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Posts Tagged ‘Trade’

One of the interesting games in Washington is deciding who on the right (however defined) is a “Trumpie” and who is a “Reaganite.”

Here are a few indicators.

But, given the huge gap in their views, trade is probably the biggest way of separating the Trumpies from the Reaganites.

And if you want a clear dividing line for Members of Congress, just see whether they support the “Reciprocal Trade Act” or the “Congressional Trade Authority Act.”

The former is sponsored by Congressman Sean Duffy of Wisconsin and would empower Trump to impose more taxes on trade.

Bryan Riley of the National Taxpayers Union is wisely skeptical.

…treating our trading partners as allies rather than adversaries has paid enormous dividends for Americans. Just since 1990, world tariffs fell by nearly two-thirds as U.S. exports more than doubled, even after adjusting for inflation. …The Reciprocal Trade Act would turn this successful approach to trade on its head. …proponents who endorse this approach often argue that tariff reciprocity is needed to as a lever to reduce foreign trade barriers. But the White House’s own case studies show this is untrue. …Trump wants to replace a successful post-World War II policy based on the understanding that trade is win-win with one that is likely to encourage foreign governments to retaliate against Americans. …History shows trade policy is more likely to succeed if it is based on the Golden Rule instead of on hostile eye-for-an eye reciprocity. It turns out that the United States benefits when we treat our trading partners the way we would like them to treat us. …Princeton University’s Robert Keohane described how countries benefit from this “sequential reciprocity”… The goal of the Trump administration’s trade policy should be to promote reciprocal trade, not reciprocal taxes.

Here’s a chart from Bryan’s study that shows how trade liberalization in recent decades has been very successful.

In an article for National Interest, Clark Packard also pours cold water on the Reciprocal Trade Act.

The United States Reciprocal Trade Act, which will soon be introduced by Rep. Sean Duffy (R-Wis.), would expand the president’s already enormous unilateral authority to impose tariffs and other import restrictions. …the Reciprocal Trade Act would grant the president the authority to match the tariff applied to any given product by a trading partner. To use one of the administration’s favorite examples, the Europe Union applies a 10 percent tariff on imported automobiles, while the United States levies a 2.5 percent tariff on its imports. The Reciprocal Trade Act would allow the president unilaterally to raise the tariff to 10 percent on European cars as leverage for further negotiations.

He lists some of the reasons why the proposed law is bad policy.

The bill is enormously flawed and should be a nonstarter for myriad reasons. …violates U.S. commitments to the WTO’s Most-Favored Nation (MFN) principle of nondiscrimination. …The bill also would violate U.S. commitments under Article II of GATT. …the effect of the law would be that countries would retaliate against American exports and ensnare unrelated industries in a tit-for-tat. …The United States has been successful in getting other countries to lower tariffs and other trade barriers through negotiations. …the Reciprocal Trade Act would jeopardize this American-led system that has paid enormous dividends.

All of his points are accurate, though I don’t expect the president’s supporters would care about violating WTO obligations since they presumably would cheer if Trump pulled the U.S. out of the the agreement – even though it has been very beneficial for the United States.

Now let’s look at the Congressional Trade Authority Act, which would restrict rather than expand the ability of the executive branch to impose higher taxes on trade.

Adam Brandon of FreedomWorks explains the principles at stake.

…the Bicameral Congressional Trade Authority Act would ensure that all tariffs imposed by the executive branch in the name of national security must first be approved by Congress. Article I, Section 8 of the Constitution establishes that Congress “shall have the power to lay and collect taxes, duties, imposts, and excises.” The framers, in their wisdom, made this the very first power they delegated specifically to the legislative branch of the United States. Tariffs are taxes, and they adversely impact American consumers. Such measures should be enacted only after thoughtful debate by the elected representatives most accountable to the people of the United States. They should not be handed down unilaterally from the White House. …it’s time for Congress to reclaim their enumerated Article I power over trade. …FreedomWorks agrees with Rep. Gallagher and Sen. Toomey on the need to respect our Constitution and ensure Congress has full control over its Article I authority.

The Wall Street Journal opines favorably about Senator Toomey’s legislation.

…some on Capitol Hill are trying again to rein in the President’s tariff powers. …the Pennsylvania Republican…Mr. Toomey’s bill would require Congress’s blessing. Once a tariff is proposed, lawmakers have 60 days to pass a privileged resolution—no Senate filibuster to block consideration—authorizing it. No approval, no tariff.This is a serious reassertion of the Article I trade powers that Congress has long shirked. Since the bill is retroactive, President Trump would have to convince Congress that his tariffs on steel and aluminum are necessary. If lawmakers didn’t agree, the tariffs would end. …But that’s not all. The Commerce Secretary is now responsible for declaring that an import endangers national security. This bill would give the task, sensibly, to the Defense Secretary.

I like what Senator Toomey is trying to achieve. And I like it, not only because I don’t want politicians interfering with trade, but also because I support the Constitution.

America’s Founders deliberately set up a system based on Separation of Powers because they understood that unilateral power was a recipe for government abuse.

Interestingly, many Trumpies also claim to support the Constitution. Indeed, they are some of the biggest critics of the “administrative state,” which developed as federal agencies began to exercise legislative powers.

Which gives me an opportunity to contribute something to this discussion. I’m a great admirer of the American Enterprise Institute’s Mark Perry, in part because of his very clever hypocrisy-exposing Venn Diagrams (taxation and incentives, the War on Drugs, minimum wage, Food and Drug Administration, and consenting adults).

So, in hopes of showing Trumpies the error of their ways, here’s my humble attempt to copy Mark.

P.S. Even though open trade is very beneficial for American prosperity, I would not want a future president to assert unilateral power to eliminate tariffs. Yes, I want better policy, but I also support the Constitution and the rule of law.

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Donald Trump and other populist leaders frequently are condemned for undermining the “rules-based system” that is the basis of the “postwar order.”

What exactly is meant by this criticism? In the case of Trump, is it disapproval of his protectionism?

Yes, but that’s just the tip of the iceberg.

The broader accusation is that Trump and the others are insufficiently supportive of the so-called “international architecture” of treaties and organizations (the United Nations, International Monetary Fund, World Trade Organization, World Bank, G-7, Organization for Economic Cooperation and Development, NATO, etc) that western nations created after World War II.

And the critics are right, in my humble opinion.

But that’s besides the point. What’s really needed is a case-by-case analysis to determine whether the aforementioned treaties and organizations are making the world a better place.

To help understand this topic, let’s look at some excerpts from an anonymously authored article in  the latest issue of Cayman Financial Review.

What is the oft-cited “postwar order” that ostensibly is being threatened by populism? …begin with some history. There have been three major attempts to create an international architecture in hopes of discouraging war and encouraging peaceful commerce among world’s countries. The first occurred after the Napoleonic wars, the second occurred after World War I, and the third occurred after World War II.

The article explains that first postwar order was a big success, with 100 years of relative peace and prosperity between 1815 and 1914.

But the second postwar order, which followed World War I, was a miserable failure.

…the urgent economic problems that World War I had created – the need for demobilization, the restoration of the gold standard, the resumption of international trade flows, and the reconstruction of war-ravaged areas. Reparations burdened Germany and contributed to hyperinflation. …Germany depended on American loans to make its reparations payments to France and the United Kingdom. In turn, France and the United Kingdom depended on German reparations to repay their wartime loans from the United States. This financial merry-go-round was inherently unstable. …In the 1930s, many countries tried economic nationalism to escape from the Great Depression. Abandonment of the interwar gold standard, high tariffs to discourage imports, and competitive devaluations to boost exports became widespread. However, these “beggar-thy-neighbor” failed economically, caused the collapse of international trade, and contributed to rising international tensions.

And this grim experience was in the minds of policymakers as they sought to restore a system based on peace and open commerce.

…neither Churchill nor Roosevelt wanted to punish ordinary Germans, Italians or Japanese. Instead of the postwar harshness of Clemenceau, Churchill and Roosevelt favored the postwar magnanimity of Metternich, in which Germany, Italy, and Japan would be reconstructed as democratic capitalist countries. …both Churchill and Roosevelt thought that other new international organizations would be needed to help finance postwar reconstruction, provide stable exchange rates, and promote the progressive liberalization of international trade. …At the risk of oversimplifying, there are four major pieces of what is now loosely though of as the postwar order.

1. The United Nations and other multilateral bodies
2. The International Monetary Fund and World Bank
3. The World Trade Organization and affiliated trade pacts
4. NATO and other military/security alliances

The article is filled with details on how these various institutions evolved.

But for our purposes, let’s focus on ostensible threats to this order. Here’s what “Hamilton” wrote.

All four components of the current international architecture have critics, but they should be examined separately.

  1. The United Nations is routinely condemned for being ineffective, wasteful and anti-Western. However, the UN part of the post-war order is not under serious threat. However, the OECD is subject to considerable attacks because of its statist policy agenda.
  2. The IMF and World Bank are routinely condemned for being wasteful and anti-market. The IMF also is singled out for bailout policies that are said to encourage profligacy in developing nation and to reward sloppy lending practices by big western banks. Notwithstanding the instability than many say is caused by the IMF, this part of the postwar order is not under serious threat.
  3. The WTO and regional FTAs are under threat from a populist backlash in the United States and Europe, driven in large part by angst over financial prospects for lower-skilled workers. This part of the postwar order is under serious threat, especially because U.S. laws give the president significant unilateral powers over trade policy.
  4. NATO and other security arrangements are being questioned for both cost and changing geopolitical factors (e.g., the rise of China, Islamic terrorism). While unlikely at this point, dramatic policy changes from the United States could substantially alter the structure and/or operation of these military alliances.

