The Master Negotiator: I’ll Beat Myself Till You Accept My Terms!

07 Wednesday Mar 2018

Posted by pnuetz in Free Trade, Tariffs, Trump Administration

Tags

Balance of Trade, Chinese Trade Policy, Coyote Blog, Cronyism, Donald Trump, Dumping, NAFTA, National Security, Panda Blog, Peter Navarro, Pierre Lenieux, Protectionism, Stephen Mihm, Tariffs, Trade Retaliation, Trade War, Warren Meyer, Wilbur Ross

As if you needed more evidence that governments are incompetent, look no further than trade policy: public officials the world over are almost universally ignorant regarding the effects of international trade and trade imbalances. In this sense, the Trump Administration’s new tariffs on imported steel and aluminum are in keeping with the long history of public sector foibles on trade. This phenomenon stems from an unhealthy and obsessive focus on the well-being of producers without regard to the implications of policy for consumers. Warren Meyer of Coyote Blog offers an evaluation of Chinese trade policy, which he mischievously (I believe) claims was written by a Chinese blogger on a “sister blog” called “Panda Blog“. Despite Meyer’s playfulness, the post is instructive:

“Our Chinese government continues to pursue a policy of export promotion, patting itself on the back for its trade surplus in manufactured goods with the United States. The Chinese government does so through a number of avenues, … each and every one of these government interventions subsidizes US citizens and consumers at the expense of Chinese citizens and consumers. A low yuan makes Chinese products cheap for Americans but makes imports relatively dear for Chinese. So-called ‘dumping’ represents an even clearer direct subsidy of American consumers over their Chinese counterparts. And limiting foreign exchange re-investments to low-yield government bonds has acted as a direct subsidy of American taxpayers and the American government, saddling China with extraordinarily low yields on our nearly $1 trillion in foreign exchange. Every single step China takes to promote exports is in effect a subsidy of American consumers by Chinese citizens.“

The very idea of a trade deficit is often used to intimate a threat to a nation’s economic health. Conversely, a trade surplus is used to suggest that a nation is achieving great economic success. Both contentions are nonsense. Here is more from “Panda Blog“:

“We at Panda Blog believe it is insane for our Chinese government to continue to chase the chimera of ever-growing foreign exchange and trade surpluses. These achieved nothing lasting for Japan and they will achieve nothing for China. In fact, the only thing that amazes us more than China’s subsidize-Americans strategy is that the Americans seem to complain about it so much. They complain about their trade deficits, which are nothing more than a reflection of their incredible wealth. … They complain about China buying their government bonds, which does nothing more than reduce the costs of their Congress’s insane deficit spending. They even complain about dumping, which is nothing more than a direct subsidy by China of lower prices for American consumers.

And, incredibly, the Americans complain that it is they that run a security risk with their current trade deficit with China! This claim is so crazy, we at Panda Blog have come to the conclusion that it must be the result of a misdirection campaign by CIA-controlled American media. After all, the fact that China exports more to the US than the US does to China means that by definition, more of China’s economic production is dependent on the well-being of the American economy than vice-versa.“

By the way, those “quotes” from “Panda Blog” appeared on Coyote Blog 12 years ago!

All nations tend to play these trade games to one extent or another. But protectionist actions always harm a nation’s consumers more than they help producers, a proposition that is easy to demonstrate using a simple supply and demand diagram. While the class of consumers is broader than the class of producers, ultimately “producer” and “consumer” are different roles played by the same individuals. So protectionism is always harmful to a nation, on balance. Furthermore, retaliation against another nation for its dim-witted trade barriers also harms the retaliating nation’s consumers more than it helps its producers, and that’s true regardless of whether retaliation begets reciprocal actions.

Of course, producers are generally in a better position than consumers to grease the political skids in their favor. In a separate post, Meyer notes that protectionist trade policies are rooted in cronyism. The costs to society are very real, but they tend to be diffuse and therefore less obvious to most consumers.

“A lot of the media seems to believe the biggest reason they are bad is that they will incite retaliatory tariffs from other countries, which they almost certainly will. But even if no one retaliated, even if the tariffs were purely unilateral, they would still be bad. In case after case, they are justified as increasing the welfare of a certain number of workers in targeted industries, but they hurt the welfare of perhaps 100x more people who consume or work for companies that consume the targeted products. Prices will rise for everyone and choices will be narrowed.“

A couple of points deserve emphasis in relation to my last post on Trump’s tariff action:

In terms of jobs, the tariffs announced by President Trump present a very poor risk-reward tradeoff (WSJ article is gated):

“The policy point is that Mr. Trump’s tariffs are trying to revive a world of steel production that no longer exists. He is taxing steel-consuming industries that employ 6.5 million and have the potential to grow more jobs to help a declining industry that employs only 140,000.“

Stephen Mihm discusses ways in which the U.S. steel industry squandered its superiority in the post-World War II era. Much of Mihm’s article is devoted to the industry’s failure to upgrade to new production technologies. Interestingly, however, it fails to mention the damaging role played by unions in the process. “Dumping” had very little to do with it.
Finally, Pierre Lemieux takes a closer look at the national security argument for trade barriers. He concludes that it is fallacious. Of course, it is an excuse for cronyism. Protectionism harms the competitiveness of the protected industries, which actually undermines national security. And protectionism is usually unnecessary on close examination. In the case of steel, for example, national defense and homeland security use only about 3% of American steel production. Beyond that simple fact, the argument is dangerously open-ended. Almost anything can be represented as critical to national security: steel, food, clothing, and many other categories. Even human resources.

