Friday, July 27, 2018

Trade war off?

Events move quickly in the Trump era. Since my last post, President Trump met with European Commission President Jean-Claude Juncker and announced a cease-fire with Europe.  A correspondent sends this link to Marc Thiessen at Fox news on the subject
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. "We agreed today ... to work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods," declared the two leaders in a joint statement.   
.... 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.
... during the G-7 summit he made a sweeping proposal. "I said, 'I have an idea, everybody. I'll guarantee you we'll do it immediately. Nobody pay any more tax, everybody take down your barriers. No barriers, no tax. Everybody, are you all set?' ...
Now Trump's hard-line trade strategy is being vindicated. Not only is the E.U. negotiating zero tariffs, but also it agreed to immediately buy more American soybeans -- which helps Trump in his trade battle with China.
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.
The question always remains with our President's dramatic moves. Crazy like a fox or just plain crazy?  To his credit, it helps if your opponents think the latter.

Could this trade war really be in the service of a completely free trade agenda -- either very well hidden, or newly discovered? There is nothing I would like to see more than a pure free trade world, and it is heartening to see this president or any president come close to endorsing such.

"Non-auto industrial goods" is already a big qualifier. US' 25% import tax on pickup trucks remains, and Europe's auto protection as well. Europe's big barriers against agricultural goods remain, along with the US' too. (Sugar quotas on and off since the 1790s, lots of Mexican produce barred even under Nafata.) Services, more important in the modern world than industrial goods,  are off the table. So pure free trade this is not.

"it [europe] agreed to immediately buy more American soybeans -- which helps Trump in his trade battle with China." Free trade this is not. In a free trade world, European governments do not stop private European people and companies from buying US soybeans. In a free trade world, government ministers do not agree to buy more American soybeans! That's government run trade 101. Especially to gang up on a third party.

Valentina Pop and Vivian Salama at the Wall Street Journal add some reporting
Mr. Juncker stuck closely to the negotiating mandate handed to him by leaders of big EU countries including Germany, France and the Netherlands. Germany, which is heavily dependent on exports, was from the onset open to a trade arrangement, including abolishing EU tariffs on U.S. car imports. France, meanwhile, was vehemently opposed to opening EU agricultural markets.
Mr. Juncker told Mr. Trump and Mr. Lighthizer that any talk of including agriculture would kill prospects of a deal. He countered with a threat to drag public procurement into negotiations, which would question the Buy American Act, a nonstarter for the U.S. side.
Well so much for unfettered free trade. Plus, as widely reported, this was a cease fire. There is no schedule for talks or any other implementation of the free trade niravna.

"We can do stupid too" said Mr. Junckers, and he is right. This is stupid. We can shoot holes in the bottom of the boat to try to get you to stop shooting holes in the bottom of the boat. But if this is going to work, it had better work darn fast before the boat sinks.

Does President Trump really believe in a free trade world? Is this where it is all heading? In my last post I questioned the lack of a public goal to all this. Only two days ago -- yes, an eternity in Trump time, but fairly recent for the rest of us, the President tweeted

$817 seems to represent the overall trade "deficit" (I hate that word!) and Mr. Trump has consistently labeled trade deficits a "loss" for the US. (No, just as your trade deficit with the grocery store is not a loss -- you get the food!) If his hope is that the point and success of completely free trade is to eliminate trade "deficits," Mr. Trump will be sorely disappointed, as will any of his supporters who view this as a goal.

Completely free trade will open up many slowly dying industries to quick death from international competition. It will open up many new industries to tremendous growth. But is Mr. Trump really prepared to accept the former? In his tour through steel country, he did not say, "In six months I hope to see you all unemployed and this mill shut down again. But the opportunities for the country in software development, banking services, and intellectual property are so huge, I want you to support it."

The big question is, when does this stop? If it stops when we have global free trade, great. If we are going to keep plowing forward with tariffs, managed trade, countervailing subsidies, and so on until the trade "deficit" is eliminated, not so good.

OK, skepticism aside, yes he has twice said that the goal is totally free trade. I suggest the rest of the world call the bluff, if it is one, or give him what he wants, if not, immediately!

Tariffs, quotas, managed trade, arbitrary waivers, will damage the economy and our political system quickly. If this is going to work, it had better work fast.


  1. There are two big drivers of the reported American trade deficit: (1) tax avoidance schemes by American multi-nationals that shift income to tax havens; and (2) American borrowing from Asia and Europe to finance the fiscal deficit.

    When Japan lends money to the United States, it does not send over bales of Yen. Instead it does things like sending electronic components to China which makes iPhones which China then sends partly to the United States and partly, for example, to Mexico. Mexico then sends, among other things, cars and car parts to the United States. Until Trump understands that capital flows are driving the trade deficit, all he can accomplish is moving around the composition of the deficit and not changing the net dollar amount very much.

    As it is Trump is accusing America's allies and China of "cheating" the United States when what is really happening is that those allies and China are financing an inflated, and temporary, American standard of living.

