Trade Goings-On: U.S.-UK Draft Agreement, New Book, and Peter Navarro’s Conversion

The Competitive Enterprise Institute is not the only group making a principled case for free trade. The UK-based Initiative for Free Trade, headed by Member of European Parliament Daniel Hannan, in conjunction with the Cato Institute’s Daniel Ikenson and Simon Lester, have released a draft for an ideal UK-U.S. trade agreement. Nine other groups contributed to the draft agreement, and CEI’s Iain Murray is a contributing author. Iain also wrote a column about the effort for National Review.

Regular readers will recall that I have a low opinion of Trump economic advisor Peter Navarro’s hawkish trade philosophy—I wrote about his policies and ideology here and here, and reviewed his book “Death by China.” In the cover story to the new issue of Cato’s Regulation magazine, Pierre Lemieux takes an in-depth look at “Peter Navarro’s Conversion,” from his four unsuccessful bids for public office, to his 1984 book-length defense of free trade, to his days as an environmental activist, to his current anti-China animus and job in the Trump administration. It’s worth a read.

For a lighter take that is just as devastating, HBO’s John Oliver recently did a segment on Navarro that is surprisingly economically literate. I could pick a few nits here and there with it about trade deficits, but overall its analysis is excellent. Oliver and his staff deserve credit for producing an excellent piece of economic education.

The Mercatus Center recently published an excellent trade primer by Lemieux, “What’s Wrong with Protectionism?: Answering Common Objections to Free Trade.” It contains probably the clearest explanation of comparative advantage I’ve read, and that alone is worth the price of admission. Countries with an absolute advantage in many industries, such as the U.S., should specialize in what they’re “more better” at, such as capital-intensive technology, aircraft, and services. Countries with an absolute disadvantage in productivity, such as China or Bangladesh, should specialize in what they’re “less worse” at—mostly labor-intensive assembly and low-skilled manufacturing.

This kind of specialization reduces opportunity costs. If the U.S. had a massive garment industry, for example, it would have to sacrifice untold billions of dollars of value it could create elsewhere. It can create more value by specializing in those high-value-added sectors, and leaving the rest to others, even if those others are less productive in absolute terms. The rest of the book is just as good, especially the chapters on manufacturing and the trade deficit. Highly recommended, especially for people new to trade policy.

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Common Myths and Facts about Trade

There are a lot of confusions on both sides of the trade debate. A short CEI WebMemo, published today, seeks to clear up three of them. Here’s the gist:

Trade barriers cause short-term job losses but have little long-term employment impact. Higher trade barriers do not improve other countries’ behavior. Finally, lowering trade barriers benefits a country’s economy, regardless of what other countries do.

Free traders have the better arguments in this policy debate, and it is not a close contest. But on employment, some free trade advocates overstate or misstate trade’s benefits. Some foreign policy analysts with little economics background believe a tough stance on trade will improve other countries’ bad behavior. We are finding out, especially with China, that this is not at all the case. Reform is possible, but tariffs actively harm such efforts. Finally, instead of negotiating for trade concessions, we might as well stop harming our own economy with trade barriers, even if other countries continue to harm their own. Trade is win-win cooperation; viewing it as adversarial is a lose-lose mistake.

Read the whole WebMemo here; it’s a quick two-page read. For a more detailed analysis of trade policy, see Iain Murray’s and my “Traders of the Lost Ark” paper.

Bats and Price Theory

A Gordon Tullock-esque insight about the law of demand and why bats hunt at night, on p. 30 of Richard Dawkins’ The Blind Watchmaker (thanks to Don Boudreaux for the recommendation):

Bats have a problem: how to find their way around in the dark. … But the daytime economy is already heavily exploited by other creatures such as birds. Given that there is a living to be made at night, natural selection has favored bats that make a go of the night-hunting trade.

In other words, animals are careful shoppers. Bats, or their ancestors, moved from higher-priced daytime hunting to lower-priced night-time hunting. Prices, in this case, being not money, but effort, food availability, and amount of competition. Had night and day’s hunting “prices” been the same, bats’ nocturnalism, and related traits such as sonar, would likely not have evolved.

Economics is everywhere, day and night.