How depressing. The part I like is the part that is under assault.

Here are the key points from the article’s conclusion.

The so-called postwar order is not a monolithic entity. …Some have been very successful. Consider, for instance, the sweeping reduction in trade barriers and the concomitant rise in cross-border commerce. …But other parts of the post-war order do not have very strong track records. Bureaucracies such as the IMF and OECD arguably deserve some hostile attention because of their support for anti-market policies. Policymakers who want to preserve the best parts of the post-war order may want to consider whether it is time to jettison or reform the harmful parts.

This is spot on.

Parts of the “postwar order” should be preserved. The World Trade Organization definitely belongs on that list. And presumably nobody wants to disrupt or eliminate the parts of the “international architecture” that facilitate things such as cross-border air travel, international shipping, and global telecommunications.

But the helpful work of those entities doesn’t change the fact that other entities engage in activities that are counterproductive. A “rules-based order” is only good, after all, if it advancing good rules.

Needless to say, the answer to all of these questions is no.

Which brings to mind the old saying about “Don’t throw the baby out with the bathwater.”

As “Hamilton” wrote, the bad parts of the postwar order should be jettisoned to preserve the good parts.

For those interested in this topic, Adam Tooze of Columbia University has a very interesting article on the same topic.

Published in Foreign Policy, his article basically applies a “public choice” description of how the current postwar order evolved. And he says it initially was not very successful

For true liberals in both the United States and Europe, who hankered after the golden age of globalization in the late 19th century, the resulting Cold War economic order was a profound disappointment. The U.S. Treasury and the first generation of neoliberals in Europe fretted against the U.S. State Department and its interventionist economic tendencies. Mavericks such as the young Milton Friedman—true advocates of free markets in the way we take for granted today—demanded a bonfire of all regulations. …The reality of the liberal order that supposedly came into existence in the postwar moment was the more or less haphazard continuation of wartime controls. It would take until 1958 before the Bretton Woods vision was finally implemented. Even then it was not a “liberal” order by the standard of the gilded age of the 19th century or in the sense that Davos understands it today. International mobility of capital for anything other than long-term investment was strictly limited.

Tooze argues that genuine liberalism (i.e., open markets and trade) didn’t really take hold until the 1980s, with the market-based revolution of Thatcher and Reagan, the “Washington Consensus,” and the collapse of communism.

The stakeholders in the 1970s were obstreperous trade unions, and that kind of consultation was precisely the bad habit that the neoliberal revolutionaries set out to break. …the global victory of the liberal order required a more far-reaching struggle. …the market revolution of the 1980s…  the aftermath of the Cold War, the moment of Western triumph. …the defeat of inflation, this was the age of the Washington Consensus.

For those not familiar with this particular piece of jargon, the “Washington Consensus” refers to the 1980s-era acceptance of free markets as the ideal route for economic development.

And “neoliberal” refers to classical liberalism, not the modern dirigiste version of liberalism found in the United States.

I’ll close by recycling this visual, which attempts to distinguish between good globalism and bad globalism.

The image uses the example of trade and jurisdictional competition, so I don’t pretend is captures all the issues and controversies that we discussed today.

But it reinforces why it is wrong to blindly accept and support the anti-market components of the postwar order simply because there are other parts that deserve our support. The goal is more global prosperity, not less.

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Since trade promotes prosperity, I want increased market-driven, cross-border commerce between China and the United States.

But you can see in this CNBC interview that I’m worried about achieving that outcome given protectionism from President Trump and mercantilism from President Xi in China.

There’s never much chance to elaborate in short interviews, so here’s some additional analysis on the key points.

1. China’s economy is weak because of insufficient liberalization.

I have written about how China got great results – especially huge reductions in poverty – thanks to partial economic liberalization last century. But those reforms were just a step in the right direction. The country currently ranks only #107 according to Economic Freedom of the World, largely because so much of the economy is hampered by subsidies, regulation, protectionism, and cronyism. Sweeping pro-market reforms are needed if China’s leaders want their country to become rich.

2. Trump’s unthinking protectionism hurts both sides, but China may be more vulnerable.

I mentioned in the interview that Trump’s protectionism meant that he was harming both nations. This is what always happens with protectionism, so I wasn’t saying anything insightful. But it is quite likely that China will suffer more because its economy doesn’t have the flexibility and durability of America’s more market-oriented system.

That is one of the conclusion from a recent news report.

Policymakers in Europe have spared no effort to emphasize that there can be no winners in an escalated trade conflict between the United States and China. But a fresh study shows there are several beneficiaries. …But a study by research network EconPol Europe suggests such an assertion isn’t quite true — in fact, it isn’t true at all. The survey analyzes the impact of tariffs imposed by the US on China and the effect of China’s retaliatory tariffs. …The EconPol Europe study calculates that Chinese exporters are bearing approximately 75 percent of the costs… in Asia, Vietnam has been gaining the most from firms relocating their production away from China. Malaysia, Singapore and India have also been profiting from this development.

3. China’s cronyism presents a challenge for supporters of unilateral free trade.

I’m a supporter of unilateral free trade. America should eliminate all trade barriers, even if other nations want to hurt themselves by maintaining their restrictions. That being said, it’s not genuine free trade if another country has direct or indirect subsidies for its companies. As I noted in the interview, some economists say we shouldn’t worry since the net result is a wealth transfer from China’s taxpayers to America’s consumers. On the other hand, that approach means that some American workers and companies are being harmed. And if supporters of free markets are upset when American workers and companies are hurt by domestic cronyism, we also should be upset when the same thing happens because of foreign cronyism.

The challenge, of course, is whether you can use trade barriers to target only cronyism. I worry that such an effort would get hijacked by protectionists, though Professor Martin Feldstein makes a good argument in the Wall Street Journal that it’s the right approach.

China’s strategy is to give large government subsidies to state-owned companies and supplement their research with technology stolen from American and other Western companies. …That is the real reason why the Trump administration has threatened tariffs of 25% on $200 billion of Chinese exports to the U.S.—nearly half the total—unless Beijing reforms its policies. …The purpose of the tariffs is not to reduce the bilateral trade deficit but to counter Chinese technology theft and forced transfer. …the U.S. could impose heavier tariffs and other economic penalties in order to force China to play by the rules, ending its attempt to dominate global markets through subsidies and technology theft.

4. Trump should have used the World Trade Organization to encourage Chinese liberalization.

I wrote last year that the President would enjoy more success if he used the WTO to apply pressure on China.

It’s not just me making this claim. Here are some excerpts from a story in the Washington Post.

Pressure from Europe and Japan is amplifying the president’s vocal complaints about Chinese trade practices… “it wasn’t a Trump issue; it was a world issue,” said Jorge Guajardo, …a former Mexican ambassador to China. “Everybody’s tired of the way China games the trading system and makes promises that never amount to anything.” …Germany and the United Kingdom joined the United States this year in tightening limits on Chinese investment. …In September, trade ministers from the United States, European Union and Japan issued a joint statement that blasted the use of subsidies in turning “state owned enterprises into national champions and setting them loose in global markets.” The statement…also rejected forced technology transfer… The United States did win E.U. and Japanese support for a complaint to the WTO alleging China has violated U.S. intellectual property rights. But rather than use the global trade body for a broader attack on China, the administration has demanded changes in the way the organization operates. To critics, the administration missed an opportunity to marshal China’s trading partners behind an across-the-board indictment of its state-led economy.

5. The imperfect Trans-Pacific Partnership was an opportunity to pressure China to reduce cronyism.

Because of my concerns about regulatory harmonization, I wasn’t grievously disappointed when the United States chose not to participate in the TPP, but I fully recognized that the pact had very positive features. Including the pressure it would have placed on China to shift toward markets and away from cronyism.

6. Additional Chinese reform is the ideal outcome, both for China and the rest of the world.

Three years ago, I wrote that China needs a Reagan-style revolution of economic liberalization. That’s still true today. The bottom line is that China’s leaders should look at the progress that was achieved last century when the economy was partially liberalized and decide that the time is ripe for the free-market version of a great leap forward. In other words, the goal should be great economic success, not modest economic success.

I’ll conclude by pointing out that I don’t want China to copy the United States, even though that would be a step in the right direction.

According to data from Economic Freedom of the World, there’s a much better role model.

Indeed, I would like the United States to copy Hong Kong as well.

The recipe for prosperity is the same all over the world. The challenge is getting politicians to do what’s best for citizens rather than what’s best for themselves.

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Last November, I shared a one-minute video from Freedom Partners on the economics of trade.

Here’s a full-length (but still only four minutes) treatment of the issue from the Center for Freedom and Prosperity.

The first part of the video is a quick glimpse at some of the academic evidence for open trade, and I hope it helps make the case against protectionism.

I then cite some country-specific examples, including how Herbert Hoover’s protectionism contributed to the economic misery of the Great Depression.

Argentina is another bad example mentioned in the video. It used to be one of the world’s richest countries, but it plummeted in the rankings in part because of its protectionist policy of “import substitution.”

The video also mentions the examples of China and India. Since I think this point is especially compelling, I want to take this opportunity to briefly elaborate on my comments in the video.

First, let’s establish that both nations did liberalize trade. Here’s a chart from Economic Freedom of the World, and you can see that there was dramatic liberalization starting about 1990.

