Archive for the ‘Trade Policy’ Category.

Life in the Trump Era: Conservatives Now Define Raising Taxes as "Progress"

John Hinderaker of Powerline writes approvingly of Trump's apparent trade deal with Mexico.  First, he quotes the New York Times celebrating the higher taxes:

Under the changes agreed to by Mexico and the United States, car companies would be required to manufacture at least 75 percent of an automobile’s value in North America under the new rules, up from 62.5 percent, to qualify for Nafta’s zero tariffs. They will also be required to use more local steel, aluminum and auto parts, and have 40 to 45 percent of the car made by workers earning at least $16 an hour, a boon to both the United States and Canada and a win for labor unions, which have been among Nafta’s biggest critics.

I am not sure how narrowing the scope of products subject to lower taxes is a "boon" to this country, though I suppose labor unions might be happy and one is suspicious that this is sufficient reason for the NYT to support it.  My suspicion is that these numbers are incredibly carefully tailored by Ford and GM lobbyists to hit a couple of their competitors while missing themselves -- this has all the fingerprints of a classic crony deal that benefits very few powerful groups to the detriment of most consumers.

So the NYT can be expected to cheer for bad crony economics that helps a few unions, but what about Conservatives, who are supposed to understand markets and trade.  Hinderaker writes:

So, from 62.5% to 75% to qualify for zero tariffs. Not exactly radical, but positive.

So broadening a US government tax on US consumers is "positive."  Powerline in the past has rightfully chided Paul Krugman for abandoning his understanding of economics in favor of cheerleading the Democratic team.  Now Powerline is doing the same for Trump.

How Does This New Trade Deal Offset My Higher Costs If I Don't Grow Soybeans?

Trump supporters are saying "I told you so" as Trump and European officials reached an agreement to dial back tariffs and pursue some efforts at free-er trade.  Trump supporters have argued, and I was skeptical, that Trump really wanted free trade but was engaging in brinkmanship as part of the opening phases of negotiation.  First, let's see exactly what this agreement included:

– They will work towards “zero tariffs, zero non-tariff barriers, and zero subsidies” on non-auto industrial products. That’s not a huge category of goods, as it excludes agriculture and raw materials, among other things, and zero non-tariff barriers and subsidies seems really unlikely. But still, it would be great if we made progress here.

– The EU will buy more U.S. soybeans and liquid natural gas. This was probably going to happen anyway because of market shifts and other factors.

– They will have a dialogue about conflicting regulatory standards in the U.S. and EU. This is a long-time goal of U.S. and EU trade policy-makers. It sounds easier than it really is.

– They will work together on reform of the WTO, and to address problems to the trading system caused by China.

In addition, the agreement effectively included:

  • Current Trump tariffs on steel and metals, and the European retaliation, will remain in place
  • Trump will not currently put in place his threatened $200 billion in auto tariffs on European vehicles

So the basic agreement is 1) leave all new tariffs in place; 2) sell more soybeans and natural gas to Europe; and 3) talk about tariff and non-tariff barriers that typically consume years and years of discussion.

This is basically a big zero.  Even beyond the fact that the agreement avoids most of the major trade categories, the act of negotiating towards lower tariffs, lower non-tariff barriers, and reconciling conflicting regulator standards has been done before -- its called NAFTA and the TPP, both of which Trump has sh*t on.  Sure, they can have flaws (especially the TPP), but these compromises are the only way these trade deals get made, as country leaders each are in thrall to their own influential crony industry.  The US's own high tariffs on SUV imports is a great example.  This is all not to mention the time -- TPP negotiations took 8 years -- through which we consumers apparently will still suffer under Trump's tariffs.

So for most US consumers, the end result of all of this is that we still are paying higher prices for any product that contains metal, from soda cans to automobiles.  This is great for soybean farmers, I suppose, but sucks for the rest of us.   This is all about politicians balancing one crony against another and in this calculus, consumers always lose.

Trump says he is for free trade, but he still spouts all this fairness BS.  Things that he considers "unfair" are actually just "unfair" to a few people in a few industries, but are eminently "fair" for 300 million consumers in the US.  Here is the true test of a free trader:

Consider two trade regimes.  In Regime #1, the US charges 0% tariffs on German steel and Germany charges 0% tariffs on US steel.  In Regime #2, the US is able to charge 10% tariffs on German steel while Germany still charges 0% tariffs on US steel.   I would bet quite a bit of money that Trump would say that Regime #2 is a better deal for the US, while free traders like myself and most economists would say that Regime #1 is not only better for the world as a whole, it is better for the US.  Zero tariffs allows the division of labor and comparative advantage to all work their magic to make sure capital and productive effort in this country are employed for the highest return.

I Know Congress Hates To Challenge A President of Its Own Party, But...

...Congress simply has to pare back the tariff authority it has delegated the President.  It is simply insane that Trump can just unilaterally impose 20% tariffs on foreign automobiles, a $200 billion new tax on US consumers.

It is appalling to see Trump following the usual blue model of economic regulation, imposing one intervention after another, each meant to fix the unintended consequences of the last intervention.  Steel tariffs increased costs to domestic auto makers, so Trump proposes tariffs on foreign autos.  When tariffs result (inevitably) in counter-tariffs on US agricultural exports, Trump proposes more agricultural subsidies.   People (not me) lament gridlock in government and want more fluid lawmaking -- well here it is.  And it sucks.  It is mindless and reactive and emotional and totally ignorant of economics.

These tariffs, when combined with earlier actions, will result in tax increases on consumers that swamp the tax cuts Trump and the Republicans were so proud of last year.

I tend to be a pessimist so I have probably accurately called 5 or the last 2 recessions, but i have started to shift my investments around to get ready for a slowing economy and a market correction.

Update (source)

While both careful not to specifically cite the politically unwise 'tariffs', Boeing, GM, and Fiat Chrysler stocks are plunging in the pre-market after trade war-related impacts caused missed earnings or lowered outlooks.

General Motors Co. cut its forecast for profit this year as surging prices for steel and aluminum combine with swings in South American currencies to burden the largest U.S. automaker. Specifically, Bloomberg reports that raw material costs probably will be a $1 billion headwind to GM’s profit this year - roughly double its previous expectation - while the Argentine peso and Brazilian real are likely to drag on results through the remainder of 2018.

Schadenfreude: Crony Jerks at Whirpool Who Begged for Tariffs Are Now Suffering From Them

This is definitely from the schadenfreude files, via the WSJ:

After the Trump administration announced new tariffs on imported washing machines in January, Marc Bitzer, the chief executive of Whirlpool Corp., celebrated his win over South Korean competitors LG Electronics Inc. and Samsung Electronics Co.

“This is, without any doubt, a positive catalyst for Whirlpool,” he said on an investor conference call.

Nearly six months later, the company’s share price is down 15%. One factor is a separate set of tariffs on steel and aluminum, imposed by the U.S. in March and later expanded, that helped drive up Whirlpool’s raw-materials costs. Net income, even with the added benefit of a lower tax bill, was down $64 million in the first quarter compared with a year earlier.

