I heard on some news show an incredibly stupid statement from our President earlier today and in utter disbelief fired off this comment on some blog:
Trump equates our trade deficit with us being ripped off. Let’s do this as a simple example. You walk into Best Buy and purchase a $1000 computer but do not have cash. So you put it on your credit card incurring a $1000 liability. Even though you now have the computer and Best Buy does not – Best Buy just ripped you off as you have a $1000 financial obligation. An odd statement from someone who routinely defaulted on his financial obligations!
Never mind that as on Friday Jeffrey Sachs beat me to this:
But don’t expect an impulsive and ignorant man like Trump to heed the lessons of economic history, logic of retaliation, and the basics of trade. His actions are based on three primitive fallacies. First, Trump thinks that America runs trade deficits with countries like China and Germany because the US is being swindled by them. The real reason is that the US saves too little and consumes too much, and it pays for this bad habit by borrowing from the rest of the world. The Trump theory of international trade is like a man in deep debt who blames his creditors for his spendthrift behavior. Come to think of it, that is precisely how Trump has spent his whole business career: over-borrowing, going bankrupt, and blaming his creditors.
Check out his discussion of the other two primitive fallacies! I guess Trump would argue that it was very unfair to me when Best Buy gave me a credit card.
Over at Econospeak, I added a bit more:
Update: Apparently Trump admires the protectionist philosophy of
Abraham Lincoln who is famous for this:
When an American paid 20 dollars for steel to an English manufacturer, America had the steel and England had the 20 dollars. But when he paid 20 dollars for steel to an American manufacturer, America had both the steel and the 20 dollars.
This line reminds me of the incredibly dumb logic ala Wilbur Ross. I know he is old but could he have been one of Lincoln’s advisers?
“The real reason is that the US saves too little and consumes too much, and it pays for this bad habit by borrowing from the rest of the world.”
Oh, please. The US is unwilling to pay full price for its toys. When cars imports were first becoming popular, there were warnings that consumers should “buy American” because buying foreign cars would destroy the American car industry and put American workers out of work. Consumers didn’t care. They wanted the cheaper cars, and the cheaper televisions, and the cheaper computers, etc. They would not pay the higher prices for goods made in the US.
Abe made a good point with, “When an American paid 20 dollars for steel to an English manufacturer, America had the steel and England had the 20 dollars. But when he paid 20 dollars for steel to an American manufacturer, America had both the steel and the 20 dollars.”
But Americans would rather pay $15 for steel today and have that $15 go overseas, than pay $20 for it and have that $20 remain here. They don’t care where the money goes, they only care how much goes out of their pockets.
@BillH,
If American workers were paid more, commensurate with their increased productivity, perhaps they could afford to think about more than how much goes out of their pockets.
I have an idea.
Let’s continue to do the same things that we have been doing about tariffs and trade agreements for about 25 years. We will just pretend that free trade has not been gamed by any other country. We will just hope that the US economy improves.
And if it doesn’t improve in 10 years or so then eventually we will do what we should have done in 2018.
Hope is not a plan.
It has been 10 years since the beginning of the Great Recession. The economic recovery has been so dismal that the Fed has kept the Effective Fed Funds Rate very very low.
July 2007_________5.26%
September 2008___1.81%
December 2008____0.16%
November 2015____0.12%
February 2018_____1.42%
See: https://fred.stlouisfed.org/series/FEDFUNDS
The Fed obviously does not believe that this economy has recovered. I realize that some believe that the Fed is controlled by well educated incompetents. I am not of that school of thought.
I expect that at some point the Fed will raise rates back to something like normal. And when that happens, if something has not been done about worker/consumer incomes and/or their debt, then this economy will crash. Again.
If you have a good income, then you don’t have a clue about what is happening in this economy. You can assume that others have good incomes but borrow and spend unwisely.
As I have said before ‘income inequality’ is a sterile term to describe what happens to others.
Hey, we all have our biases. I happen to believe that American corporations that reveal their intellectual property to Chinese companies, get exactly what they deserve. I don’t spend a moment worrying about it. I can always buy the Chinese product.
Bill H assumes foreign goods are cheaper because they are inferior. It turns out that washing machines from South Korea are actually better than the machines put out by Whirlpool and Maytag. Same holds for automobiles. We purchase German and Japanese cars as much for the quality as well as the price.