Both nations are still a long way from total free trade (Singapore and Hong Kong, for instance, respectively get scores of 9.29 and 9.32), but it goes without saying that there was considerable liberalization in China and India.

And how did that work out?

Trade liberalization was a slam-dunk success. Based on data from the World Bank, here’s a look at how China and India started converging with the United States after opening to the world economy.

To be sure, both nations still have a long way to go. And it’s highly unlikely that either nation will ever fully converge to American living standards unless there is a lot more pro-market reform. Not just in trade, but all facets of economic policy.

But as I mentioned in the video, the reforms that already have occurred – particularly trade liberalization – have contributed to huge reductions in poverty in China and India.

Given all this evidence, I’ll close with a version of my two-question challenge. Can anybody identify a nation that has prospered by moving to protectionism (h/t: the USA in the 1800s is not a good answer) or a nation that has suffered because of trade liberalization?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Here’s some of that analysis.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Let’s look at what experts have said.

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

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

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

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

I agree with everything in both columns.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Here are the things that worry me for 2019.

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

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

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

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

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

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

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

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

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

What about this year?

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

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

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

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

Now let’s look at the bad news.

Here are the worst developments of 2018.

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

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

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

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

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

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

I guess those two pieces are oldies but goodies.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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I have a four-part video series on trade-related topics.

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

Here’s Part III, which explains how trade (whether domestic or international) leads to creative destruction, which results in some painful short-run costs but also yields immense long-run benefits.

I recently argued that creative destruction is the best part and worst part of capitalism.

It’s bad if you’re a worker in a company that loses out (or if you’re an investor in that company). but it’s also what enables us to become more prosperous over time.

I’m not alone. Writing for CapX, Oliver Wiseman reviewed Capitalism in America, a new book by Alan Greenspan and Adrian Wooldridge. Here are some key observations.

…there was nothing predictable about America’s rise from colonial backwater to world-beating economy. …The fight for independence began a year before the publication of Adam Smith’s The Wealth of Nations; “the new country was conceived in a revolt against a mercantilist regime that believes a nation’s economic success was measured by the size of its stock of gold.” …The Constitution’s limits on the power of the majority set America apart from the rest of the world and “did far more than anything else to guarantee America’s future prosperity…” On top of this fortuitous start is the country’s “greatest comparative advantage”: its “talent for creative destruction”, the driving force of innovation, growth and prosperity that “disequilibriates every equilibrium and discombobulates every combobulation”. Americans realised that “destruction is more than an unfortunate side effect of creation. It is part and parcel of the same thing”. …The result is a system that has squeezed more productive energy out of its human capital than other countries, and generated unparalleled prosperity.

For those interested in economic history, Joseph Schumpeter gets most of the credit for developing the concept of creative destruction.

This Powerpoint slide is a nice summary of Schumpeter’s contribution.

And here’s a Tweet showing that Schumpeter was under no illusions about the folly of socialism.

The bottom line is that creative destruction is what gives us churning, and churning is what dethrones rich and powerful incumbents. My friends on the left should be cheering for it.

Instead, they push for regulations and taxes that hinder creative destruction. And that means less long-run prosperity for all of us.

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Both Barack Obama and Hillary Clinton have said really foolish things, but Donald Trump may have set a new record for economic illiteracy with this tweet.

This tweet contains an astounding collection of inaccurate and offensive statements.

Here my corrective commentary.

I’ll briefly elaborate, starting at the top left and going clockwise.

The bottom line is that Trump is playing with fire. Indeed, what’s happening in financial markets is a very worrisome sign that he’s putting the economy at risk.

To be sure, I don’t think all of the volatility on Wall Street can be blamed on Trump’s protectionist policies and statement (the Federal Reserve should be blamed for creating a fragile market with easy-money policies). But a trade war could be the trigger that leads to the next recession.

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Three weeks ago, I shared a video about the economics of trade balances.

Here’s the next video in the Freedom Partner series, which looks at why trade (whether inside a nation or across borders) makes our lives better.

Simply stated, we would all be miserably poor if we couldn’t trade.

But when we can exchange with each other, we naturally begin to specialize in what we like and what we do best. Adam Smith referred to this as the “division of labour” and he noted that this enables much greater prosperity.

A related concept is comparative advantage, which is a way of illustrating how we become richer when trade enables us to focus on what we do best compared to others.

Alan Blinder summarized this concept in a column for the Wall Street Journal.

A snarky mathematician once challenged the great Paul Samuelson to name an economic proposition that is true but not obvious. Samuelson’s choice was comparative advantage, which shows, among other things, that there are mutual gains from trade even if one nation is better than another at producing everything. Here’s a homespun illustration. Suppose a surgeon is also a whiz at house painting—better than most professional painters. Should she therefore take time off from her medical practice to paint her own house? Certainly not. For while she may have a slight edge over most painters when it comes to painting walls, she has an enormous edge when it comes to performing surgery. Surgery is her comparative advantage, so she should specialize in it and let some others, who don’t know their way around an operating room, specialize in painting—their comparative advantage. That way, the whole economy becomes more efficient. The same principle applies to nations.

Some of Samuelson’s observations over a lengthy and influential career were not so great, but his analysis about comparative advantage was spot on.

This short clip from Matt Ridley also is a very good description of why we should trade and reap the benefits of comparative advantage.

Last but not least, here’s a video from FEE on why specialization gives us so many great things.

By the way, I cited a couple of studies in my video.

The one showing 2-percent to 5-percent faster growth was published by the International Monetary Fund last November. Here’s part of the abstract.

In the cross section of countries, there is a strong positive correlation between trade and income, and a negative relationship between trade and inequality. Does this reflect a causal relationship? We adopt the Frankel and Romer (1999) identification strategy, and exploit countries’ exogenous geographic characteristics to estimate the causal effect of trade on income and inequality. Our cross-country estimates for trade’s impact on real income are consistently positive and significant over time.

And here’s the best chart from the study.

It shows that pro-trade nations are both more rich (solid green line) and more equal (dashed green line).

The moral of the story is that protectionism generates undeserved riches for the friends of politicians while lowering the living standards of everyone else.

The other study is from the Peterson Institute for International Economics. Here are the key findings.

We use four very different methods to estimate past gains. Each of these methods entails its own set of assumptions. Estimated annual gains are on the order of $1 trillion. The estimated gain in 2003 income is in the range of $2,800 to $5,000 additional income for the average person and between $7,100 and $12,900 for the average household. Future gains are harder to quantify, not surprisingly since the future is always difficult to predict. The estimates range from $450 billion to $1.3 trillion.

And my favorite visual from the study shows the negative impact of 1930s-style trade taxes.

At the risk of understatement, repeating the policies of Herbert Hoover would be a very bad idea.

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Last month, I explained why trade deficits don’t matter.

I make the same point in this short video from Freedom Partners.

Near the end of the video, I pointed out that unfettered trade is good, whether with your neighbors or with people in other nations.

And I also mentioned trade with people in other states, which gives us a great opportunity to look at how free trade between American states developed and what it has meant for U.S. prosperity.

Writing for the Wall Street Journal, John Steele Gordon gives us a valuable history lesson on free trade inside America’s borders.

The Constitution requires free trade, the U.S. Supreme Court held in 1824. …The court ruled unanimously…that the power to regulate interstate commerce lay exclusively with the federal government and that states couldn’t impose impediments to that commerce in their parochial self-interest. The economic effect of the ruling was immediate. …Charles Warren, the great historian of the Supreme Court, called Gibbons v. Ogden “the emancipation proclamation of the American economy.” The case made the U.S. the world’s largest free market by flattening state-imposed barriers to “commerce,” a word the court had defined broadly to include trade and navigation. Within a half-century, the American economy rose to become the mightiest in the world, due in no small part to the precedent created by that decision. Free trade allows maximal use of “comparative advantage” to minimize the price of goods for everyone. The lower the prices, the higher the demand and thus the larger the economy.

Sadly, we have not always applied the lessons we learned to trade across our borders.

The Great Depression was a very painful example of what happens when protectionists are in charge.

With its own example of the power of free trade to produce wealth for everyone, one would think that the U.S. would have promoted it world-wide. But for most of the country’s history, Americans have been anything but free traders beyond their own borders. …In 1930, hoping to safeguard the American domestic market for U.S. producers in the looming Depression, Congress passed the Smoot-Hawley tariff, the highest in American history. Despite the pleas of more than 1,000 economists, President Herbert Hoover signed it into law. The results were catastrophic. With the U.S. erecting higher tariff walls to protect its internal market, other countries naturally did the same in a game of beggar-thy-neighbor. American exports fell from $5.241 billion in 1929 to $1.161 billion in 1932, a 78% decline. World trade in that period declined from $36 billion to $12 billion—less, adjusted for inflation, than it had been in 1896.

Fortunately, policy has moved in the right direction ever since World War II, with spectacularly positive results.

After World War II, …The U.S., having learned its lesson, moved to lower tariffs world-wide. In 1947, 23 nations signed the General Agreement on Tariffs and Trade and began negotiations to lower tariffs, which then averaged 22%, as well as other barriers to trade. In a series of seven negotiations, …the average tariff had been lowered to only 5% by 1999. …The results of this long and often arduous process have been spectacular. World trade has increased exponentially. Merchandise trade amounted to about $58 billion in 1950. By the end of the century it was $5.4 trillion. Only 17 years later, merchandise trade had increased to $17 trillion. Trade in agricultural products and services has increased similarly. Even taking inflation into account, world trade since World War II has increased by a factor of about 30, making the whole world vastly more prosperous.