Unfortunately, as is always true in protectionism, consumers are being hurt as well.  This chart on the left is amazing:

One reason politicians do this sort of thing is that there really is not any sort of organized consumer groups in this country, other than groups on the Left like Ralph Nader's PIRG groups that often actually support protectionism -- these groups always seem more beholden to traditional Democratic groups (especially unions) than they are to consumers.  Elizabeth Warren, who styles herself a consumer advocate and who created the CFPB almost single-handedly, actually supports Trump's tariffs.   Since the link above is gated, I will give an excerpt of Senator Warren advocating for higher consumer prices:

But the support of key Democrats—including Sen. Elizabeth Warren of Massachusetts—for Mr. Trump’s “America first” approach to trade stands to complicate any GOP effort to tie the president’s hands.

The awkward political divisions over trade matters were on display Sunday as Ms. Warren backed Mr. Trump’s policy while Republican senators rebuked the president.

“When President Trump says he’s putting tariffs on the table, I think tariffs are one part of reworking our trade policy overall,” Ms. Warren said on CNN’s “State of the Union.”

Some Democratic lawmakers have found fault with the implementation or scope of the steel and aluminum tariffs. But Ms. Warren, to whom Mr. Trump derisively referred as “Pocahontas” again on Saturday, declined to criticize the president’s policy and said previous approaches to trade boosted profits at multinational corporations.

 

Are You (or Trump) Really for Free Trade? Here is a Hypothetical to Test You

A few days back, we had a debate in the comments about whether Trump really wants free trade.   In my view, Trump looks at tariff rates and trade deficits like a simple scorecard of winning or losing without really understanding trade and its benefits.  Sure, Trump proposed a zero tariff rate agreement in passing with our European trading partners.  I think he did this because it made him look good and he knew they would never go for it.

But no matter the case, even if he is sincere, he still is judging this proposal by a very different standard than economists would.  Take European tariffs on passenger cars.  My understanding is that they are about 10% on US cars vs. our 2.5% on theirs  (this ignores the absolute hypocrisy in this whole thing that our light truck tariff on imports is like 25%, but put that aside).  Trump sees taking these two passenger car tariff rates to zero as a win NOT because it would be a benefit to consumers but because in his thinking the US gets a 10% concession out of Europe and only gives up a 2.5% concession in exchange.  Winning!

I tried to think of the best way to highlight the difference between Trump's thinking and good economic thinking on trade, and I came up with this hypothetical:

Consider two trade regimes.  In Regime #1, the US charges 0% tariffs on German steel and Germany charges 0% tariffs on US steel.  In Regime #2, the US is able to charge 10% tariffs on German steel while Germany still charges 0% tariffs on US steel.   I would bet quite a bit of money that Trump would say that Regime #2 is a better deal for the US, while free traders like myself and most economists would say that Regime #1 is not only better for the world as a whole, it is better for the US.  Zero tariffs allows the division of labor and comparative advantage to all work their magic to make sure capital and productive effort in this country are employed for the highest return.  I believe from reading the comment section of this blog that there are many many people who call themselves a free trader but who would say that Regime #2 is a better deal for the US.  If you believe that, you better have done a lot of work educating yourself on the issue because the great mass of economic theory and practice is against you.

I am not an economist and I am too busy today to give the whole explanation today, but here is one hint at part of the answer:

As of mid-2017, there were 29,288 steel-consuming firms, employing more than 900,000 workers who face higher prices versus just 916 steel-producing firms with 80,000 employees who benefit from those higher prices and reduced competition.

When the F*ck Did We Give The President So Much Power? Trump Unilaterally Raises Taxes Again

Republicans that used to lament the imperial presidency under Obama sure seem to be OK with Trump unilaterally levying tens of billions of dollars of new taxes on American consumers.  I presume since no one has seriously questioned his power to do so that he must have this power.  Yet another example in the shameful history of Congress delegating its powers to the Administration.

Trade Wars Are Weird

Trump:  I'm going to raise taxes on the consumers and businesses in the US that buy things from overseas.

China: Oh yeah?  I will show you, I will raise taxes on my citizens even more!

 

From the vaults:  Our sister publication in China complains about Chinese tariffs.  Note the date, way back in 2006.  If history doesn't repeat itself, it at least rhymes.

The Historical Reason I Am Skeptical About Trump's G7 Free Trade Proposal

After hammering various members of the G7 with new tariffs and threats of even more tariffs, Trump proposed that everyone eliminate all their tariff's and subsidies:

Q Mr. President, you said that this was a positive meeting, but from the outside, it seemed quite contentious. Did you get any indication from your interlocutors that they were going to make any concessions to you? And I believe that you raised the idea of a tariff-free G7. Is that —

THE PRESIDENT: I did. Oh, I did. That’s the way it should be. No tariffs, no barriers. That’s the way it should be.

Q How did it go down?

THE PRESIDENT: And no subsidies. I even said no tariffs. In other words, let’s say Canada — where we have tremendous tariffs — the United States pays tremendous tariffs on dairy. As an example, 270 percent. Nobody knows that. We pay nothing. We don’t want to pay anything. Why should we pay?

We have to — ultimately, that’s what you want. You want a tariff-free, you want no barriers, and you want no subsidies, because you have some cases where countries are subsidizing industries, and that’s not fair. So you go tariff-free, you go barrier-free, you go subsidy-free.

Awesome, sign me up. But is this serious?  I want to get to that in a minute but first let me offer two practical observations

  • Trump belabored the 270 percent Canadian dairy tariffs on US products, but at the same time the US tariff rate on Canadian dairy products is effectively infinite, because we simply don't let any in.  This is the kind of complexity he is glossing over.  Forget Canada, his proposal for no tariffs or subsidies would cause a major freakout among US dairy farmers, a business absolutely chock-full of crazy quilt of progressive state regulation on prices and subsidies and quotas.  (and by the way, congrats to Trump for getting progressives like Drum into the free trade, anti-price-control camp).
  • Simple statements like "no subsidies" are easy to make, but is a lower corporate tax rate a subsidy?  How about lower minimum wages?  What about really long copyright lives?  What about when a governor or mayor gives out relocation incentives and tax abatements?  What about the whole Amazon HQ2 deal that is coming?   The list of complexities are endless.  That is why long and complicated negotiations are necessary to reduce tariffs and subsidies.  Fortunately we have actually done this, in deals like NAFTA and the TPP.  Unfortunately, Trump has given both of these the boot.  So is he really serious?

I have a love for history and like to make comparisons of modern events to history, and in this case I believe there is a very parallel case we can learn from.   Here is the problem:  It involves Hitler's Germany.  Hitler is obviously the third rail of Internet discourse, but the example is so parallel I am still going to go ahead, with the following proviso:  I am not saying Trump is Hitler, or making any such analogy or statement.  I am merely attempting to learn from a very similar international negotiation that occurred in the 1930's.

If  you can put aside all the emotional baggage of Hitler being either the worst mass murderer in history or at least in the top 3, he was (at least for a while until it all blew up on him) very successful in getting wins in diplomatic face-offs of the type Trump seems to want (by this I mean gains for his own country in zero-sum or even negative-sum games made by repudiating past international settlements).  Hitler's brashness essentially won out with the reoccupation of the Rhineland, Germany's remilitarization, the annexation of Austria, and even led to the western powers basically handing the Sudetenland over to him.

