Trump, Tariffs, and the Future of Free Markets

The Detroit News ran a column of mine, “Will Trump’s Tariffs Kill Free Markets?

The short answer: no. Classical liberal institutions are strong, enduring, and embedded in American culture. Politicians are none of those things. They pass from the scene after a few years, limiting the damage they can do.

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A Quick Lesson in Antitrust: Netflix and Comcast

Every time a major corporate merger is announced, pundits predictably warn of impending doom if regulators allow it to happen. Here’s an example from Susan P. Crawford’s 2012 book Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age (Kindle edition location 2098):

The absence of any effective regulatory regime or oversight over the cable giant makes it unlikely that Netflix will ever be able to challenge Comcast. Comcast has a number of options that will make it extremely difficult for independently provided, directly competitive professional online video to challenge its dominance.

Now that a few years have passed and the dust has settled from the Comcast-NBC merger, how has it affected Netflix? Rather differently than Crawford feared, as any student of Schumpeter could have predicted. Here is an excerpt from last week’s cover story in The Economist, “The Tech Giant Everyone is Watching”:

This year its entertainment output will far exceed that of any TV network; its production of over 80 feature films is far larger than any Hollywood studio’s. Netflix will spend $12bn-13bn on content this year, $3bn-4bn more than last year. That extra spending alone would be enough to pay for all of HBO’s programming—or the BBC’s. … Its ascent has mirrored the decline of traditional television viewing: Americans between the ages of 12 and 24 watch half as much pay-TV today as they did in 2010.

Within a year of Crawford’s book, Netflix began producing high-quality original content, an innovation she did not foresee. Her whole project was a waste of time and effort.

The lesson here is that pundits and regulators don’t know any better than you or I how a merger will turn out. And unlike investors and entrepreneurs, they don’t have their own money at stake, so they don’t have any incentive to innovate or react to changing conditions.

Of course, another lesson is that pundits and agencies will not heed that first lesson. As the same Economist story points out, “Some suspect that Netflix harbours ambitions to monopolise tv.” So the cycle repeats itself, and likely for no good reason.

For more antitrust lessons, see Wayne Crews’ study The Antitrust Terrible 10: Why the Most Reviled “Anti-competitive” Business Practices Can Benefit Consumers in the New Economy.

This Week in Ridiculous Regulations

America celebrated its 242nd birthday on Wednesday, and new tariffs on $34 billion worth of Chinese goods came into effect on Friday. Meanwhile, during a four-day work week, regulators added new rules ranging from documenting non-immigrants to loan seasoning.

On to the data:

  • Last week, 64 new final regulations were published in the Federal Register, after 96 the previous week.
  • That’s the equivalent of a new regulation every two hours and 38 minutes.
  • Federal agencies have issued 1,731 final regulations in 2018. At that pace, there will be 3,329 new final regulations. Last year’s total was 3,236 regulations.
  • Last week, 809 new pages were added to the Federal Register, after 1,393 pages the previous week.
  • The 2018 Federal Register totals 31,582 pages. It is on pace for 60,735                                                         pages. The all-time record adjusted page count (which subtracts skips, jumps, and blank pages) is 96,994, set in 2016.
  • Rules are called “economically significant” if they have costs of $100 million or more in a given year. Three such rules have been published this year, none in the last week.
  • The running compliance cost tally for 2018’s economically significant regulations is $319.1 million.
  • Agencies have published 61 final rules meeting the broader definition of “significant” so far this year.
  • In 2018, 281 new rules affect small businesses; 16 of them are classified as significant.

Highlights from selected final rules published last week:

For more data, see Ten Thousand Commandments and follow @10KC and @RegoftheDay on Twitter.

Ancient Openness

Openness and globalization have a long pedigree. Just count all the different cultural traditions mixing in this single paragraph, and keep in mind these guys didn’t have trains, cars, or planes:

In 668 Pope Vitellius sent Theodore of Tarsus, who had studied in Athens, to be Archbishop of Canterbury. His friend Adrian, who accompanied him, was an African, a Greek and Latin scholar. It was he who, with the Irish, propagated the culture of the ancients among the Anglo-Saxons.

