trade war

A Contemporary Economist’s Account of the “Crowning Folly of Tariff of 1930”

“[T]here came another folly of government intervention in 1930 transcending all the rest in significance. In a world staggering under a load of international debt which could be carried only if countries under pressure could produce goods and export them to their creditors, we, the great creditor nation of the world, with tariffs already far too high, raised our tariffs again. The Hawley-Smoot Tariff Act of June 1930 was the crowning folly of the who period from 1920 to 1933….

Trade Warriors Exclude a Third of U.S. Exports from “Trade Deficits”

Private services account for 69% of GDP, and 128.2 million jobs in June. In the Bureau of Economic Analysis industry accounts, private service industries “consist of utilities; wholesale trade; retail trade; transportation and warehousing; information; finance, insurance, real estate, rental, and leasing; professional and business services; educational services, health care, and social assistance; arts, entertainment, recreational, accommodation, and food services; and other services (except public administration).”

Goods-producing industries, by contrast, “consist of agriculture, forestry, fishing, and hunting; mining; construction; and manufacturing.” All of these goods-producing industries combined accounted for only 20.7 million jobs this June. That was fewer goods-producing jobs than in July 2000 (24.7 million) or August 1979 (25 million) or even May 1969 (22.9 million).  In other words, all long-term U.S. job growth has been in service occupations, not in manufacturing, mining, construction, and agriculture.

Employees producing Services or Goods

The United States is predominantly a service economy.  Many world-famous U.S. enterprises provide services all over the world – including entertainment, transportation, legal services, chain restaurants, advertising, accounting, medical tourism and college degrees.  In fact, rising U.S. service exports accounted for a third of total exports from January through May, and the U.S. surplus in services shrunk the total deficit by 31%.

Yet when President Trump and his trade war generals talk excitedly about bilateral trade deficits, they invariably talk only about goods - never services.  Commerce Secretary Wilbur Ross, for example, published “Free Trade Is a Two-Way Street” in The Wall Street Journal, writing only about “trade in goods” – as though a third of U.S. exports, most U.S. jobs and 69% of U.S. GDP is not worth mentioning.

U.S.-China Trade Deal Trumps U.S.-China Trade War

Amid increasing tensions between Washington and Beijing over economic and security matters, Chinese President Xi Jinping is in Florida today and tomorrow for meetings with President Trump.  Although economic frictions between the world’s two largest economies are nothing new, the safeguards that have helped prevent those frictions from sparking an explosion and plunging the relationship into the protectionist abyss may no longer be reliable.

As I noted in this recent Cato Free Trade Bulletin: 

Never have the U.S. and Chinese economies been more interdependent than they are today. Never has the value of the bilateral trade and investment relationship been greater. Never has the precarious state of the global economy required comity between the United States and China more than it does now. Yet, with Donald J. Trump ascending to power on a platform of nationalism and protectionism, never have the stars been so perfectly aligned for the relationship to descend into a devastating trade war.

What are those safeguards and why might they no longer be reliable?

First, U.S. multinational business interests that used to favor treading lightly with China, and provided a policy counterweight to U.S. import-competing industries advocating protectionism, have grown disillusioned by the persistence of policies that continue to impede their success in Chinese markets. Many think a more aggressive posture from Washington, even if that makes matters worse for them in the short run, is overdue.

Second, the pro-China-trade lobbies in Washington have grown sheepish in their advocacy on account of an economic study that went viral last year, ascribing massive U.S. jobs losses to trade with China, and because many fear political retribution from challenging Trump’s assumptions.  Full-throated support for the relationship has become conditional support.

Third, now more than ever before, U.S. policymakers, media, and the public are less inclined to look at the bilateral economic relationship in isolation from the strategic and geopolitical aspects of the relationship.  Segregating the issues in the past allowed us to focus on the win-win elements of trade, where there was broad enough agreement that mutual benefits could be derived, without being distracted by the issues where the United States and China are less likely to agree.  Today, our economic frictions are viewed through the prism of our geopolitical differences – and that makes trade disputes more difficult to manage.

Trump Adviser Peter Navarro: Reagan Critic, Industrial Policy Fan

Donald Trump always sounded just like a Bernie Sanders Democrat when talking about international trade. “We have one issue that’s very similar,” he said, “and that’s trade.”  That Trump-Sanders hostility to trade liberalization, in turn, is identical to that of the AFL-CIO and the Economic Policy Institute, a leftist think tank created and largely financed by labor unions.

It should be no surprise that Donald Trump’s most influential adviser and spokesman on international trade, Peter Navarro, is a former unsuccessful Democrat politician who seems closer to an old-style Bernie Sanders leftist Democrat than to a Bill Clinton “New Democrat.”

The only academic among Trump 13 economic advisers, Navarro returned to being an economics professor at U.C. Irvine, after losing San Diego mayoral election to Republican Susan Golding. In 1993 Navarro wrote the book, Bill Clinton’s Agenda for America.

With one caveat, the book was full of glowing praise for everything Clinton promised to do – notably lots more federal spending (which, ironically, fell substantially).

Navarro’s doubts about Clinton concerned NAFTA, which Bush created but Clinton promised to change. “I thought the NAFTA agreement ought to have been more properly called ‘SHAFTA,’” says Navarro.  But he notes that “candidate Clinton later acknowledged the problems of the environment and lost jobs raised by NAFTA, and called for wage safeguards and stricter environmental regulations. It remains to be seen whether this was merely rhetoric, or a serious concern that will have policy follow-through.”

Understanding the U.S.-China ‘Trade War’

An emerging narrative in 2012 is that a proliferation of protectionist, treaty-violating, or otherwise illiberal Chinese policies is to blame for worsening U.S.-China relations. China trade experts from across the ideological and political spectra have lent credibility to that story.  Business groups that once counseled against U.S. government actions that might be perceived by the Chinese as provocative have relented and changed their tunes.  Use of the term “trade war” is no longer considered taboo.

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