Why Is Trump's Tariff Talk Attractive (To Some)?

One of the first things I learned in undergrad economics was the idea that free trade is one of the only things that most economists agree about. The idea is simple and was probably said best by Joan Robinson:

"If your trading partner dumps rocks into their harbor, you do not make yourself better off by dumping rocks into your own harbor."

Donald Trump's "America first" thinking on this idea is an attractive, but basic fallacy of composition - if you impose restrictions on your trading neighbors, then they will impose trading restrictions on you. In the end, you will both be worse off since you now both have a harbor that is filled with rocks that no one can navigate into or out of. So why are trading restrictions like tariffs so intuitively attractive to people like Trump and his supporters? Let's dive in a little deeper.

Change is Hard

The global economy is changing faster than it ever has. Globalization via international trade is one of the biggest changes as companies are able to build cheaper products abroad and sell them back home. This is not a bad thing. After all, when Apple (AAPL) builds a cheaper iPhone in China we all get to consume less expensive phones which leaves us with that much more money to spend elsewhere.

This sort of change is highly disruptive to the domestic economy. As companies stop building the same stuff in the USA, all that saved income from cheaper products flows to different industries. In the case of the USA, that transition has been mostly from manufacturing to services industries. In the aggregate we are not necessarily worse off, but we are very different. This is producing new industries, but it is also destroying older industries. For those in the losing industries the pain is very real.

Trade Deficits aren't Necessarily Good (or Bad)

The idea of being in a deficit does not have a good connotation. When we think of a deficit we think of a loss. From an income perspective that's exactly right. A trade deficit represents more money flowing out than in. But it also means more goods coming in than going out. Again, it's just a "trade." China gets green pieces of paper and we get pieces of plastic that will end up in a landfill. Who's really winning that trade? Well, we don't really know. More on this below….

In a general sense, trade deficits and current account deficits are not inherently bad. They just reflect the aggregate ex-post position of all those flows. But they can sometimes be reflective of bigger problems in an economy. For instance, before the financial crisis many countries like Spain, Greece and the USA were running very large current account deficits. This, in retrospect, was indicative of a private sector debt problem in which consumers were going ever deeper in debt to finance a lifestyle that was unsustainable. The large current account deficits were not necessarily the cause of this issue, but a coincident indicator. As we are still pulling ourselves off the mat from the financial crisis, it's not unreasonable to look back at that situation and view it as something we would like to avoid in the future.

Of course, in a world with global trade there will always be trade surplus countries with corresponding trade deficit countries. This isn't a problem in and of itself, but it does not mean that trade deficits are always good either. For instance, when we trade with China we are getting cheaper pieces of plastic that end up in landfills and we end up with more saved income that can be spent elsewhere. I said earlier that we are just sending them pieces of paper, but we're not really. We are also sending them corporate investments and jobs. Then again, cheaper goods and services in the USA has a multiplier effect that leads to income being spent elsewhere in the domestic economy. If this does not lead to domestic investment, then the USA could be on the losing end of this trade. This, arguably, is what's been happening in the USA over the last 30 years. While the USA has cheaper goods and services, we have not seen a corresponding boom in corporate investment. Therefore, on a relative basis, it could be argued that the USA is doing worse than we should be.

Free Trade Ain't Free

The real winners in free trade agreements are wealthy developed economies. By enacting free trade agreements they are able to impose implicit trading restrictions on their neighbors. For instance, I alluded to the potential that China is winning the international trade bet with the USA because they are getting more foreign investment than the USA gets in domestic investment. In other words, the multiplier effect of US investment in China is humongous while the USA is not experiencing the same corresponding degree of a multiplier in US domestic due to cost savings from imported goods. China wants this investment badly. They do not want to lose those jobs, training, skills and investment to Vietnam because then Vietnam will win in a relative sense.

As a result of this, China is incentivized to do things that will make them more attractive in a relative sense. So it is, to some degree, in China's best interest to do things that attract this foreign investment so that it does not flow elsewhere (in recent decades their primary strategy has been currency manipulation which is not really a US Dollar attack as much as it's fending off the likes of Vietnam). Likewise, Vietnam will do things that make their economy more attractive to these large developed economies. Forcing these countries into free trade agreements is an implicit restriction that reduces their ability to attract foreign capital. So free trade isn't really that free for all involved and there are inevitable winners and losers in any trade.

I've touched on a number of problems that Americans are presently feeling:

1. High levels of household debt.
2. Loss of jobs in industries such as manufacturing.
3. Lack of domestic corporate investment.
4. Rapid changes in our culture and environment due to globalization.