-Henri Pirenne, Mohammed and Charlemagne, p. 127.

Aristotle was on to something when he described man as a social animal.

Wages, Productivity, and Trade

An iron law of labor economics is that wages are tied to productivity. Something for China trade hawks to ponder:

First, an irresistibly competitive China is a figment of the fevered imagination, since the real cost of labour will tend to remain in line with productivity.
-Martin Wolf, Why Globalization Works, p. 183.

This is why, as Chinese workers become more productive and thus higher-paid, labor-intensive industries such as textiles and basic assembly are leaving China for even lower-wage countries such as Indonesia and Bangladesh. The real key to prosperity is a mix of liberal economic institutions which enable high productivity (classically liberal, not left-liberal), and cultural institutions that value peace and prosperity. If China’s slow and stuttering cultural and economic liberalization continues, not only will it cease to be a security threat or an intellectual property thief, its people will become rich. And they will do so by enriching others through mutual exchange.

Pro-Market, Not Pro-Business

Charles Sauer’s new book Profit Motive: What Drives the Things We Do quotes from a paper Iain Murray and I coauthored:

Young Murray cite Sauer Profit Motive

The book is here. See also Iain’s and my paper “The Rising Tide: Answering the Right Questions in the Inequality Debate,” and our companion paper “People, Not Ratios: Asking the Wrong Questions in the Inequality Debate.”

CEI Book Club: Peter Navarro and Greg Autry, Death by China

Trump economic adviser Peter Navarro has a longstanding animus against China. It is important to know Navarro’s thoughts on China. He played a major role in pushing for the 25 percent tariffs on 1,108 Chinese goods currently being implemented (see this release from the United States Trade Representative for details). Those goods are worth a total of $50 billion. China announced retaliatory tariffs on $50 billion worth of U.S. goods, and another round of U.S. action is likely, possibly against $200 billion worth of Chinese goods. If a trade war is in fact brewing, Navarro will have played a large role in starting it.

In 2011, Navarro and coauthor Greg Autry published Death by China: Confronting the Dragon—A Global Call to Action. Navarro has written other books on China, such as 2008’s The Coming China Wars and 2015’s Hidden Dragon, coauthored with Gordon G. Chang. But Death by China is Navarro’s best known book. As with my previous critiques of Navarro’s thought, this review will start with some general observations about Death by China, then analyze specific parts of the book.

A striking theme in Death by China is that its tone and thought are very macho—and juvenile. The language is very strident, a strategy adolescent males often use to display confidence. It is easy and psychologically rewarding to belittle one’s opponent and feel bigger in comparison. It is also a way to distract attention away from the arguments at hand. This is handy if one lacks confidence in the arguments or in one’s ability to defend them.

Death by China is a sterling, if non-academic example of an attitude Deirdre McCloskey criticizes in “The Boys in the Sandbox,” the opening chapter of her book, The Vices of Economists—The Virtues of the Bourgeoisie:

It’s like an aunt watching her three-year old nephew and his friends playing in a sandbox. They are so earnest in their play, so full of confidence and life, so sure that what they are playing with is reality. The aunt would have to be a monster to be happy they are wrong. (p. 13)

It is opposite the strategy Homer and Herodotus used in The Iliad and The Histories. They humanized their antagonists and put noble words in their speeches. They made their Trojan and Persian opponents strong and cunning so that when the Greeks won, their victories were even more impressive. Navarro and Autry instead call their enemies “morally degraded Chinese ‘black hearts’” (p. 16) who were “raised in an ethical vacuum.” (p. 59) They contrast China with “the truly civilized nations of the world like the United States, Great Britain, France, and Japan.” (p. 104)

Of 16 chapters, all but two titles contain the word “death.” On the plus side, the table of contents provides several possible titles for heavy metal albums and horror movies, with chapters such as “Death by Red Hacker” and “Death by Darth Liu: Look Ma, There’s a Death Star Pointing at Chicago.” That chapter calls for the creation of a military space force, another juvenile idea, about which more below. The opening chapter simply asserts, “It Isn’t China Bashing if It’s True.”