But the example I have in mind is with the disarmament conferences of the the early 1930's.  Major western powers were looking for some sort of agreement to head off an expensive and destabilizing arms race of the type that occurred in the run-up to WWI (and which by the way was way too expensive for countries bogged down in the Great Depression).  As the powers discussed incremental limits or reductions, one world leader jumped into the fray and proposed that all the powers agree to total disarmament  -- no more militaries at all.  Can you guess who made this radical proposal that would be the envy of any 1960's hippie?**

Hitler had [President Roosevelt's] message before him when he prepared the final draft of his speech to the Reichstag. Contrary to expectation, his speech, when delivered, made no threat of immediate rearmament. Germany was ready at any time, Hitler said, to renounce the aggressive weapons forbidden to her by the Treaty of Versailles “if the whole world also bans them.” Without further ado, Germany would dissolve her whole military establishment “if neighboring nations unreservedly did the same.” For President Roosevelt's proposal the German government was “indebted with warm thanks.” Germany was ready to join in “any solemn non-aggression pact because she thinks not of attack but of her security.”

In making this speech, Hitler said that he above everyone else wanted peace.  He was a soldier, he had been in the trenches, and no soldier wanted war.

Given his past actions, we suspect Hitler was not a total peacenik, so what was going on here?  The Treaty of Versailles had essentially disarmed Germany, reduced its army to 100,000 men and banned it from having an air force and submarines, among other things.  Germany chaffed at these limits, considering them grossly unfair, and wanted limits at parity with those on, say, France.

Hitler always liked to turn other nations' values against them in his international statements.  Later, when he justified potential annexations in Austria, Czechoslovakia, and Poland, he would say that he was just interested in "self-determination of peoples" and that other powers were inconsistent and unfair when they refused to allow this principle they themselves had established to be applied to ethnic Germans in these countries.  Hitler clearly didn't care one bit about free self-determination of peoples, but he was happy to throw US and British and French rhetoric back in their faces.

So in this case Hitler grabbed at the other major powers' pious pronouncements about their commitment to disarmament and again threw it back in their faces.  You want disarmament?  OK, let's do it -- total disarmament.  Hitler knew that they would never do it -- France in particular did not trust Germany at all.  Hitler waited until it was clear the other countries were not going to go for this proposal and said something like, "see, those other countries were never serious, they never wanted peace.  All they want to do is keep Germany down."  He proceeded to resign from the conference,  renounce the military limits of the Versailles treaty, and started building Germany's army and air force.   Which was what he had intended to do all along.

I know from the comments that there are folks reading my blog who honestly don't seem to understand trade and the trade deficit, and I am at my limit in explaining any more clearly.  I know there are also folks who honestly think Trump is following a brinksmanship path to get to a net better set of trade rules in the future.  I wrote the other day that I doubted this, but folks have emailed me the quotes about Trump proposing full free trade as proof of his intentions.  Sorry, while I would love to believe this is true, and will happily admit my error later if needed, I don't believe it for a minute.  It just looks too much like Germany's actions at the disarmament conference.  People who truly want and understand free trade do not say things like "there are too many German cars in the United States."***

 

** This link is squirrelly and sometimes is gated and sometimes not.  The full citation is Boeckel, R. M. (1933). The Disarmament Conference, 1933. Editorial research reports 1933 (Vol. II). Washington, DC: CQ Press. Retrieved from http://library.cqpress.com/cqresearcher/cqresrre1933100900

*** Anyone older than about 45 can tell you how badly US cars sucked before foreign competition, and how much better they are today only because we allowed this competition.  Even if you don't own a German car (and I do), your American car is better and less expensive than it would be without German and Japanese and Korean competition.

 

Response From Trump Supporters on Tariffs

I can't resist publishing this email.  This is the full text, I have not edited it:

57 YEARS ASIA FAKE MONOPLY MONEY THEFT/TRADE THEFT/DEFENSE THEFT/WELFARE THEFT & BUILT US OVER THERE & CHARGING “””””””YEN,YUAN’’’’’’’’’’’’’’’’’’’MONEY MANIPULATION

SO POTUS TRUMP STOPS THEFT & YOU MF ARE MAD

SO WHY ARE YOU NOT LIVING IN ASIA US=================INSTEAD OF THE ONE YOU DESTROYED-US!!!!!!!!!!!!!!!!!!!!!!!!!

Trump Likely to Impose New Tariffs Today: Is This Bad Economics or Madman Theory?

Frankly, I do not know how folks like Mark Perry and Don Boudreaux do it.  They are able to keep going, day after day, year after year, refuting the same stupid anti-trade arguments over and over again.  I don't have the patience or endurance.  Long-time readers will remember I used to spend a lot of time on climate.  But the debate never went anywhere.  It was like Groundhog Day.  At some point I just thought "I've said what I have to say, and now I am done"  (though I actually do have a climate update in the works).

Anyway, Trump has put tariffs on Mexican and Canadian steel and aluminum and is poised to do so for European products soon, a tax that will ultimately be paid by every American consumer.  Sigh.  This is just so economically ignorant it is hard to take it seriously, yet here it is.  In the name of 150,000 or so US steelworkers and a bare handful of obviously politically well-connected corporations, we are going to raise prices on essential raw materials that are consumed in one way or another by a huge number of American businesses and hundreds of millions of US consumers.   Two or three years ago when US manufacturers are moving oversees for lower raw material costs, you will know why.

Republicans are really supposed to know better on this sort of thing, which to me is just proof #12,465 that our political parties represent tribal rather than consistent ideological differences.  Republicans have twisted themselves in so many knots trying to support Trump while knowing better on tariffs that some have actually brought back a version of madman theory.

I am not entirely sure of the intellectual and historical origins of madman theory, but I have always ascribed it to Nixon and Kissinger.

President Richard Nixon and his national security adviser Henry Kissinger believed they could compel "the other side" to back down during crises in the Middle East and Vietnam by "push[ing] so many chips into the pot" that Nixon would seem 'crazy' enough to "go much further," according to newly declassified documents published today by the National Security Archive.

The documents include a 1972 Kissinger memorandum of conversation published today for the first time in which Kissinger explains to Defense Department official Gardner Tucker that Nixon's strategy was to make "the other side ... think we might be 'crazy' and might really go much further" — Nixon's Madman Theory notion of intimidating adversaries such as North Vietnam and the Soviet Union to bend them to Washington's will in diplomatic negotiations

Speaking of Kissinger, the new Conservative explanation of Trump trade (and foreign) policy also includes an element of old-time brinksmanship.  I remember reading something in college from Kissinger, which I can't find now so maybe I have it wrong, but I would paraphrase it as, "it is very dangerous to go to the brink over an issue, but one can never make progress without going to the brink."