These problems are all somewhat related to international trade, but will not be solved by eliminating or reducing international trade. Tariffs dump rocks in our own harbors. That will make the goods we want more expensive because now we have to swim out to those ships to get those same goods. In other words, tariffs act as a domestic tax since it is consumers who will ultimately bear the cost of those more expensive goods. After all, we import those goods because it is not cost-effective to make the same quantity of those goods in the USA. If we built the same goods here in the USA they would cost more (and corporations could theoretically pay their workers that much more, which they probably won't), but we would be foregoing the counterfactual relative improvement where those goods cost less AND we have more income resulting from the trade flows and cost savings.

While there are reasonable concerns about global trade and the impact of globalization we should reject policies that make us all worse off. The 4 problems listed above have solutions that can be improved with domestic policies that don't involve an implicit tax on all US consumers.

Comments

[pktasap]

Dependency of any sort for the USA is not a good thing. Neither is the current trade deficit
Both can be the impetus for economic blackmail

[pktasap]

The article's underlying assumption is trade wars will and must occur if the USA imposes tariffs AND THIS WILL BE BAD FOR USA CONSUMERS.
If true, that tariffs cause trade wars, then why has the USA sat on trade agreements that are net negatives to the USA?
THE CURRENT 1/2 TRILLION TADE DEFICIT NOW IMPOSED BY THE CURRENT TRADE AGREEMENTS CAN IN NO LOGICAL WAY BE BENEFICIAL TO US CITIZENS AND TAXPAYERS

[Hungry for Knowledge]

Goldman Saks runs the world.
Without any further effort to research or provide links in support of this statement, I will posit that Goldman / Wall Street / world banking cartels wanted "free" trade with China for the US and Europe so they could have another virgin territory to......(fill in the blank with your own suitable word or phrase).
Free entry for Chinese goods regardless of dumping, etc.
Just a thought, based on a nearly perfect record of watching Goldman's / banking cartel's real actions over 30 years.

[sleek]

[Quote]
"[T]he Barbie doll receives plastic, hair, and other materials from a number of countries – oil from Saudi Arabia, plastic from Taiwan, hair from Japan – and then is assembled in China. The doll is valued at $2 when it leaves the dock in China en route to the United States, but only 35¢ of that amount reflects the value of Chinese labor used in the assembly. The rest of the $2 export value was actually imported into China from these other countries, but nevertheless, the entire $2 is counted as an export from China to the United States. This example shows that the bilateral trade deficit or surplus between countries is a slippery concept. It doesn’t really make sense to count the entire $2 doll as a Chinese export to the United States, as is done in official trade statistics, when only 35¢ is the value-added in China and the rest was purchased from other countries. This shortcoming of official statistics gives us a good reason to not focus on the bilateral trade deficit or surplus between countries, even though that number is often reported in the press."
—from a book titled "International Economics"
[End Quote]

I've read that the amount of value added by China to an iPhone is about $8. Yet China gets dinged with the whole cost of an iPhone.

Seriously, these trade figures are meaningless.

[getgene]

Free trade requires fair trade. 25% tariff on American cars vs. 2.5% on European. This is free trade?
Look up dumping. Recall we used to make VCRs and televisions?
Of note, it appears Canada's steel is very much rebranded, inferior Chinese steel.

Anyway, making conclusions, especially about ones you heard in college is what economists believe, and then wandering around theories and talking points in search of creating an induction, at best, is not useful

[MARTI0141]

Halt - if Chinese steel was taxed on it's environmental impact alone - it'd be more expensive than its weight in gold.
As for ever cheaper goods - I never really got this either - I'd prefer to pay more for better quality & know that I'm helping to keep someone in employment / who's paying taxes into the system / & consuming goods & services themselves - that's how an economy is supposed to work.

[Tommy Yank]

"While there are reasonable concerns about global trade and the impact of globalization we should reject policies that make us all worse off. The 4 problems listed above have solutions that can be improved with domestic policies that don't involve an implicit tax on all US consumers."
Cullen, I think you are overly generous with your use of the word "all" in your statement above.
"All" does not include the millions who have lost their factory jobs so that the richer service industry workers could enjoy a higher standard of living than was the case 25 years ago.
And why does all commentary disregard the wisdom of insuring the US not only defends its Steel & Aluminum factories-but insures they are growing stronger. Certain industries should be insulated -just as Agricultural primary industries are. Japan would rather pay 4 x's more for Rice, that allow its 8 million rice farmers to be thrown in the dust bin. Throughout American History their has always been a sea-saw Tariffs loosening and tightening. After 25 years of WTO regime the verdict is in, and the Nation spoke at the last Election. Finally this Nation is exerting some common sense. Wiping out America's Middle Class is what is at stake. I understand how the only way to secure China was wrapped into the orbit of the US Reserve Currency was to make sure they had plenty of our Greenbacks, and the only way to make that happen was to give them our factories so they had something to sell back us. The FEDS policy has been wildly successful. Job done. Now lets get back to saving our country and way of live.

