President Trump's favored catchphrase when speaking about trade policy is that it must be "free, fair, and reciprocal." His penchant for such language has certainly been on display during his current trip to Asia, where in Japan alone Trump used some variation of it on at least three separate occasions.
Conducting a joint press conference with Prime Minister Abe, Trump professed a particular affinity for the reciprocal aspect of this formulation:
[F]rankly, I like reciprocal the best of the group. Because when you explain to somebody that you're going to charge tariffs in order to equalize, or you're going to do other things—some people that don't get it, they don't like to hear that. But when you say it's going to be reciprocal—that we're going to charge the same as they're charging us—the people that don't want a 5 percent or a 10 percent tariff say, oh, reciprocal is fair—and that could be 100 percent. So it's much more understandable when you talk about reciprocal.
Trump also noted that this prized reciprocity does not exist in the U.S.-Japan trade relationship, telling a group of U.S. and Japanese business leaders that "We want free and reciprocal trade, but right now our trade with Japan is not free and it's not reciprocal."
On the surface, Trump's comments may appear to be commonsensical and correct. Indeed, ideal tariff levels between two countries are a reciprocal zero. It is also accurate that the United States and Japan do not enjoy reciprocal trade in the context of tariffs. A deeper examination of the subject, however, reveals that the president gets more wrong than he gets right.
Let's first note that while President Trump often frames the reciprocity argument as one in which the United States is the aggrieved party charging lower tariffs while its trading partners opt for higher ones, the opposite is also frequently the case.
The U.S.-Japan trading relationship is a useful example. Perusing the two countries' HTS codes, one can see that the United States charges tariffs on a number of goods produced by Japan including a 2.5% duty on automobiles, a 25% tariff on trucks, and 14% tariff on imports of railway passenger coaches. Japan, in contrast, charges no tariff at all for any of these products.
Even where the two sides both extend duty-free treatment to the same product, this can simply mask underlying protectionism. Like Japan, the United States does not apply tariffs to imports of ships used for the transport of people and goods (HTS code 8901.90.00 for those who care to look it up). It does, however, have a law on the books called The Merchant Marine Act of 1920—more commonly known as the Jones Act—which mandates that any vessel used to transport goods or people between U.S. ports must be domestically built. While a ship can be purchased from Japan tariff-free, this protectionist law ensures that its usefulness will be greatly diminished.
None of this is to suggest that the United States is always the villain and never the victim. Japan is notoriously protectionist in the area of agricultural products, which is particularly costly to an agricultural powerhouse such as the United States. Japanese tariffs on beef, for example, are typically 38.5%—and currently 50% due to the imposition of a "safeguard" measure to give the country's beef producers additional protection—while the U.S. rate is a comparatively low 4%. Oranges, meanwhile, incur a Japanese duty ranging from 16-32% depending on the time of year they are imported, while 100 kilograms of the fruit imported into the United States will face a tariff bill of just $1.90. Fish, mostly duty-free in the United States, typically face duties of 3.5% and higher in Japan.
Under a tariff regime based on perfect reciprocity, the United States would impose tariffs on such food products to match those of Japan. But other than raising the cost to U.S. consumers of Wagyu beef or Japanese fish (Americans do not consume Japanese citrus products in any significant quantity), what would this accomplish? Japan's high food tariffs reflect the influence of the country's powerful farm lobby (sounds familiar!), and the prospect of diminished exports to the U.S. is unlikely to dissuade those in Japan's agricultural sector from their protectionist stance. The likely result would be the status quo by Japan, but with American consumers facing elevated prices and reduced choice and American businesses confronted with increased input costs, thus reducing their competitiveness. Copying a trading partner's misguided approach is not a sensible policy.
Rather than hewing to a blind insistence on tariff reciprocity which holds U.S. businesses and consumers hostage to decisions made in foreign capitals, the Trump administration should push for the conclusion of trade agreements which reduce tariffs and other forms of trade barriers by both the United States and its trading partners to the greatest extent possible. This, not simplistic sloganeering, represents the best path towards freer and expanded trade.
The United States has recorded a trade deficit in each year since 1975. This is not surprising. After all, we spend more than we save, and this deficit is financed via a virtually unlimited U.S. line of credit with the rest of the world. In short, foreigners in countries that save more than they spend (read: record trade surpluses) ship the U.S. funds to finance America’s insatiable spending appetites.
