More Trumpeterian Trade Follies

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President Trump is nothing if not consistent on the matter of international trade. The Boss has had few fixed positions over the years. He’s been a Democrat — and a generous financial party donor, even giving money to Crooked Hillary — then a Republican when it suited him; pro-abortion then anti-abortion; pro-immigrant before becoming the king of nativism; religiously indifferent before his newfound flourishing of faith; and so on. But his opposition to global trade has never wavered.

When pressed, of course, he will feign support for free trade if it’s “fair” — “fair” being what philosophers call a “weasel-word.” It allows the speaker to shift meanings to suit the context. If we are talking about China, Trump says its trade is unfair because it steals intellectual property and forces our companies to share technology with Chinese companies — both practices that, all economists agree, violate the World Trade Organization rules — and because it has a large balance of trade surplus with the US — something that most economists view as usually not a problem, because any trade surplus is invariably balanced by an investment deficit.

Trump has had few fixed positions over the years. But his opposition to global trade has never wavered.

But Trump’s virulent attack upon NAFTA was merely based on the fact that Mexico posted a modest balance of payments deficit with us and Canada an even smaller one. Neither country, please note, has routinely (or even occasionally that I have heard reported) stolen our technology or forced transfers of it as the price of doing business in its markets. El Jefe, who apparently cannot grasp the concept of comparative advantage, has never understood that in any free trade deal with Mexico, a fair amount of low-level manufacturing would shift there, but a fair amount of agricultural production would move from there to the US. Both things happened, but most American critics of NAFTA never noticed the shift of agriculture to the US, just as Mexican critics of NAFTA never noticed the shift of manufacturing to their country.

I recall a business ethics class in which one of my students — a gabacho like me — waxed emotional about “Mexicans stealing our jobs”, while another student — una Mexicana — waxed equally emotional about how gringo farmers were stealing the jobs of campesinos. I suggested that this is what the law of comparative advantage would predict: in the case of a country blessed with a grotesque amount of deeply fecund land trading freely with a country blessed with a grotesque number of deeply hard-working but low-skilled laborers (and less fertile land), low-level manufacturing moves to the labor-heavy country, while agricultural production moves to the fertile-land-heavy country — to the obvious general benefit of both sides. At this, the clearly puzzled students fell silent.

Several recent stories bring to light the economic consequences of Trump’s economic incomprehension. The first is about the debate over the USMCA — the new agreement between the US, Mexico, and Canada that is intended to replace NAFTA. Our own International Trade Commission, a bipartisan body that is tasked with evaluating trade deals for Congress, has said that the effects of the new trade agreement would be limited, eventually raising the GDP of America by only 0.35%, while adding maybe 176,000 jobs. These are meager results compared to the benefits that the existing NAFTA has delivered. And the ITC found that (if the new agreement is ratified) the cost will be a considerable rise in prices for American-made cars — in great part because it requires Mexican companies to raise wages artificially to bring them closer to American unionized auto wages. Specifically, the agreement says that 75% of a car’s value must come from North America, 45% of the car must be made by workers earning $16 per hour or more, and more local aluminum and steel must be used.

He has never understood that in any free trade deal with Mexico, a fair amount of low-level manufacturing would shift there, but a fair amount of agricultural production would move from there to the US.

This is a great deal for Trump’s rentseeking union supporters, but a screw job for the American consumer. The ITC estimated that small American cars will rise 1.6% in price, leading to a 2.35% drop in sales — sales that are already shaky.

Worse yet, some economists predict that many auto industry companies will simply pay the tariffs rather than agree to the outrageous rules and regulations imposed by the unions’ catspaw Trump — ironically, a man who brags about eliminating regulations! This will again directly raise prices to consumers.

Another article reports on the aftermath of Trump’s reckless and thoughtless decision to pull out of the Trans-Pacific Partnership (TPP). He figured that he killed the agreement when he announced that the US would drop out of the deal (negotiated under the Obama administration); however, the remaining 11 countries went ahead, renamed it the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and ratified it in 2018. In its first year, it is already producing great results for the countries in it, though not of course for us.

For instance, the General Department of Vietnam Customs has reported that Vietnam’s exports to Japan are up by 11.2%, and those to Canada are up by 36.7%, in the first two months of this year compared with last year. Japan reported that last year its beef imports rose 25% from the same period. New Zealand has seen a rise of 133% in beef exports to Japan, and Canada a rise of 345% this year over last.

In its first year, the renamed Trans-Pacific Partnership is already producing great results for the countries in it, though not of course for us.