Last but not least, Gordon closes by pointing out that trade deficits are not a bad thing.

…there is the persistent though discredited belief that countries should strive to maintain a positive balance of trade, with more exports than imports. It is, of course, no more possible for all countries to have a positive balance of trade than it is for all people to be above average in height. Rapidly growing and maturing economies usually run foreign trade deficits, as the U.S. did throughout the 19th century while it grew into an economic superpower. The U.S. is again running large trade deficits, but those deficits are balanced by large capital inflows from foreign investors.

Amen. That’s the point of my video.

Especially the point about a trade deficit simply being the flip side of a capital surplus (now technically known as a financial surplus, but I’m sticking for now with the old terminology).

Let’s close by looking at the historical data on U.S. trade. Notice we had a trade deficit during much of the 1800s when we enjoyed very strong growth.

And also notice the miserable results during the 1930s.

P.S. While I generally don’t worry about the trade deficit/capital surplus, it can be a negative sign if foreigners are using the dollars they earn to buy government debt and prop up D.C.’s fiscal profligacy. But that’s the fault of Washington spending, not trade.

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I’m in Victoria, British Columbia today to talk about trade with some young Canadians.

In doing some research about how to present the best case for free trade and against protectionism, I found some excellent commentary on why trade deficits don’t matter.

Here are some excerpts from a column by Don Boudreaux, a professor at George Mason University.

…the president’s trade policies are dreadful; they’ll reduce U.S. economic growth and diminish Americans’ spending power. …No myth about trade is more widespread than is the belief that imports reduce domestic employment. …trade is a two-way street. Non-Americans sell stuff to Americans only to acquire the dollars needed buy American exports and to invest in the U.S. — and each of these activities creates other particular jobs in America to offset those that are destroyed. …The reason trade deficits don’t reduce overall employment is that, in fact, trade deficits are not really deficits at all. Every cent that does not return to the U.S. as demand for American exports returns instead as investment in America. In economists’ lingo: the trade deficit (or, to be precise, the current-account deficit) is matched by a capital-account surplus of equal size. …Why should we be upset if foreigners continue to think highly enough of our economy to want to invest here?

And here’s some of what Greg Mankiw of Harvard wrote for the New York Times.

…the president’s overall approach to international trade is so confused. …When Mr. Trump discusses our trade relations with another nation, he often points to the bilateral trade balance — the difference between the value of our exports to that nation and the value of our imports from it. If imports exceed exports, we are running a bilateral trade deficit, which Mr. Trump interprets as a sign that we are the relationship’s losers. …consider some of the many bilateral trade deficits that I run. Whenever my family goes out to dinner, the restaurateur gets some money, and we get a meal. In economics parlance, the Mankiw family runs a trade deficit with that restaurant. But that doesn’t make us losers. …I can run persistent trade deficits with restaurants because I run trade surpluses elsewhere. Take The New York Times, for instance. It pays me more for my columns than I pay it for my subscription. That’s a bilateral trade surplus for me and a bilateral trade deficit for The Times. But nonetheless, we both gain.

I tried to incorporate these insights into my presentation, which has more than 30 slides.

Here are the ones that deal with the trade deficit, starting with some elementary observations.

I then pointed out that all of us have trade deficits in our daily lives.

Yet we understand this doesn’t hurt us.

Using trade with China as an example, I explain that money we send overseas only has value because foreigners can use it to purchase things in America.

Including investments.

And I recycled this chart from a column back in March.

For what it’s worth, understanding that a trade deficit is merely the flip side of a financial surplus is the key to recognizing that trade deficits (generally) don’t matter.

I’ll close with an important caveat.

I’m a big fan of foreign investment in the U.S. economy. Indeed, it’s one of the reasons why I’m happy America is a tax haven for citizens of other countries.

That being said, not all inbound investment is created equal. I’m delighted when foreigners buy stock and bond. I’m very happy when they make direct investments (one of the reasons I like the EB-5 visa program).

It’s not good news for our economy, though, when foreigners buy government bonds. But that’s the fault of our ever-expanding welfare state, not trade.

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When Trump imposes protectionist trade barriers, he doesn’t realize that the harm imposed on other nations is matched by damage to the U.S. economy.

As I warn in this interview, something similar could happen if the federal government convinces other nations to reject the dollar because they no longer want to acquiesce to the extraterritorial imposition of U.S. laws.

This is a wonky issue, but the bottom line is that the United States benefits enormously because the rest of the world uses the dollar.

The best article I can recommend was published earlier this year by the Cayman Financial Review. It’s a good tutorial on the issue and it explains why the United States enjoys an “exorbitant privilege” because the dollar is the world’s reserve currency.

A reserve currency is a currency that governments hold in their foreign exchange reserves to settle international claims and intervene in foreign exchange markets. …Governments overwhelmingly choose one currency – the U.S. dollar… U.S. dollar-denominated assets comprised 63.79 percent of disclosed foreign exchange reserves… The Bank for International Settlements (BIS) reported that 88 percent of all foreign exchange transactions in 2016 involve the U.S. dollar on one side. …In 2014, 51.9 percent of international trade by value and 49.4 percent of international trade by volume of transactions were invoiced in U.S. dollars. …Major internationally traded commodities such as oil are priced in U.S. dollars. …The status of the U.S. dollar as the world’s reserve currency and the resulting foreign demand for U.S. dollars creates what French Finance Minister Valéry Giscard d’Estaing described in 1965 as an “exorbitant privilege” for the United States. …While difficult to measure, empirical studies suggest the privilege is worth about ½ percent of U.S. GDP (or roughly $100 billion) in a normal year.

And Peter Coy’s column for Bloomberg does a good job of explaining why the rest of the world is tempted to abandon the dollar.

America’s currency makes up two-thirds of international debt and a like share of global reserve holdings. Oil and gold are priced in dollars, not euros or yen. …threats to be cut off from the dollar-based global payments system strike terror into the likes of Iran, North Korea, and Russia. …Political leaders who once accepted the dollar’s hegemony, grudgingly or otherwise, are pushing back. …In March, China challenged the dollar’s dominance in the global energy markets with a yuan-denominated crude oil futures contract. …French Finance Minister Bruno Le Maire told reporters in August that he wants financing instruments that are “totally independent” of the U.S. …This disturbance in the force isn’t good news for the U.S. …As it is now, when trouble breaks out, investors flood into U.S. markets seeking refuge, oddly enough even when the U.S. itself is the source of the problem, as it was in last decade’s global financial crisis. …The most immediate risk to the dollar is that the U.S. will overplay its hand on financial sanctions, particularly those against Iran and countries that do business with Iran. …European leaders, in response to what they perceive as an infringement on their sovereignty, are openly working on a payments system that would enable their companies to do business with Iran without getting snagged by the U.S. Treasury Department and its powerful Office of Foreign Assets Control. …dissatisfaction with the dollar’s dominance…is only mounting. …Lew said in 2016, “the more we condition use of the dollar and our financial system on adherence to U.S. foreign policy, the more the risk of migration to other currencies and other financial systems in the medium term grows.”

Here’s some of what I said on the issue of sanctions in a different interview.

But notice that it’s not just sanctions.

The rest of the world is irritated by FATCA and other aspects of extraterritorial taxation.

Other nations also are irked by the pointless imposition of “know your customer” rules and other anti-money laundering policies that impose heavy costs without having any impact on actual criminal behavior.

Anyhow, let’s review some additional analysis, starting with this editorial from the Wall Street Journal.

More than any recent U.S. President, Mr. Trump is willing to use economic leverage for coercive diplomacy. He’s now targeting Turkey… Turkey is vulnerable because of Mr. Erdogan’s economic mismanagement. In the runup to June elections, he blew out the fisc on entitlements and public works. …As tempting as sanctions often are, they should be used sparingly and against the right targets. They make sense against genuine rogue states like Iran and North Korea, as well as to show Vladimir Putin that there are costs… But sanctions against allies should be used only in rare cases. They would also be less risky if they weren’t piled on top of Mr. Trump’s tariff war. …If Mr. Trump is determined to use coercive economic diplomacy, including tariffs and sanctions, then the Treasury will have to be ready to deal with the collateral financial damage.

Writing for Real Money, Mike Norman is very worried.

The United States is increasingly using sanctions as a form of warfare. …It’s a form of soft warfare that targets a country’s economy and its ability to transact business and safeguard its financial wealth in today’s dollar-based economy. Do you know what the result of these sanctions will be? The dollar will get crushed. Something like 80% of all international transactions take place in dollars. The global financial system rests on a dollar architecture. That includes funds transfer, clearing, payments, etc. …How long do you think the rest of the world will operate under such a risk? A risk that at any moment if you fall out of favor with the fools in Washington your entire economy and lifeline to the world’s financial system can be shut down? That is too much risk. No country and no citizen wants that risk hanging over them.

Professor Barry Eichengreen expresses similar concerns in a column for Project Syndicate.

…the Trump administration is eroding the dollar’s global role. Having unilaterally reimposed sanctions on Iran, it is threatening to penalize companies doing business with the Islamic Republic by denying them access to US banks. The threat is serious because US banks are the main source of dollars used in cross-border transactions. …In response to the Trump administration’s stance, Germany, France, and Britain, together with Russia and China, have announced plans to circumvent the dollar, US banks, and US government scrutiny. …This doesn’t mean that foreign banks and companies will shun the dollar entirely. US financial markets are large and liquid and are likely to remain so. US banks operate globally. …But in an era of US unilateralism, they will want to hedge their bets. …there will be less reason for central banks to hold dollars in order to intervene in the foreign exchange market and stabilize the local currency against the greenback. …In threatening to punish Europe and China, Trump is, ironically, helping them to achieve their goals. Moreover, Trump is squandering US leverage.