[halt4768]

Cullen, unfortunately I think a lot of the damage from years of bad policy has already been done. I have two main problems w the arguments offered up by proponents of “free trade”. The first is the notion that we can continually disadvantage our industries and then expect them to compete against the rest of the world. For example, It is insane to me that we held our companies to such high standards for environmental friendliness and then allowed other companies w no such restrictions to sell freely into our country. The environmental damage caused by these other countries does not effect us. This made and makes no sense, period. There should an environmental tax placed on all goods coming in from other countries that do not require their manufacturers to abide by certain environmental standards (same w OSHA). Yes, it is a tax on our consumers. The point is that it would have slowed the migration from US made goods to imports-and would have made a big difference at the margin. Some companies are on the fence about importing based on quality, lead times-forecasting issues. If savings was not “artificially low” due to these regulation disparities, I think it would have made a difference. The argument that we couldn’t help the manufacturing migration bc in a capitalist economy he money goes to cheapest production ignored the costs to our manufacturer of regulation (No, I don’t want pollution or dangerous working conditions-in the US, Mexico, or China.
Second issue is that consumers and workers are the same people. Why doesn’t anyone understand this? Everything cheaper and cheaper for the consumer does not help them if they are unemployed. Use to be, middle class meant make a decent living and then decide if your family took the big summer vacation or bought the big screen TV. At some point, we became convinced that it would be good for us if we could afford the TV, the computer, the new sneakers. But, cutting the cost of these products in half doesn’t help if their is no income coming in other than from the government (We do we have people proposing having the government provide minimum living wages?). Anyway, some of this too late. But, in my opinion, some of the arguments have been too one sided and full repercussions were never considered.

[Hungry for Knowledge]

Cullen, I enjoy your writing immensely. Thank you.
Trump’s tariffs are attractive to me because many/most other countries place higher tariffs on importing our goods and services.
It’s as easy as that for me.
$800 billion in a trade deficit just seems..... too much. I’ve been staying aware of it for decades and in the late 1980s when my international business professor walked in and asked, weekly, “free trade or fair trade?” I’ve been aware.
Deficit was much lower then. I’ve seen much stagnation in real wages since then, and a lower quality of goods for decades since then, mainly anything built of plastic or so-called steel from developing countries

[mortenefriis]

Sorry but you are listening to a compulsory lyer.. the deficit is 570 not 800.. despite his repeated statements.. secondly, why do you think other countries have higher tarifs and that its the reason? Did you know the EU proposed zero tarifs, and that US refused? Secondly the trade deals are actually the result of a negotiation, which you signed.. noone forced you. Between EU and US there are diff in trade tarifs, not because EU wamted that, as mentioned above, but because US threw in Property rights.. and the deal was made.. its a signed deal not forced!! Like your idea that the climate deal was bad for US! Well again, its a voluntary arrangement. Noone told you to do or sign anything! You decided yourself, how your arrangement with the world would be on climate change.. why is it so important US people to have these friend-enemy black-white perspectives? Primitive and narrowminded.. funny enough most other countries sees through this and we are all shaking our heads.. getting into a discussion on the deficit itself is a different discussion and how to deal with it.. just bear in mind that US twice started a tradewar 1930 and 2002, both times it had detrimental effects on US and the world economi.. please get smarter!!

[lperruso]

And what about the intellectual properties that are sacrificed when doing business with China?

[gvj11]

Undergrad Econ 101 was totally wrong on many subjects, as you well know, Cullen. What makes you think they were right on trade?

Free movement of goods and services automatically implies free movement of people by definition. In other words, it requires open borders.

No thanks.

[fishfryer]

Cullen,

There can be no free trade because we do not have a free market for labor in the U.S. we have laws that inflate wages here. A person that flips burgers may only be worth $1/hr, but minimum wage laws and entitlement programs skew that. Are you suggesting we abolish minimum wage and welfare and food stamps?

When living standards have been vastly different between two areas you have differences of labor rates. Cost of living in the U.S. Is generally much higher than in china, therefore wages have to be higher and product cost is higher.

http://bit.ly/2G6M81E

Consumer Prices in United States are 61.67% higher than in China
Consumer Prices Including Rent in United States are 75.18% higher than in China
Rent Prices in United States are 110.89% higher than in China
Restaurant Prices in United States are 127.95% higher than in China
Groceries Prices in United States are 53.48% higher than in China

Workers in the U.S. make 15x more on average than in China.