The rise in beef imports threatens to trigger a Japanese protection mechanism that will jack up tariffs on beef imports from an insane 38.5% to a truly absurd 50%. This will not affect CPTPP ranchers, but it will non-CPTPP ones. More generally, as the Asian region continues its rapid economic growth, the US will be at a distinct disadvantage in exports to the region, compared with the CPTPP ones.

As another article notes, Japan is willing to deal. It has indicated that to avoid tariffs on its cars, it will open up its agricultural market. If Trump simply can’t stomach joining the CPTTP, he can still do a bilateral deal. We can only hope that he does. And Our Oyabun seems to think that he can get better deals if they are bilateral rather than multilateral, apparently under the schoolyard-bully theory that he can use his personal power to force concessions out of the other side.

That’s the theory. So far it hasn’t worked out.

Two other articles point out the idiocy of Trump’s trade policy. The first reports the results of the steep tariff on imported washing machines he ordered a year ago. Faced with stiff competition from evil Asian competitors — you know, horrible people who work harder, for less money, and produce a superior product! — especially the companies LG and Samsung, domestic company Whirlpool got the president to impose a whopping 50% tariff on all imported washing machines. That was a year ago. A new research report written by economists at the Federal Reserve and the University of Chicago gives the results. Profits at Whirlpool have risen a stunning fourfold, to $471 million; but only a measly 1,800 jobs are owing to this high tariff. Samsung plans to open a plant here employing 1,000 people, LG one employing 600, and Whirlpool — the crony capitalist villain of this story — will add a risible 200 jobs.

American consumers were ripped off to the tune of $1.5 billion. That works out to $800,000 for each of the 1,800 jobs!

What is the cost of this “fair-trade” charade? Prices on imported washing machines went up $86 on average (that is, about 12%). Of course, Whirlpool did not keep its own prices low — it jacked them up 13% to 17%! Hence Whirlpool’s whopping half-billion-buck profit. The report estimates that American consumers were ripped off to the tune of $1.5 billion. That works out to $800,000 for each of the 1,800 jobs! That was your tax dollars at work.

Another article reminds us that while China’s trade with us has been flawed by its often dishonest trade practices, we ourselves don’t exactly have clean hands. Consider “anti-dumping duties.” In America, as in most other countries, domestic companies that can’t compete with foreign ones routinely claim that the foreigners are “dumping.” Dumping is the (alleged) practice of selling what is traded in the foreign market for less than what is charged to home customers, or below the cost of production. Most economists doubt that this routinely occurs — it would cost a company a lot of capital to sell below market in another country to get a monopoly, especially when you realize that such a monopoly would be impossible to sustain. When the “dumper” raised prices back up, domestic firms would just start making the product again.

Trump has systematically used dumping charges to protect chosen industries here. China has been the target of 40% of American dumping investigations, and the US imposes the heaviest duties on Chinese companies — duties that have been rising recently. These charges are often dubious. The US protects its own industries, often by comparing a foreign company’s prices here only with full prices in that company’s home market, disregarding discounted prices it charges at home. Moreover, price deductions for such things as overhead and salespersons’ salaries are capped for sales at home but not here. In other cases, where the home market prices are lower, our trade officials simply ignore them.

We keep pulling these stunts, even though the WTO has shot many of them down. Funny, President Trump never mentions how we stick it to other countries. No, he has demagogically persuaded a large part of the American public that we are pure victims in these trade games.

Trump’s tariffs will cost the average American family over $800 per year. The amount will rise dramatically if he applies those tariffs to all Chinese imports.

Two other articles put a nice cap on this discussion. No doubt to Trump’s amazement, the Chinese are playing hardball. Their tariffs on our agricultural goods have devastated many of our farmers. Brazil — which long ago negotiated a free trade agreement with China — has now replaced us as China’s major supplier of soy beans and other crops. In fact, Brazil is opening more of its lands to cultivation, in order to increase exports. In soybean production, US exports to China fell from $12.3 billion in 2017 to a pathetic $3.2 billion last year.

To counter the decision by the Chinese to buy more from Brazil, and to keep the support of farmers here, Our Great Protector just announced that he will give another $16 billion in aid to farmers (in addition to the $11 billion he gave them last year). This is the president at work: using billions of our tax dollars to keep the farm states on his side. It’s a great illustration of public choice theory, or venality in office.

While Trump makes the claim that the subsidies for farmers are coming from the tariffs the Chinese are paying, that claim is ludicrous on its face. Tariffs are taxes imposed on foreign goods — but paid by the American consumer. As noted by US News, Trump’s tariffs will cost the average American family over $800 per year. The amount will rise dramatically if he applies those tariffs to all Chinese imports, as he has threatened to do.