Japan and more recently China have been the primary creditors for the savings-deficient U.S. And since their exports are largely manufactured goods, the real counterpart of their buildup of dollar claims on Americans is for them to run export surpluses in manufactured goods with the U.S. The accompanying chart shows the contribution of Japan and China to the U.S. trade deficit since the late 70s.
So, the U.S. savings deficiency has contributed to the hollowing out of American manufacturing. But, you wouldn’t know it by listening to President-elect Trump. He never mentions America’s savings deficiency. Instead, he claims that American manufacturing has been eaten alive by foreigners who use unfair trade practices and manipulate their currencies to artificially weak levels. This is nonsense.
To get a handle on why the President-elect Trump – and many others in Washington, including the newly-elected Senate Minority Leader Charles Schumer – are so misguided and dangerous, let’s take a look at Japan. From the early 1970s until 1995, Japan was America’s economic enemy. The mercantilists in Washington asserted that unfair Japanese trading practices caused the trade deficit and destroyed U.S. manufacturing. Washington also asserted that, if the yen appreciated against the dollar, America’s problems would be solved.
Washington even tried to convince Tokyo that an ever-appreciating yen would be good for Japan. Unfortunately, the Japanese caved into U.S. pressure, and the yen appreciated, moving from 360 to the greenback in 1971 to 80 in 1995. This massive yen appreciation didn’t put a dent in Japan’s exports to the U.S., with Japan contributing more than any other country to the U.S. trade deficit until 2000 (see the accompanying chart).
In April 1995, Secretary of the Treasury Robert Rubin belatedly realized that the yen’s great appreciation was causing the Japanese economy to sink into a deflationary quagmire. In consequence, the U.S. stopped bashing the Japanese government about the value of the yen, and Secretary Rubin began to evoke his now-famous strong-dollar mantra. But while this policy switch was welcomed, it was too late. Even today, Japan continues to suffer from the mess created by the yen’s appreciation.
Now, China is America’s economic enemy, and China bashing is in vogue. Indeed, hardly a day goes by without President-elect Trump railing against China, accusing it of unfair trade practices and currency manipulation. He is also threatening to impose huge tariffs on the Middle Kingdom.
At the same time, President-elect Trump is promising a set of spending and taxing policies that will cause the gap between our spending and savings to widen. This will balloon our trade deficit. And with that, Mr. Trump will, no doubt, point an accusatory finger and start a trade war with China, a country that currently contributes 48% to the U.S. trade deficit. So, the President-elect’s promised lax fiscal policies might just get us into a trade war with one of the most important countries in the world.
Remember Bill Murray's Groundhog Day, the 1993 comedy classic about a weatherman who experiences the same day over and over again?
Well, the same thing is happening in Japan. But instead of a person waking up and reliving the same day,
we get politicians pursuing the same failed Keynesian stimulus policies over and over again.
The entire country has become a parody of Keynesian economics. Yet the politicians make Obama seem like a fiscal conservative by comparison. They keep doubling down on the same approach, regardless of all previous failures.
The Wall Street Journal reports on the details of the latest Keynesian binge.
Japan’s cabinet approved a government stimulus package that includes ¥7.5 trillion ($73 billion) in new spending, in the latest effort by Prime Minister Shinzo Abe to jump-start the nation’s sluggish economy. The spending program, which has a total value of ¥28 trillion over several years, represents...an attempt to breathe new life into the Japanese economy... The government will pump money into infrastructure projects... The government will provide cash handouts of ¥15,000, or about $147, each to 22 million low-income people... Other items in the package included interest-free loans for infrastructure projects...and new hotels for foreign tourists.
And if you go back farther in time, you'll see that the Japanese version of Groundhog Day has been playing since the early 1990s.
Here's a list, taken from a presentation at the IMF, of so-called stimulus plans adopted by various Japanese governments between 1992-2008.
And here's my contribution to the discussion. I went to the IMF's World Economic Outlook database and downloaded the numbers on government borrowing, government debt, and per-capita GDP growth.
I wanted to see how much deficit spending there was and what the impact was on debt and the economy. As you can see, red ink skyrocketed while the private economy stagnated.
