Category Archives: Economics

Trade War State of Play: China, USMCA

If President Trump’s trade war has a single takeaway, it is this: Raising tariffs is an ineffective bargaining strategy. When the U.S. raises its tariffs, other countries always retaliate, and always become less cooperative. Trump’s tariff-heavy bargaining strategy is harming both of his top trade priorities, China and the new NAFTA/USMCA trade agreement.

Right now, the big news is another round of tit-for-tat in the U.S.-China dispute. On the night of Sunday, May 4, right before a week of high-level negotiations, President Trump threatened a 25 percent tariff on $200 billion of Chinese goods if the two governments did not reach an agreement by the following Friday, May 10.

Trump has made drastic last-minute threats in the past as a tactic to speed up negotiations and move them in his favor. Sometimes he follows through. But often he withdraws, as when he recently threatened to shut down the U.S.-Mexican border and quickly backed off. He considers it an advantage for such follow-through to be unpredictable.

This time he followed through. But the Chinese government did not accede to his demands. Instead, it is raising its own barriers against U.S. products. Every one of Trump’s tariff increases so far has been met with retaliation, not cooperation. The strategy does not work.

Another round of trade talks is likely in the next few weeks. President Trump, in line with his established strategy, is mulling extending tariffs to all Chinese imports if matters are not settled soon. It is safe to predict that another tariff will garner the same response as all of its predecessors. The pattern was set long ago. With Trump unlikely to change his stripes, it is well past time for Congress to retake the taxing authority it delegated away to the president back in the 1960s and 1970s. Absent such reform, the U.S.-China trade war could be long-term.

China is not the only dispute in which Trump’s tariffs are blocking his goals. The president’s top domestic priority is passing the new NAFTA/USMCA trade agreement. The biggest remaining sticking point there is Trump’s steel and aluminum tariffs. These are meant in part to get Mexico and Canada to acquiesce to U.S. negotiation demands. Instead, the tariffs are causing holdups and resentments in both countries— and in Congress.

For legal reasons, the tariffs were enacted on national security grounds. Mexico and Canada are both offended that a close ally is publicly calling them national security threats. They are withholding cooperation. Back home, many congressional Democrats and even some Republicans want the steel and aluminum tariffs repealed as a condition for ratifying the agreement. Trump, so far, is unwilling to agree. Members of Congress are also using tariff repeal as a bargaining chip for non-trade issues where the president needs congressional cooperation. This could stymie administration agenda items well outside of trade.

President Trump has two options going forward. He can double down on his mistakes, or he can change to a strategy that does work. A positive change would involve repealing the problem-causing tariffs, reengaging the World Trade Organization’s dispute resolution process, and re-joining the Trans-Pacific Partnership. Of course, such a change would require significant creativity in PR framing in order to save face on Trump’s end, but smart diplomats on all sides can find ways to do so.

Unfortunately, the president is committed to his tariff strategy and likely will continue to double down on failure. This creates an important role for both parties to play. Democrats need to check an executive branch run amok and affirm their principles of dynamism, openness, and economic inclusiveness. Republicans from the free-market wing of the party need to give their longstanding principles a higher place than they currently give to an outlier personality who will disappear from the political scene in 2025 at the latest.

This post has focused mostly on political strategy. It is well-established that tariffs are even more harmful to the U.S. economy than they are to U.S. foreign policy interests.

For more on that side of the issue, see Iain Murray’s and my study, “Traders of the Lost Ark.”

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Henri Pirenne – Medieval Cities: Their Origins and the Revival of Trade

Henri Pirenne – Medieval Cities: Their Origins and the Revival of Trade

Of Pirenne’s three best-known books, also including Mohammed and Charlemagne and Economic and Social History of Medieval Europe, this one, from 1925, is probably the strongest on its analysis of institutions and how they changed over time. The Pirenne Thesis is essentially that economic isolation caused the downfall of Roman civilization. Not barbarians, or Christianity, or decadence, as many other historians argue. It was a combination of economics and closed cultural attitudes among Europe’s Mediterranean neighbors. Centuries later, a gradual return to economic and cultural openness led to the high medieval ages, and eventually the Renaissance. Pirenne’s line of thought can easily be extended to the Enlightenment, the Industrial Revolution, the Information Age, and today’s debates over trade and immigration, where Pirenne has most influenced this writer.

This book focuses on the rise of the city. Cities require a lot of support, and do not emerge fully formed out of a vacuum. They have numerous economic and cultural preconditions. One of the major ones was shaking off feudal shackles. This was a long, gradual process with many degrees. It was a spectrum, not an on/off switch. City residents were often former serfs; remember the famous saying, “city air makes one fee.” This was a legal concept, not just an attitude. An escaped serf who lived a year and a day without being captured was legally freed.

City residents answered to neither king nor lord, at least during the period Pirenne studies in this book. But there was more to the story of cities than a simple rejection of feudal authority. City workers did not grow their own food. They relied on specialized work and trade with outside farmers to put food on the table. This was not possible without requisite population density, infrastructure, and a cultural openness to commerce and technology.

Most societies are neophobic; city life required almost a neophilia. Once this happened to a small degree, a virtuous circle emerged. Improved productivity made people more prosperous and more accepting of bourgeois social norms. This further reinforced the process, and so on. This mishmash of factors, with arrows of causality pointing every which way, are why people began to live in cities rather than farms and villages, eventually paving the way for modernity.