Today, Trump announced that Canada and Mexico will be exempt from the new tariffs while a renegotiation of the North American Free Trade Agreement (NAFTA) is underway. That’s better, but this carve-out exempts only 25% of U.S. steel imports. Perhaps Australia will be granted an exemption as well, but additional carve-outs will prompt further increases in tariffs on non-exempt imports. Trump also said that U.S. flexibility in applying the new tariffs to allies will depend on their commitments for military spending!

Thus, rather than maintaining the pretense that trade relationships are about economics, the administration has conceded that the tariffs and the exemption process will be transparently political, never a prescription for efficient resource allocation. Moreover, U.S. trading partners are likely to be reluctant to test the politics of modifying their own trade manipulations at home. Indeed, the politics may dictate retaliation, rather than concessions. In any case, the governments of our trading partners are as clueless on trade as Trump, his Commerce Secretary Wilbur Ross, and his economic advisor Peter Navarro, or they would never intervene in private trade decisions to begin with.

Trump Bumbles On Trade With Tariffs

02 Friday Mar 2018

Posted by pnuetz in Free Trade, Protectionism, Tariffs

≈ 1 Comment

Tags

Carve-Outs, central planning, Fair Trade, Import Quotas, monopoly power, Protectionism, Tariffs, Trade Barriers, Trade War, Trading Partners, Trump Tariffs

You can get away with lousy policy by calling it a “negotiating tactic” for only so long. But that dubious ploy is one of the rationales offered last week by the Trump Administration for imposing a 25% tariff on imported steel and a 10% tariff on imported aluminum. Sure, the tariffs are like gifts rendered onto American steel and aluminum producers, their shareholders, and their unionized workers. The tariffs allow them to compete more effectively, without any effort, with foreign steel and aluminum in the domestic market, and the tariffs may also give them leeway to raise prices. The tariffs are also forgiving of degraded performance by domestic producers, since reduced competition relieves pressure for efficiency, a primary social cost of monopoly power.

So who pays for these gifts to the domestic steel and aluminum industries? A tariff, of course, is a tax, and a significant portion of it will be passed along into higher prices of both imported and domestically-produced steel and aluminum. Therefore, the burden of that tax will be borne to a large extent by domestics users, including every domestic industry that uses steel or aluminum as an input, and by consumers who purchase those products. That erodes the job security of many domestic workers outside of the steel and aluminum industries. In fact, the tariffs are unlikely to create more jobs even in the steel and aluminum industries given the negative impact of higher prices on the quantities of those metals demanded.

The desperate story line in support of tariffs also includes the assertion that the U.S. steel and aluminum industries are in such dire straits that they are in danger of vanishing. Statistics on U.S. production hardly suggest that is the case, however. Steel output in the U.S. has been reasonably steady since recovering from the last recession, though it has not achieved its pre-recession level. While aluminum output has been declining, it is hardly in a free fall. The stock prices of major steel and aluminum producers, which are forward-looking, have not demonstrated a particular need for government aid (as if that could ever justify a too-big or too-important-to-fail mentality).

Defenders of the tariffs claim that one effect will include additional direct investment in the U.S. by foreign producers of steel and aluminum, because they can avoid the tariffs by setting up production within our borders. Perhaps a few will, but capital is mobile in other sectors as well. Producers in other industries requiring intensive use of steel or aluminum inputs will now have an incentive to shift production overseas, where the tariffs won’t apply. Attempting to prevent such shifts via import tariffs on final products would quickly become a nightmare of central planning.

Apologists for the tariffs go even further, noting that our new regulatory and tax environment will bring foreign producers to the U.S., essentially making the tariffs irrelevant. If that’s the case, why bother imposing the tariffs at all? And why penalize consumers and industries requiring intensive use of steel or aluminum?

The argument that tariffs provide a stronger position from which to negotiate with foreign “trading partners” (or rather, their governments) is tenuous at best. More likely, the tariffs will prompt retaliation by foreign governments against a range of American products. The very notion that “trade wars are good”, tweeted by President Trump on Friday morning, is as nonsensical as a suggestion that voluntary exchange is destructive. Already, the EU has announced plans to retaliate by imposing tariffs on bourbon and motorcycles produced in the U.S.

Negotiations are unlikely to be successful. Perhaps some foreign governments who subsidize their steel and aluminum producers could be persuaded to enter talks. Our own domestic producers are penalized by various tariffs and quotas in place abroad, and those might be used by foreign interests as a lever in negotiations. However, the most fundamental foreign trade advantages, when they exist, have to do with low wages, less regulation, more efficient production facilities, and sometimes a more favorable tax environment. Wage levels reflect labor productivity, but those wage levels are valued more highly in their home countries than in the U.S, and penalizing these countries with trade sanctions merely penalizes their workers. Not all dimensions of a cost advantage can be negotiated, and in any case, healthy competition in any industry is always in the interests of a nation’s consumers.