One of the Internet’s guiding rules is a variant of Godwin’s Law, in which the probability that any philosophical argument will turn to Nazi Germany approaches 1 the longer it goes on. The rule is simple: the first person to invoke Adolf Hitler, or Nazi Germany, automatically loses the argument (unless, of course, that is actually the topic of discussion). By that rule, even the publisher’s blurb on the book’s Amazon page loses its argument:

Death by China documents the myriad ways that a powerful, wealthy, and corrupt Chinese Communist Party emboldened by a growing nationalistic frenzy is becoming the biggest threat to global peace, prosperity, and health since Nazi Germany.

The word “Nazi” appears six times in the book itself. But Navarro and Autry also use other language to make the same comparison—for example writing of the “most rapid military buildup of a totalitarian regime since the 1930s” (p. 112), and referring to Chinese submarines as “U-boats” (p. 123).

Navarro and Autry go out of their way to tell the reader about “the profound portrait of today’s China so accurately painted in the book.” (p. 263) For the most part, it isn’t. But Navarro and Autry do make some good points. Let’s look at those before turning to areas where their arguments fall short.

The Chinese government has a horrible human rights record, and Navarro and Autry give many examples, from Tiananmen Square to the Falun Gong persecutions to unsafe working conditions. As much as life in China has improved since Mao Zedong’s death in 1976, the Chinese government still has a long way to go before its treatment of its people can be called humane.

Chinese government officials cannot abide political disagreements that pose no threat to their power. They persecute many non-threatening religious beliefs and mistreat ethnic minorities, as well as domestic and foreign businesses. And the Great Firewall around China’s Internet is one of the world’s most egregious examples of censorship. China still has a prison camp system, the Laogai—interested readers should turn to survivor and Laogai Research Foundation founder Harry Wu’s Bitter Winds: A Memoir of My Years in China’s Gulag.

China’s economic policies also still have a very long way to go. As economist Jagdish Bhagwati often says about illiberal countries, the problem is that Adam Smith’s invisible hand is nowhere to be seen. The state still owns, whether de facto or de jure, a large percentage of businesses. Corruption is high, ranking 77thin the world in Transparency International’s 2017 Corruption Perception Index. Regulatory enforcement and punitive measures are applied arbitrarily, often with no apparent rhyme or reason, discouraging long-term investment. The government often requires Chinese control of foreign business investments. And the Chinese government and even many private businesses are guilty of widespread intellectual property theft.

Navarro and Autry also rightfully point out that China’s currency manipulation is bad policy, arguing that “a stronger yuan would put significantly more purchasing power in the hands of a woefully underdeveloped Chinese consumer.” They correctly argue that a floating yuan would provide a better deal for Chinese consumers, as well as their foreign trading partners, than the current policy of pegging the yuan to the dollar.

Daron Acemoglu and James Robinson argue in Why Nations Fail that countries with extractive rather than inclusive political institutions will find limits to their growth. Extractive institutions are those that enable include expropriation of private industries, high corruption, suppression of political dissent, and arbitrary regulations. Inclusive institutions, by contrast, incentivize political accountability, open democratic elections, judicial integrity, and consistently enforced property and other rights. As impressive as China’s reform program has been to date, its government is still more extractive than inclusive. Its growth is likely unsustainable without continuing political and economic liberalization. If that process were to stop or reverse, the Chinese people will never truly be free or become as rich as the United States, Western Europe, or the nearby Asian Tiger economies.

Navarro and Autry might disagree with Acemoglu and Robinson, though. Acemoglu and Robinson’s argument that China’s economy stands on fragile ground without liberalization doesn’t play into Navarro’s theme of China as the biggest threat to U.S. national security since the Nazis.