And Michael Maharrey elaborates on the warning signs in a column for FEE.

…the U.S….weaponizes the U.S. dollar, using its economic dominance as both a carrot and a stick. …”enemies” can find themselves locked out of the global financial system, which the U.S. effectively controls using the dollar. …It utilizes the international payment system known as SWIFT…the Society for Worldwide Interbank Financial Telecommunication. …SWIFT and dollar dominance give the U.S. a great deal of leverage over other countries. …China, Russia, and Iran, have taken steps to limit their dependence on the dollar and have even been working to establish alternative payment systems. A growing number of central banks have been buying gold as a way to diversify their holdings away from the greenback. …even traditional U.S. allies have grown weary of American economic bullying. On Sept. 24, the E.U. announced its plans to create a special payment channel to circumvent U.S. economic sanctions… De-dollarization of the world economy would likely perpetuate a currency crisis in the United States, and it appears a movement to dethrone the dollar is gaining steam.

All of the above articles could be considered the bad news.

So I’ll share one small bit of good news from Coy’s column. The one thing that may save the dollar is that there aren’t any good alternatives.

The best thing the dollar has going for it is that its challengers are weak. The euro represents a monetary union… Italy’s recent woes are only the latest challenge to the euro zone’s durability. China is another pretender to the throne. But China’s undemocratic leadership is wary of the openness to global trade and capital flows that having a widely used currency requires.

I agree. Indeed, I wrote way back in 2010 and 2011 that the euro lost a lot of credibility when the European Central Bank surrendered its independence and took part in the bailouts of Europe’s welfare states.

So why jump from the dollar to the euro, especially since Europe will be convulsed by additional fiscal crises when the next recession occurs?

That being said, the moral of today’s column is that the crowd in Washington shouldn’t be undermining the attractiveness of the dollar. Here’s a chart to give you some idea of what’s been happening.

P.S. I want to close with a point about trade deficits. It turns out that being the world’s reserve currency requires a trade deficit. That was explained in the Cayman Financial Review column.

A significant part of the U.S. current account deficit and the U.S. trade deficit (whether measured as goods and services or as goods only) is attributable to the U.S. dollar’s status as the world’s reserve currency. Even if every country in the world were to practice free trade and not to engage in any currency manipulation, the United States would still record persistent current account deficits so long as the U.S. dollar remains the world’s reserve currency.

Likewise, here’s the relevant portion from the Real Money column.

Since most of of the world’s commerce is denominated in dollars and because oil was priced in dollars, it necessitated that the rest of the world ran trade surpluses with the U.S. in order to get dollars. Therefore, our trade deficits were an expression of high demand for dollars, not vice-versa. …We never understood, or at least our policy makers never understood, that we had the better part of the deal. When the rest of the world labors for low wages to build finished goods that they send to us for our paper currency, that is a benefit to us, not a cost.

Last but not least, here are excerpts from Peter Coy’s column.

…for the U.S. to supply dollars to the rest of the world, it must run trade deficits. Trading partners stash the dollars they earn from exports in their reserve accounts instead of spending them on American goods and services. …the U.S. gets what amounts to a permanent, interest-free loan from the rest of the world when dollars are held outside the U.S. As Eichengreen points out, it costs only a few cents for the U.S. Bureau of Engraving and Printing to produce a $100 bill, but other countries have to pony up $100 worth of actual goods and services to obtain one.

I share all these excerpts to reinforce my oft-made point that there is nothing wrong with a trade deficit. Not only does it represent a financial surplus (formerly known, and still often referred to, as a capital surplus), it also reflects the benefit the U.S. enjoys from having the dollar as a reserve currency.

P.P.S. This issue also reinforces my oft-made point that laws should not extend beyond borders.

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I don’t want to write about Trump’s new NAFTA deal (which now has the clunky acronym of USMCA), largely because not much changed since the partial deal with Mexico was unveiled.

Also, it’s hard to get too worked up about the new agreement since it largely tinkers with the status quo. And since I was a fan of NAFTA, I’m relieved Trump didn’t eviscerate that pact.

But several experts have produced very good summaries, which means I can be lazy and share their good work.

Let’s start with Jeffrey Schott of the Peterson Institute, who is underwhelmed by the revised NAFTA.

NAFTA’s benefits had always been primarily through the strengthening of economic integration of the three economies. Contrary to President Trump’s claims, the new pact moves backwards in this critical regard and imposes new restrictions that will impede regional trade and investment, stifling the potential for economic growth. On autos, the deal is innovative in a perverse way: It is the first free trade agreement (FTA) negotiated by the United States that raises rather than lowers barriers to trade and investment. It adds layer upon layer of costly new regulations that producers must follow to qualify for NAFTA’s low tariffs—layers virtually certain to drive up costs of autos for consumers and very likely reduce US jobs in the auto sector. …these steps add up to a step backwards on trade and investment in the United States and the region as a whole that, while not as damaging as it could have been, will do little or nothing to help workers, consumers, and the economies of North America.

Veronique de Rugy of the Mercatus Center is similarly dour, though thankful that the deal isn’t as bad as Trump wanted.

…the Trump administration gave up on its worst demands, including one for a minimum of 50 percent mandatory U.S. content to benefit from the new NAFTA duty-free treatment, a ban on student visas for Chinese nationals and an every-five-year sunset clause. If the U.S. hadn’t dropped these poison pills, I doubt we would have had this new deal. Let’s all be grateful for the willingness to compromise on the part of the U.S. trade negotiators. …in spite of the tiny trade-liberalization measures in the deal, tariffs overall remain significantly higher than they were before president Trump started “negotiating.” …The auto section of the deal is not as bad as what the Trump administration had hoped for, but it is still really ugly. For automobiles to enter the U.S. duty-free from North America, at least 75 percent of their content must originate in the U.S., Mexico, and Canada, up from the current 62.5 percent. It doesn’t take a rocket scientist to understand that this requirement will increase the price that Americans pay.

Ryan Young of the Competitive Enterprise Institute piles on.

Given the Trump administration’s emphasis on government-managed trade, it could have been much worse. Now President Trump can claim a political victory and hopefully turn his attention to non-trade issues, while actual trade policy remains mostly unchanged. …The 1,812-page agreement leaves intact the mostly tariff-free relationship between the U.S., Canada, and Mexico. It even has a few improvements, such as a slight liberalization of Canada’s dairy policy. U.S. agriculture policy will remain heavily subsidized and insulated from competition, however. Among the downsides are new wage and country-of-origin rules that will make cars more expensive… Also troubling is a general NAFTA/USMCA ethos under which some countries determine other countries’ regulatory policies for them. This is generally due to trade-unrelated policies in trade agreements, mostly on labor, environmental, and intellectual property issues. …In short, NAFTA has a new name, but it’s still NAFTA. …a major bullet has been dodged between America and two of its largest trading partners. That the Trump administration is calling it a victory means that a major economic loss has been avoided for the time being. It would have been better to leave well enough alone, but under the circumstances, this may be about the best possible outcome.

Simon Lester and Inu Manak grade the new deal, citing good news on agriculture and bad news on labor regulation and autos.

In terms of liberalization in the USMCA, the most important component is the liberalization of Canadian agriculture imports, such as dairy products, eggs, wheat, poultry, and wine. Dairy market access was a key concern for the United States, which has long complained about Canada’s strict supply management and quota system. …In addition, Canada agreed to give up a pricing system for certain types of milk, as well as expanding the U.S. quota for chicken, eggs, and turkey. …The labor rights provisions go further than past U.S. trade agreements. For some people on the left, this could offer a reason to support the agreement. If you are skeptical about including labor provisions in trade agreements, as we are, this is a negative aspect to the agreement. …The new rules of origin are extremely restrictive, raising costs for auto production in North America. This could lead to more production being done outside of North America, or higher costs for consumers. This is the most negative part of the new agreement.

Speaking of all the new command-and-control regulation in the USMCA, this tweet from Scott Linicome sums up one of the great ironies of the NAFTA revision.

William Reinsch of the Center for Strategic and International Studies adds his two cents, mostly noting that we’re lucky Trump didn’t make things that much worse (a common theme from all the experts).

It is somewhat comforting to see that one of the worst things you can say about U.S.-Mexico-Canada Agreement (USMCA) is that the new trade agreement replaces a term that everyone knows and can say with an unpronounceable acronym. …the business communities in all three countries dodged a serious bullet. …no one had to swallow many of the so-called poison pills. …The fact that many of its efforts to build an economic wall around the United States did not make it to the finish line is also good news, although the Canadians and Mexicans probably deserve more credit for that than our administration does.

Let’s close with some optimism. Dalibor Rohac of the American Enterprise Institute writes for CapX that the new pact shows that Trump’s protectionist instincts can be sidetracked.

…considering the range of possible outcomes, a sigh of relief is in order. President Trump’s zero-sum view of the world and his penchant for grand gestures and publicity stunts created a real risk that NAFTA – one of the great successes of trade liberalisation around the world – would follow the fate of other agreements from which his administration decided to withdraw. Forcing higher wages and labour protection standards on a relatively poor country such as Mexico will have unintended consequences, but that is likely an acceptable price for keeping trade in North America tariff-free. …USMCA shows how President Trump’s protectionism can be constrained by other world leaders: by letting the US President score easy headline-grabbing victories, which will allow him to claim that he has ‘fixed’ previously ‘horrible’ trade deals, while leaving the substance of policies mostly unchanged.