National security is another standard argument in favor of protectionist measures. We’re told, for example, that we cannot allow China to produce all of the steel, but China provides only a small fraction of U.S. steel imports. Canada, Brazil and Mexico provide far more. In fact, China was in 11th place on that list in 2017. So our sources of steel are fairly well diversified. A domestic shortage of steel or aluminum caused by a breakdown in relations with one or more steel-exporting countries would lead to higher prices, but it would bring forth greater supplies from other countries and even from high-cost domestic sources. That is not a national emergency.

It’s possible that the Trump Administration will create “carve-outs”, exempting goods from certain countries from the tariffs. Presumably, those would be based on an assessment of each country’s trade policies and whether they are consistent with “fair” trade, in the judgement of U.S. trade authorities. However, all nations play the protectionist game in one form or another, including the U.S. Any carve outs would be better than none at all, but the remaining tariffs imposed by the administration will be a net burden to the U.S. economy.

Up till now, I have been pleasantly surprised by the Trump Administration’s efforts to de-tax and deregulate the U.S. economy. However, the threat that Donald Trump would adopt protectionist trade policies was one of my major trepidations about his candidacy. And here it is, as he promised. The dilemma often expressed by protectionists is that foreign producers can put elements of the domestic economy out of business by selling below cost. That drain on a country’s resources cannot span all industries — the U.S. has a comparative advantage in many areas. Such an effort cannot last forever or else these nations would cannibalize their own industrial base. Foreign governments quite simply cannot afford it economically and politically. On our end, the best advice is to accept the gift of low-cost goods. With access to ultra-cheap goods, whether steel, sorghum, or some finished product, American consumers and producers who use those imports gain unambiguously, and the purchasing power released can be spent on other goods and services.

Protectionist Ugly: Trump Makes Bad on Tariffs

29 Monday Jan 2018

Posted by pnuetz in Free Trade, Tariffs

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I’ve reacted favorably to much of the Trump Administration’s economic agenda, but foreign trade has been a huge area of concern. Trump’s rhetoric on trade was bellicose on the campaign trail. Thus far in office he has succeeded in upending or threatening trade agreements: he pulled the U.S. out of the Trans-Pacific Partnership (TPP) negotiations, a multilateral trade agreement involving 11 of our Asian trading partners; he has also promised that NAFTA will be renegotiated. This week, he imposed tariffs on solar panels produced in China and washing machines built in South Korea. You will now be forced to pay a penalty tax on any purchase of those products.

Renegotiating existing trade agreements is one thing (though my ideal is unilateral elimination of trade barriers), as is a general preference for bilateral agreements, particularly if they remain focused on trade and not extraneous social issues. But I sincerely hope that the latest move is not the start of a long rollout of tariffs and other protectionist measures. Unfortunately, more such moves are expected.

What possible logic can explain these actions? To hear Donald Trump tell it, the U.S. must enforce trade laws and establish a “level playing field”. So, perhaps this is a form of negotiation. If so, are the cards we hold so strong that we can afford to risk retaliation in the form of tariffs levied on our own exports? Do our trading partners value our business so much that they will not retaliate? Would those countries offer to remove any subsidies they grant their own export industries? Would they tell those industries they must be price followers regardless of cost structure and taxes, charging no less than their American competitors? Can we dictate the terms of trade with these parties? Trump apparently thinks so, but we shall see. I believe the answer is almost certainly no.

Retaliation is likely; this is how trade wars begin, and they have a way of precipitating economic contraction. But that risk represents only one part of the cost of Trump’s tariff action. The real problem is the likely impact of the Trump tariffs on American consumers, American production, and on America’s long-run competitiveness.

Prices: Tariffs are essentially a tax on imports. A significant share of the burden of that tax will be borne by consumers. The price they pay for the import will rise to reflect a portion of the tariff. If, instead, they opt to purchase the American product after the imposition of the tariff, that is a coerced and suboptimal decision based on their existing preferences. They are likely to pay more to the American producer than in the absence of the tariff on the import because American producers will face less competitive pressure. Thus, American consumers will be penalized by the tariff whether they continue to purchase the import or not.
Output: Quantities purchased fall when prices rise. That is the law of demand. American consumers will buy less of the import and less overall, so consumers lose on both price and quantity. But it’s worse than that, because domestic producers gain a degree of market power under the tariff. They have greater leeway to price above marginal cost, which implies output restraint. It is therefore quite possible that domestic output will decrease as well.
Competitiveness: Handicapping foreign competitors eases the pressure on domestic producers to perform by reducing costs, pleasing customers, creating value, and innovating. This is not likely to be a sudden change. Rather, it would manifest in a gradual deterioration of competitiveness. Perhaps no one abroad will want our exports, but domestic consumers will have little recourse except to pay the tariff for the foreign good they preferred to begin with. Meanwhile, if other domestic industries are reliant on tariffed imports as inputs to production, they too will suffer a loss of competitiveness.

