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Weighing Trump’s Trade Apologists

In the wake of the recent “trade agreement” between President Trump and EU Commission President Jean Claude Juncker, we have seen a surfeit of commentary heaping praise on the U.S. president for his strategic trade policy vision and tactical brilliance. Much of that praise has come from people who share the president’s flat-earth view that trade is a zero-sum game played by national governments where the objective is to promote exports, block imports, and secure a trade surplus. Trump throwing U.S. weight around to assert the rule of power over the rule of law is music to this crowd’s ears.

But then there are the apologists who know better; the enablers. They are the bigger problem. In their obsequious tones, they explain how our brilliant president is blazing his own path toward free trade and that the evidence of his success is all around us. If we just disregarded Trump’s nationalist rhetoric, ignored his belief that the trade deficit means the United States is getting ripped off, shoveled away his mounting pile of destructive, protectionist actions, and stopped believing our own lying eyes, we too would rejoice in the greatness of a man who is committed—above all else and above all others—to free trade. 

Engaging in such extreme mental contortions is no easy task, but that’s exactly what an op-ed by tax reform luminaries Steve Moore, Art Laffer, and Steve Forbes in the New York Times last week expects readers to do.

Moore, Laffer, and Forbes (MLF) portray Trump’s “gunboat diplomacy” (you open your markets fully or I’ll close ours!) as strategic genius, akin to Reagan’s nuclear arms race, which broke the Soviets’ backs.  They conclude: “Just as no one ever thought Mr. Reagan would stem nuclear proliferation, if Mr. Trump aggressively pursues this policy, he could build a legacy as the president who expanded world commerce and economic freedom by ending trade barriers rather than erecting them.” Well, yeah, maybe he could.  But so far Trump has only increased trade barriers, more are coming, and there are no negotiations underway—with anyone—aimed at lowering tariffs or other barriers to trade.  But just close your eyes and imagine.

Peter Navarro, Harvard Ph.D. Economist, Trade Warrior

Peter Navarro, director of the newly-established White House National Trade Council, gave a speech last week to the National Association for Business Economics, which he condensed into an opinion piece for the Wall Street Journal. The analytical errors and the fallacies portrayed as facts in that op-ed are so numerous that it is bewildering how a person with a Ph.D. in economics from Harvard University—and a potentially devastating amount of influence within the White House—could so fundamentally misunderstand basic tenets of introductory economics.

Almost every paragraph in the op-ed includes an error of fact or interpretation.  I’ll focus on a few, deferring to others’ noble efforts (Phil Levy, Don Boudreaux, Linette Lopez) at wading through the rest of Navarro’s confused and misinformed diatribe.

Consider Navarro’s portrayal of the national income identify as an economic growth formula.  He claims:

The economic argument that trade deficits matter begins with the observation that growth in real GDP depends on only four factors: consumption, government spending, business investment and net exports (the difference between exports and imports).

The sentence betrays a deep and troubling misunderstanding of the factors of economic growth. Real GDP growth (growth in the total value produced in the economy) depends on increases in the factors of production and increases in the productive use of those factors, which trade and specialization facilitate. What Navarro refers to as the drivers of growth are actually the channels that account for the disposition of our output – what we do with our output.

The national income identify is expressed as: Y=C + I + G + X – M.  It tells us that our national output is either consumed by households (C); consumed by business as investment (I); consumed by government as public expenditures (G); or exported (X). Those are the only four channels that can account for the disposition of national output.  We either consume our output as households, businesses and government or we export it.

Imports (M) are not a channel through which national output is disposed.  We don’t import our output. But M appears in the identity and is subtracted because we consume – as C, I, and G – both domestically produced and imported goods and services.  If we didn’t subtract M in the national income identity, we would overstate GDP by the value of our imports.

But Navarro believes – or wants the public to believe – that the national income identity is an economic growth formula or function, where Y (GDP) is the dependent variable, C,I,G, X, and M are the independent variables, and the minus sign in front of M means that imports are inversely related to (or detract from) GDP.  That’s wrong and a Harvard Ph.D. economist should know that.

Reducing a trade deficit through tough, smart negotiations is a way to increase net exports—and boost the rate of economic growth.

The evidence is overwhelming – month after month, quarter after quarter, year after year – that the trade deficit and GDP rise and fall together. The largest annual decline in the trade deficit ever recorded was between 2008 and 2009, during the trough of the Great Recession. The largest annual increase in the trade deficit occurred between 1999 and 2000, when the economy grew by 4.7 percent – the strongest annual economic growth in the past 33 years.

When the economy grows, households, businesses, and government tend to spend more, and they spend more on both domestic and imported goods and services.  When the economy contracts, there is less spending on both domestic and imported goods and services.  For the past 42 straight years, the United States has registered trade deficits.  In 40 or those 42 years, annual changes in the value of imports and the value of GDP moved in the same direction.

Navarro either believes, or would have the public believe, that imports detract from GDP and that our national security requires all of the gears of U.S. trade policy be put to the service of eliminating our trade deficit. This is a fool’s errand and a Harvard Ph.D. economist should know that.

Suppose America successfully negotiates a bilateral trade deal this year with Mexico in which Mexico agrees to buy more products from the U.S. that it now purchases from the rest of the world. This would show up in government data as an increase in U.S. exports, a lower trade deficit, and an increase in the growth of America’s GDP.