Needless to say, this doesn’t cast Trump in a positive light.

I’ll close by restating a point I made in August about, “The process of NAFTA began under Reagan, negotiations finished under the first President Bush…, and the pact was approved under Clinton.”

And American workers were beneficiaries, though Trump put 1.8 million jobs at risk by threatening to deep six that achievement.

Thankfully, it looks like NAFTA will largely survive Trump.

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I’m happy to discuss theory when debating economic policy, but I mostly focus on real-world evidence.

That’s because my friends on the left always have a hard time answering my two-question challenge, which simply asks them to name one success story for big government.

They usually point to Sweden and Denmark, but get discouraged when I point out that those nations became rich when government was relatively small.

And I’m embarrassed to admit that some of my fellow economists once thought that communist nations grew faster than capitalist nations.

But let’s not digress. I raise this topic because there are many critics of capitalism who admit that free markets generate more wealth, but they assert that society would be better off if incomes were lower so long as rich people suffered more than poor people.

This strikes me as morally poisonous. But it also gives me an opportunity to cite a new study from the International Monetary Fund that allows us to further analyze this issue.

The IMF report starts by noting that globalization (free trade, liberalization, etc) has been good for global prosperity.

Over the course of the last decades the world economy has witnessed rapid integration. Most countries have opened up their economies and experienced an unprecedented rise in the flow of goods and capital across borders. This phenomenon – now widely known as economic globalization – was coincident with rising living standards in a large number of countries. Many developing countries have experienced episodes of strong economic growth and substantial poverty reduction as they integrated their economies with the rest of the world.

Sounds like good news, right?

It is good news, but those who fixate on inequality are worried.

…while globalization might on average be good for growth, more might not always be better for all. …When we shift the analysis to how income gains from globalization are distributed within countries, we also find globalization to have different effects on different incomes…gains are, however, distributed unequally both across and within countries. …Within countries, income inequality increases as a consequence of globalization. The income gains resulting from globalization tend to go primarily to the top of the national income distributions.

In other words, rich people are getting richer at a faster pace.

This phenomenon is captured in these two charts, which show that globalization is associated with more growth and more inequality.

But what’s important is that poor people also are getting richer.

In the subsample of developing countries where the gains from globalization are generally larger, however, they also reach the bottom of the income distribution and reduce poverty. … We find…some evidence of a poverty reducing effect of globalization in developing countries.

Consider, for example, the remarkable data I shared about China. Income inequality increased at the same time that poverty dramatically declined.

And those results seem to hold for the rest of the world, especially in developing nations.

So now let’s look at the most important chart from the IMF study, which shows that all income groups enjoy more prosperity with globalization.

Yes, rich people benefit the most, so official inequality numbers will increase.

But put yourself in the shoes of a poor person. Would you be willing to forego your additional income in order to deny additional income for a rich person? I suspect the vast majority of poor people would think that’s a crazy question.

But, as Margaret Thatcher pointed out, there are plenty of folks on the left who think that’s a perfectly reasonable position. Including, incidentally, some of the people at the IMF.

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Earlier this week, Neil Cavuto asked me about the politics of trade and I warned that Trump’s protectionism may backfire on Republicans because many workers and businesses are suffering the consequences.

Needless to say, I’m not a political expert, and I think even the folks who do that for a living have a hard time disentangling the various factors that motivate voters, so we may not even know for sure after the mid-term elections.

But I do have some actual knowledge of economics, so this is a good opportunity to share some excerpts from my recent article in the Federalist. I start with the basic observation that interventionism is misguided.

…the economy grows faster when markets rather than politicians determine where labor and capital go. …Simply stated, government intervention is a recipe for cronyism, corruption, and inefficiency. It’s no coincidence that market-oriented jurisdictions such as Hong Kong are so much more prosperous than state-driven nations such as Greece. This appreciation of markets explains why conservatives should be in the forefront of the battle to defend free trade.

And it doesn’t matter whether politicians are interfering with transactions between neighbors or interfering with transactions between people who live in different countries.

We understand it would be wrong to let politicians interfere with our freedom to trade with our local grocery store. We also understand it would be a mistake to allow politicians to hinder our liberty to trade with people in neighboring states. The same argument applies when looking at our trade with people in other nations.

I then list seven reasons why free trade is desirable, starting with the fact that exchange, by definition, is mutually beneficial.

1. Voluntary Trade Is a De Facto Good – The capitalist system, based on competition and trade, is defined by voluntary exchange. There is no need for “balance” between participants. We all have trade deficits with our local gas stations. …they never buy from us. Is that bad? Of course not.

And it doesn’t matter whether people in one country are buying more than people in another country.

2. A ‘Trade Deficit’ Means a ‘Capital Surplus’ – Nations don’t trade, people do. So when people in one nation buy goods from people in another nation, the money doesn’t disappear. …Foreigners have placed trillions of dollars in America’s financial markets… This “capital surplus” boosts prosperity and should be celebrated, not bemoaned.

I also point out that trade barriers enable cronyism and corruption.

3. Protectionism Corrupts Markets – Many people unfortunately equate capitalism with big business. This is very unfortunate because large companies…manipulate the political process in order to obtain unearned profits. Trade barriers…interfere with genuine free markets…they contribute to the perception that capitalism is merely a system for the benefit of the rich and powerful.

I then share Bastiat’s wisdom about the “seen” and the “unseen.”

4. Trade Barriers Reduce Jobs and Growth – It’s easy to identify jobs that have been “saved” because of protectionism…it’s not easy to calculate the greater number of jobs that are lost because of higher prices, lost purchasing power, enforced inefficiency, and lost competitiveness.

I admit that trade of any kind can be harsh, but that’s what drives prosperity.

5. Creative Destruction Is Painful But Beneficial – Trade causes pain, but not because goods cross borders. Far more jobs are lost because of domestic trade than because of international trade. …These changes, including ones driven by cross-border trade, are painful for some people, but we all wind up much richer if markets are allowed to function.

I close with two lessons in economic history, starting with an explanation of what drove growth in the 19th century.

6. Tariffs Didn’t Create Growth in the 1800s – …the growth of the 1800s wasn’t because of trade barriers. This was an era before the welfare state. Government was very small and there were no income taxes. There was no regulatory state. …Those were the policies that helped make America an economic powerhouse.

And concluding with an observation about the success of nations with laissez-faire trade policy.

7. Protectionist Nations Lag Free-Trade Jurisdictions – …sometimes it’s easier for people to learn from real-world examples. Hong Kong and Singapore are the two jurisdictions with the world’s lowest trade barriers. Is it any coincidence that they have become rich and prosperous? …countries like New Zealand enjoyed a renaissance after dismantling trade barriers.

The bottom line is that Trump’s protectionism is bad policy. And risky policy.

I politely ask those who disagree to answer these eight questions.

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When President Trump proposed zero trade barriers among major economies, I applauded. Government-imposed barriers to commerce hurt prosperity, whether those restrictions hinder voluntary exchange inside a country or across national borders.

There’s a debate over Trump’s sincerity, and I’m definitely with the skeptics (look at his supposed deal with Mexico, for instance), but let’s set that issue aside and investigate the merits of free trade.

But let’s go one step farther. Instead of looking at whether multiple nations should simultaneously eliminate trade barriers, let’s consider the case for unilateral free trade.

In other words, should the government abolish all tariffs, quotas, and other restrictions so that buying products from Rome, Italy, is as simple as buying products from Rome, Georgia.

The global evidence says yes, regardless of whether other countries do the same thing.

Consider the examples of Singapore, Macau, and Hong Kong. According to the World Trade Organization, trade barriers are virtually nonexistent in these jurisdictions.

Have they suffered?

Hardly. According to the World Bank, all three jurisdictions are among the most prosperous places on the planet. Indeed, if you removed oil sheikdoms and tax havens from the list, they would win the gold, silver, and bronze medals for prosperity.

To be sure, there are many reasons that Singapore, Macau, and Hong Kong are rich. They have low taxes and small government, as well as comparatively little red tape and intervention.

But free trade definitely helps to explain why these jurisdictions have become so rich at such a rapid pace.

Let’s also look at the example of New Zealand. It doesn’t have absolute free trade, but average tariffs are 2.02 percent, which means it is the world’s fifth-most pro-trade nation.

Have the Kiwis suffered from free trade?

Nope. I shared a remarkable video last year that explains the nation’s remarkable turnaround coincided with a period of unilateral trade liberalization.

Today, let’s look at a column on the same topic by Patrick Tyrrell.

New Zealand…is one of the champions of economic freedom around the world. But it wasn’t always so. In the mid-1980s, New Zealand was facing an economic crisis, with its domestic market and international trade both heavily regulated. Unemployment had reached 11 percent… In response, the government of New Zealand began implementing revolutionary economic reforms, most significantly related to trade policy. It announced in 1987 a program that would reduce the tax on imports to under 20 percent by the year 1992. By 1996, that tax was reduced further to under 10 percent, and by the end of 1999, about 95 percent of New Zealand’s tariffs were set at zero.

Was that a successful policy?

Extremely beneficial.