Alas Bill H assumes American consumers are stupid. Not so even if our fearless leader is.
https://mises.org/library/lincolns-tariff-war
The Morrill tariff bill was passed in 1861 just before Lincoln took office. This link argues that the only reason Lincoln became President is that he pandered to the protectionists of Pennsylvania, which is now steel country. Trump is now pandering the protectionists of Pennsylvania!
Of course in 1861 the agricultural south turned against President Lincoln in a bloody way. Will Trump’s farm base do the same?
What long-term issue does the US as a nation incur from a trade deficit? We’ve shifted our wealth creation to intangible industries and can export the excess wealth to receive tangible goods. Frankly, it seems like an incredibly good deal.
In defense of Lincoln and the 19th-century mercantilists, when your currency was based on a limited asset such as gold, trade imbalances could very well be a problem.
Michael – two good comments. On the first – a lot of literature has been written under the heading “Dark Matter”. On the 2nd – trade protection could lift a nation out of a deep recession if monetary policy refuses to do its job. Of course it is beggar thy neighbor policy so to lift the global economy out of a deep recession requires each nation to engage in either monetary stimulus (leaving the gold standard) or massive fiscal stimulus.
pgl:
We have someone who is posing as you. If you see him, let me know so I can spam them. I just got done deleting severa not-yous.
Michael,
What long-term issue does the US as a nation incur from a trade deficit? We’ve shifted our wealth creation to intangible industries and can export the excess wealth to receive tangible goods. Frankly, it seems like an incredibly good deal.
Certainly it appears that way. Only it has not worked well for those who earn their money from their labor.
The last paragraph just answered my question of whether FG or RM.
Jim H,
“income inequality’ is a sterile term” Never liked it — prefer something like “Great Wage Depression”, but too clumsy.
Equality easy to come by — or to come back to: Labor unions upgrade “price takers” to “price negotiators.” About 20% of our labor force thrives in perfect competition condition. Perfect competition meaning they are able to extract pretty much the max the consumer is willing to pay for their input into production or services — never mind all that long winded economic definition; same thing, right?
New Democratic Congress simply has to mandate union certification and de-certification elections at every private workplace; every one, three or five years; plurality rules.
Should have been done decades ago — only way to maintain democracy in this uniquely in all the first world, anti-labor union, labor market. Much of second and third world not fanatically anti-labor union like us: Argentina and Indonesia do sector-wide labor contracts.
Bottom 40% of workforce take 10% share of overall income. Mid 40% plus upper mid 19% (total 59%) take 67.5%. Top 1% take 22.5% — up from 10% over two-plus generations. See where this is going?
Newly unionized employees take back 10% share through higher prices for their labor — or they won’t show up for work …
… If McDonald’s can pay $15/hr with 33% labor costs, then, Target can pay $20/hr with 10-15% labor costs and Walmart (bless it’s efficient heart) should be able to pay $25/hr with 7% labor costs.
Bobby Kennedy’s son Chris is running for governor in the Democratic primary in Illinois. His father wanted to fight poverty — I remember something called model cities — but with only half today’s per capita income back then I’m not sure what he was thinking. Now, with double the per capita income it’s just a matter of sloshing it all around better.
The bottom 40% will gently (and persistently) nudge the middle 59% to take back 12.5% of overall income through confiscatory taxes — of the kind we had during the Eisenhower administration; and nobody gave it much thought either. With twenty times the personal income going to the same top 1% jobs now, this time around we are going to get really serious about confiscation.
Top paid NFLer in 1968, Joe Namath made $600,000/yr in today’s money. Quarterback pays more like $12 million now. Sorry Colin (I’m sure you’re not greedy). 🙂
Sorry, but I have to dissent from Jeffrey Sachs on this one. I know he is recycling the standard economist’s claim that trade balances are the tail and net savings are the dog, but there isn’t a shred of logic to back this one up. There certainly is an accounting identity between the two (setting aside the other items in the current account), but there’s no basis for assuming that one causes the other. I wrote an article on this topic about ten years ago for Challenge in which I reviewed the implications of both arrows of causation and came out modestly on the side of micro “net causing” macro. If I were to revise it today I would emphasize that the micro and micro metrics are different perspectives on the same phenomenon—that surplus countries have characteristic economic policies as well as political and cultural tendencies, and so do chronic deficit countries like the US. In other words, I would endorse the standard IPE position on this issue.
