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.
So, the BAT will take money out of the economic flows and little new hiring will result immediately because industry will need time to ramp up its production capacity to satisfy some uncertain demand which is supposed to materialize out of thin air. Corporations in the US have allowed their production capacity to slowly deteriorate because they’ve not seen demand domestically sufficient to justify major expansion. With wasges stagnant, just how will some new source of demand be created. That high dollar will make exports of anything being produced domestically pretty pricey in foreign markets. All of this conservative magical thinking on how economics works makes my head hurt.
I think what Trump has in mind (not saying it’s what he’s doing, merely that’s what I think he thinks he is doing) is something along the lines of Japan Inc. in the era where the Ministries reigned supreme. Alternatives he may have in mind are similar – Taiwan before Japan’s rise, South Korea or China after it. Think something more than reciprocity, and a hell of a lot more than the silly “when they ship us walkmen and all we ship them back are green pieces of paper, it’s clear they’re they suckers” policy that Friedman sold to America.
That’s a very different thing from import substitution. I lived in South America from 1970 to 1985, and dealt with that first hand. (Ask me how to smuggle electronic components past customs some day. Or why Puerto Stroesner was the second largest city in Paraguay.) The idea there was purely infant industry. I haven’t heard anything from Trump that sounds remotely like that. He doesn’t seem to care that we import X from countries A, B and C, unless he feels that one of those countries has a non-reciprical trading arrangement with the US.
The Border Adjustment Tax does seem to be a relative of the infant industry argument, but note that it isn’t something Trump was enthusiastically supporting.
Full disclosure – I am not enthusiastic supporter of Donald Trump, nor of any other active American politician.
I know what you mean. I lived in Venezuela in the early1960s and we use to have the smugglers come by out house and deliver out cigarettes, booze and other small items. We could place an order for almost anything.
I do not think Trump has some strategy in mind. It is just some off the cuff interference in the markets with his having the only decision.