New Zealand’s adoption of less restrictive trade policies has corresponded to its climb up the trade-freedom scale…and with a huge boost in per capita gross domestic product. The United States could take a page out of New Zealand’s trade-policy book and implement the same type of reductions in tariffs… That would enhance innovation and economic freedom—and grow our economy.

Here’s the chart from Patrick’s column.

Once again, the obvious caveat applies. New Zealand has adopted many pro-market policies in recent decades, so trade is just one of the reasons the country has moved in the right direction.

Now let’s go back in history and peruse Professor Peter Cain’s analysis of what happened when the U.K. adopted unilateral free trade in the mid-nineteenth century.

The trend to freer trade began in the late eighteenth century. …it was the 1840s that saw the beginning of a true revolution in policy. Earlier moves towards freer trade had been conditioned by an insistence on reciprocity (i.e. agreements with other states on mutual tariff reductions), but from the 1840s policy was determined unilaterally. The most dramatic instance of this was the Repeal of the Corn Laws in 1846. …It also reflected a growing belief that cheap imports were the key to prosperity because they would benefit the consumer as well as reduce business costs… Free trade certainly became a hugely popular cause in Britain… It was attractive not only because it guaranteed cheap food, but also because it supported the belief, widespread amongst both the business class and their workforce, that the state should be kept out of economic life.

What was the impact of this shift to unilateral free trade?

…free trade, in combination with heavy foreign investment, certainly helped to change the shape of the British economy in the late nineteenth century. …the long run effect of unilateral free trade had been to increase competition for British agriculture and industry, lower profits and stimulate capital exports. …this regime had yielded great benefits. British capital, pouring into foreign railways and other industries overseas, had helped to reduce agricultural commodity prices, shifting the terms of trade in Britain’s favour and raising national income. Dividends and interest payments on foreign investments had also increased greatly and these returns were realised by importing cheap foreign produce freely. Furthermore, …this unilateral free trade-foreign investment system had provided a strong boost to Britain’s commercial and financial sector.

Here’s the Maddison data on per-capita GDP in the United Kingdom between 1800-1914.

Looking at this chart, I’m wondering how anyone can possibly argue that unilateral free trade hurts an economy.

Once again, many caveats apply. Most important, many other policies play a role in determining national prosperity. It’s also worth noting that a handful of tariffs on products like wine and tobacco were maintained. Most troubling, the era of unilateral free trade coincided with the imposition of the income tax (though it didn’t become a money machine for bigger government until the 1900s).

The bottom line is that every example of unilateral free trade (or sweeping unilateral reductions in trade barriers) tells a positive story. Trade liberalization isn’t everything, but it’s definitely a huge plus for growth.

Yes, the best of all worlds is for trade liberalization to happen simultaneously in all countries, and negotiations have produced considerable progress since the end of World War II, so I’m somewhat agnostic about the best strategy.

But there’s no ambiguity about the ultimate goal of ending protectionism.

P.S. Sometimes bad things happen for good reasons. The income tax in the United States also was adopted in part to offset the foregone revenue from lower trade taxes.

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I wrote a few days ago about Obama’s weak track record on the economy and included the relevant part of a Fox Business interview.

In that same interview, I also talked about Trump’s performance. As you might expect, I said nice things about tax reform and regulatory relief, but was rather alarmist about his protectionism.

The bottom line is that Trump simply doesn’t understand trade. He thinks a trade deficit is bad, when it’s really just the flip side of a capital surplus.

Investor’s Business Daily opines on the inanity of protectionist spats.

In the tit-for-tat trade war between the U.S. and China, pain is a major theme. The idea is to ratchet up the pain, through tariffs and other punishments, until one side says “uncle.” But what if no one says “uncle”? …President Trump doubled down, proposing $100 billion in added tariffs on Chinese goods, in addition to the $50 billion or so already imposed. …China, meanwhile, on Friday withdrew from trade talks and promised to “fight back with a major response,” calling Friday’s U.S. move “arrogant.” …As the rhetoric heats up, neither side feels it can back down. …China slapped tariffs on products made in states that voted heavily for Trump, including such products as soybeans, SUVs, and small commercial jet planes. …trade disputes and tariffs have a history of becoming nasty economic downturns. …the Smoot-Hawley tariffs…caused a massive contraction in global trade and output in the late 1920s and led to the Great Depression. …in 1971, President Nixon devalued the dollar, imposed a 10% “surtax” on all imports, and the 1970s stagflation began. …trade wars are hardly ever beneficial. So maybe it’s time for both countries to cool their rhetoric, step back, and return to talking. Before we add to the damage and end up with another global economic meltdown.

Amen, especially about the foolishness of copying one of the policies that contributed to the Great Depression.

In a column for the Wall Street Journal, Tunku Varadarajan shares some observations by Douglas Irwin, a prominent trade economist.

Mr. Trump may be the first openly protectionist president since Hoover, but what Mr. Irwin finds most frustrating about him is that “he never really defines what a ‘better’ trade deal is. His judgment of trade comes down to the trade balance, which he uses as a sort of ledger, as a businessman would, rather than think more broadly about the national economic impact of trade.” It is impossible for every country to run a trade surplus, but “Trump thinks about trade in these zero-sum terms, about whether there’s profits or losses, and he views exports as good and imports as bad.” …He fails to see that in international trade, imbalances “aren’t an indication that one country is beating another, or that one is ‘winning’ and the other’s ‘losing.’ ” Mr. Trump’s rhetoric and vocabulary are “not the way economists think about trade at all.”

There are two things from the column that merit extra attention.

First, manufacturing employment primarily has declined because of productivity improvements.

The U.S. has lost steel jobs, but Mr. Irwin says that’s because the domestic industry has become more productive. “In 1980, it used to take 10 worker-hours to produce a ton of steel. Today, it takes less than two worker-hours. So even though we’re producing the same amount of steel, or even more, we use many, many fewer workers to produce that steel.”

Second, Trump has botched the opportunity to create an alliance against China.

The U.S., Mr. Irwin says, needs strong allies in Europe and Asia to “counter China when it violates the letter or spirit of its World Trade Organization commitments, and the Trump administration has done little to cultivate such allies. Instead, it seems bent on alienating them.”

Moving beyond theory and history, Trump’s protectionism is a job killer.

Here are some excerpts from a Bloomberg report about steel tariffs.

Researchers at the Federal Reserve Bank of New York said… “The new tariffs are likely to lead to a net loss in U.S. employment, at least in the short to medium run,” Mary Amiti, Sebastian Heise, and Noah Kwicklis wrote in a blog post… “given the history of protecting industries with import tariffs, we can conclude that the 25 percent steel tariff is likely to cost more jobs than it saves.” …the Fed’s Beige Book…cited one unnamed company in the Boston Fed’s region as saying that “these tariffs are now killing high-paying American manufacturing jobs and businesses.” …the effects of similar tariffs imposed by President George W. Bush in 2002 led to the loss of 200,000 jobs across the U.S. labor market. That number was bigger than the total headcount of U.S. steel producers at the time.

In other words, protectionism is bad for America, even if other countries don’t retaliate (which they often do, further exacerbating the damage of bad policy).

In the New York Times, Veronique de Rugy’s column offers some essential insights about why the trade deficit doesn’t matter.

In 1776, Adam Smith observed that nothing “can be more absurd than this whole doctrine of the balance of trade.” Sadly, almost 250 years later, the president — along with his economic adviser Peter Navarro and Commerce Secretary Wilbur Ross — has elevated this economic fallacy into a pretext for protectionism. Fueling this bipartisan hysteria is the widespread failure to understand that United States trade deficits generally add capital to our economy — more factories, more R & D or more machines. …The notion that trade deficits are always bad for the economy is…simply wrong. …we mustn’t forget that the American dollars we spend on imports eventually return to America, either by foreigners purchasing American exports or making investments. Protectionists like Mr. Trump always complain about the United States’ trade deficit for goods but mention neither the surplus of foreign investment capital that we get nor our trade surplus in services. …Recessions, reduced foreign investment in the United States and a weak dollar are the most effective ways to reduce the trade deficit. I doubt any of us would enjoy these remedies.

Trump isn’t merely wrong on the basic economics of trade. He also doesn’t even understand specific examples. Consider his recent tweets about using tariffs to force Ford to build cars in the United States.

A report in the Detroit Free Press explains why that is nonsense.

Auto analysts groaned on Sunday in response to tweets sent by President Trump that touted his tariffs on Chinese imports and his claim that the trade war would inspire Ford Motor Co. to build its Ford Active crossover in the U.S. rather than overseas. …Jon Gabrielsen, a market economist who advises automakers and auto suppliers, said, “This is further evidence that neither the president nor his trade representatives have any clue of the complexities of global supply chains.”

And Trump’s protectionism will hurt exports by American car companies.

Dziczek said. “China lowered the tariff rate from 25 percent to 15 percent for most-favored nation status — which is offered to World Trade Organization members — but raised it to 40 percent for the U.S. in retaliation to the tariffs we put on Chinese goods.”

If that’s “winning,” I hate to see the definition of losing.

We’ll round out the editorial commentary with Dan Griswold’s piece in the Los Angeles Times.

The U.S.-China trade war escalated again…both sides have a lot — almost exactly the same amount — to lose from commercial warfare. …A recent World Bank study confirms that neither side will win a protracted trade war. At the current level of tariff retaliation, the World Bank estimates that each country will suffer a drop in annual exports of about $40 billion. If retaliation escalates to include all two-way trade in goods and services, Chinese exports to the United States would fall by $190 billion and U.S. exports to China by $166 billion. …a worst-case scenario would result in a $426-billion loss to the Chinese economy and a $313-billion loss to the U.S. economy. The biggest losers in the United States will be agriculture, chemicals and transport equipment. It will be cold comfort to Americans who lose their jobs and their businesses that our loss is somewhat smaller than what our government inflicts on China.