Some Conservatives are now arguing that Trump's protectionism is "good" protectionism because it is an opening move in a bargaining game where the US can make headway and perhaps get better rules all around.  As such, Trump's seeming irrationality and willingness to ignore basic economics is a feature, not a bug, supporting the madman model of negotiation.

Ugh.  This might perhaps all be reasonable strategy in a zero-sum game such as, say, negotiating shares of the assets in a bankruptcy settlement (something Trump is actually super experienced at).  Trade, though, is not a zero-sum game.  By definition, trades that are executed voluntarily have to help both parties, or else they would not be agreed to.  As such, anything that reduces the amount of trade between people in two countries is guaranteed to be a net loss for BOTH groups of people.  There are no winners.

Addressing the Pro-Tariff Arguments

Don Boudreaux and and Mark Perry have been doing a great job making the case against Trump's trade sanctions.  But it is always a danger only to learn about opposing views from those who disagree with you, so in the spirit of Bryan Caplan's "Ideological Touring Test" I wanted to address directly some of the arguments in support of Trump's sanctions.

I followed several links to this article by Spencer Morrison.  After reading the whole thing, I fear I have made the intellectual error of choosing a poor representative of the opposing side's argument, but I am committed now, so here goes.

Consider that China steals more than half a trillion dollars in American intellectual property every single year. This is one of the reasons America’s trade deficit with China is so massive. For example, in 2010 Chinese companies stole high-speed rail designs from American firms, thereby depriving them of hundreds of billions in potential revenues. Such theft occurs in nearly every industry, whether it’s software programs or branded consumer goods. And the worst part? We let it happen.

I find the author's figure absurd, and likely untrustworthy given his example.  Following his high-speed rail design "theft" link one quickly finds that 1) Americans were not involved at all, which is not surprising since we really don't have high-speed rail manufacturing industry or expertise in this country; 2) the technology seems to have been acquired or copied legally; and 3) the real competitive issue for non-Chinese companies seems to be that the Chinese have extended and improved the technology.

This one paragraph essentially summarized the theme of the article, that technology is the key to increased well-being and that the US is poorer when they cannot monopolize the best technology.  The first is true, the second is dead wrong and flies in the face of 200 years of history.

I won't spend time on the mass of the article where describes the economy in very production-based terms which I don't totally agree with, but his basic point is one I can partially accept -- that real economic growth over time comes from  productivity growth.  I agree that technology is part of the productivity equation, but unlike the author I also see other drivers such as trade (which he calls "noise").  Trade is a critical factor in productivity improvement as specialization and comparative advantage greatly increase productivity.

But where I think he really goes off the rails is to say that because technology is wealth-creating, we need to monopolize that technology in the US.

The core issue remains: we continue to  offshore our advanced industries at an alarming pace, which will only increase the likelihood that the “next big thing” will be invented abroad. If we do not reverse this trend, we will soon be on the outside looking in.

It would be entertaining to discuss the origins of the American textile industry in the late 18th and early 19th century with the author, which were largely based on spinning jenny and powerloom designs that were literally stolen from manufacturers in the UK (countries don't own technologies, only individuals and their companies do).  The UK at the time had strict technology export restrictions of which I am sure the author would have been approving.

So did the UK suddenly become poorer as America built a lively cloth industry?  No, in fact the UK boomed along with the US.  It turns out that spreading new technology and productivity techniques around more widely made everyone richer.  This only makes sense.  Would the West really be wealthier if they had kept all technology from spreading, and thus were surrounded by countries dominated by subsistence farming and medieval crafts?  A skeptic might argue that the UK did eventually become poorer relative to the US and upstart Germany, but Andrew Carnegie could have told you why at the beginning of the 20th century.  He went back and toured manufacturers in his old home and was horrified at how little they reinvested in new technology.

Which brings me back to Chinese high speed rail, the example he started with.  Clearly the Chinese have a growing high-speed rail manufacturing industry, and they DIDN'T invent the technologies originally in China.  This is what trade is all about.  Rather than keep technologies locked up in a secret underground bunker in the Rockies, as the author seems to prefer, it spreads technologies around the world.  Production then shifts around the world based on a variety of factors such as comparative advantage in ways that are hard to predict, but seldom has a strong relationship to the country in which the technology was first invented.  One place production does NOT shift, though, is towards countries whose government has artificially raised critical raw material prices through border taxes on its consumers called tariffs.

Which reminds me, if the problem is China "stealing" things like high-speed rail technology, then why in the hell are we imposing steel and aluminum tariffs?  What the heck does this have to do with technology transfer?  In fact, if the US really had a high-speed rail industry we were worried about, or if one were exclusively concerned with the auto industry, the author is essentially telling them "we are sorry you had your technology stolen so to help you out we going to substantially raise the prices of your two largest purchases (steel and aluminum) so that you can be even less competitive internationally."  Ahh, I can feel the economic growth from that already.

If the author wants better intellectual property protections for US companies and individuals, I am generally supportive of efforts to achieve this (as long as we don't over-specify intellectual property and end up again with endless patent troll suits).  For all its flaws, though, joining the TPP seems to be a better path to this end (it actually addresses, you know, intellectual property protections rather than just raise steel prices for consumers).

To conclude, I love this quote from his article because, despite being anti-trade, he in fact is echoing the pro-trade observation by Steven Landsburg.

Yet our trade policy does exactly the opposite. After the North American Free Trade Agreement took effect in 1994, U.S. corn exports surged, as did our imports of automobiles. The problem is that automobile manufacturing is much more likely to benefit from disruptive technology than is growing corn—under NAFTA, the preponderance of long-run benefits went to Mexico, not the United States. The same is true with America’s trade relationship with China: America’s advanced goods trade deficit with China now tops $120 billion. Meanwhile, our biggest export is soybeans.

Free trade is, quite literally, turning America into China’s mercantile resource colony: we buy their value-added, manufactured products, and we sell them raw materials.

This is freaking awesome!  We grow and sell soybeans and get back advanced technology products.  Brilliant!  No wonder we are the richest nation on Earth.

Postscript:  So to save the time clicking through to Steven Landsburg, here is a part of what he said (via Carpe Diem):

There are two technologies for producing automobiles in America. One is to manufacture them in Detroit, and the other is to grow them in Iowa. Everybody knows about the first technology; let me tell you about the second. First you plant seeds, which are the raw material from which automobiles are constructed. You wait a few months until wheat appears. Then you harvest the wheat, load it onto ships, and sail the ships eastward into the Pacific Ocean. After a few months, the ships reappear with Toyotas on them.

International trade is nothing but a form of technology. The fact that there is a place called Japan, with people and factories, is quite irrelevant to Americans’ well-being. To analyze trade policies, we might as well assume that Japan is a giant machine with mysterious inner workings that convert wheat into cars. Any policy designed to favor the first American technology over the second is a policy designed to favor American auto producers in Detroit over American auto producers in Iowa. A tax or a ban on “imported” automobiles is a tax or a ban on Iowa-grown automobiles. If you protect Detroit carmakers from competition, then you must damage Iowa farmers, because Iowa farmers are the competition.