Regarding national security, President Trump recently made headlines when he proposed creating a new military branch called the space force. The idea may have come from Death by China, in which Navarro and Autry warn of China’s military aspirations in space:

Options run the gamut from boulders hurled off the moon with enough energy to destroy a metropolis on Earth, EMP pulse bombs designed to disable our electronic infrastructure, and directed energy weapons fired from space to orbiting H-bombs and space planes capable of raining nuclear death on any city in the world. (p. 162)

The boulder idea is straight out of Robert Heinlein’s 1966 science fiction novel, The Moon Is a Harsh Mistress. They also worry about China’s ability to destroy satellites:

When a few kilograms of gravel are thrown into orbit, they will attack the satellites like meteor showers and incapacitate the expensive GPS constellation. (p. 168)

The trouble with this fear is that such an attack would not advance Chinese interests. Debris does not discriminate, and China has its own satellite network to worry about. So while it could easily take out America’s military and commercial satellites, it would have to be willing to sacrifice its own satellites. The rest of the world would lose its satellites too, which would anger more than a few countries. Such is Navarro and Autry’s justification for the U.S. to establish a military space force.

There are also some errors of fact. For example, China is not “a country originally founded on anti-colonial, Marxist principles.” (p.4) China was first unified under the Qin dynasty in the third century B.C. Karl Marx was born in 1818. Mao and his fellow communist revolutionaries changed China’s flag and renamed it the People’s Republic of China, but they did not create a new country.

A common theme throughout the book is a decline in American manufacturing. According to the data, U.S. manufacturing is near an all-time high, both in terms of real output and in value added. Increased worker productivity can increase manufacturing output as manufacturing employment is reduced. This is actually good news; the U.S. economy gets spectacular output, plus more time and talent left over for other, additional purposes.

This is why manufacturing’s decline as a percentage of total U.S. GDP is also a good thing. Not only is U.S. manufacturing healthy and growing, but the rest of the economy is growing even faster. It turns out that non-manufacturing jobs are more lucrative on average, so the more of those, the better. Our diversified economy is better able to withstand economic shocks than less diversified countries like China, which not only has much smaller per capita output, but relies on manufacturing for 29 percent of its GDP, compared to less than 12 percent in the U.S. (See data here.)

Death by China also bemoans that current U.S. policy is “allowing a mercantilist and protectionist China to destroy the American manufacturing base and vitiate our economy.” (p. 124) Economists have long pointed out that mercantilism and protectionism are self-harming policies. When China raises trade barriers, it hurts itself. Its export subsidies take money away from Chinese taxpayers and transfer it to much wealthier U.S. consumers, who benefit from artificially low prices. Americans give up less to get more, and have more money left over for other purchases. All this is at Chinese expense.

Chinese currency manipulation has a similar effect. American consumers have to give up less money to get more stuff. This is a good deal for U.S. consumers, but a bad deal for Chinese consumers, who must give up more and get less to the same degree. And this speaks nothing of the opportunity costs and distorted decision making that accompany distorted prices.

Navarro and Autry also worry about America’s trade deficit with China. They argue against an exhaustive literature explaining why trade deficits are worse than useless as a measure of economic health, going all the way back to Adam Smith and David Ricardo. Countries don’t trade with each other, individual people do. Navarro and Autry assume the opposite. Their aggregate thinking is a common analytical mistake. People won’t make deals with other unless both parties expect to be made better off. Add up all these win-win deals, and it turns out that a lot of people are making win-win deals.

Moreover, this would be the case whether the trade deficit is positive or negative, and whether it is small or large. The trade deficit simply does not measure economic well-being. If anything, it inversely correlates with unemployment. When times are good and unemployment is low, the trade deficit tends to be high. It usually shrinks during recessions, when unemployment is high.

Navarro and Autry fall for the zero-sum fallacy, writing that in U.S.-China trade, “one country wins at the expense of the other’s income, jobs, manufacturing base, and prosperity.” (p. 219) Post-Mao China has experienced rapid growth, and currently enjoys per capita income of about $8,827—the highest it’s ever been. This is up from $959 as recently as 2000. In the U.S., per capita income also grew, increasing more than $22,000 over that time. These numbers are from a World Bank dataset measured in constant U.S. dollars, available here. For one country to have more, it is not necessary for another to have less. Economic growth is just that—growth. The pie gets bigger.