New China Tariffs Coming Soon

Note: I wrote this post earlier today. The official announcement was made, probably not coincidentally, after markets closed.

Less than a week after signing a bill to reduce some tariffs, the administration is moving to raise others. As soon as today, the Trump administration is expected to announce ten percent tariffs on about $200 billion of Chinese goods. They could take effect in as soon as a few weeks, in time for the holiday shopping season. The administration is also reserving the right to adjust the rate upwards to 25 percent in the future. They did not specific the likelihood, criteria, or timetable for such an increase, which is upsetting to longterm investors.

What is the goal of all of these tariffs? It isn’t entirely clear. The President seems preoccupied with trade deficits. This is unfortunate; trade deficits have no effect on economic health. As Trump’s aides repeatedly explain to him in what they call “Groundhog Day” meetings, trade deficits don’t hurt the economy because people get something in return. I send money abroad only if I get, say, a pair of shoes that I value even more than the money. My employer runs a trade deficit with me, just as I run a trade deficit with my grocery store, which runs a trade deficit with its suppliers, and so on. None of these trade deficits are a bad thing. This accounting measure would remain ethically and economically irrelevant even if international borders stood in between any of those trades. The President’s logic does not hold, and his advisors can’t seem to shake him out of it.

But there are other things going on, too. The U.S. does have legitimate policy grievances with Beijing. To briefly go through the list:

  • Intellectual property theft is rampant in China. The U.S. government is responding by enacting new tariffs. The Chinese government is not changing its IP policy. It has enacted retaliatory tariffs instead.
  • The Chinese government forces technology transfers from foreign companies who do business in China. The U.S. government is responding by enacting new tariffs. The Chinese government is not changing its technology transfer policy. It has enacted retaliatory tariffs instead.
  • Beijing requires a government ownership stake in many foreign investments, or at least some form of government control. The U.S. government is responding by enacting new tariffs. The Chinese government is not changing its policies. It has enacted retaliatory tariffs instead.
  • There is a troubling and possibly growing general authoritarianism under Xi Jinping. Tariffs give the Chinese government a free bad guy to blame for any economic setbacks. “The problem isn’t our repressive policies, it’s unfair actions by the Americans,” they can tell their people.

We have learned the hard way that tariffs do not work. Leaving economic harm aside, which we shouldn’t, tariffs do not advance the U.S. government’s foreign policy objectives. We should not be enacting them.

What will work? Policies the administration has mostly rejected. The Trans-Pacific Partnership (TPP) would have enacted binding reforms along the lines of what the Trump administration wants. The Trump administration pulled out of the TPP on its first full business day in office.

Engaging the World Trade Organization is another option, and it is still on the table. One benefit of China joining the WTO is that it is now subject to its dispute resolution process, where America’s success rate as a complainant is more than 85 percent. Instead of engaging this process, President Trump has expressed a desire to leave the WTO.

Any way you slice it, the new round of China tariffs is counterproductive. It will not achieve its foreign policy objectives, it will not benefit the economy, and odds are it won’t affect the trade deficit, which has nothing to do with economic health anyway. It is not too late for the administration to admit its mistakes and rescind its existing and proposed tariffs.

For more on sound trade policy, see my recent study (with Iain Murray), “Traders of the Lost Ark: Rediscovering a Moral and Economic Case for Free Trade.”

This Week in Ridiculous Regulations

It was a slow week for substantive news, aside from President Trump’s surprise signing of the Miscellaneous Tariff Act, which reduces tariffs on about 1,700 goods worth hundreds of millions of dollars, including some goods targeted in Trump’s new China tariffs. Big developments are brewing on other issues from the Supreme Court to NAFTA to a possible government shutdown. Meanwhile, regulatory agencies issued new regulations ranging from entities to moving vegetables.

On to the data:

  • Last week, 72 new final regulations were published in the Federal Register, after 35 the previous week.
  • That’s the equivalent of a new regulation every two hours and 20 minutes.
  • Federal agencies have issued 2,340 final regulations in 2018. At that pace, there will be 3,269 new final regulations. Last year’s total was 3,236 regulations.
  • Last week, 1,312 new pages were added to the Federal Register, after 719 pages the previous week.
  • The 2018 Federal Register totals 46,545 pages. It is on pace for 65,007 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. Five such rules have been published this year, none in the past week.
  • The running compliance cost tally for 2018’s economically significant regulations is a net savings ranging from $348.9 million to $560.9 million.
  • Agencies have published 77 final rules meeting the broader definition of “significant” so far this year.
  • So far in 2018, 419 new rules affect small businesses; 21 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.