I tend to be skeptical of any claim that a foreign government facilitates (or engages in) predatory pricing on American markets. Of course they might. And I know… the U.S. itself has thrown subsidies at solar panels in the past. (Well how unfair!) However, the facts are that in a variety of industries, foreign producers actually have cost advantages over U.S. producers. The very idea of trade is to take advantage of such differences for mutual gain. We buy things from others precisely because we can’t do it all ourselves, at least not without great sacrifice (high cost).

It is all too easy for domestic producers to cry “protect us”, and to claim that national security demands protection. These claims are often accepted with little if any analysis. The pleas for protection are characteristic of rent-seeking crony capitalism. And it isn’t as if Americans have nothing to gain in the exchange: cheap consumer goods and cheap inputs for domestic producers. The income released via low foreign pricing is available for other uses, including saving, larger quantities, or spending on other goods.

American consumers pay the price of trade restrictions and tariffs in several ways. The restrictions not only cost them directly in terms of higher prices, but they also represent a violation of consumer sovereignty and tend to restrain output. That a central authority would deign to prohibit or penalize certain consumer decisions is abominable. One can assert that the actions protect workers, but that is a fiction and holds only in the short-run at best. Remember that workers are consumers in the first instance. Ultimately, the trade restrictions degrade the ability of those workers to compete on world markets. In short, they are destructive. At the link above, George Will quotes Henry George to that effect:

“What protection teaches us, is to do to ourselves in time of peace what enemies seek to do to us in time of war.“

Trade Enragement Syndrome

31 Sunday Jul 2016

Posted by pnuetz in Free Trade, Protectionism

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Bernie Sanders, Capital Account Surplus, Don Boudreaux, Donald Trump, Free trade, Geocentrism, Heliocentrism, Import Competition, monopoly power, NAFTA, Protectionism, Trade Deficit, Trans-Pacific Partnership

Trade makes us richer, not poorer. The anti-trade rhetoric spouted by neo-mercantilists like Donald Trump and Bernie Sanders is about as sensible as a boycott on goods produced in the next town, or for that matter, on anyone with whom one might otherwise choose to trade. Don Boudreaux perfectly captures my feelings about the rising trend of protectionist sentiment by comparing it to geocentrism:

“Lately I feel as I imagine an astronomer would today feel if, centuries after Copernicus and Galileo proved beyond a shadow of a doubt that the earth isn’t the center of the solar system, large numbers of people – including popular media pundits and politicians – began to insist that the sun and the planets and the stars do indeed all revolve around a stationary earth that is situated in the center of the universe.“

The very motivation for trade is to obtain something of value that one did not produce, to acquire that which one cannot easily acquire without trade, or to acquire it on more favorable terms than otherwise. It recognizes the reality that one’s productive efforts should be focused in an area that best suits their skills or natural talents. That’s better for the individual and better for society! Countries should produce what they are best at producing, which gives them a cost advantage in their areas of specialization. Trade allows individuals and nations to specialize in production but diversify in consumption, allowing them to enjoy access to the broadest possible range of goods and services produced worldwide.

The consummation of any trade heralds the attainment of mutual benefits to the parties: one produces and employs at a profit; the other consumes a thing of greater value than the price paid. The payments for foreign goods must come from either domestically-produced goods or from foreign investment in domestic real estate, buildings, factories or other real and financial assets. That is, if we purchase more goods from abroad than we export, then foreigners must either hold the dollars they receive or invest them in other ways. The latter represent trades in assets, and those trades, too, are mutually beneficial. The result is that U.S. investors gain and/or the economy benefits from new, productivity-enhancing plant and equipment, not terrible outcomes. Trade deficits are balanced by capital surpluses, and trade surpluses are balanced by capital deficits. Taken together, trade in goods and capital (assets) always balance and are mutually beneficial in every case, whether we run a trade deficit or a surplus.

That said, it’s worth emphasizing that so-called free trade agreements are something of a sham. Countries don’t trade. People do. Unfortunately, I have indulged the notion of national trade negotiation in the past, if only implicitly, by vouching for trade agreements like NAFTA and TPP as sort of second-best solutions to the horrid reality of trade restrictions promulgated by protectionist politicians. I reasoned that dismantling those barriers, one-country (or region) at-a-time was preferable to doing nothing. However, negotiations like these become mired in extraneous issues such as environmental policies, labor laws, immigration rules and other commercial policies. Nor do those negotiations always inhibit domestic subsidies to politically-favored activities. Indeed, they might actually encourage subsidies for value-eroding projects. Again, the entire process of trade negotiations is extraneous to the extent that trade takes place between individuals. Unfettered gains from trade require the absence of trade barriers. Dropping them unilaterally would benefit consumers, encourage efficiency by domestic producers, and provide a great example for other nations.

Opponents of trade, like Messrs. Trump and Sanders, lack a basic understanding of the reasons why individuals engage in cooperative exchange. Or at least they fail to acknowledge, for political reasons or sheer density, that what improves well-being at home is freedom to transact, across our borders as well as within our borders. To prevent this activity is to forcibly deny individual freedom. Boudreaux makes this point be asking trade opponents a series of questions, the first few of which are listed below:

“– Are you made richer if the supermarket … at which you once shopped hires armed goons to force you to start shopping there again?

