Category Archives: Trade

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.”

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.

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.

This is a statement from my colleague Iain Murray and me about today’s jobs report. Original statement online here.

The U.S. economy added 201,000 jobs in August, the U.S. Labor Department announced today. Good news, but impending trade restrictions could put a damper on those gains, Competitive Enterprise Institute analysts warn.

Iain Murray, CEI senior fellow:

Today’s jobs numbers are further evidence that the economy is in a strong position. Beating expectations for jobs created in an increasingly tight labor market is a sign of economic dynamism. Supply-side reforms like deregulation and tax cuts are working. The tax cuts probably enabled employers to offer higher starting wages, which has been a major area of concern since the Great Recession.

There will be some people, however, who point to the jobs numbers as evidence that the trade war is having no effect on employment. This would be a mistake. To be sure, trade never accounts for more than a small percentage of jobs lost in any given month, and those effects will be swamped by new job creation in a strong economy. However, the effect of tariffs over time will be to entice employers and workers into the wrong industries and the wrong jobs—jobs the market would not have created on its own. That means that those jobs will be less able to spur growth and their wages will be artificially high. This will weaken the economy in the long run.

Ryan Young, CEI fellow:

It is good news that the economy continues to create new jobs—it shows that economic fundamentals are strong despite political turmoil. The worry is that the good news is only in the short term. Regulatory burdens have practically stopped growing, which probably deserves some of the credit. But policymakers need to lock in recent short-term reforms with permanent legislation.

Producers have been stockpiling affected goods before new trade tariffs kick in, which gives an economic boost now, but likely at the expense of future months. Tax cuts can also create short-term economic benefits, though again, at the cost of long term harm if increased deficits must be repaid eventually, with interest.

Like quarterbacks, presidents get too much criticism when the economy is bad and too much credit when times are good. Unemployment rates are mostly due to a number of long-term factors a president simply does not control. Congress can help by cooperating with the current president’s deregulatory agenda and restraining his bad impulses on trade and the Federal Reserve’s independence.

Murray and Young recently co-authored a study making the case for free trade, “Traders of the Lost Ark: Rediscovering a Moral and Economic Case for Free Trade.”

This is a statement released by CEI regarding today’s announcement on NAFTA renegotiations.

This morning, the White House announced a new “understanding” with Mexico, related to ongoing talks about the North American Free Trade Agreement (NAFTA).

Competitive Enterprise Institute Fellow Ryan Young expressed skepticism about today’s announcement.

“NAFTA is not perfect, but in this case it is better to leave well enough alone. There are some parts of NAFTA that could be improved through renegotiation, such as eliminating trade-unrelated provisions concerning energy policies and environmental and labor regulations. These non-trade issues should be treated separately. Unfortunately, the Trump administration instead seems interested in making cars more expensive for American consumers. The President seeks to raise trade barriers in an agreement intended to lower them, and Congress should block his efforts.

“The administration is clearly uninterested in free trade, and the time is likely too short on Mexico’s end to reach a reasonable deal before its own populist administration, under Andrés Manuel López Obrador, takes power December 1.​”

Related:

Traders of the Lost Ark

Protectionism Keeps People Poor