The task of producing a given fleet of cars can be allocated between Detroit and Iowa in a variety of ways. A competitive price system selects that allocation that minimizes the total production cost. It would be unnecessarily expensive to manufacture all cars in Detroit, unnecessarily expensive to grow all cars in Iowa, and unnecessarily expensive to use the two production processes in anything other than the natural ratio that emerges as a result of competition.

That means that protection for Detroit does more than just transfer income from farmers to autoworkers. It also raises the total cost of providing Americans with a given number of automobiles. The efficiency loss comes with no offsetting gain; it impoverishes the nation as a whole.

Average People Used To Understand That Protectionism Was Welfare for Special Interests That Hurt Consumers. When Did This Change?

I have been watching the second season of Victoria on PBS (quite good, I think) and much of it has covered the famines of the 1840's and the debate over the Corn Laws.  At the time, it seems that average people understood that the British tariffs on imported food were in place solely to protect the agricultural profits of aristocratic (and by definition well-connected) landowners while hurting the country as a whole by raising food prices for every consumer and contributing to the famines that were sweeping Ireland and parts of England.

Trump's proposed tariffs are simply a disaster.  A lot of the media seems to believe the biggest reason they are bad is that they will incite retaliatory tariffs from other countries, which they almost certainly will.  But even if no one retaliated, even if the tariffs were purely unilateral, they would still be bad.  In case after case, they are justified as increasing the welfare of a certain number of workers in targeted industries, but they hurt the welfare of perhaps 100x more people who consume or work for companies that consume the targeted products.  Prices will rise for everyone and choices will be narrowed. This is Bastiat's classic seen and unseen -- the beneficiaries (say in the steel industry) are easy to identify, but the individual consumers who change their purchasing plans or industries that change their investment plans are frequently invisible.  It is the height of childish public policy to pretend those hurt by this don't exist merely because they can't easily be interviewed on TV.

Well, not completely invisible:

 A proposed expansion of an Exxon Mobil Corp oil refinery could be impacted by the Trump administration’s plan to place a 25 percent tariff on imported steel, a source familiar with the matter said on Thursday.

Exxon has been considering increasing its North American crude refining capacity since at least 2014, the company has said, but has not disclosed a final decision. An Exxon spokeswoman was not available for immediate comment.

 The nation’s largest oil producer has been weighing adding new processing capacity to its 362,000 barrel-per-day Beaumont, Texas, plant that could make it the nation’s largest. (Reporting by Erwin Seba Editing by James Dalgleish)

Government Regulatory Template: Subsidize Demand, Restrict Supply

The government does it in health care, education, and housing.  Usually in the name of increasing access to or usage of something, they will subsidize demand.  But then at the same time they will restrict supply, giving lie to this stated justification of increasing access, making the whole exercise a crony enrichment of a small number of incumbent producers or asset owners.  The government creates low income housing programs and subsidized mortgages but limits the ability to construct new homes, thus having the primary effect not of increasing housing access but of driving up home prices for current incumbent home owners.  In health care the government subsidizes access to care in any number of ways but then restricts supply through certificates of need, onerous licencing programs, and drug manufacturing restrictions.

Now, consider solar panels.  The government has many programs to subsidize the purchase of solar panels.  Often, one can get local, state, and federal rebates and tax breaks for buying solar panels.  But at the same time:

President Donald Trump’s pledge to offer American companies more aggressive protection from foreign competition got fresh ammunition Friday, when a government board cleared the way for him to deploy a long-dormant legal weapon to restrict solar panel imports....

In the solar panel case, filed by Georgia-based Suniva Inc. and joined by Oregon-based SolarWorld Americas Inc., the ITC commissioners will now consider specific policy recommendations and submit those to the White House by Nov. 13. Mr. Trump then has two months to decide whether to impose solar trade barriers....

“We brought this action because the U.S. solar manufacturing industry finds itself at the precipice of extinction at the hands of foreign market overcapacity,” Suniva said. The firm filed for bankruptcy protection earlier this year.

This really is utter madness, even from a domestic employment standpoint.  I would be willing to be that the solar panel installation industry, which will be hurt by rising costs of solar panels, employs way more people than the US panel manufacturing industry.  The solar industry's trade association seems to agree:

“Analysts say Suniva’s remedy proposal will double the price of solar, destroy two-thirds of demand, erode billions of dollars in investment and unnecessarily force 88,000 Americans to lose their jobs in 2018,” said the Solar Energy Industries Association, which promotes solar use.

For Progressives who are suspicious of public choice theory, this is they sort of prediction public choice theory makes and should be an area where Progressives and libertarians could make common cause.  But traditionally Progressives have always been trade restrictionists, which seems crazy to me.

 

Orren Boyle Smiles

I just cannot understand how politicians can be called "populist" for favoring a few hundred thousand domestic steel workers and steel company equity holders over 300 million domestic consumers who depend on low-cost steel for their jobs or buy steel products.  But there seems to be something about the steel industry that causes folks who normally would scream about corporate welfare to just roll over.

At noon, Donald Trump will sign an executive order calling for a probe whether imports of foreign-made steel are hurting U.S. national security. The order will revive a decades-old, rarely used law to explore imposing new barriers on steel imports, in this case aimed loosely at China.

Trump will sign the memorandum related to section 232 of the Trade Expansion Act of 1962 at an event in the White House that will include leadersd of several U.S. steel companies; the law will allow the president to impose restrictions on imports for reasons of national security. Trump’s directive will ask Ross to conduct the probe “with all deliberate speed and deliver the results to the president with his recommendations."

An official cited by Reuters sad that there are national security implications from imports of steel alloys that are used in products such as the armor plating of ships and require a lot of expertise to create and produce.

Why do I suspect the national defense argument is a total sham?

Update:  “For every steelworker, there are 60 workers in steel-using industries,” said Lewis Leibowitz, a Washington attorney who has worked on trade cases involving steel in the past. “You need competitive steel prices for those industries to be competitive and to export.”  source:  WSJ

Why Aren't The Chinese Ticked Off About Subsidizing American Consumers? And Why Aren't We Happy About It?

Ten years ago, we published an editorial from our Chinese sister publication Panda Blog.  Though some of the details of their government's financial actions have changed since then, the gist of it is still correct -- the Chinese government still engages in actions that they call "export promotion" and President Trump calls "currency manipulation".  So I think this editorial from the perspective of the Chinese consumer is still relevant:

Our Chinese government continues to pursue a policy of export promotion, patting itself on the back for its trade surplus in manufactured goods with the United States.  The Chinese government does so through a number of avenues, including:

  • Limiting yuan convertibility, and keeping the yuan's value artificially low
  • Imposing strict capital controls that limit dollar reinvestment to low-yield securities like US government T-bills
  • Selling exports below cost and well below domestic prices (what the Americans call "dumping") and subsidizing products for export

It is important to note that each and every one of these government interventions subsidizes US citizens and consumers at the expense of Chinese citizens and consumers.  A low yuan makes Chinese products cheap for Americans but makes imports relatively dear for Chinese.  So-called "dumping" represents an even clearer direct subsidy of American consumers over their Chinese counterparts.  And limiting foreign exchange re-investments to low-yield government bonds has acted as a direct subsidy of American taxpayers and the American government, saddling China with extraordinarily low yields on our nearly $1 trillion in foreign exchange.   Every single step China takes to promote exports is in effect a subsidy of American consumers by Chinese citizens.

