Trade War

I am encouraged by the reported Senate reaction (Politico) to the latest salvo in the trade war, the agriculture department's announcement to ramp up Roosevelt-era farm subsidies to offset the Administration's tariffs.

“Taxpayers are going to be asked to initial checks to farmers in lieu of having a trade policy that actually opens and expands more markets. There isn’t anything about this that anybody should like,” said Sen. John Thune of South Dakota, the No. 3 GOP leader....

You put people in the poorhouse and provide them aid. What you need to do is not put them in the poorhouse,” Corker said 

These views are good, but not really in my mind the largest danger. The closest is Sen. Ron Johnson:

“This is becoming more and more like a Soviet type of economy here: Commissars deciding who’s going to be granted waivers, commissars in the administration figuring out how they’re going to sprinkle around benefits,” said Sen. Ron Johnson (R-Wis.). ...”

It's not really Soviet, which was more do what you're told or go to Siberia. It's a darker system, which leads to crony capitalism. 

Everyone depends on the whim of the Administration. Who gets tariff protection? On whim. But then you can apply for a waiver. Who gets those, on what basis? Now you can get subsidies. Who gets the subsidies? There is no law, no rule, no basis for any of this. If you think you deserve a waiver, on what basis do you sue to get one? 

Well, it sure can't hurt not to be an outspoken critic of the administration when the tariffs, waivers, and subsidies are being handed out on whim. 

This is a bipartisan danger. I was critical of the ACA (Obamacare) since so many businesses were asking for and getting waivers. I was critical of the Dodd Frank act since so much regulation and enforcement is discretionary. Keep your mouth shut and support the administration is good advice in both cases. And to my mind, our drift to an economy in which every successful business needs a special waiver or dispensation from the government, granted at the government's pleasure or displeasure,  is our greatest danger. 

I'm even more delighted to see signs of Congress waking up

... a number of senators have been itching to tie the president’s hands from making unilateral tariff policy with legislation that would require Congress to approve of unilateral tariffs that are imposed with the justification of national security.

Yes, but that's only the beginning. Tariffs are a tax. Why does the President have unilateral power to impose a tax? The president can't change the income tax code (except for some interpretation issues. Index capital gains for inflation now!)

The answer is, because the Congress handed him that power. Congress likes to pass laws that make it look protectionist, and then count on the fact that no sane Administration would ever enforce them.

The regular trade law basically says that the Administration should impose tariffs if any industry is hurt. That's basically any industry that has any imports, i.e. all of them. We have counted for decades on no administration being nutty enough to actually do that.

The national security provisions under which the Trump administration is acting are even vaguer.

By now, both parties ought to be sick of the imperial presidency. Take back the power to impose tariffs. Or at least write a reasonable statute: that tariffs and quotas may only be imposed if consumers are harmed.

If national security is an issue, then write that the defense department must ask for it and pay for it. Do we need steel mills so we can re-fight WWII? If so, put subsidized steel mills on the defense budget. If defense prefers to use the money for a new aircraft carrier rather than a steel mill, well, that's their choice.

We are told that the trade war is all a game on the way to freer trade. I am dubious. From WSJ coverage,

What’s the strategy, what’s the end game here? At what point do we start seeing things move out of the chaotic state they are in now and to where we actually see new trade agreements?” asked Sen. Mike Rounds (R., S.D.).

Mr. Trump, addressing a gathering of veterans groups on Tuesday, urged patience on trade, despite concerns raised by critics: “Just stick with us,” he said. “It’s all working out.”

Well, what is the end game? If it is a world of zero tariffs -- a suggestion the G7 should have taken and run with -- fine, but say so. If it is for China to reform intellectual property treatment, fine, say so. You cannot expect a negotiating adversary to move unless that adversary understands that if you do X, the problem really will be solved. If the goal posts always shift, they have no reason to budge.

I fear the goal is a bilateral trade surplus with every nation. That cannot happen without a massive change in our saving rate and federal deficit. In the meantime, if you impose a lot of tariffs on a country, its exchange rate depreciates so that the overall amount of trade is exactly the same. As is already happening with China, and now currency manipulation charges are back in vogue.*

Wars are hard to win, and they are only won if you have a clear objective, and know to stop when you reach the objective.

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* Update: A blog reader asked for an explanation.

You run a trade deficit with the grocery store. They sell you more food than you sell them. You run a surplus with your employer. You sell him or her more services than they sell you. Bilateral deficits are not a bad thing! If your garden is anything like mine, growing your own is a bad idea.

If you earn more from your employer than you spend at the store, then you are saving money. You run a net trade surplus with the world, and save it. You are accumulating financial assets. If you run a net trade deficit with the world, you are dissaving or borrowing.

So, we have the ironclad law. Savings - Investment = Net Exports. If you want to sell everything to the world, you have to save more than you are investing at home, and use the money you get from selling stuff to the world to buy foreign assets.

If your saving and investment do not change, your export position cannot change.

Now, what happens if the Administration puts a 100% tariff on everything imported, but we do not change savings and investment? Well, the total volume of imports - exports can't change. So the dollar has to go up relative to foreign currencies so that the after tax price of exports has not changed.

I hope that is not too simplified -- Im holding a lot of general equilibrium effects constant. Trade experts feel free to chime in in the comment if I am not clear or screwed that up somehow.

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Update 2: The Washington Examiner does a much better and more detailed job on economic policy by fiat and waiver, though still missing, I think, the greatest danger:

Similarly [as with current tariffs and subsidies], President Barack Obama was able to help companies with taxes and regulations that protected them, with bailouts that rescued them, with a stimulus that subsidized them, and with massive federal programs that padded their profits. 

General Electric, Chrysler, Goldman Sachs, Netflix, Boeing, H&R Block, Solyndra, and many other companies benefited, if fleetingly, from Obama’s big-government policies. Conservatives and Republicans generally didn’t applaud these “pro-business” policies even though they created jobs at these favored companies. 

Instead, Republicans rightly charged Obama with “picking winners and losers.” ...
GE CEO Jeff Immelt heralded the Obama era with a shareholder letter declaring the “reset” of capitalism. “The interaction between government and business will change forever. In a reset economy, the government will be a regulator; and also an industry policy champion, a financier, and a key partner.” 

Tax them, regulate them, subsidize them, bail them out. 

This was the clear and deliberate structure of Obamanomics. Fewer profits were to be earned separate of government. More profits were to be earned in partnership with government. 

That’s where Trumponomics is headed. Trump’s tariffs on China have spurred Chinese tariffs on American soybeans. "No problem," Trump declares, "we’ll just use a New Deal law to subsidized soy bean farmers."
....
Also, forcing business to run the government gauntlet tilts the playing field toward the big guys who can afford the lawyers and lobbyists.

The one thing missing is in that last sentence. It's not just about affording lawyers and lobbyists. It's about showing support for the Administration.  Both left and right wing autocracies dispense economic favors in return for political support, or at least acquiescence. People worried about authoritarianism, this is your worry. This is how China and Russia work. And don't mistake this as Trump hysteria. This was my complaint about the Obama administration, and it seems pretty clear that  Democrats have no interest in reining in the regulation, waiver, executive order state, they just want to capture it back for themselves.

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