– Do you believe that the owners and the employees of [that store] are so ethically entitled to your continuing patronage as a consumer that they are justified in employing armed goons to prevent you from shopping elsewhere?

– Do you believe that, now that [the store] has successfully forced you not to shop at competing supermarkets, that the owners and employees … will work as diligently and as creatively as possible to keep the prices they charge low and the quality of their service high?

– Do you believe that the higher profits and higher wages reaped by [the store’s] owners and workers as a result of their holding you hostage as a customer make you more prosperous?

– Do you believe that the higher profits and higher wages reaped by [the store’s] owners and workers as a result of their holding you hostage as a customer make your community more prosperous, even though [the store’s] higher profits and higher wages are necessarily funded by money that you and other … ‘customers’ are forced not to spend on other goods, services, or investment options?

– If you believe that [the store] has a right to force you not to shop for food at other supermarkets, do you believe also that [the store] has a right to force you not to grow more of your own food, or not to eat out more often at restaurants, or not to go on a diet?“

It is difficult to believe that educated people believe restrictions on the freedom of individuals to cooperate with others will improve their well being. Of course, those educated people are often politicians who stand to benefit from frightening voters, and who have no interest in reminding them that a flow of foreign goods broadens choices, reduces prices, and provides valuable discipline to domestic businesses. Without competitive discipline, we forgo important benefits and instead allow quality and price to come under the arrogant power of monopolists. There are, of course, many producers who are willing to provide meaningful support to politicians who will protect them from foreign competition. That’s not capitalism. Its cronyism!

Good Leaders Aren’t Trade Warriors

30 Wednesday Mar 2016

Posted by pnuetz in Free Trade, Protectionism

≈ 1 Comment

Tags

Bernie Sanders, CATO Institute, Currency Manipulation, Daniel J. Ikenson, Direct Foreign Investment, Don Boudreaux, Donald Trump, Dumping, Federal Reserve, Free trade, Hillary Clinton, NAFTA, Open Trade, Paul Krugman, People's Bank of China, Predatory Pricing, Protectionism, Reserve Currency, Ted Cruz, TPP, Trade Deficit, Trade War, Unfair Competition

Protectionism

The protectionist foreign trade rhetoric issued by the major-party presidential candidates is intended to appeal to ignorant economic instincts. Donald Trump and Bernie Sanders come to mind most readily, but Ted Cruz and Hillary Clinton are jumping in with similar campaign positioning. The thrust of these populist, anti-trade appeals is that America is losing jobs to “unfair” foreign competition, an argument that distorts the very objective of trade: consumers take part in exchange in order to consume; they capture value from high quality, unique merchandise and competitive terms. Ultimately, producers engage in trade to gain the wherewithal to consume. Consumption is the real end-game.

It can be misleading to talk about “nations” engaging in trade with each other, despite the emphasis placed on trade agreements like NAFTA and TPP. In the first place, it is better to stress consumers and producers, rather than “nations”, because most foreign trade is private, cooperative activity, not national decision-making. But the candidates persist in characterizing trade as a “contest”. That misleading notion is what prompts governments to muck up the trade environment by imposing restrictions on the free flow of goods and services. Trade agreements have been heralded as great achievements, but they never approximate a regime of truly liberalized trade because the latter requires no formal agreement whatsoever, merely a hands-off approach by government. And trade agreements tend to entangle trade issues with other policy objectives, holding consumers hostage in the process.

We hear from opportunistic candidates that jobs are lost to trade with foreigners. But again, consumption, not “jobs” per se, is the real objective of economic activity. If domestic jobs are lost, it is generally because consumers judge the value produced inferior to what’s offered from abroad. American consumers should not be obliged to support inferior value, domestic market power unchecked by competition, monopoly prices and limited choices. Patriotic jingoism attempts to blind us from these economic imperatives.

The standard protectionist narrative is that foreign “nations” cheat on trade with the U.S. via currency manipulation, predatory pricing or “dumping”, “unfair” wages or other unfair labor practices. Do any of these objections to free trade hold water?

The “fairness” of foreign wages and labor practices is a matter of perspective. Wages cannot be considered unfair merely because they are low relative to U.S. wages. Wages paid to workers by foreign exporters tend to be consistent with the standard of living in those societies, and they are often some of the best income opportunities available there. This is economic dynamism that lifts masses from the grips of poverty. It’s absurd to caste it as “exploitation”.

Is it “unfair” to competitors in the U.S.? Not if they know how to compete and are allowed to do so. Unfortunately, government regulatory policies in the U.S. often present obstacles to the competitiveness of domestic producers. This is well-illustrated by Daniel J. Ikenson of The CATO Institute in “Crucifying Trade For The Sins Of Domestic Policy“. He emphasizes that trade promotes economic growth, but when it causes job losses for some workers, U.S. economic policies make it difficult for those workers to find new jobs.