I would challenge readers of this blog to offer me *any* compelling reason why net savings at the macro level “cause” contemporaneous net trade flows. Hint: arguments in which the mechanism is the real exchange rate fail, because the explanatory power of changes in the autonomous determinants of savings on xrates is weak, and in any case there is still something like a J-curve with a duration of many months between forex moves and trade responses.
Arguing the economics of Trump’s position / proposal is an exercise in futility. He didn’t use economics as a basis. His chief economics advisor (Cohen) was opposed and tried to persuade him to not do it. Congressional leaders also certainly tried to dissuade him immediately after the fact as well (if not also before the fact).
US Law rules allow him to do this unilaterally only by the following: laws (listed below). The only ones that are unrestricted, (except by a law suit) is the 1962 act which requires a unilateral tariff can be imposed to assure national security isn’t threatened, and the 1977 law which require he declare a state of national emergency.
See
https://fas.org/sgp/crs/misc/R44707.pdf
for the acts listed.
Trade Expansion Act of 1962 §232(b)–(c):24 If the Secretary of Commerce “finds that an article is being imported into the United States in such quantities or under such circumstances as to threaten to impair the national security,” then the President is authorized to take “such other actions as the President deems necessary to adjust the imports of such article so that such imports will not threaten to impair the national security” .
This claim will end up having to be defended in court by suits that claim it doesn’t “threaten or impair”.national security… so the courts will actually decide his authority in this case.
Another applicable law is Trade Act of 1974 §122 in which the President may impose a tariff for 150 days, not to exceed 15% ad velorem (UNLESS congress extends the 150 days).
There are two other paragraphs (§123(a), & §151) in the Act of 1974 restricting the President’s authority on imposing tariffs Neither are applicable since the authority rests on enforcing trade agreements.
Then there’s this one which requires the President consult with Congress BEFORE he acts on this statute, which also requires he declare a state of national emergency. :
International Emergency Economic Powers Act of 1977 §203(a)(1)(B):30 If the President “declares a national emergency”
.
““The President, in every possible instance, shall consult with the Congress before exercising any of the authorities granted by this chapter and shall consult regularly with the Congress so long as such authorities are exercised.”
The only other one that allows a tariff is:
Bipartisan Congressional Trade Priorities and Accountability Act of 2015 §103(a). ““Whenever the President determines that one or more existing duties or other import restrictions of any foreign country or the United States are unduly burdening and restricting the foreign trade of the United States…” but only under specified limitations, the only one which applies in this case is “(C) increases any rate of duty above the rate that applied on June 29, 2015.”.
So the Act of 2015 doesn’t apply in this case.
Here’s Trump’s opening basis for Aluminum and Steel Tariffs:
“…big aluminum companies in the United States. And they’ve been very unfairly treated by bad policy, by bad trade deals, by other countries. They’ve been horribly treated by other countries, and they have not been properly represented.”
Here’s another statement in response to a Steel Executive at the same meeting:
” What they do is they dump massive amounts of product on our country, and it just kills — it destroys our companies and our jobs. And it’s been happening for so many years, and we are not the beneficiary.”
https://www.whitehouse.gov/briefings-statements/remarks-president-trump-listening-session-representatives-steel-aluminum-industry/
None of these statements relate to national security, but instead to “unfair”, “dumping”, being “horribly treated”, improper “representation”, “destroying jobs”,
In other words the whole charade is simply playing to his base ..the “tough guy” stance.
He has no US laws to stand on, nor has he invoked the WTO’s rules being violated — indeed his unilateral desire to impose tariffs violate WTO rules.
Trump’s tweets on imposing Al and Steel tariffs are listed in the following article:
https://www.washingtonpost.com/news/posteverything/wp/2018/03/05/why-trumps-fist-shaking-tariff-talk-will-translate-into-action/?utm_term=.4a8463db7666
Relevant excerpts:
Mar 2, 2:50 am
“When a country (USA) is losing many billions of dollars on trade with virtually every country it does business ..
Mar 3, 9:43 am
“United States has an $800 Billion Dollar Yearly Trade Deficit because of our “very stupid” trade deals and policies. … They laugh at what fools our leaders have been.”
Mar 3, 9:53 am
“If the E.U. wants to further increase their already massive tariffs and barriers on U.S. companies doing business there, we will simply apply a Tax on their Cars….They make it impossible for our cars (and more) to sell there. Big trade imbalance!”
Mar 4, 4:10 am.