Though we shouldn't be surprised. Keynesian economics didn't work for Hoover and Roosevelt, or Bush and Obama, so why expect it to work in another country.
By the way, I can't resist making a comment on this excerpt from a CNBC report on Japan's new stimulus scheme.
Abe ordered his government last month to craft a stimulus plan to revive an economy dogged by weak consumption, despite three years of his "Abenomics" mix of extremely accommodative monetary policy, flexible spending and structural reform promises.
In the interest of accuracy, the reporter should have replaced "despite" with "because of."
In addition to lots of misguided Keynesian fiscal policy, there's been a radical form of Keynesian monetary policy from the Bank of Japan.
Here are some passages from a very sobering Bloomberg report about the central bank's burgeoning ownership of private companies.
Already a top-five owner of 81 companies in Japan’s Nikkei 225 Stock Average, the BOJ is on course to become the No. 1 shareholder in 55 of those firms by the end of next year.... BOJ Governor Haruhiko Kuroda almost doubled his annual ETF buying target last month, adding to an unprecedented campaign to revitalize Japan’s stagnant economy. ...opponents say the central bank is artificially inflating equity valuations and undercutting efforts to make public companies more efficient. ...the monetary authority’s outsized presence will make some shares harder to buy and sell, a phenomenon that led to convulsions in Japan’s government bond market this year. ...the BOJ doesn’t acquire individual shares directly, it’s the ultimate buyer of stakes purchased through ETFs. ...investors worry that BOJ purchases could give a free ride to poorly-run firms and crowd out shareholders who would otherwise push for better corporate governance.
Wow. I don't pretend to be an expert on monetary economics, but I can't image that there will be a happy ending to this story.
Just in case you're not sufficiently depressed about Japan's economic outlook, keep in mind that the nation also is entering a demographic crisis, as reported by the L.A. Times.
All across Japan, aging villages such as Hara-izumi have been quietly hollowing out for years... Japan’s population crested around 2010 with 128 million people and has since lost about 900,000 residents, last year’s census confirmed. Now, the country has begun a white-knuckle ride in which it will shed about one-third of its population — 40 million people — by 2060, experts predict. In 30 years, 39% of Japan’s population will be 65 or older.
The effects already are being felt, and this is merely the beginning of the demographic wave.
Police and firefighters are grappling with the safety hazards of a growing number of vacant buildings. Transportation authorities are discussing which roads and bus lines are worth maintaining and cutting those they can no longer justify. ...Each year, the nation is shuttering 500 schools. ...In Hara-izumi, ...The village’s population has become so sparse that wild bears, boars and deer are roaming the streets with increasing frequency.
Needless to say (but I'll say it anyhow), even modest-sized welfare states eventually collapse when you wind up with too few workers trying to support an ever-growing number of recipients.
Now maybe you can understand why I've referred to Japan as a basket case.
P.S. You hopefully won't be surprised to learn that Japanese politicians are getting plenty of bad advice from the fiscal pyromaniacs at the IMF and OECD.
P.P.S. Maybe I'm just stereotyping, but I've always assumed the Japanese were sensible people, even if they have a bloated and wasteful government. But when you look at that nation's contribution to the stupidest-regulation contest and the country's entry in the government-incompetence contest, I wonder whether the Japanese have some as-yet-undiscovered genetic link to Greece?
Could the U.S.-Japan alliance founder as a result of alcohol? Apparently. At least, that’s the implication of the U.S. Navy’s ban on drinking by personnel stationed on the Japanese island of Okinawa.
It would be far better to phase out America’s military presence on Okinawa, turning U.S. bases back to the Japanese government. More than seven decades after the end of World War II, Tokyo should take over responsibility for Japan’s defense.
Washington currently bases and personnel on the island of Okinawa, with just .6 percent of Japan’s land mass. Local anger exploded in 1995 after three American service members raped a 12-year-old girl. The Japanese government sought to placate islanders with financial transfers and plans to move Futenma airbase and relocate Marines to Guam. These schemes failed to satisfy, however.
Base opponents, bolstered by the 2014 gubernatorial victory of Takeshi Onaga, continued to resist. Fueling popular anger has been a seeming spate of high-profile offenses committed by U.S. military personnel (who, in fact, have a lower crime rate than locals). Last month a sailor pled guilty to rape. Also last month a contractor and former Marine was detained in a murder case.