Navarro and Autry are convinced that China is responsible for sky-high American unemployment, writing again and again about China’s “weapons of jobs destruction,” and predict massive unemployment. As of this writing, unemployment is 3.8 percent, which is historically quite low. The unemployment rate will go up and down as the economy goes boom and bust, but overall, trade does not affect the number of jobs. It affects the types of jobs.

Trump’s recent steel and aluminum tariffs, which Navarro has publicly defended, will according to a Trade Partnership study save roughly 33,000 jobs in the steel and aluminum industries, and cost about 179,000 jobs in downstream industries—in the short run. In the long run, employment effects are about nil. Many of those steel workers will probably eventually lose their jobs anyway and find different work elsewhere. Displaced workers in downstream industries will find different jobs, too. But artificial restrictions and distorted prices imposed by the tariffs mean that those jobs will likely create less consumer value, on average, than if the government had left well enough alone. And jobs that create less value tend to pay less. China’s unfair trade policies are a direct result of its autocracy. While Navarro and Autry are right that China needs to both open its markets and free its political system, the trade policies they suggest will not solve the problem.

Other statistics in Death by China are misleading. The late Hans Rosling warns about lonely numbers in his book Factfulness, coauthored with Ola Rosling and Anna Rosling Rönnlund:

Never believe that one number on its own can be meaningful. If you are offered one number, always ask for at least one more. Something to compare it with. Be especially careful about big numbers. (p. 130)

Navarro and Autry give just such a lonely number when they argue that, “On [President George W.] Bush’s watch alone, the United States surrendered millions of jobs to China.” (p. 10) Let’s give that large, lonely number some company. In January 2001, when Bush took office, the U.S. labor force was 143.8 million people. When his term expired in January 2009, it was 154.2 million people, despite the economy being in recession. The data are here.

So even if “the United States surrendered millions of jobs to China,” those losses were outweighed by gains elsewhere, most of which have nothing to do with trade policy. Technological change and changing consumer tastes cause more than six times as much job churn as trade, according to a Ball State University study. The size of the labor force is tied more closely to population size than anything else. Today, after nearly another decade of rapid Chinese economic growth, the U.S. labor force stands at 161.5 million people, a net gain of nearly 18 million since Bush took office. Navarro and Autry have misled the reader about the significance of their lonely number.

Navarro and Autry give another lonely number: “a staggering 750,000 Chinese have settled in Africa over the past decade.” (p. 98) Again, they give no other numbers to compare this to. I’ll fill in the gap. In 2011, the year of Death by China’s publication, Africa had a population of just over 1 billion. Adding 750,000 people to that 1 billion is an addition of less than one person in 1,000, or about 0.075 percent.

Put another way, the city where I grew up, Racine, Wisconsin, has a population of about 77,000. The “staggering” migration Navarro and Autry describe is equivalent to about two Chinese families moving into my hometown per year for 10 years. Now that we have compared Navarro and Autry’s lonely number with other relevant numbers, we can better see how meaningful it is as a guide to policy.

On the next page, Navarro and Autry express worry about “Africa, where there are already over a million Chinese farmers. That’s right, over a million Chinese farmers” (italics in original). They don’t say if any, or how many, of those people are double-counted from the 750,000 number on the previous page. And they again decline to give this lonely number some companions.

Navarro and Autry also tell numerous scare stories about consumer products, quoting on p. 44 from a 2007 Chicago Tribune story that “Despite 55 complaints, seven infants left trapped, and three deaths, it took years for the Consumer Product Safety Commission to warn parents about 1 million flawed cribs.” They do not put these scary numbers in context. In 2007, the overall mortality rate for children under 5 in the U.S. was 7.8 per 1,000 per year. That’s a rate of 0.78 percent per year. Three deaths out of a million flawed cribs is 0.0003 percent. This number, which is 3,846 times less than the general child mortality rate, overstates the danger. And the Chicago Tribune story does not specify how many of those million cribs were Chinese-made. Navarro and Autry do not provide a comparison for mortality rates from cribs made in China versus those made in other countries.