“We are on the losing side of almost all trade deals. Our friends and enemies have taken advantage of the U.S. for many years. Our Steel and Aluminum industries are dead. ”
You’ll note that his reasons for tariffs have nothing to do with national security. He asserts the US has been taken advantage of… by our past trade deals because we run a trade deficit. He clearly doesn’t understand that we’ve run an increasing trade deficit since 1992, all of which is due to goods production not being competitive on the global market.
https://fred.stlouisfed.org/series/BOPGSTB
NAFTA didn’t begin until 1994 and the impetus for it was Reagan who made it part of his campaign in 1979. By 1994 our trade deficit was already down 12% of where it is now (6%/year already)..
China’s entry into the WTO didn’t occur until the very end of 2001. By then our trade deficit was already down by 54% of where it is now, or by 5.4%/year from 1992 when the deficit went negative. The US had begun significant trade with China by 1992 already 10 years before they were a member of the WTO Their entry into the WTO made it fairer for the US and Europe to trade with China on terms much more beneficial to the US than before the WTO membership. The significant trade with China beginning in 1992 was under Bush Sr’s administration. Clinton succeeded him in 1993 and China’s entry into the WTO didn’t occur until Bush Jr’s admin (beginning Jan 2001) in which he favored China’s entry into the WTO (Dec 2001).
https://web.archive.org/web/20110515133508/http://edition.cnn.com/2001/WORLD/asiapcf/east/04/05/china.WTO/
Basically what Trump wants to undo (or redo) US trade policy since Reagan’s administration. .. i.e. the last 35 years or so. Remake history?, or make believe to his base that he can.
Bert:
Do not post here again.
“Mar 2, 2:50 am
“When a country (USA) is losing many billions of dollars on trade with virtually every country it does business”
Trump does a lot of really stupid tweets but this takes the cake. Let me go back to my Best Buy example. Does Trump think Best Buy has made $1000 in profits when I spend $1000 on the computer? No – it may have a very modest gross margin which covers the cost of its crew plus an even smaller operating margin. Now did I incur a $1000 loss? Well it depends on what I did with this computer. If I threw it away before I got home – then yes. But no – I use my computer for both enjoyment and in business.
If Trump’s business ventures were publicly traded, I would advice short selling all of them.
“If Trump’s business ventures were publicly traded, …”
They would be subject to the SEC, public quarterly financial statements, including major share holders & independent audits. Which is of course precisely why they’re not publically traded. .
Sources of Steel Imports to US — you’ll get a better picture now that Trump has exempted Canada & Mexico. Data for YE Sept 2017
https://www.trade.gov/steel/countries/pdfs/imports-us.pdf
78% of US Steel imports are from 10 countries (by volume in million metric ton tonnes)
16% – Canada
13% – Brazil
10% – South Korea
9% – Mexico
9% – Russia
7% – Turkey
5% – Japan
4% – Taiwan
3% – Germany
2% – India
Canada & Mexico provide 25% combined.
That leaves all other countries providing 75%, and 53% from the remaining top 10 countries. China isn’t even on the list.
Of the top 10 source nations only one isn’t a U.S, ally — Russia…. but that’s the one Trump likes to do business dealings wit:. Russia accounts for 9% of US steel imports — 9% x 25% Tariff = 2.25% approximate value not imported if all our allies become exempt.
If no further exemptions are approved then 25% x 7% remaining import sources =18.75% net approximate value of steel not imported. that’s nearly a 20% increase potential profit / price increase margin for US Steel Producers … much of which get passed on to consumer products for which the pubic will pay in increased steel product prices.
That will decrease consumption and then also Steel production volumes for the US Steel producers which will thus decrease rather than increase jobs in Steel producers, not to mention in Steel products mfg’ng — Automobiles, machine tools heavy equipment, high rise building construction, & bridges among many others.
Auto, machine tools, and heavy equipment mfg’ers will thus be less competitive and increase imports of these and other goods, limiting jobs rather than increasing them on net.
Of course South Korea, Brazil, Japan, & Germany (at least) will probably file a WTO complaint requiring the U.S. prove they comprise a US security threat, any more than Canada & Mexico do.
This isn’t about a security threat at all.. that’s just the 1962 US law being used to obtain unilateral Executive tariffs authority. I don’t think the WTO will agree with Trump’s basis.
I haven’t read Trump’s final legal document so I don’t know whether the Steel and Aluminum import tariffs are by steel value or volumes (million metric tons). I presume volumes, but don’t know.
I’m getting a big kick out of watching Trump’s tariff’s charade though. And it is a charade.