Then an apparently intoxicated sailor crashed, injuring two Okinawans. The navy confined all personnel to base except for essential travel and banned drinking on or off U.S. facilities.
Prime Minister Shinzo Abe largely ignored the Okinawa question as he sought to bolster Tokyo’s military capabilities. But he has made little progress against strong public opposition.
Japan’s “peace constitution” forbidding a military remains unchanged, so Abe simply interprets the law as he wishes it had been written. Military outlays have risen only modestly since Abe took power, up just two percent in 2015. Japan then devoted about $41 billion to defense, compared to roughly $180 billion by China, Tokyo’s main potential nemesis.
Although last year his government adjusted the military’s defense guidelines, Tokyo’s international activities will remain non-combat and do little to reduce America’s military duties.
Moreover, the revised standards merely allow Japan to better defend Japan, not assist the U.S. Now a Japanese ship on patrol with an American vessel can assist if the latter is attacked—so long the Japanese vessel too is threatened. And Japanese analysts warn against expecting Tokyo to allow such situations to occur.
Worse, the new guidelines appear to envision an even stronger U.S. guarantee for Japan and deployment of additional weapons. Under the “bilateral” treaty Washington’s obligations apparently only increase.
The U.S. has an obvious interest in Japan’s continued independence, but Japan’s commitment to its own security should be even greater. Tokyo should do more to defend itself.
In fact, no one expects a Chinese armada to show up in Tokyo Bay. If conflict erupts, it likely will be over disputed Senkaku/Diaoyu Islands. Of course, Beijing is not justified in using force there or elsewhere, but nothing at stake there is worth war, at least for America.
A serious Japanese military build-up is opposed by some of Tokyo’s neighbors, but no one seriously suggests that Japan is about to embark upon a new round of imperial conquests. More than seven decades after World War II Japan should finally act like a normal country—defending itself, guarding its region, and ending its dependence on America.
The U.S. should turn its security guarantee to Japan into a framework for future cooperation. That should include potential assistance if a genuine hegemonic threat arises in Asia. But Tokyo should take the lead in confronting day-to-day security challenges.
As I wrote in Forbes: “Japan should decide its own defense and foreign policies. As American forces returned home Okinawa’s bases would empty. What came next would be up to the Japanese. And American military personnel could continue to enjoy a drink … back home in their own country.”
Japan is a developed nation that allows little immigration, thus winning occasional praise from American immigration restrictionists. If the reason for copying Japan’s immigration policy of almost no immigrants is that it will improve the labor markets, conditions there do not provide evidence for that claim, at least on the surface.
Japan’s immigrant population is minuscule compared to the United States, as a percent of either country’s population (Figure 1).
Figure 1: Immigrant Stock as Percentage of Population
Source: World Bank.
Although there is little immigration to Japan, real average monthly cash earnings have declined slightly since 1995 (Figure 2). During the same time period, U.S. wages have actually grown, albeit not as fast as many want (Figure 3). If those graphs were unlabeled, my hunch is that most immigration restrictionists would assume the better graph is Japan. Japan’s sluggish wage growth in a low-immigration environment doesn’t match the restrictionist fairytale while American wage growth contradicts it.
Figure 2: Japanese Real Average Monthly Cash Earnings, (2010 Thousand Yen)
Source: United States Census and World Bank.
An immigration restrictionist might counter that more Japanese are employed due to a paucity of immigration, thus outweighing (or explaining) the sluggish wage growth. That response doesn’t fit either as labor force participation rates (LFPR) for the entire adult population in Japan has been lower than in the United States for as long as World Bank data is available (Figure 4). Japan’s population is older than the United States which likely explains much of their lower LFPR.
Figure 4: Labor Force Participation Rates (% of total population ages 15+)
Source: The World Bank, http://beta.data.worldbank.org/
However, according to a different ILO estimate of LFPR for those aged 15-64, Japanese workers are more likely to be in the workforce since 2009 but less likely prior to then (Figure 5).