Lots of material today, so if you made it this far, your reward is this amusing remake of the famous Ben Stein clip from Ferris Bueller’s Day Off.

If you want a more substantive video on why trade barriers are bad, I included Don Boudreaux’s excellent presentation at the end of this column.

P.S. If trade policy continues to move in the wrong direction, I suspect Trump’s final “grade point average” on economic policy might be similar to Obama’s final report card.

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Remember the big debate about whether Trump was a closet free trader or a crude protectionist?

Some people claimed he was imposing tariffs and threatening other nations in order to get them to reduce trade barriers.

From the beginning, I was skeptical of this argument, but also acknowledged that we wouldn’t know for sure until we saw a Trump-negotiated deal.

Well, I point out in this interview that my skepticism was warranted. Trump unveiled a quasi-deal on NAFTA yesterday, and it unquestionably will reduce economic liberty.

There’s a lot we still don’t know. Especially about whether this new agreement will actually get approved.

But Claude Barfield of the American Enterprise Institute has a very succinct explanation of the good and bad. He agree with me that it’s good to remove uncertainty.

(1) The best thing about the agreement — if it holds — is that it will remove the extreme uncertainty for businesses in all three NAFTA economies.

And I’m guessing he also agrees that a weakened NAFTA is better than no NAFTA.

By the way, Administration officials have told me that there are a few good provisions, involving matters such as digital goods and property rights.

But Barfield’s list of bad provisions easily trumps (no pun intended) any positive changes.

(2) The tentative “rules of origin” provisions for autos are an abomination — so complex and anti-competitive that they invite endless litigation and corruption (rules of origin govern what percentage of a final product must come from the three NAFTA nations).

(3) The old NAFTA dispute settlement system for investors has been gutted, leaving US industry and Congress with a huge dilemma as to whether to support the new pact.

(4) The auto/labor provisions (forcing Mexico to pay workers $16/hour for a number of jobs in Mexican auto plants, or four times the average hourly pay in Mexico) is a terrible precedent for mandating changes in domestic policy through a trade agreement.

Point #4 is especially terrible. It basically seeks to set wage levels above productivity levels in Mexico, which is a recipe for more unemployment in that already shaky economy (by the way, someone should tell Trump this will lead to more illegal migration from Mexico to the U.S.).

This is the same theory that the French and Germans use when trying to undermine tax competition. It’s supposedly unfair, they argue, when other countries have lower tax rates.

The bottom line is that Trump is hurting America. NAFTA has been good news for the United States, producing more jobs, more exports, and higher living standards.

When grading Trump’s overall economic policy, we just got a big chunk of bad policy to offset some of the good policy.

Sad!

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During America’s early history, trade taxes were the major source of government revenue, but they were “revenue tariffs” rather than “protectionist tariffs.”

Lawmakers didn’t necessarily want to block imports. This was before America was plagued by an income tax and some source of revenue was needed to finance the government.

And since the central government back then was very small, as the Founders envisioned, the first tariff was only 5 percent and it applied equally to all imports.

Compared to what we have today, that was a pretty good system. But it seems inevitable that politicians – sooner or later – will manipulate and abuse any power they have.

It didn’t take long for that original tariff of just 5 percent to climb higher. And it also was just a matter of time before politicians begin imposing special tariffs on selected imports in response to pleading (and goodies) from various interest groups.

Today, government’s power over trade enables some utterly disgusting and oleaginous examples of insider dealing and rank corruption.

For instance, the Wall Street Journal is reporting about an odious example of unjust enrichment thanks to protectionism.

…tariffs on imports of newsprint…have been cause for celebration at private-equity firm One Rock Capital Partners LLC. Government records show that a team from the New York-based firm approached the Commerce Department, including one meeting with Secretary Wilbur Ross, saying Canadian newsprint imports were hurting One Rock’s investment in North Pacific Paper Co., a paper mill also known as Norpac. Commerce responded to One Rock’s appeal by setting tariffs on Canadian imports, causing newsprint prices to jump by as much as 30%, significantly lifting Norpac’s business prospects.

Yes, your read correctly.

Some bigwigs bought a paper mill and then used their connections to undermine competition from Canadian paper mills.

They get rich, but only by manipulating the levers of power, not because they provide value to consumers.

…the price surge threatens the viability of small-town papers across the country, forcing reduced publication days, layoffs and other cut backs. Canadian mills have historically supplied a large portion of U.S. newsprint. “This whole play by Norpac basically disrupted an entire industry,” said Paul Boyle, senior vice president at the News Media Alliance… The tariffs represent a remarkable success by a relatively little-known private-equity firm at pulling the levers of power in Washington for advantage. …Canadian Ambassador David MacNaughton called Norpac a “rogue actor seeks to game American trade laws for its own short-term advantage, while putting thousands of U.S. and Canadian jobs at risk.”

The obvious takeaway from this story is that protectionism is bad for the U.S. economy. Yes, a few rich insiders pocket some undeserved profits and there will be a few more workers at one plant, but those results will be easily offset by the loss of jobs and income elsewhere in the economy because of the adverse impact on newspapers, advertising, and related sectors.

But I want to highlight another negative effect. I wrote back in 2011 that there are many well-meaning folks on the left that support class-warfare policies because they assume that rich people got their money illegitimately.

Well, this story is sad confirmation that this is often true.

I tell all my statist friends that punitive and destructive taxation is not the right response to this kind of sleaze. Instead, we need to get rid of protectionism (and subsidies, cronyism, and other forms of special favoritism). Make sure we have a system where people instead get rich by satisfying the needs and wants of consumers.

And I tell my Republican friends that if they don’t want crazies like Bernie Sanders, Elizabeth Warren, and Alexandria Ocasio-Cortez to wind up in charge of Washington, they need to stop playing footsie with special interests and instead fight for genuine free markets.

Sadly, neither group is taking my advice.

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There’s a debate in Washington about what President Trump really thinks about trade. Is he a crude protectionist or closet free trader?

If we focus on actions rather than rhetoric, I fear Trump is in the anti-trade camp. That is certainly the case if we look at how the Administration wants to alter the North American Free Trade Agreement. I was interviewed yesterday and here’s what I said about Trump and NAFTA.

By the way, even though I’ve previously defended NAFTA, I would like to see changes to the deal. The pact, which drags on for 1700 pages, isn’t genuine free trade.

An ideal agreement would contain just one sentence: “Mexicans and Canadians are free to buy goods and services from Americans, and Americans are free to buy goods and services from Mexicans and Canadians.”

Unfortunately, the Trump Administration wants to modify NAFTA in the other direction.

Clark Packard of the R Street Institute discusses this problem in a column for National Review.

…the administration should resolve NAFTA quickly. But a toxic mix of political miscalculations and bad policy is threatening to push that goal out of reach. U.S. Trade Representative Robert Lighthizer wants to remove the investor–state dispute-settlement process (ISDS) from NAFTA 2.0. ISDS provides neutral arbitration to settle disputes between private investors and governmental parties to NAFTA. For example, if the Mexican government expropriated an oil field owned by an American firm, ISDS would permit the American firm to seek compensation from the Mexican government in an arbitration process rather than seek redress in a Mexican court. …removing the process from NAFTA 2.0 would be a political miscalculation. …Another troublesome demand the United States is making in NAFTA negotiations is the inclusion of a so-called sunset clause that would terminate the agreement after five years unless all three countries affirmatively renew it. This is an unpopular idea on Capitol Hill and is a non-starter for Mexico and Canada, with good reason. Investment thrives in predictable environments. …the United States suggested lowering the regional-content threshold to 70 percent and requiring that 40 to 45 percent of an automobile must be produced by autoworkers making at least $16 per hour. …If manufacturers complied with this proposed requirement, their costs would skyrocket and consumers would face higher prices at the dealership. …manufacturers would forgo duty-free trading under NAFTA by sourcing parts from non-NAFTA countries and paying wages below $16 an hour, and then simply paying the small U.S. tariff on automobiles.

And here’s a good explanation, from Gary Clyde Hufbauer, of why NAFTA is a big plus for the American economy.

The North American Free Trade Agreement (NAFTA) has benefited American consumers, workers and businesses since 1994. …Some 14 million US jobs depend on the agreement with our nation’s two largest export markets, Canada and Mexico. Together, these countries spend nearly $500 billion purchasing US exports annually. …The Peterson Institute’s research shows that overseas investment is an engine for American job creation. For example, case studies in Mexico show a win-win relationship from establishing research and development facilities outside the United States: Every 131 jobs added in Mexico lead to 333 jobs created here at home. …NAFTA has fostered robust growth in agricultural exports over the past 24 years.

The bottom line, as I’ve explained many times, is that Trump will be undermining the benefits of the good things he’s accomplished – such as last year’s tax plan – if he insists on imposing higher taxes on trade. Protectionism isn’t just bad for taxpayers, exporters, consumers, and manufacturers. It’s also a net job destroyer.

The process of NAFTA began under Reagan, negotiations finished under the first President Bush (one of the few good things he did), and the pact was approved under Clinton (one of the many good things that happened during his tenure).

Let’s hope it’s not wrecked under Trump.

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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.

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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.

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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.

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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.

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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.

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