Category Archives: Trade

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.”

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Ex-Im Bank Revival?

Next week the Senate is expected to vote on new board members for the Export-Import Bank, which gives favorable financing terms to foreign governments and businesses when they buy U.S. products. This is a bigger deal than it sounds. Ex-Im’s charter requires a quorum of three members to authorize any transactions larger than $10 million. It has lacked that quorum since 2015 due to expiring board member terms. As a result, Ex-Im has been doing just a fraction of the business it used to do. Its financing projects declined from $21 billion in 2014 to $3.6 billion in 2018.

Sen. Pat Toomey (R-Penn.) and other members have been blocking board member confirmation votes in order to keep Ex-Im to returning to its former “Bank of Boeing” status—when Boeing alone accounted for nearly half of its business in most years. A literal top 10 list of large businesses captured as much as 80 percent of Ex-Im largesse before the big 2014-2015 reauthorization and board quorum battle.

The current board quorum fight is the first act in a larger fight. Ex-Im’s charter expires on September 30. If Congress does not reauthorize it, Ex-Im would close its doors to new projects, wind down its portfolio, and then disappear entirely. This nearly happened in the 2014-2015 reauthorization cycle, when Ex-Im’s authorization lapsed for more than six months. It has lacked board quorum for much of the period since.

CEI has signed on to a coalition letter opposing Ex-Im’s reauthorization. We also hope the Senate declines to give the Ex-Im board a quorum. As the Mercatus Center’s Veronique De Rugy and Justin Leventhal point out in a recent study, Boeing and other major Ex-Im beneficiaries are doing just fine without Ex-Im. They have had no trouble finding private financing, and Boeing even set new profitability records.

Total U.S. exports have increased by $266 billion since 2014. The most recent GDP growth and employment rates are both stellar, despite four years of limited Ex-Im activity. Estimated GDP growth was 3.2 percent in fourth quarter 2018, and Friday’s employment report estimated an employment increase of 263,000 jobs and a 3.6 percent unemployment rate.

Given that the prelapsarian was Ex-Im operating at a loss of $2 billion per decade under conventional accounting standards (the Bank uses unconventional methods to show a $14 billion profit instead), it is time to close Ex-Im. Congress can do that simply by doing nothing. It can also limit Ex-Im’s cronyism by doing nothing to vote on new quorum-restoring board members.

For more on the case for closing Ex-Im, see my paper “Ten Reasons to Abolish the Export-Import Bank.”

Elizabeth C. Economy – The Third Revolution: Xi Jinping and the New Chinese State

Elizabeth C. Economy – The Third Revolution: Xi Jinping and the New Chinese State

A very useful guide to China’s economy and political culture. It is especially credible because it lacks the exaggerated, hyper-emotional tone that many China analysts have taken in the Trump era. Economy’s general take is that China’s reach exceeds its grasp. After five years in office, President Xi Jinping has established that he is no liberalizer. He is re-centralizing economic and political power and undoing some, though not all, of the limited 1990s and 2000s-era reforms.

This is bad for China’s future. But it is no reason for other countries to be scared. Centrally run economies tend not to perform well, to put it mildly. Economy gives example after example of grand central plans for Chinese education, manufacturing, technology, and urban planning that sounded scary, but turned to be pretty crappy in practice. Such plans also consume billions of dollars of resources that could have been better used elsewhere, doubly foiling China’s geopolitical ambitions.

in short, as long as China remains illiberal, it will have limited growth prospects. It will fall further behind its more liberal neighbors and potential adversaries.

This is a shame because China’s 1.3 billion people have both human rights and enormous potential. Their government’s policies have left the country without a vibrant economic or political culture—there is a reason China has few homegrown international brands besides Alibaba and Lenovo. The Great Firewall around China’s internet and its political repression might make the current regime feel more secure, but they prevent the Chinese people from engaging with and profiting from the rest of the world.

The rest of the world needs to continue to put pressure on China’s government to reform its human rights abuses and act in economic good faith. The Trans-Pacific Partnership that Trump pulled out of is a natural venue. Eleven other countries are still party to it, and U.S. participation could only make it stronger. The WTO’s dispute resolution process, which Trump wants to pull out of is another option.

Some of Economy’s other policy recommendations, such as expanded use of the Export-Import Bank, are prone to the same problems as their Chinese analogues, and should be avoided. But overall, this is a smart and sober take in a political climate that badly needs it.

Leland Yeager – Free Trade: America’s Opportunity

Leland Yeager – Free Trade: America’s Opportunity

Short, but packed with useful and principled arguments in favor of free trade, along with plenty of laugh-out-loud examples of actual tariffs. Much of what Yeager wrote in 1954 still applies to today’s trade battles. Yeager passed away in 2018, and the spontaneous outpouring of admiration from his former students and colleagues was truly impressive. Yeager was not as famous as Hayek or Friedman, but he certainly left his mark on the profession both in trade and monetary theory.

Martin Wolf – Why Globalization Works

Martin Wolf – Why Globalization Works

Of all the books in the early- and mid-2000s boomlet of popular-level books on trade and globalization, this is probably the one written at the highest level. Wolf is a longtime writer for the Financial Times, and before that was an academic and a think tanker. He offers some deep insights into the economics of trade, devastating critiques of anti-globalization activists, and a qualified defense of the current international trading system, which, as of this writing, is still governed by the WTO’s dispute resolution process and a number of bi- and multi-lateral trade agreements around the world. This system is imperfect and overly complicated, but it is a world better than what trade’s enemies had in mind back then and still do today.

Bas van der Vossen and Jason Brennan – In Defense of Openness: Why Global Freedom Is the Humane Solution to Global Poverty

Bas van der Vossen and Jason Brennan – In Defense of Openness: Why Global Freedom Is the Humane Solution to Global Poverty

Argued from a philosopher’s point of view, though both authors are economically literate. They argue that the most effective poverty-relief policies involve positive-sum interactions. A more open approach to trade, immigration, and entrepreneurship are the most important positive-sum policies, and they back them with strong moral and consequentialist arguments.

People have the right to make deals with each other, or to move somewhere else if they like. For a third party to get in the way and forcibly stop them requires a very strong reason. The burden of proof is on that third party.

Conservatives and nationalists offer few strong justifications for their force-happy trade and immigration policies. Progressives also come off poorly for preferring zero-sum redistribution policies even when positive-sum policies are readily available. Both authors argue instead for a more permissive, open, and liberal approach–liberal in its original, correct sense.

Delaying Further China Tariffs “Nice” but Fails to Undo Harm “Being Done Right Now”

This is a CEI press release. See the original at cei.org here.

In a notice put out this morning, the Trump Administration announced a delay in tariffs against China “until further notice.”

CEI fellow Ryan Young said:

“Trade talks with Beijing have resulted in the Trump administration delaying ‘until further notice’ its threat to raise the current 10 percent tariff on $200 billion of Chinese goods to 25 percent. This is good news, but it is important to remember the difference between abstaining from harm and actively doing good.

“The existing 10 percent tariff reduced GDP by more than $14 billion in 2018, causing direct harm to the U.S. economy. Because China has responded in kind to President Trump’s tariffs, soybean exports to China are down 99.7 percent from a year ago, and other industries such as automobiles are also having difficulties in China. The administration’s decision to hold off on doing further harm is nice, but it doesn’t change the harm already being done right now.”

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