Figure 5: Labor Force Participation Rate, Modeled ILO Estimate (% of total population ages 15-64)
Source: The World Bank, http://beta.data.worldbank.org/
Prime Minister Shinzo Abe is turning his attention to reforming Japan’s lackluster labor market that is widely blamed for holding back the country’s economic recovery. Immigration reform could be a portion of that reform package. Some Japanese politicians are less satisfied with their immigration restrictions than they used to be. Japanese public opinion toward immigration has softened recently, especially when viewed in an economic context. Regardless of potentially shifting Japanese public opinion, Japan’s labor market experience does not help immigration restrictionists make their case in the United States.
Due to difficulty in finding Japanese data I had to rely on average wage rates and use the CPI as an inflation benchmark.
Andy Yuan assisted with this blog post.
It's very hard to be optimistic about Japan. I've even referred to the country as a basket case.
But my concern is not that the country has been mired in stagnation for the past 25 years. Instead, I'm much more worried about the future. The main problem is that Japan has the usual misguided entitlement programs that are found in most developed nations,
but has far-worse-than-usual demographics. That's not a good long-term combination.
As I repeatedly point out in my speeches and elsewhere, a modest-sized welfare state can be sustained in a nation with a population pyramid. But even a small welfare state is a challenge for a country with a population cylinder. And it's a crisis for a jurisdiction such as Japan that will soon have an upside-down pyramid.
To make matters worse, Japanese politicians don't seem overly interested in genuine entitlement reform. Instead, most of the discussion (egged on by the tax-free bureaucrats at the OECD) seems focused on how to extract more money from the private sector to finance an ever-growing public sector.
But the icing on the cake of bad policy is that Japanese politicians are addicted to Keynesian economics. For more than two decades, they've enacted one "stimulus package" after another. None of these schemes have succeeded. Indeed, the only real effect has been a quadrupling of the debt burden.
The Wall Street Journal shares my pessimism. Here's some of what was stated in an editorial late last year.
Japan is in recession for the fifth time in seven years, and the...Prime Minister who promised to end his country’s stagnation is failing at the task. ...Mr. Abe’s economic plan consisted of three “arrows,” starting with fiscal spending and monetary easing. The result is a national debt set to hit 250% of GDP by the end of the year. The Bank of Japan is buying bonds at a $652 billion annual rate, a more radical quantitative easing than the Federal Reserve’s. ...The third arrow, structural economic reform, offered Japan the only hope of sustained economic growth. ...But for every step Mr. Abe takes toward reform, one foot remains planted in the political economy of Japan Inc. In April 2014, Mr. Abe acquiesced to a disastrous three percentage-point increase in the value-added tax, to 8%, pushing Japan into its first recession on his watch. More recently, he has pushed politically popular but economically ineffectual spending measures on child care and help for the elderly. ...only 25% of the population now believes Abenomics will improve the economy. Reality has a way of catching up with political promises.
You might think that even politicians might learn after repeated failure that big government is not a recipe for prosperity.
But you would be wrong.
Notwithstanding the fact that Keynesian economics hasn't worked, Japanese politicians are doubling down on the wrong approach.
According to a report from Bloomberg, American Keynesians (when they're not busing giving bad advice to Greece) are telling Japan to dig a deeper hole.
Paul Krugman urged Japanese Prime Minister Shinzo Abe to...expand fiscal stimulus to revive the economy.
Reuters filed a similar report:
U.S. economist Paul Krugman said on Tuesday he advised Japan's Prime Minister Shinzo Abe to...boost fiscal spending... Krugman's advice was the same as that which fellow U.S. economist Joseph Stiglitz gave Abe last week.
Indeed, there apparently was a consensus for bigger government:
Every one of the economists that Prime Minister Shinzo Abe has invited here for a series of meetings with policymakers has recommended that Japan let loose government spending... When Abe asked why consumer spending has remained feeble since the 2014 consumption tax increase, the U.S. academic suggested the answer lies in expectations that fiscal stimulus will end. ...Abe's government...appears to be seeking to rally the G-7 for aggressive fiscal policy.
So why did the Japanese government create an echo chamber of Keynesianism? Perhaps because politicians want an excuse to buy votes with other people's money.
With an upper house election looming in July, ruling coalition lawmakers also are eager to dole out massive public spending.
And it appears that Japanese politicians are happy to take advice when it's based on their spending vice ostensibly being a fiscal virtue. That's not too shocking, but the Keynesian scheme that's being prepared is a parody even by Krugmanesque standards.
