Trumponomics

Trump’s America First economic strategy looks a lot like the import substitution economic development strategy that was so popular several decades ago—notably in Latin America and South Asia..  But it only had limited success, especially compared to the export led growth strategy followed in East Asia.  Import substitution tended to produce fragmented, inefficient and low productivity industries protected from foreign competition by high tariffs and other trade barriers

Take autos, for example.  It does not take a lot more labor to build a $30,000 or $60,000 car than a $15,000 car.  But no one can profitably manufacture a $15,000 car using expensive American labor.  That is why most auto imports are economy or luxury cars.  But this is exactly what Trump is asking Detroit to do.  SEER suspects that the auto CEOs told Trump what he wanted to hear and went back home and did nothing. If for no other reason, the auto industry is operating at very high capacity utilization and does not have the idle capacity to dedicate to small car and truck production. If questioned, they can say it is more difficult than they thought and they are still working on it. That is probably preferable to  actually building some white elephant. Most manufactured imports are not profitable to make in the US at current prices.

 

The Border Adjustment Tax ( BAT) appears to be dead, but who knows.  SEER does not accept the idea being pushed that the dollar will automatically rise to offset the tariffs. It is an interesting theory, but SEER has not been able to find a single historic example of it ever actually happening.  The trade deficit is driven by the domestic savings-investment gap – including the federal deficit as negative savings.  BAT will be a major source of federal revenues and will dampen the savings- investment gap as well as the trade balance.  The impact of BAT on the dollar appears indeterminate as far as SEER can tell. But the bottom line is that the Republicans have long worked to shift taxes from income to consumption and BAT is just another example of that.

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