Yet another article informs us about another unseen group of Trump’s economic victims, namely, American farm equipment manufacturers. As the piece reports, companies that make combines, tractors, and other farm machinery are looking at a double-Trump-whammy.

Trump’s high tariffs for the steel and other metals that farm equipment manufacturers use will further hurt them.

First, they face a loss in demand as farmers under pressure from low prices for crops choose to defer buying new equipment. US agricultural exports to China in the first few months of this year are down 40% from the same period last year. And in 2018 we shipped to China less than half of what we shipped in 2017. So Deere will cut production 20% in the second half of its fiscal year. Lindsay Corp said its profits will drop by 31%, because sales have declined 16% in the last three months through February. CNH and AGCO also reported lower sales of their machinery in the first quarter of this year, compared to last year. Titan has reported a 35% drop in first-quarter profit in farm machinery sales.

Second, Trump’s high tariffs for the steel and other metals that farm equipment manufacturers use will further hurt the manufacturers. For example, Vermeer Corp., manufacturer of hay balers, said that it will lose $4 million in direct tariff costs in 2019. CNH expects tariffs to drive up its costs by $50 to $100 million, and Deere estimates the tariffs will cost it $75 million. Moreover, both Vermeer Corp. and Lindsay Corp. report paying more for costs because of the tariffs.

Especially worrisome for the American agricultural industry is this question: once China and all the other countries we have hammered get robust supply chains set up with Argentina, Brazil, Canada, New Zealand, and elsewhere, will they resume buying from us when we cease our tariff wars?

There’s no reason to think that Trump is open to a cessation of tariffs, which he seems to love, as an exercise in power.

Now, to this last point, one might cleverly respond that if a cessation of dumping would cause a quick resumption of competition, why wouldn’t a cessation of tariffs cause a quick resumption of competition?

Of course, there’s no reason to think that Trump is open to a cessation of tariffs, which he seems to love, as an exercise in power. But speaking to the general principle: if a country were truly to start dumping with an eye to putting its competition out of business, it would lose massive amounts of profit until it succeeded. Upon cessation of this dumping, the prior competition could just quickly reopen its factories. But when you tariff your own goods, your domestic producers lose market share as other countries create or expand facilities to meet the demand of satisfying your prior customers. But if you stop your tariffs, those other countries would still have their newly created or expanded production lines still in place.

In other words, this feeble reply is a false analogy. Dumping — a phenomenon most economists doubt really exists — would only temporarily shut down some of the pre-existing competitors’ facilities. But tariffs lead to the permanent creation of new facilities of competitors.

Even after any imagined cessation of tariffs, there will be an irreversible loss of trust.

Does anyone really think that after tariffs disappear — if they disappear — that the newly developed farmland in Brazil will just be converted back into rainforest? If you believe that, I have a high-rise Trollop Tower in Manhattan to sell you.

Finally, even after any imagined cessation of tariffs, there will be an irreversible loss of trust. If America, a loud exponent of free markets, private property, and free trade, from the end of WWII until recently, is now willing to wage tariff war for the most trivial of reasons, who will trust such a Republic of Lies?

The even more worrisome question raised above is this: will the tariff war end at all? Perhaps the Chinese have taken the measure of Trump and have concluded that he is a flawed and doomed president, and that they can just outlast him. Moreover, he has just announced that he will reattack — Mexico! His loopy proposal is aimed at getting Mexico to seal its borders, so Central Americans won’t keep coming here. He will start the tariff at 5% on all of Mexico’s exports immediately, and raise it 5% per month until it hits 25%. What a massive misuse of the tariff powers of the president! Trump seems to now view tariffs to be the ultimate skeleton key to open the door for any policy he wishes to achieve.

America will be increasingly consigned to third-rate status in world trade and influence.

Oh, and this just in: Trump has informed Prime Minister Modi (a man he professes to admire) that India — whose alliance we may need to counter a rising China — will shortly lose its designation as a beneficiary developing country. It will be removed from the Generalized System of Preferences, aimed at helping developing countries. We will now start jacking up taxes on Indian trade — starting with washing machines! To this, India has promised jacking up tariffs on American goods. In fine, a new front on the widening trades war.

This all raises the question of whether our standing in the world will recover any time soon. Color me skeptical. Trump’s widespread and indiscriminate use of tariffs, his refusal to join TPP, his upending of NAFTA, his failure to produce any new free trade agreements, his other bullying trade tactics — indeed, his whole crony capitalist betrayal of free market economics — mean that America will be increasingly consigned to third-rate status in world trade and influence.

Trump has made America small again. Quick — somebody order a bunch of “MASA” caps!




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