“Incentivize businesses to hire people to train them in exchange for their commitment to work for the company for a period of time. Reform a corporate tax system that currently discourages repatriation of an estimated $2 trillion of profits parked in U.S. corporate coffers abroad, deterring domestic investment, which is needed for job creation. Curb excessive and superfluous regulations that raise the costs of establishing and operating businesses without any marginal improvements in social, safety, environmental, or health outcomes. Permanently eliminate imports duties on intermediate goods to reduce production costs and make U.S.-based businesses more globally competitive. Advocate the retirement of protectionist occupational licensing practices.“

So-called “dumping” by foreign producers, or selling below cost, is an unsustainable practice, by definition. Pricing below cost is difficult to prove, especially if local wages are low and raw inputs are plentiful. If dumping can be proven, retaliation might feel good but would punish American consumers. A foreign producer might be subsidized by its government as a matter of industrial policy and economic planning, an unhealthy policy to begin with, and possibly to facilitate a long-run market advantage in foreign trade. The U.S. itself is thick with subsidized industry, however, so arguing for retaliation on those grounds is more than a little hypocritical.

I rarely quote Paul Krugman, but when I do, it’s from work he’s done as an actual economist, not as an agenda-driven pundit. So we have the following Krugman quote courtesy of Don Boudreaux:

“I believe that if the rhetoric that portrays international trade as a struggle continues to dominate the discourse, then policy debate will in the end be dominated by men like [James] Goldsmith, who are willing to take that rhetoric to its logical conclusion. That is, trade will be treated as war, and the current system of relatively open world markets will disintegrate because nobody but a few professors believes in the ideology of free trade.

And that will be a shame, because for all their faults the professors are right. The conflict among nations that so many policy intellectuals imagines prevails is an illusion; but it is an illusion that can destroy the reality of mutual gains from trade.“

David Harsanyi asks how American consumers will like more restrictive trade policy when forced to pay more for smart phones, laptops, HDTVs, cars, food, and any number of other goods. The usual anti-trade narrative is that foreign producers have harmed the manufacturing sector disproportionately, but in another article, Ikenson lays bare the fallacy that U.S. manufacturing has been victimized by trade.

The consequences of trade restrictions are higher prices, reduced production and reduced consumption, an undesirable combination of outcomes. This means higher prices of imported goods as well as domestic goods, whose producers will face less competition by virtue of the trade barriers. With reduced availability of imported goods, economic theory predicts that domestic producers will not fully meet the frustrated demands. This is a classic response of producers with monopoly power: restraint of trade. The negative consequences are compounded when foreign governments impose retaliatory measures against the U.S., harming American exporters.

A further misgiving expressed by politicians regarding free trade is that America’s trade deficit implies greater indebtedness to the rest of the world. This argument has been made by a few leftist economists who misunderstand the nature of direct investment, and who tend to think erroneously of economic outcomes as zero-sum. It’s true that foreign producers who receive dollars in exchange for goods often invest those proceeds in U.S. assets. A fairly small share of that investment is in debt issued by U.S. governments and private companies. But a much larger share is invested in U.S. equities and real assets, which are not U.S. debts. As Don Boudreaux points out, the domestic sellers of those assets generally reinvest in other U.S. assets, so private U.S. ownership of global capital is not diminished by increased foreign investment in the U.S.

An interesting aspect of the trade debate is that the dollar’s role as a global reserve currency implies that the U.S. must run a chronic trade deficit. The rest of the world uses dollars to trade goods and assets, but to acquire dollars, foreigners must sell things to holders of dollars in the U.S. This keeps the foreign exchange value of the dollar elevated, which makes imports cheaper to Americans and U.S. exports more costly to foreigners. Those dollars are a form of U.S. debt, but it is debt for which we should feel flattered, as long as confidence in the dollar remains. A diminished role for the dollar in world trade would lead to a surplus of dollars, undermining its value and promoting inflation in the U.S. Let’s hope for a gradual transition to that world.

Finally, the presidential candidates allege that foreign currency manipulation is another reason for American job losses. One prominent example occurred last year when China allowed the renminbi to decline to more realistic levels on foreign exchange markets. Donald Trump called this an unfair trade tactic, but apparently the People’s Bank felt that it couldn’t support the renminbi without undermining economic growth. The earlier dollar peg also helped to keep Chinese inflation in check. Contrary to Trump’s assertions, if China stopped manipulating its currency altogether, the renminbi would go even lower!

Beyond the opportunistic political arguments, the point is that central banks (including the U.S. Federal Reserve) manage their currencies to achieve a variety of objectives, not merely to promote exports. That is not an endorsement of such policies. It is an objective fact. Anyone can argue that a foreign currency is “too low” if their objective is to demonize a country and it’s exports to the U.S., but the assertion may not be grounded in facts as markets assess them.

The arguments against open trade policies are generally specious, hypocritical or grounded in a mentality of victimhood. Vibrant producers who are free of government restrictions should welcome the expanded markets available to them abroad and should not seek redress against competition via government protection. Liberalized trade has engendered tremendous economic benefits over the years, while protectionist policies have only brought severe contractions. Let’s be free and trade freely!