This policy of raping the domestic market in pursuit of exports and trade surpluses was one that Japan followed in the seventies and eighties.  It sacrificed its own consumers, protecting local producers in the domestic market while subsidizing exports.  Japanese consumers had to live with some of the highest prices in the world, so that Americans could get some of the lowest prices on those same goods.  Japanese customers endured limited product choices and a horrendously outdated retail sector that were all protected by government regulation, all in the name of creating trade surpluses.  And surpluses they did create.  Japan achieved massive trade surpluses with the US, and built the largest accumulation of foreign exchange (mostly dollars) in the world.  And what did this get them?  Fifteen years of recession, from which the country is only now emerging, while the US economy happily continued to grow and create wealth in astonishing proportions, seemingly unaware that is was supposed to have been "defeated" by Japan.

We at Panda Blog believe it is insane for our Chinese government to continue to chase the chimera of ever-growing foreign exchange and trade surpluses.  These achieved nothing lasting for Japan and they will achieve nothing for China.  In fact, the only thing that amazes us more than China's subsidize-Americans strategy is that the Americans seem to complain about it so much.  They complain about their trade deficits, which are nothing more than a reflection of their incredible wealth.  They complain about the yuan exchange rate, which is set today to give discounts to Americans and price premiums to Chinese.  They complain about China buying their government bonds, which does nothing more than reduce the costs of their Congress's insane deficit spending.  They even complain about dumping, which is nothing more than a direct subsidy by China of lower prices for American consumers.

And, incredibly, the Americans complain that it is they that run a security risk with their current trade deficit with China!  This claim is so crazy, we at Panda Blog have come to the conclusion that it must be the result of a misdirection campaign by CIA-controlled American media.  After all, the fact that China exports more to the US than the US does to China means that by definition, more of China's economic production is dependent on the well-being of the American economy than vice-versa.  And, with nearly a trillion dollars in foreign exchange invested heavily in US government bonds, it is China that has the most riding on the continued stability of the American government, rather than the reverse.  American commentators invent scenarios where the Chinese could hurt the American economy, which we could, but only at the cost of hurting ourselves worse.  Mutual Assured Destruction is alive and well, but today it is not just a feature of nuclear strategy but a fact of the global economy.

Trade and World Peace -- Economic Nationalism Leads to War

President Trump is a strong economic nationalist.  He believes that this country should source everything domestically - its products and its labor - and any labor or resources that are coming from other countries should either be stopped by a wall or heavily taxed.

Economists and I will spend a lot of time over the next four years trying to explain to our economically-ignorant administration why global trade and the global division of labor increase domestic incomes and production rather than decreasing them.  But I do not want to lose sight of another important benefit of open trade in the global economy - peace.

We often miss the fact because our news is dominated by stories of violence and terror, but we live in times of unprecedented peace around the world.  It is no coincidence that this is occurring at the same time that global trade is at a historic peak.  People and governments can obtain just about anything they want, inexpensively, through voluntary trade.  This has seldom been the case through history -- and when people could not get what they wanted through free trade, they tried to take it by force.

Think about the corollary of Trump's economic nationalism, particularly if everyone followed this same approach.  If one skews all the rules and taxes and prohibitions so everything must be sourced domestically, then if a country does not have some particular resource or skill domestically, it is out of luck.  No domestic rare earth metals?  Sorry.

But governments and powerful people seldom calmly accept that something they critically need is not available.  They will be tempted to go and take it.  The worst, most violent empire building of the last 100-150 years has occurred when countries have pursued economic nationalism.  Think of the colonialism of the late 19th century.  Today we happily trade with South Africa and other countries for valuable resources, but in that time of economic nationalism, if a country wanted access to these resources, it felt it had to control the land and the people.  Hitler in the 1930's wanted to make Germany self-sufficient in agricultural goods and certain other resources, and the only way to do that was to go and grab other people's land and resources.

The best example of all of this phenomenon is, I think, Japan in the 1930's.  Japan felt that it was resource poor and under Trump's theory of economic nationalism, it felt it had to control oil and other resources it did not have domestically.  So it plotted to go take it.  When the US instituted a trade embargo in these very goods to punish Japan's aggressiveness in China, it just accelerated Japan's thinking in this area, convincing it for good it had to control these resources, and it was soon invading the oil-rich islands of what is now Indonesia.  This example is all the more telling because Japan actually found true prosperity after the war when it traded peacefully for these resources.  Unfortunately, it adopted economic nationalism, via MITI, of another form and helped manage themselves into a 20-year recession, but that is another trade-related story for another day.

Postscript:  I have more to say on this when I get my thoughts better organized.  Right now I am hurrying to a plane, for Regina, Canada, where I am speaking on global warming tomorrow.  There is a related issue of what happens when strong protectionism on our part pushes China over into the crash they have been putting off for years -- suddenly a crash largely of their making becomes the fault of the US, with implications for a formation of a new cold war, but that again is another topic for another day.

Trump Silver Lining: Liberals Are Now Defending Trade Deficits

Thanks to Trump, it appears that some of the Left have discovered economic reality and are defending trade and suddenly seem less unsettled by trade deficits.  Here is Kevin Drum with one in a series trying to downplay panic over trade deficits, in this case with Mexico.    Here are some of my recent thoughts on the trade deficit.

International trade is such an obvious benefit to the country that it is simply incredible that we are, hundreds of years after Adam Smith and Ricardo and Bastiat, still trying to explain and defend it against ignorance.  It's like we have to constantly battle recurrences of the phlogiston theory of combustion.

Why Are We Making It So Hard For the Chinese to Provide Us With Lower-Cost Aluminum?

This WSJ article's hook is a huge cache of raw aluminum photographed in the Mexican desert.  American aluminum manufacturers claim that this is Chinese aluminum being illegally transshipped through Mexico to get a lower tariff rate.

The U.S. Commerce Department says it is investigating the Mexican aluminum’s origin as part of a slew of trade complaints by the U.S. metals industry against China, many of which include allegations of transshipping.

China’s booming industrial production has reordered global markets, few more dramatically than aluminum. Fueled by access to inexpensive electricity and tax breaks, Chinese aluminum output doubled between 2010 and 2015. With local demand slowing,more of it was sent to the U.S., which was importing 40% of its aluminum by 2015—up from only 14% in 2010.

By the end of 2016, only five aluminum smelters will be operating in the U.S., down from 23 in 2000.

Alcoa Inc., the largest American aluminum maker, is splitting in two, isolating its profitable parts-making units from its troubled raw-aluminum operations. Alcoa Chief Executive Klaus Kleinfeld last year said illegitimate Chinese exports were “the major driver” of lower aluminum prices.

I suppose to an incumbent who has convinced himself that he has a God-given right to his historic market share, new sources of competition are always "illegitimate."  But through the whole article I kept asking myself, why are we forcing these folks in China to jump through so many hoops just to bring us lower-cost aluminum?  Given how fundamental aluminum is to almost every manufactured product today, we should be welcoming them as heroes, not forcing them to play silly games in the Mexican desert just to deliver their product at the price they want to sell it for.