China Retaliates to U.S. Tariff Increase

A story in Canada’s The Globe and Mail (unfortunately behind a subscription paywall), quotes me on the latest tariff increases in the U.S.-China trade war:

Ryan Young, a senior fellow at the free-market think tank, Competitive Enterprise Institute, said Mr. Trump’s negotiating strategy has “backfired badly” and he will have to change course to reach a resolution. Mr. Young said Congress should try to take away Mr. Trump’s authority to impose levies.
Mr. Young said better options for dealing with China’s behaviour would be suing Beijing through the World Trade Organization and joining the Trans-Pacific Partnership, a Pacific Rim trade pact meant to contain China’s influence.
“The President has the order wrong – he says ‘ready, fire, aim,’” Mr. Young said. “Trump can’t be trusted with tariff authority.”

Happy 120th Birthday, F.A. Hayek

Today would be Hayek’s 120th birthday. From the archives, here is an appreciation I wrote a few years ago of Hayek’s career and intellectual contributions.

Export-Import Bank Politics

Politico’s Zachary Warmbrodt has an excellent–and thorough–writeup on the current state of Export-Import Bank politics, covering all sides. He also quotes me at the end:

Conservative opponents of the bank are making clear they’ll resist entreaties by McHenry and others to bring them along for reauthorization.

“He’s not going to succeed with us — that’s for sure,” Competitive Enterprise Institute senior fellow Ryan Young said. “We’re standing by our principles.”

I’m a (classical) liberal, not a conservative, but the statement is still true. The more company, the merrier on that front, regardless of party.

Trump Threatens New China Tariff with May 10 Deadline

On Sunday, President Trump announced via Twitter that if he does not approve of the results of this week’s U.S.-China trade talks, he will enact a new tariff on Friday, May 10th. It would raise a current 10 percent tariff on $200 billion of Chinese goods to 25 percent. He threatened a similar tariff late last year, but backed off. China, in response, might withdraw from the talks altogether.

This week’s trade talks, set to begin Wednesday, were expected to conclude by Friday anyway, though without a hard deadline.

Trump has a history of using drastic threats as a negotiating tactic, only to quickly back off. In addition to threatening and backing away from the same China tariff last year, he has also backed off of threats to shut down the U.S.-Mexico border and to enact tariffs against European automobiles on national security grounds.

If Sunday’s tweets are just the latest iteration of an established pattern, consumers will have little to worry about. But if Trump follows through, those same consumers should be aware of Trump’s tenuous grasp of how tariffs work. His two tweets read:

1:  For 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods. These payments are partially responsible for our great economic results. The 10% will go up to 25% on Friday. 325 Billions Dollars….

2: ….of additional goods sent to us by China remain untaxed, but will be shortly, at a rate of 25%. The Tariffs paid to the USA have had little impact on product cost, mostly borne by China. The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!

To which I responded—with my apologies for a dumb grammatical error (that’s Twitter for you):

Chinese producers doesn’t pay the tariffs. American consumers do. Chinese companies sell goods at the same price and profit margins. U.S. consumers then pay the tariff when they make the purchase.

President Trump has a fundamental misunderstanding of who pays tariffs, and that matters for his policy aims. He has made this mistake before, and his advisors are apparently unable to shake him of it despite repeated “Groundhog Day” meetings.

As for tariffs helping the economy, that is also false. When people have to pay more money to get the same goods as before, they have less left over to spend on other goods, or to save and invest. This means tariffs not only reduce consumption, they shrink available capital for U.S. entrepreneurs, startups, and homebuyers.

Writ large, the Trade Partnership estimates that if President Trump goes through with the 25 percent Chinese goods tariff, and China retaliates in kind per usual, total tariffs would cost up to 1.04 percent of GDP. That comes to $2,389 per year for a family of four.

There is a policy action Congress can take immediately to prevent further tariff abuses. The China tariffs are enacted under Section 301 of the Trade Act of 1974; Congress should repeal that section. For more on that, see the trade chapter in CEI’s “Free to Prosper: A Pro-Growth Agenda for the 116th Congress.” For more on the larger case for free trade, see Iain Murray’s and my study “Traders of the Lost Ark.”

Ideology, Evolution, and In-Groups

Joel Mokyr points out a strange tendency among ideologies on p. 51 of his 2016 book A Culture of Growth: The Origins of the Modern Economy:

Cultural beliefs tend to occur in clusters. For instance, those Americans who adhere to evangelical religion commonly also think that widespread gun ownership is desirable, that marriage should be confined to heterosexual couples, that climate change is not a reality, and object to large scale federal redistribution policies, although logically these beliefs are not all obviously connected.

This tendency is not specific to religious conservatives. Other groups across political, national, and religious identities have their own similarly odd belief clusters. For many people, affirming their group identity is more important than evaluating the merits of a given policy.

We’re evolved to think that way, and it won’t change anytime soon. Even those of us without religious or partisan affiliation think that way; we’re human, too.

A big part of the greater Enlightenment project is raising awareness of this cognitive tendency among people. If people are more aware of what they’re doing, they are more likely to take a step back and evaluate policies with a cooler, more rational head. There are healthier ways to feel part of a group.