Anti-Capitalists Prescribe Third-World Phlebotomy

12 Monday Oct 2015

Posted by pnuetz in Free Trade, Human Welfare

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Benjamin Powell, Economic Development, Fair Trade, Huffington Post, International Food Policy Research Institute, James Bovard, Johan Norberg, Penn Jillette, Protectionism, Sweatshops, Texas Tech University, The Freeman, Third-World Wages, World Bank

Working conditions and wages in the third-world usually look so undesirable to observers in developed countries that we commonly use the term “sweatshops” to describe production facilities serving global markets in developing countries. Those facilities, however, are relatively modern by their domestic standards. The wages and working conditions are far superior to traditional opportunities available to the workers, offering them a rare opportunity to get out of poverty. But it is not uncommon to hear a narrow view that these workers are “exploited”, as if shutting down those operations was a better alternative. Calls for boycotts and other measures to punish firms with ties to those facilities are a common refrain from the Left, but if successful, the real victims of such activists would be the very workers whose interests they claim to represent.

Johan Norberg makes this all too clear in the Huffington Post, in “How Your T-Shirt Saves the World“, citing reports from the World Bank and the International Food Policy Research Institute:

“The number of extremely poor in Bangladesh fell from 44 to 26 million between 2000 and 2010, despite the population growing by 15 million. Since 2004, the level of poverty in Cambodia has more than halved, from 52 to just over 20 percent. It is ‘one of the best performers in poverty reduction worldwide’, according to the World Bank.

This is a stunning success in the countries that need it the most, and the export sector has been instrumental in bringing it about. It increases the workers’ productivity, and therefore also their wages and working conditions, which has been especially important for women. In a study from the International Food Policy Research Institute, the researchers show that the increase in Bangladeshi wages from the garment sector ‘dwarfed’ the rise attributed to government programs. …

Obviously even the best jobs in very poor countries look bad compared to what we are used to in Europe and America, but that is not the alternative in an economy at a low level of capital and education. As a worker I interviewed in Vietnam once put it, the main complaint to management was that she wanted the factories to expand so that her relatives could get the same kinds of jobs.“

This is a very basic lesson in the process of economic development, and no one pretends that it’s easy. In this interview of Professor Benjamin Powell of Texas Tech University in The Freeman, he quotes Penn Jillette of Penn & Teller:

“The way Penn … put it once when he interviewed me is that ‘it’s better than tilling the soil with Grandpa’s femur.’ That is a bit crass . . . but true. Wishing away reality doesn’t give these workers better alternatives. Workers choose to work in sweatshops because it is their best available option. Sweatshops, however, are better than just the least bad option. They bring with them the proximate causes of economic development (capital, technology, the opportunity to build human capital) that lead to greater productivity—which eventually raises pay, shortens working hours, and improves working conditions.“

When you hear anyone talk about “exploitation” of workers in the third world by capitalists, ask them what alternatives they have in mind for lifting those workers out of poverty. Chances are they will pretend that firms can offer pay at levels far exceeding the current productivity of the workers — a prescription for closing the operations. Or they might offer naive suggestions that rely heavily on government as a benefactor, which are unlikely to succeed in ending poverty. They might even advocate for “fair trade”, which is leftist ear-candy code for protectionism. Nothing could be worse for first-world consumers or more harmful to the cause of economic development in the third world. As Norberg says of the so-called “sweatshops”: “The world needs more jobs like these, not fewer.“

Should Foreign Goods Be Pricey?

18 Thursday Jun 2015

Posted by pnuetz in Free Trade

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Caroline Baum, Don Boudreaux, Fast Track Authority, Free trade, Intellectual Property Rights, Mercantilism, Protectionism, Trade Promotion Authority, Trans-Pacific Partnership

Even ardent supporters of the Pacific trade deal get one thing wrong consistently: promoting free trade is not so much about domestic producers, jobs and export promotion as it is about consumers, prices and improved access to imports. The latter are the real rewards of trade, while the former are more appropriately viewed as payments. This was the subject of “Free Trade Lets You Make a Deal” on Sacred Cow Chips in April., in which I quoted Greg Mankiw:

“A nation benefits from imports, [Adam Smith] argued, because they expand its opportunities for consumption. Exports are necessary only because other nations have the temerity to want to be paid for the goods they provide.“

Free trade is a process of exploiting exchanges that are mutually beneficial, but based on the commentary in the press and social media, one would think it was something harmful. You could hardly blame anyone from drawing that impression based on the way governments negotiate trade deals. Last month, Don Boudreaux had a humorous take on this in “If Buying A Car Were Like Negotiating A Trade Deal“. The parties just can’t tolerate a better deal!

To draw another analogy, when IKEA opens a store in a new town, consumers are excited about the goods available there, and about the new shopping experience. When the circus comes to town, people are thrilled by the “imported” entertainment. They are not especially antagonized about the extra spending this might entail, or the extra hours they might have to work in order to afford it. Of course, the cheaper, the better. Yet when it comes to foreign trade, the general commentary turns this logic on its head: you’d think our concerns centered around a desire for more expense and that our access to new goods is a nuisance!

Opposition to trade deals among progressives is based on classic protectionist sentiment. This usually ends in protecting rents earned by interests that would rather not face competition. Nothing could be more corporatist in its effect. But it is obviously counter-productive to argue in support of industries that cannot compete internationally, so opponents retreat to accusations that trading partners cheat by selling below cost or manipulating their currencies. If so, those policies represent gifts to the U.S. It would be wonderful for the country if the flow of gifts from abroad continued indefinitely, but that is not sustainable. As matters are rationalized over time, and they will be, opportunities will present themselves to U.S. producers, who may well be in better stead by virtue of the earlier gifts from abroad. Don’t look a gift horse in the mouth by favoring domestic rent seekers.