    1. There are real, non-monetary, "value" transfers from USA to China that MrT has, I think, mentioned. e.g. technology transfers that are mandated when joint ventures are established. Whether or not his posturing will any effect is open to doubt. The underlying driver, as Absalon mentions, is that corporations have rushed to China for cheap manufacturing, whatever the obscure costs. We are enjoying consuming products of underpaid Chinese labourers. Just as we enjoy being subsidised by the underpaid labour of "illegal immigrants" who work our farm fields. And then there is the drug war that some of us insist on continuing on "moral" grounds and which leads to that immigrant problem. Quite an uncertain future here.

  2. I have concluded there is no such thing as global "free, "fair" or "foul" trade.

    The complexities of domestic and international law, regulations, taxes, tariffs, foreign government land ownership, foreign government ownership of banks, and circumstance render any interpretation of whether global trade is "free," "fair," or "foul" simply silly.

    Take China and Singapore. In those nations all the land is owned by the government, and in China also banks. So are exporters favored through low rents? Free rent? Reverse rent? How about free capital rom the state (loan forgiveness). No one knows.

    WTO quibbling about tariffs appears silly in context. Tariffs are bit players on a crowded stage.

    Even "clean" examples are confusing. Let us say a nation improves its infrastructure. No one can begrudge that. But say, particularly in regards to exports. Yet if exporters do not pay for the infrastructure improvements, they are in effect subsidized.

    Curious tidbit: For a while France in the 1970s required all imports of consumer electronics goods to pass through an undermanned port. Tariffs?

    Exporters in nations that use VAT are subsidized by default. Those exporters do not pay taxes but benefit from taxes paid by others (including importers) that support infrastructure and government.

    Why Western orthodox macroeconomists insist VATs are not a subsidy is…well, probably just PC-posturing, not honest assessment. Obviously, in VAT nations exporters piggyback for free on government, civil courts, national security, etc, much of what makes business possible.

    The upshot of all this? If you want to have a debate about global trade, first send in the clowns. So maybe Don Trump is right.

    There is a case to be made for US unilateral free-trade, that is let anybody import for free. Yay! We get subsided goods from around the world!

    However, why anybody would ever risk capital to build an industry in the US, under such circumstances, remains a mystery.

    Suppose some US smarties figure out they can build an aluminum plants that will produce at $0.90 a unit. The China price is $1 a unit.

    So the US smarties seek $2 bil in financing.

    US financiers say, "Nice, but China prices to obtain market share. They will undercut you until you go out of business, and our loans become equity in a shuttered factory. Sorry, no financing from us."

    In this example, US consumers pay a higher price, the $1 China price, as US financiers understand…well, there is no such thing as "free," "fair" or "foul" trade.

    BTW, the IMF released a report lately that large US current-account trade deficits are leading to bloated asset prices in the US. All that capital seeking a home. The IMF darkly suggests a Hyman Minsky moment on the cusp.

    Is this aspect of chronic and large current-account trade deficits also non-PC?

  3. "Events move quickly in the Trump era." Although often in the sense of a pendulum with a high frequency, swinging wildly from one direction to the other but not actually making any net movement in one direction or the other.

  4. There's no risk that "free trade" will break out at any time, now or in the future. What we know about "free trade" is that it is an ideal, an academic construction, seldom if ever achieved, and in those instances where an effort was made to achieve the "free trade" ideal, it was ultimately untenable and unenforceable because the conditions for "free trade" to exist in a steady-state are rarely if ever found in practice.

    In the case of the current administration, Henry Clay's "American System" (implemented from 1816 and onward in various manifestations) holds certain attractions--protection of selected industries, promotion of local labor inputs, 'national security' (mistakenly characterized by foreign politicians and media), reassertion of 'American exceptionalism', and dominance of foreign allies' political policy decisions (e.g., defense spending and economic alliances). Will it pay dividends, or merely hasten the marginalization of American influence beyond its domestic borders? Too early to tell, but not beyond the range of possibility.

  5. “Tariffs, quotas, managed trade, arbitrary waivers, will damage the economy and our political system quickly. If this is going to work, it had better work fast.”

    What’s the rush? We’ve spent a couple hundred years developing the status quo, trading tariff and non-tariffs barriers, managing exchange rates, and employing direct and indirect subsidies aginst each other. The “damage” to our various economies has been institutionalized. There isn’t much of an argument defending the status quo if you are a free (vs managed) trade supporter. Slow progress toward that ideal would still be better than none. Who says the path to freer trade leads through the US unilaterally lowering tariffs?

  6. If I remember correctly, that trade agreement that Obama almost concluded reduced all the tariffs Juncker agreed to try to reduce.
    As for soybeans, Juncker was quick to point out upon return that Commission can't order countries to buy US goods, countries are independent in such matters. Of course, nowadays US prices are low because of sanctions, and China, biggest market, is buying from other producers, rising their prices.


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