Streetwise Professor

March 3, 2018

Trump Cuts the Hair Suspending the Trade Sword of Damocles

Filed under: China,Economics,Energy,Politics,Regulation — The Professor @ 11:04 am

Overall, I have found the Trump administration’s economic policies to be favorable.  The tax bill was pretty good, even though it was worse than the administration’s original proposal.  The chipping away at the encrustation of regulation has been highly beneficial.

But there was always a sword of Damocles hanging by a thread over our heads: protectionism. Heretofore, that sword has remained dangling, but last week the hair broke (perhaps by Trump’s hair-trigger temper) when he announced plans to impose substantial tariffs on imported steel and aluminum.

This is egregiously bad policy, even on its own terms. Like all tariffs, these will impose far greater costs on consumers than they will generate benefits for producers.  Since steel and aluminum are intermediate goods, the first consumers are manufacturers that use the metals.  The cost will be borne in the form of lower output from these firms, lower employment and wages in the consuming industries, and higher prices for the final goods.

These tariffs are a failure on their own terms, and demonstrate Trump’s economic ignorance. Trump wants to bolster American manufacturing: these tariffs will harm US manufacturing overall, even though they benefit relatively small subsectors thereof.   This is because US manufacturing is a big consumer of these materials.  As an example, Trump touts the American energy revolution and promotes American energy exports.  Well, the energy business is a huge consumer of steel in particular, in everything from pipelines to rigs to drill pipe to storage tanks to oil refineries to LNG liquefaction plants.  By helping one shrunken sector of the US economy, Trump is imposing substantial harm on a growing one–and one that he touts, no less.

A common retort to criticisms like mine is that the trade playing field is unfair, and that countries like China in particular advantage domestic producers at the expense of foreigners.  Well, they do that in many sectors, but even though that is inefficient, it redounds to the benefit of other sectors in the US economy: for example, subsidizing aluminum benefits US auto manufacturers, who increasingly utilize aluminum (in part to achieve compliance with self-inflicted regulatory harms, namely CAFE standards).

What is little understood is that a tax on imports is a tax on trade: it reduces both imports and exports.  Similarly, subsidizing exports increases trade–including exports by the country importing the subsidized good.

This is true over the long run: in the short run capital flows adjust as well as trade flows.  For example, Chinese subsidies can lead to an increased US trade deficit (Chinese trade surplus), which means that the Chinese accumulate US dollar claims–pieces of paper (or, more accurately, electronic book entries).  Then one of two things happens.  Either the dollar claims prove worthless, or the Chinese spend the dollars on US goods.  So we either get goods in exchange for worthless pieces of paper (or electronic records), or we export goods later.

If retaliatory measures like Trump’s tariffs could result in some bargain or accommodation that levels the playing field, then perhaps the benefit would exceed the cost (although ironically much of the overall benefit will redound to those who tip the playing field, because they bear the brunt of the cost of doing so). The track record on this is hardly encouraging, however. I predict that the likelihood is that Trump’s actions will not materially reduce imbalances in the trade playing field, and that as a result they will be highly detrimental to the US economy–including the sectors which Trump claims to champion.

When Trump was a candidate, I was highly critical of his views on trade, e.g.:

Perhaps to give him more intellectual credit than he deserves, Trump is a died-in-the-wool mercantilist who believes trade is a zero sum game, and who favors protectionism and beggar-thy-neighbor currency policies. He talks like it is the late-80s, and Japan is still an economic juggernaut that will overwhelm the US, completely overlooking the fact that Japan’s crypto-mercantilist policies gifted it a 25 year long lost decade, and that neo-mercantilist China is on the brink of the same fate. If it is lucky.


What is bizarre is that the sin of “giving our industrial markets to the Japanese” was somewhat dated by 1999, but Trump pounds on that theme today, when it is well past its sell date. Decades past. Just yesterday, in  Greenville, SC, he said something to the effect that “the Japanese are up here [holding his hand over his head] and we are down here [holding his hand by his knee].” Fact: Japanese per capita GDP is $36K, and US per capital GDP is exactly 50 percent higher, at $54K. But facts don’t matter. The image of Japanese domination (now accompanied by the image of Chinese domination) resonates intensely among Jacksonians.

I was hoping that he would not act on these impulses, or that he would be constrained from doing so. No such luck. Impulsive ignorance has won out.

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  1. I fear a more relevant piece of hardware from Greek mythology here is Pandora’s box. The world economy today seems slightly more interconnected than in the Smoot-Hawley era, so by the time the dust settles there may not be much of it left.

    Comment by Ivan — March 3, 2018 @ 4:48 pm

  2. He was elected to act on those impulses and he cannot run on tax cuts in midterms or for reelection. If he does not clearly set a populist accent early enough, he has no chance of holding on to the coalition he assembled. He has no choice, especially as the other part of his platform – immigration – is stalled.

    Comment by Krzys — March 3, 2018 @ 6:08 pm

  3. Additional problem is that overall efficiency argument overlooks distributional, and especially, sociological consequences of the current globalized system. That is, the creation of the globalized upper class that shares little in common with its compatriots. This arrangement makes democratic politics impossible as it directly undermines the very concept of citizenship.

    Comment by Krzys — March 3, 2018 @ 6:20 pm

  4. Shrug. It’s a small potatoes issue. Actual impact will be relatively small. The Europeans and Chinese will take some minor, face-saving tit-for-tat retaliatory measures aimed for maximum symbolic effect but no one wants a serious trade war. And it’s hard to imagine they are not to some degree afraid of Trump’s capriciousness.

    It’s clear he recognizes that steal and aluminum are symbolically significant (albeit small within the broader economy). The Republican message going into the midterms will be pure economics. This will play to that message. It makes sense. The Republican party can’t win on social issues/minority issues, so they should shift to protectionism (both economically and immigration wise) as their major thesis. This could actually win elections, as opposed to the asinine libertarian worldview that can’t get more than 3% of the national vote but has long been attractive to conservatives. (Or, worse, the neocon/neoliberal that saw the party hopelessly enfeebled by the end of the Bush years.)

    Comment by FTR — March 3, 2018 @ 9:19 pm

  5. None of your threads or comments are viewable. Just links, clicking on them does nothing.

    Comment by JavelinaTex — March 5, 2018 @ 11:17 am

  6. SWP, I can no longer view your articles when I click on the links, nor can I view the comments. I’m assuming this isn’t my IT dept trying to stymie you…

    Comment by Swiggy — March 5, 2018 @ 12:13 pm

  7. What happened to the blog? All I get are titles, links to comments that are just “comment by xxxxx-date and time.

    Comment by The Pilot — March 5, 2018 @ 1:07 pm

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