Like Boudreaux, I support trade deals like the Trans-Pacific Partnership (TPP) “with my nose held tightly“. Deals like this generally do reduce trade barriers, though they invariably involve politically-motivated nonsense like the imposition of cross-country rules and regulations that negate some of the economic gains.

Caroline Baum has a good summary of legislation related to the TPP, which involves the president’s “fast-track” negotiating authority as well as assistance to “workers who are adversely affected by a trade agreement“. The trade deal, fast track and trade assistance have created strange political bedfellows and estrangements. Baum notes the confusion surrounding the real benefits of trade from fast track’s biggest proponent:

“Obama’s entire trade pitch – ‘the more we sell abroad, the more jobs we create at home’ – is a thinly disguised mercantilist argument: the idea that a country can export its way to prosperity. It’s a mistake to think that the advantages of free trade are limited to the export side.“

Some otherwise strong supporters of free trade are opposed to granting Obama fast-track authority, despite the fact that the last six presidents have had that authority. I am as skeptical about Obama’s leadership and negotiating skills as anyone, and I have little faith that he would keep sight of the main objective, were he actually sitting at the negotiating table. That would be lower trade barriers, not the environment or any other intrusion into the domestic policies of other parties to the deal. If our domestic regulatory standards are tougher or involve greater expense than those abroad, that should be afforded by greater U.S. productivity, not by making our producers uncompetitive on international markets. And if that is the case, our standards should be reassessed, we should recognize the prohibitive impact that our standards could have on the costs of our trading partners, and we should hope for those partners to eliminate any additional barriers to our goods.

I am also opposed to making the trade deal hinge on the extension of tougher intellectual property (IP) rights to poor Asian nations, though that is certain to be part of the negotiations. There is disagreement among economists about whether such an extension of IP rights would be good or bad.

I would like to see Congress grant Obama fast-track authority, but only because Congress will still have the authority to approve or reject a final deal. The promise of reductions in trade barriers is unequivocally positive. We’ll have to evaluate the downside when the deal goes before Congress.

Free Trade Lets You Make a Deal

29 Wednesday Apr 2015

Posted by pnuetz in Free Trade

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Alan Blinder, Bryan Caplan, Economists agree, Fast Track Authority, Free trade, Greg Mankiw, Murphy's Law of Economic Policy, Trade Liberalization, Trans-Pacific Partnership, Tyler Cowan

“Economists have the least influence on policy where they know the most and are most agreed; they have the most influence on policy where they know the least and disagree most vehemently.”

And what a shame! That quote is Alan Blinder’s Murphy’s Law of economic policy, provided by Greg Mankiw in the New York Times. Mankiw’s article, “Economists Actually Agree on This: The Wisdom of Free Trade“, discusses the prospective Trans-Pacific Partnership (TPP), an agreement that would liberalize trade between the U.S. and a number of Asian nations. A bill is before Congress that would give President Obama “fast track” authority to negotiate the deal. Some provisions of TPP are settled in principle, such as reduced tariffs, free trade unions, a reduced role for the state in the economy, and more transparency. Admittedly, it feels odd to advocate for Barack Obama to negotiate over less government — not to mention transparency!

As Mankiw says, “Among economists, the issue is a no-brainer.” Just as individuals voluntarily engage in trade because it is mutually beneficial, nations should engage in trade when they can specialize in their areas of comparative advantage. Liberalized trade, including reductions in tariffs and removal of quotas and other obstructions, ultimately brings more goods at lower prices. And ultimately, trade liberalization is not really about nations trading with one another. Rather, it is about liberating individuals to trade freely with one another across international borders.

Passage of fast-track authority is not assured. A great deal of nonsense has been written about the agreement. Oddly, people have a big hang-up about imports, but Mankiw notes that this is precisely wrong:

“A nation benefits from imports, [Adam Smith] argued, because they expand its opportunities for consumption. Exports are necessary only because other nations have the temerity to want to be paid for the goods they provide.“

Again, economists across the idealogical spectrum agree with this perspective. Mankiw offers three reasons, attributed to Bryan Caplan, for the public’s ambivalence to free trade:

“The first is an anti-foreign bias. People tend to view their own country in competition with other nations and underestimate the benefits of dealing with foreigners. Yet economics teaches that international trade is not like war but can be win-win.

The second is an anti-market bias. People tend to underestimate the benefits of the market mechanism as a guide to allocating resources. Yet history has taught repeatedly that the alternative — a planned economy — works poorly.

The third is a make-work bias. People tend to underestimate the benefit from conserving on labor and thus worry that imports will destroy jobs in import-competing industries. Yet long-run economic progress comes from finding ways to reduce labor input and redeploying workers to new, growing industries.“

Tyler Cowan is enthusiastic about the prospects for some of the poorest Asian nations to benefit from TPP, especially Vietnam. I seem to recall that he likes the cuisine! Cowan says: “Do you get that, progressives? Poorest country = biggest gainer.“