On Trade And Solutions
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Featuring views and opinions written by market professionals, not staff journalists.
I saw interviews with Trump’s head trade guy Peter Navarro and Commerce Secretary Wilbur Ross, over the weekend. They are the two protectionists in the Administration. Nothing they said in defense of raising tariffs in their interviews made any sense. Here are their arguments:
1) The National Defense Argument
"If we don't stop countries from dumping steel and crashing the price, we won’t have a steel industry. And if we don't have a steel industry, we won't have a national defense".
If it's all about defense, then I suggest we estimate what the market price of steel would be without foreign nations subsidizing it. Then, establish a subsidy for American steel companies sufficient to prevent them from going out of business. Then raise or lower that subsidy as the price of steel rises or falls. This would be paid for through the defense department budget.
We will be spending 700 billion this year on defense. Much of that budget will be for purchases of the things we need for defense. Paying for steel is one of them. Paying our steel companies a higher price in order to insure a trusted supplier of steel, would be like a cost-plus business and would insure the best defense possible. It's the most direct way to target the problem -- which is to maintain American steel producers to insure an effective defense.
This would take away the need for tariffs and yet still allow our consumers to benefit from the lower steel prices paid by foreign governments who subsidize our consumers. Allowing dumping is allowing our consumers to buy products at below market prices. Since we are all consumers, I say -- bring it on!
2) "If a country charges us a 50% tariff on a product, and we are charging zero on the same product, we're getting ripped off. We need reciprocal trade".
What is being said is that if a nation charges their citizens a 50% tax, we should tax our citizens a 50% tax too! That would be reciprocal trade! (That'll teach 'em!) Tariffs on imports are taxes on the importing consumer. It makes no sense to tax ourselves to get even with governments that tax their citizens to subsidize us.
3) "Free trade must be fair trade. Fair trade is reciprocal trade"... meaning if they are protectionist we should be protectionist too. We should penalize our citizens and economy as much as they do. And how is that protection working out for them?
If protectionism works why aren't they rich and why aren't we poor? Why since WW ll has America soared economically while most have stagnated. Why is Japan, the greatest industrialized protectionist nation in the world, in a 35 year recession while we went into a technological revolution with no recession from 1982 to 2007? Why is protectionist Europe running an unemployment rate almost triple that of the US?
To advocate the use of force, (taxation of the consumer) to protect businesses from even unfair competition is still the use of force against the many. There are 3 states that produce most of the US's steel. In those states there are 140 thousand steel workers,and 40 times that many steel consumers. The idea of taking from the many and giving it to businesses, is called corporate welfare. It is also called crony capitalism. And it is also called "picking winners and losers".
If Trump proceeds down this road, we will have an economic disaster. What he wants to do, however, may be meaningless in the bigger picture. It's only one shot in a war. But if he wants to actually bring on a trade war...batten down the hatches! Thankfully, that is unlikely since while he has the power over tariffs when it comes to national defense, it is Congress that has the power over all other trade decisions.
The Wall St Journal called this move the biggest blunder of the Trump administration. And he did it on his own, without the normal White House process or verification. It was emotion that won over reason. Hopefully this huge backlash from economists and markets that know better, will persuade him to rethink this destructive move.
The rebound in the markets indicate that this is a one-off event and will not have a significant economic effect. Almost every President in the past flirted with protectionism, especially steel protection. It did not work then, and it won’t work now. Trump has at the last minute eliminated tariffs on Canada, Mexico, and Australia. He must of thought better of the case against tariffs for our major trading partners.
However China is an exception. They are stealing intellectual property and violating several trade agreements with impunity. This is not just a trade dispute. This is theft and must be dealt with separately, and most likely will be.
And finally, the last justification...
4) "We have trade deficits of 800 billion dollars."
So what? We are sending them pieces of paper and getting their goods at bargain prices in return. We have a 4% unemployment rate and most of the exporting surplus nations, have an 8-10% unemployment rate. The only thing a trade surplus is good for is to buy foreign goods. But governments don't want their citizens to buy other nations goods, so they hoard the little pieces of paper and force their consumers to buy only those products that government approves, and at higher prices than they should have to.
Yes, we have a huge trade deficits, but unlike budget deficits, trade deficits do not have to be paid back. They can only be used to buy foreign goods and invest in foreign economies.
Solution: Thank the citizens of the world for the foreign aid that they are sending us, because that is what they are doing. Nine out of ten economists and businessmen know this. Eighty percent of the citizens of the world, however, agree with the protectionist argument even though they are the victims. It is education that will lead to a return to free trade. Taxing consumers and using force to take from one group, (consumers), and give to another group, (producers), will only lead to what we have now -- huge trade deficits in the import countries, and high unemployment and stagnation in the export countries. Protectionism doesn't work.
For a simple, but academic article on the merits of free trade, see: Who's Protected By Protectionism - PaulNathan.biz
The notion that if we raise our tariffs to the level of their tariffs which would level the playing field reminds me of an old story...
A poor soul with a deformed hand walks into a church, walks down the aisle, falls to his knees and says "please God, make my hand like the other one", and poof, just like that he had two deformed hands.
That's reciprocal trade.