President Trump Signs Miscellaneous Tariff Act

In a surprise move, President Trump signed the Miscellaneous Tariff Bill Act into law on Thursday, September 13. The bill will reduce tariffs on roughly 1,700 goods worth hundreds of millions of dollars. Some of the affected goods are even on the list of Chinese imports subject to President Trump’s various rounds of new tariffs against Chinese goods.

This is good news, though the bill isn’t quite as good as it sounds (full bill text here). Most importantly, it is at least three orders of magnitude too small to counteract the thousands of new and threatened tariff increases on potentially hundreds of billions of dollars’ worth of goods. Its tariff relief is also temporary. And it isn’t really a reduction in trade barriers—it extends a previous round of tariff exemptions that expired in 2012, so it’s more of a return to the status quo ante. Still, it’s wonderful news that not only did a tariff reduction bill pass both chambers of Congress with large bipartisan majorities, but President Trump signed it.

Every indication is that the president will continue to pursue a mercantilist trade philosophy he has held for more than 30 years. Consumers, businesses, and people who have taken Economics 101 should not get their hopes up about a substantive trade policy shift during the current administration. But the president’s willingness to sign a bill he clearly disagrees with is certainly good news.

Congress should give him more opportunities to sign such legislation; 99.9 percent or so of existing, new, and threatened tariffs remain unaffected. But for now, this is a good start. Consumers and producers deserve to celebrate today.

Free Trade Challenges: Tariffs, Concentrated Benefits, and Diffused Costs

Tariffs hurt more people than they help. So why do those outnumbered few keep winning so many political victories at the majority’s expense? The answer can be found in the concept of concentrated benefits and diffused costs. Gordon Tullock gives an example of this with his Tullock Economic Development Plan, which “involves placing a dollar of additional tax on each income tax form in the United States and paying the resulting funds to Tullock, whose economy would develop rapidly” (see more on this plan on p.13 of “Virtuous Capitalism,” Fred Smith’s and my 2015 paper on rent-seeking).

For the losing majority, a dollar per year is not worth the trouble of going all the way to Washington and trying to get Congress to change policy. But Tullock has hundreds of millions of reasons to fight as hard as he can to keep that unfair policy in place. That is why concentrated beneficiaries usually win over indifferent majorities.

The late economist Mancur Olson develops the idea more fully in his classic book The Logic of Collective Action. Olson points out that it is far easier to organize a small group than a large one. Not only that, but people in a smaller group are more likely to know each other and police each other than in a larger group. That social dynamic means smaller groups are less likely to have shirkers, slackers, and deserters than a larger group. And because fewer people are sharing the spoils, smaller groups pursue their missions more intensely than larger, diffused groups where each individual member has less at stake.

This logic applies to tariffs. The steel and aluminum industries are quite happy about their new tariffs—these relatively small industries can now raise their prices by as much as 25 and 10 percent, respectively, without improving their product, or losing out to cheaper competitors. Their concentrated benefits come at a very diffused cost. Downstream industries such as construction, automobiles, food, beverages, and electronics now face higher costs. But each individual company’s pain is less than the concentrated benefits that steel and aluminum producers get.

It gets worse—businesses pass on their costs. Some of these will be borne by workers who are fired or have their hours or benefits cut. Consumers, the most diffuse group of all, will see higher prices. And when people have to pay more money for the same thing as before, they have less left over to spend on other goods, so the steel and aluminum industries’ benefits cost other industries having nothing to do with them, and may not even be aware that the tariffs are hurting them.

As I mentioned in an earlier post on corruption, the concentrated benefits and diffused costs of tariffs open more opportunities for corruption. Tariffs and other trade barriers are not just bad economics—they are bad ethics.

For more, read my recent study with Iain Murray, “Traders of the Lost Ark: Rediscovering a Moral and Economic Case for Free Trade,” here.