America’s child mortality rate is less than half what it was when China began its economic reforms in 1978. Back then in it was 16.3 deaths per 1,000 children under five. By 2015, the number was 6.5 per 1,000. So by that measure, children in the U.S. are more than twice as safe as they were before Chinese products began flooding American store shelves.

Navarro and Autry also point out appalling environmental conditions in China, noting that, “as China has established itself as the world’s manufacturing floor, it has also turned itself into a toxic waste dump and the world’s most polluted country.” Here they have a point, though it might not be valid for much longer. Initial stages of industrialization are indeed very polluting. But when per capita income reaches a level of $4,500 or $5,000 per person, something changes.

At that level of development, families can begin to stop worrying about where their next meal will come from. They can afford sturdier housing, some health care and transportation, and can afford to send their children to schools instead of the farm or the factory. People can afford to care about environmental quality, and do. From that point on, environmental quality tends to improve as a country gets richer.

Economists who graph pollution against per capita income call this U-shaped curve the environmental Kuznets curve. This pattern has held in country after country, and researchers are finding that that it is also holding true in China. One 2016 study in the journal Energy Policy looks at 28 different measures of environmental quality in China and finds that:

[T]he Environmental Kuznets Curve (EKC) hypothesis is well supported for all three major pollutant emissions in China across different models and estimation methods. Our study also confirms positive effects of energy consumption on various pollutant emissions.

This makes sense. According to World Bank data, China reached that $4,500 threshold in 2010, one year before Death by China’s 2011 publication. So as Navarro and Autry were writing their book, China was at the very nadir of the environmental Kuznets curve. By 2017, per capita income in China had reached $8,827 per person, and continues to climb.

The U.S. reached its $4,500 per person environmental Kuznets curve threshold in 1968, just six years after Rachel Carson’s Silent Spring was published, which Navarro and Autry cite. Today, per capita income in the United States exceeds $59,000, and environmental quality has greatly improved. Even since Death by China’s publication, China’s environment has improved enough to show up in the data, though it clearly still has a long way to go. My colleague Iain Murray’s chapter on the Aral Sea in his book The Really Inconvenient Truths gives another example of this process.

Death by China also contains contradictions. I already mentioned how Navarro and Autry apparently believe in some kind of Schrodinger’s China: they belittle Chinese people as backward and poor while also portraying them as an unstoppable high-tech economic juggernaut. Which is it?

Navarro and Autry also write that “one of the advantages that China has over America is its ability to focus on the long term and think in terms of generations rather than individuals.” (p. 162) But they also have “an almost perfect lack of future vision.” (p. 184) Which is it?

Navarro and Autry are right that China has a repressive government and that its people deserve freedom. They are also right that the Chinese government doesn’t always play fair in international trade. But China has little to gain from military action against the United States, and everything to lose. The right way to encourage China to drop its protectionist and mercantilist policies is not for the U.S. to adopt those same policies, as we are currently doing. It is for us to drop our own trade barriers and liberalize our own economy, and reap the benefits, regardless of how China reacts. Veronique de Rugy of the Mercatus Center recently made this case in a brilliant New York Times column:

President Trump should take a page from Hong Kong. As that territory’s experience demonstrates, and as economists have long argued, lowering trade barriers regardless of other governments’ trade policies fuels domestic economic growth. So if Mr. Trump insists on acting unilaterally, he should cut rather than raise tariffs.

The U.S. would gain economic strength from unilateral free trade, and have more resources to address conservatives’ national security concerns. And we can turn to China and say, “economic and personal freedom is what made us rich. And it is how we are becoming richer still. You’re more than welcome to join us. Here’s how you do it.”

Death by China’s sensationalist tone, weak arguments, erroneous economic reasoning, contradictions, and confusions do a disservice to both the U.S. economy and the cause of Chinese freedom. But Navarro has the president’s ear, and Trump is already enacting some of Death by China’s policy prescriptions. Better for cooler heads to prevail over frustrated men competing over who can appear more hawkish against non-threats.