It turns out that all this government effort to "protect" us from lower cost aluminum is to support an American aluminum industry that is tiny, maybe 2% of world production.

The industry would argue that the lower prices of Chinese imports are "illegitimate" in part because the sales price in the US is subsidized by Chinese taxpayers.  To which I answer, "so what?"  Or actually, to which I answer, "yay!"  If another country's taxpayers want to pay higher taxes so that they can provide valuable raw materials to US industry at lower prices, why in the heck would we want to stop them?

Was Brexit About Racism or Tea Kettles?

Everyone on the Left is absolutely convinced that the Brexit vote was all about racism.  In part, this is because this is the only way the Progressives know how to argue, the only approach to logic they are taught in college for political argumentation.

Yes, as an immigration supporter, I am not thrilled with the immigration skepticism that dominates a lot of western politics.  I struggle to cry "racism" though, as I confess that even I would be given pause at immigration of millions of folks from Muslim countries who hold a lot of extremely anti-liberal beliefs.

Anyway, I would likely have voted for Brexit had I been in Britain.  I think the EU is a bad idea for Britain on numerous fronts completely unrelated to immigration.  The EU creates a near-dictatorship of unelected bureaucrats who seem to want to push the envelope on petty regulation.  And even if this regulation were just "harmonizing" between countries, Britain would still lose out because it tends to be freer and more open to markets and commerce than many other European countries.

By supporting Brexit, I suppose I would have been called a racist, but it would really have been about this:

The EU is poised to ban high-powered appliances such as kettles, toasters, hair-dryers within months of Britain’s referendum vote, despite senior officials admitting the plan has brought them “ridicule”.

The European Commission plans to unveil long-delayed ‘ecodesign’ restrictions on small household appliances in the autumn. They are expected to ban the most energy-inefficient devices from sale in order to cut carbon emissions.

The plans have been ready for many months, but were shelved for fear of undermining the referendum campaign if they were perceived as an assault on the British staples of tea and toast.

A sales ban on high-powered vacuum cleaners and inefficient electric ovens in 2014 sparked a public outcry in Britain.

EU officials have been instructed to immediately warn their senior managers of any issues in their portfolios that relate to the UK and could boost the Leave campaign were they to become public....

Internet routers, hand-dryers, mobile phones and patio jet-washers are also being examined by commission experts as candidates for new ecodesign rules.

As a free trade supporter, the downside would be the loss of a free trade zone with the rest of Europe, but I am not sure it can be called a "free trade zone" if they are banning toasters.  Britain will negotiate new tariff rates with the EU, just as Switzerland and Norway (much smaller and less important trading partners) have done.

The real crime from a US perspective is the actions of our President.  Mr. Obama has told the British that by voting for Brexit, they go to "the back of the line" for trade negotiations with the US.  This is, amongst a lot of stupid things politicians say, one of the stupidest I have ever heard.  My response as president would have been to move Britain to the front of the line, offering them a free trade treaty with the US the day after the Brexit vote.  Like most politicians, unfortunately, President Obama does not view trade as a vehicle for the enrichment of individuals but as a cudgel to enforce his whims in the foreign policy arena.  Why on Earth has President Obama threatened to undermine America's strong interest in trading with the UK merely to punish the UK for not staying in the EU, a transnational body this country would certainly never join?

The Trade Deficit is Not A Debt

If you search Coyoteblog for the title of this post, you will see a number of others with the same title.  It seems to be a theme we keep having to come back to.  Here is one example of where I tried to explain why the trade deficit is not a debt.

Take the Chinese for example.  One thing that people often miss is that the Chinese buy a LOT more American stuff than the trade numbers portray.  The numbers in the balance of trade accounts include only products the Chinese buy from the US and then take back to China to consume there.  But the Chinese like to buy American stuff and consume it here, in the US.  They buy land and materials to build factories and trade offices.  They buy houses in California.  They buy our government bonds.  None of this stuff shows up in the trade numbers.  Is it somehow worse that the Chinese wish to consume their American products in America?  No.  How could it be.  In fact, its a compliment.  They know that our country is, long-term, a safer and more reliable place to own and hold on to things of value than their own country.

Dollars paid to a Chinese manufacturer have to get recycled to the US -- they don't just build up in a pile.   If I am a construction contractor in LA and build that manufacturer a new office or a local home and get paid with those recycled dollars, I am effectively exporting to the Chinese, only the goods and services I sold them never leave the country and so don't show up in the trade numbers.  So what does this mean?   In my mind, it means that the trade deficit number is a stupid metric to obsess over.

Another way I think about it is to observe that the US is winning the battle of stuff.   Money as money itself does not improve my well-being -- only the stuff (goods and services) I can purchase with it can do so.   So i t turns out that other countries ship far more stuff to the US than we ship out. And then these folks in other countries take the money they earn from this trade and buy more stuff in the US and keep keep that stuff here!

I am reminded of all this because several other folks are taking a swing at trying to make this point to the economically illiterate.   Don Boudreaux does so here, and Dan Ikensan here.  And here is Walter Williams as well.

A Media Article Actually Highlights the Trouble with A Falling Currency

If you listened to the media and political candidates, you would quickly come to the conclusion that the quickest way to prosperity and wealth is to have a worthless currency.  Every politician the world over argues for devaluing their own currency vs. other nations, with the logic that this helps domestic manufacturers by making imported competitors more expensive and making their own products less expensive to buy in other countries.  **

While the latter two statements are nominally true, the only way this actually helps an economy is if one ignores everyone except manufacturers in markets dominated by international trade.  What it ignores is that a falling currency makes purchases more expensive for everyone else.  Consumers and service industries and even manufacturers who depend on imported raw materials all suffer from a falling currency.  And this is not even to mention the effect on wealth -- if one's savings are all in assets denominated in the falling currency, one is clearly losing wealth as the currency falls.

Well, for the first time in a really long time, I actually saw an article this week that focuses on some of the problems of having a falling currency.  via zero hedge.

“I’ve never seen it that high. It’s usually $6.99, maybe $8 but that seems like quite a jump.”

Grapefruit isn’t the only produce to soar in price as fresh fruit has increased by 12.4 per cent since December 2014, and fresh vegetables are up 14.4 per cent, according to data from Statistics Canada released Friday. Led by those surging produce prices, Alberta’s annual inflation rate rose last month by 1.5 per cent, year over year.

The high prices are a direct result of adverse weather in the United States and the lower Canadian dollar since most produce is imported, said Jason Wiebe, president of Chongo’s Market at the Crossroads Farmers Market.

“Tomatoes trade the same as the TSX. It’s a commodity, too, and all produce is traded in U.S. dollars. In November, the retail cost of tomatoes on the vine was $1.99 a pound. Now I have to sell the same box at $3.99 pound.

“What’s going to be really interesting going forward is what happens to local growers come summer. With the dollar, they can make one and half or two times as much exporting than selling here.”