The only answer since china refuses to raise its minimum wage and to continue to oppress its workers is to lay heavy tariffs on them.

[Lance Brofman]

Protectionism can save jobs. In the USA the best measurement of the cost per job saved to the rest of the country is about $1 million per job saved. Saving one job might provide $100,000 in gains to the worker and the employer who benefit from the protectionism, but cost the rest of the country $1,000,000. Since the million dollars is just one third of one cent per person in the USA, no one notices it.

To save a million jobs via protectionism would cost the country a S1 trillion which would be about the same impact as a very severe recession. To save 10 million jobs via protectionism would cost the country a S10 trillion. That would make the USA a poorer country than Mexico. That would mean it would be likely the people born in the USA would be going to Mexico to work as servants and dishwashers. The degree of impoverishment that would result from that much protectionism is usually only associated with severe natural disasters or wars..."
https://seekingalpha.c...

[fishfryer]

Lance,

You throw a lot of made up numbers around. Can you deny that a nation with a trade deficit and fiscal deficit is on a path to a problems?

You do forget that money that is spent in the U.S. will create velocity. Part of our current problem with money velocity is that without factories and production all other supporting industries do not exist. That velocity increases GDP, tax collection, and improved living standards. Right now, $375 billion goes to china to improve their lives and build their military.

If a trade imbalance was so good for a country, why does every other country fight tooth and nail to have balanced trade or a trade surplus? Why can we all just run deficits and order stuff off the Internet? Why work?

Still, you have not addressed the original point that we cannot compete in many industries because of our artificially high standard of living brought about by our social net and minimum wage laws.

[sleek]

fishfryer,

>> Right now, $375 billion goes to china to improve their lives and build their military. <<

Actually, you have it exactly backwards.

A trade deficit means a surplus on the capital account which means that capital is flowing from China into the US. When the US builds a bridge and sells Treasuries to fund it, it is the Chinese who paid for that bridge built in the US, not China.

Similarly, it is those Treasuries which the US sells to China that fund the US military. You know, like for those wars in Afghanistan and Iraq.

[Ben Gee]

A trade war is much less damaging than a shooting war.
People are not rational, when they think they can win a war, they would start a war. Germany and Japan did in WW2.
Trump think a trade war is winnable. We will be in much worse shape if he think he can win a real shooting war.

[Lance Brofman]

There are stupid tariffs and very stupid tariffs. A very stupid tariff is a tariff on steel and aluminum that increases the costs of every product made in the USA that uses those metals. This increases consumer prices and makes products produced in the USA less competitive relative to those made outside the USA using steel and aluminum priced at the world market rather than the artificially propped-up protected US steel market.

A less stupid tariff is the retaliatory tariff that will be put on US motorcycles (Harley Davidson) that will not raise any costs on any EU producers, or raise prices for anyone in the EU, except for buyers of motorcycles.

. Protectionism is the progressivism of fools. Gandhi was a great statesman but a horrible economist. Just as the ignorant in the USA argue that American workers who earn $15 per hour should not have to compete with Chinese workers who make $2 per hour, Gandhi thought that Indian workers should not have to compete with American and European workers who have the benefit of modern machines. As a result India adopted protectionism. In 1947 the per capita income of India was similar to countries such a South Korea. By 1977 the per capita income and standard of living in South Korea was many times that of India. India has since largely abandoned protectionism and has benefited immensely from free trade. Just as David Ricardo proved would be the case when he developed comparative advantage..."
https://seekingalpha.c...

[sleek]

Lance,

India just did something really stupid.

For the last few years, Canada has been growing a large volume of legumes for the Indian market. This is good for India because it diversifies their food supply. But this year, they had a bumper crop. So they put tariffs on, you know, to favor their local farmers.
Meanwhile, Canadian farmers are switching back to canola.

When the next drought invariably hits India...

Full link to the article below:

http://bit.ly/2G7U6rp

[reasonable2]

I recommend an economist's thoughts that might make you re-consider your assertion. "Bad Samaritans: the Myth of Free Trade and the Secret History of Capitalism".

Ha-Joon Chang, a Korean economist tells the history of free trade in a way that explains how South Korea, a poor country with nothing to offer the world in post-WWII, was underdeveloped and had much less GDP than North Korea whose coal reserves were attractive to the Japanese plans to invade China in the years prior-- yet today sells us cars, TVs, cell phones and many other goods- far outstripping the North.

It was done with protections for "infant industries".

Many historical examples. (England could only sell its wool to Brussels until they got looms, the American colonies were prohibited from making cloth and were forced to send cotton to England.)

Check it out. It is only the dominant nation's technological expertise that makes them hawk "free trade".

All through history...

Still, Mr. Trump is an anachronism in this regard.