First, note the implication that Navarro expects U.S. trade agreements to include commitments by our trade partners to meet certain outcomes – “…Mexico agrees to buy more products from the U.S.”  This kind of managed trade is unprecedented and utterly defies the purpose and spirit of trade liberalization.  Trade agreements are intended to reduce barriers to competition, not to preempt competition by anointing the winners at the outset.  But, okay, the administration believes it has a mandate to blow things up on the trade front.

But, here’s another problem with Navarro’s scenario.  If Mexico agrees to buy from the United States some of what it now purchases from other countries (Navarro’s key to decreasing the bilateral trade deficit with Mexico), then won’t those other countries have fewer dollars with which to purchase U.S. exports?  Wouldn’t that, all else equal, increase bilateral trade deficits or reduce bilateral surpluses the United States has with those other countries?  Yes and yes.  What Navarro is suggesting is a game of trade policy whack-a-mole. Bilateral trade accounting is utterly meaningless, and a Harvard Ph.D. economist should know that.

Why We Trade

Imagine life in isolation, waking every morning before sunrise to make your own clothes, build and repair your meager shelter, hunt and harvest your own food, concoct rudimentary salves for what physically ails you, and attend to the upkeep of your brutish existence engaging in other difficult and tedious tasks. Forget leisure or luxuries; all of your time would be consumed trying to produce basic necessities merely to subsist.

Congress Fist Bumps Itself Over Tariff “Reform” Bill That Keeps 97% of Import Taxes in Place

This week congressional trade leaders introduced The American Manufacturing Competitiveness Act of 2016 (AMCA), a bill to reform and reinvigorate the stalled Miscellaneous Tariff Bill (MTB) process.  MTBs are legislative vehicles through which Congress temporarily suspends import duties on certain qualified products typically used as inputs in U.S. manufacturing operations. Soon followed the self-congratulatory triumphalism.

House Ways and Means Committee Chairman Kevin Brady (R-TX) said: “This bipartisan bill will empower American manufacturers to compete around the world, create new jobs at home, and grow our economy.”

Ranking Member Sander Levin (D-MI) added: “The MTB is a critical tool that supports American manufacturers and workers, and I’m pleased that we’re finally moving forward with this legislation.”

Senate Finance Committee Chairman Orrin Hatch (R-UT) boasted: “With this legislation, we offer a smart bicameral and bipartisan approach for MTBs — one that improves transparency and allows domestic firms to receive appropriate tariff relief on products that can only be found abroad so that those firms can produce American-made goods here at home.”

Ranking Member Ron Wyden (D-OR) moralized: “We need to do everything we can to make U.S. manufacturers more competitive — that includes passing a miscellaneous tariff bill that reduces costs of components we don’t make here in the U.S.”

Let’s unpack this. 

Rethinking Currency Manipulation

Interest groups in the United States have focused on the possibility of including provisions in trade agreements with the intent of countering currency manipulation.  The concern is that another country may choose to reduce the value of its currency relative to the U.S. dollar in order to encourage its businesses to export more goods to the United States.   Such currency realignment also would tend to make it more expensive for the devaluing nation to import products from this country.

It’s true that an adjustment in currency exchange rates – regardless of the reason for the adjustment – can have an effect on trade flows.  U.S. industries that export to foreign customers, or compete with imported goods in the domestic marketplace, understandably would prefer that currency relationships not become skewed against their commercial interests.  Currency stability improves the business climate by making it easier to build long-term relationships with customers and suppliers. 

However, currency exchange rates have fluctuated throughout recorded history.  Sometimes those changes may be driven by a government’s conscious desire to devalue its currency.  More often the variability in exchange rates reflects fundamental economic realities.  Economies that experience growing productivity and rising prosperity should not be surprised to find that market pressures cause their currencies to strengthen.  The reverse is true for countries that are growing slowly or not at all. 

A shift in exchange rates changes a country’s “terms of trade,” which is a term  used by economists to describe the ratio of a country’s export prices to its import prices.  From a U.S. perspective, if another country sets its currency at an artificially low level relative to the dollar, the U.S. terms of trade will improve.  The United States will be able to obtain a greater value of imports for the same value of exports.  Exporting the same number of airplanes and soybeans as before will pay for the importation of larger quantities of shoes, coffee, and automobiles. 

Frederic Bastiat Makes the Case for Trade Facilitation

Earlier this month in Bali, WTO ministers reached agreement on a set of negotiating issues known as “trade facilitation,” which deal mostly with customs reform and related measures to reduce the time and cost of transporting goods and services across borders. If removing tariffs is akin to turning on a water spigot full blast, trade facilitation is the act of untangling and straightening out the attached hose. A kinked hose impedes the flow as an administratively “thick” border impedes trade.

Time to Lose the Trade Enforcement Fig Leaf

During his SOTU address last week, the president declared it a national goal to double our exports over the next five years.  As my colleague Dan Griswold argues (a point that is echoed by others in this NYT article), such growth is probably unrealistic. But with incomes rising in China, India and throughout the developing world, and with huge amounts of savings accumulated in Asia, strong U.S.

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