And that may only be the beginning of higher food costs, according to ATB chief economist Todd Hirsh.

“Going forward I think we’ll see even higher upward pressure on imported fruits and vegetables. If not for weather conditions, certainly that low Canadian dollar will affect it. Because the numbers we’re talking about today are from December and now in January we’re almost five to six per cent lower on that dollar….If people insist on eating fresh tomatoes and pineapple in January, they’ll be forced to pay for it.”

 

** To my eye, every government in the industrialized world is working as hard as they can to hammer down the value of their own currency.  As a result, a rising currency tends to mean only that the country in question has a central bank that is not working as hard and as fast as other countries to trash their currency.  All of which makes accusations that China is manipulating its currency an enormous joke.  Several trilling dollars in QE here and they are the ones manipulating their currency?

China Slashes Costs for American Consumers

My headline is probably the most accurate description of how China's devaluation of the yuan yesterday affects this country.  But I bet you will not see it portrayed that way in any other media.  What you are going to see, particularly as the Presidential election races heat up, are multiple calls to bash China in some way to punish it for being so generous to American consumers.  Why?  Because the devaluation of the yuan will negatively affect the bottom line of a few export sensitive companies.  And if we have learned anything from the Ex-Im battle, things that GE and Boeing like or hate are much more likely to affect policy than things that benefit 300 million consumers.  Make no mistake, protectionist measures are the worst sort of cronyism, benefiting a few companies and workers and hurting everyone else (look up concentrated benefits, dispersed costs).

By the way, aren't the worldwide competitive devaluation sweepstakes amazing?  If everyone is doing it, then devaluations have no substantive effect on trade (except to perhaps decrease its magnitude in total), which just adds to the utter pointlessness of the game.  And it is hilarious to me to see US elected officials criticizing China for "manipulating" its currency, as if the US Fed hasn't added several trillion dollars to its balance sheet over the last few years in a heroic attempt to manipulate the value (downwards) of our own currency.

Globalization and Start-Ups

In a comment on this article about declining startup activity and the growing average size of businesses, a commenter wrote:

The high foreign trade deficit is also a barrier to the formation of small new companies. The annual trade deficit of the US is greater than the rate of GDP growth, which explains a lot of things. Probably more companies are being destroyed than created in the US. Legislate and reverse the foreign trade deficit and there will be a massive surge in small companies.

I wrote in return

As for wolf-dogs comment on the trade deficit, I think this is totally wrong. Most of the trade imbalance is with stuff like cars and steel which are unlikely startup businesses. The easy availability of Asian manufacturing sources for nearly anything you want to make or can dream up facilitates startups and entrepreneurship. My gut feel, just seeing what entrepreneurs around me are doing but not from any hard data, is that globalization and easy international sourcing is a net positive for small business formation.

I have never seen any data on this though.  Thoughts?

Currency Manipulation

One of the critiques of any trade deal of late is that there should be penalties for countries guilty of "currency manipulation."  The concern is that countries will devalue their currency in an effort to make their own exports cheaper to other nations while making it harder for other countries to export back to them.  As an example, if the Chinese were to do something that cuts the value of the Yuan in half vs. the dollar, their products look very cheap to American consumers while American-produced goods suddenly look a lot more expensive to Chinese consumers.

I have two brief responses to this:

  1. I find it hilarious that anyone in the United States government, which has a Federal Reserve that has added nearly $2 trillion to its balance sheet in the service of cramming down the value of the dollar, can with a straight face accuse other nations of currency manipulation.  In practice in today's QEconomy, currency manipulation means another country is doing exactly what we are doing, but just doing it faster.
  2. As an American consumer, to such currency manipulation by other countries I say, Bring it On!  If China wants to hammer its own citizens with higher prices and lower purchasing power just to subsidize lower prices for me, I am happy to let them do it.  Yes, a few specific politically-connected export businesses lose revenues, but trying to prop them up is pure cronyism.  Which is one reason I think Elizabeth Warren is a total hypocrite.  The constituency of the poor and lower middle class she presumes to speak for are the exact folks who shop at Walmart and need very price break on everyday goods they can get.  Senator Warren's preferences for protectionist trade policies and a weak dollar will hurt these folks the most.

Celebrate the Strong Dollar

We are already seeing articles bemoaning the strong dollar as somehow a threat to the American economy.  Don't believe it.  Maintaining a weak dollar is yet another crony government program that benefits a tiny minority of admittedly vocal and politically connected Americans.

First, a bit of an aside.  It is amazing to me that the US dollar can be strong at all right now, given the actions of the Fed.  With its near infinite QE and zero-interest rate programs, one would expect the dollar to be weak (Oversimplifying, driving down the returns on financial assets reduces the overseas demand for them, thus reducing the demand for dollars, driving down the price of dollars).  But it turns out that the rest of the world (esp. Japan and the EU) are actually working twice as hard to trash their own currencies (they are actually heading into negative interest rate territory, not just zero) and thus on a relative basis, the dollar is stronger.

Companies that export or compete a lot with manufacturers in other countries hate the strong dollar.  It makes their domestically produced products more expensive vis a vis products manufactured in other countries.  Many of these companies have powerful political voices, and some have large unions with even more powerful political voices.  They lobby for a weaker dollar.  Part of that lobbying is often to portray other countries as nefariously "manipulating" their currencies to hurt the US.

What these countries that are weakening their own currencies are actually doing is trashing the prosperity of the vast majority of their citizens to protect the earnings of a few politically powerful producers.  Japan is a great example.  Japan is a country in which consumers have been stomped on from decades in order to reduce the price of the country's exports.  Japanese consumers pay far more for everything than we do, all so their exporters can lower their prices in the US.

This is the same in China.  We frequently host visiting Chinese students.  You know what every one of these kids do on their trip to the US?  They bring an empty suitcase that they fill up with electronic and fashion goods they buy here, many of which were actually manufactured in China  (I have never, ever have hosted a Chinese student that did not buy at least one Chinese-manufactured iPhone here).

So, we must oppose this currency "manipulation" that impoverishes Japanese, Chinese, and European citizens in favor of giving much lower prices to Americans -- Why?

We should celebrate the strong dollar.  It makes every one of us richer.  Not just when we buy Chinese electronics, but even when we buy American-made products that now must be less expensive to compete with foreign products and which benefit from cheaper inputs in their own manufacturing.

Years and years ago I wrote a hypothetical post about Chinese interventions to maintain a trade surplus form a Chinese consumer's perspective in a post from our sister publication Panda Blog.  I think it holds up really well.  It said in part:

It is important to note that each and every one of these government interventions subsidizes US citizens and consumers at the expense of Chinese citizens and consumers.  A low yuan makes Chinese products cheap for Americans but makes imports relatively dear for Chinese.  So-called "dumping" represents an even clearer direct subsidy of American consumers over their Chinese counterparts.  And limiting foreign exchange re-investments to low-yield government bonds has acted as a direct subsidy of American taxpayers and the American government, saddling China with extraordinarily low yields on our nearly $1 trillion in foreign exchange.   Every single step China takes to promote exports is in effect a subsidy of American consumers by Chinese citizens.