Japan's government is considering handing out gift certificates to low-income young people in a supplementary budget for fiscal 2016 as consumer spending remains sluggish on a slow wage recovery, the Sankei Shimbun newspaper reported Thursday. Government officials believe certificates for purchasing daily necessities would lead to spending, unlike cash handouts which could be saved... The additional fiscal program would follow a similar measure for seniors and the ruling coalition would use it to gain voter support before the Upper House election expected in July, the daily said.
Maybe the politicians will succeed in buying votes, but they shouldn't expect better economic performance. Giving people gift certificates won't alter incentives to work, save, and invest (the behaviors that actually result in more economic output).Indeed, on the margin, these handouts may lure a few additional people out of the labor force.
The plan is foolish, even from a Keynesian perspective. Since money is fungible, do these people really think gift certificates will encourage more spending that cash handouts?
By the way, another reason to be pessimistic about Japan is that there apparently aren't any politicians who understand economics. Or, at least, there aren't any that want good policy. The opposition party isn't opposed to Keynesian foolishness. Instead, it's leader is only concerned about who gets the goodies.
Katsuya Okada, the leader of the main opposition Democratic Party of Japan, said in parliamentary debate in January. "Elderly people are not the only ones who are suffering. Among the working generation, only a limited number of people are feeling the fruit of Abenomics."
The bottom line is that Japan will become another Greece at some point. I'm not smart enough to know whether that will happen in five years or twenty-five years, but barring a radical reversal in government policy, the nation is in deep long-run trouble.
P.S. Though I have to give the Japanese government credit for being so incompetent that it introduced a giveaway program that was so poorly designed that nobody signed up for the handout.
P.P.S. And Japan also wins the prize for what must be the world's oddest regulation.
Nearly all surviving Democrat and Republican presidential candidates (except John Kasich) have essentially endorsed the shared campaign theme of Donald Trump and Bernie Sanders that the U.S. economy is weak because we import too many goods from foreign countries. If only we could raise the cost of imports with tariffs, according to the Trump-Sanders theory, then the U.S. economy would supposedly have more jobs and higher real wages.
Paying more for anything (such as Fords or iPhones) is no way to get rich. Yet that concept somehow eludes many non-economists. Theory aside, the idea that fewer imports are good for the economy is the exact opposite of what we have experienced. The fact is that U.S. imports always fall when the economy slips into recession and imports rise briskly whenever the economy does.
As the graph shows, the annual percentage growth of real GDP in the United States is very closely tied to the annual growth of real imports. Rapidly expanding U.S. businesses need more imported parts and materials and increasingly prosperous Americans can also afford more imported goods. In recessions, we neither need nor can afford as many imports. This is why the U.S. balance of trade on goods and services was 3.6% of GDP in 2000 when the economy grew by 4.1% but shrunk to 2.7% of GDP in 2009 when the economy shrunk by 2.8%. U.S. GDP grew by 2.1% a year 2010-15 (lifting imports), while foreign economies did much worse (hurting exports), so the trade deficit has been 2.9-3% of GDP lately - including a surplus of $220 billion in services.
The fact that U.S. trade deficits always expand when the U.S. economy grows faster than others certainly does not mean slower economies are “winning” and the U.S. is a loser. As our own experience shows, the fact that imports slow or contract when the economy does hardly makes stagnation or recession more desirable than 3-4% economic growth. Europe and Japan would surely prefer decent economic growth to the weak imports that invariably accompany such weak economies.
Japan has run big trade surpluses for decades, yet Japan’s industrial production fell 2.7% from early 2010 to late 2015, while U.S. industrial production rose 13%. Manufacturing jobs in Japan fell from 14.4 million in 1997 to 10.4 million in 2014. Most Hondas and a very big share of other Japanese-branded cars are now made in the USA, where auto exports topped 2.1 million in 2014, including Japanese and German vehicles exported from this country.
Campaign rhetoric about the U.S. “not making anything anymore,” or about the U.S. not “winning” some make-believe trade war, is wrong and dangerous. The U.S. is second only to China in manufacutring, and maybe not for long. The 2016 Deloitte global manufacturing competitveness index concludes that “China is currently the most competitive manufacturing nation [with the U.S. second and Mexico eighth], but the US is expected to take over the top spot in five years."