supply chains can withstand the escalating pressures from multiple rounds of tariffs, and financial markets may start to react.

In other words, there are no winners in a protectionist battle. Except, of course, for the army of lobbyists who get fat contracts to manipulate the system. So the swamp wins, but the rest of us lose.

P.S. As I noted in the interview, I don’t buy the argument that Trump is using protectionism to fight protectionism.

Read Full Post »

A couple of days ago, I shared a segment from a TV interview about trade and warned that retaliatory tariffs were a painful consequence of Trump’s protectionism.

I also was asked in that interview about the negative effect on farmers. I speculated that farmers (and many other groups) were giving Trump the benefit of the doubt in hopes that this process might actually lead to trade liberalization – sort of like what Trump suggested at the G7 meeting.

While I was depressed and glum in that interview, it turns out that things are worse than I thought.

Instead of keeping their fingers crossed for trade liberalization, farmers may be nonplussed by protectionism because President Trump’s expansion of bad trade policy may also wind up being the pretext for an expansion of bad agricultural policy.

The Wall Street Journal opines on the upside-down logic of Washington.

When pork prices collapsed amid a global trade war during the Great Depression, the Roosevelt Administration in 1933 had an idea—slaughter six million piglets. Put a floor under prices by destroying supply. It didn’t work. Now the Trump Administration may try its own version of Depressionomics by using the Commodity Credit Corporation (CCC) to support crop prices walloped by the Trump tariffs: Hurt farmers and then put them on the government dole.

Given the economic misery of the 1930s, it should be obvious that copying the awful policies of Hoover or Roosevelt is never a good idea.

But that’s not stopping the crowd in Washington.

In 2012 Congress put limits on CCC purchases of surplus commodities and on price supports after the Obama Administration used it for a costly 2009 disaster program without Congressional approval. But then out of the blue this year, Congress lifted the limits on CCC’s power to remove surplus crops from the market to support prices. Republicans made that change because the Trump Administration wants to use the CCC to mitigate the damage to U.S. crop prices from the Trump trade war. In a June 25 USA Today op-ed, Agriculture Secretary Sonny Perdue wrote that the Administration is ready to “begin fulfilling our promise to support producers, who have become casualties of these disputes.” Too bad these U.S. casualties were caused by friendly fire.

And don’t be surprised if today’s handouts wind up becoming permanent entitlements.

The bigger danger is that the need for Mr. Perdue’s “help” is unlikely to be temporary. …With the higher tariff, Beijing will turn even more to Brazil and Argentina for soy and grains; Australia and Chile for fruit, nuts and wine; and Canada and the European Union for some or all. …The CCC is a relic of Dust Bowl America. Today the American farmer is high-tech, productive and eager to compete. Mr. Trump’s trade policy is creating a problem that didn’t exist and next he may create another one to ease the pain he has caused.

In other words, one bad government policy is being used the justify another bad government policy.

This is a classic example of Mitchell’s Law, otherwise known as the lather-rinse-repeat cycle of government failure.

We see it when government over-spending is used as an excuse for big tax increases.

We see it when government-run healthcare is used as an excuse to impose nanny-state policies.

We see it when government drug-war failures are used as an excuse to push for gun control.

And now we’re seeing it when bad trade policy is leading to more bad farm subsidies.

I realize this is pure fantasy, but wouldn’t it be nice to have the reverse approach? How about we simultaneously eliminate trade barriers and get rid of the Department of Agriculture?

Given the inherent corruption of Washington, I won’t hold my breath for that outcome. I’ll have more luck waiting for this fantasy to become reality.

Read Full Post »

Older Posts »

%d bloggers like this: