Tag Archives: Donald Trump economic policies

Is there such a thing as “free trade”?

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“Every economic answer is a political question.”

It is entirely possible that the US is tired of carrying most of the burden for the defence of the West and would like a bit of sharing the burden. It might also find some respite for itself in strengthening those parts of its economy which are more closely associated with its defence industries. And it might even wish for some kind of gratitude from others supposedly on its own side in trying to assist the US in resurrecting its strength. And then there are the straightforward economic issues, which are not the same as the political. So let us go to these.

And of course the issue even economically is comparative advantage and not pure let the most efficient producer produce each product. With comparative advantage it is not always the most efficient low-cost producers who produce. If you don’t even understand that, you should keep right out of this debate.

Why encourage free trade:

  • competition is what drives improvement and growth – without competition most businesses would just coast along to the fullest extent they could
  • innovation is driven by competition – the way to take on an established business is to find a better way to do something

Why “free trade” is not working for the US:

  • cheating is rife – try to sell an American car in Japan – not possible for all kinds of products in all kinds of countries
  • many countries subsidise exports while imposing non-tariff barriers to trade
  • currency manipulation – artificially holding exchange rate lower to discourage imports and encourage export
  • $US is world reserve currency which will not adjust to repair a balance of payments deficit
  • approved forms of trade restriction – the EU for example – such as:

Trading blocs

A regional trading bloc is a group of countries within a geographical region that protect themselves from imports from non-members. Trading blocs are a form of economic integration, and increasingly shape the pattern of world trade. There are several types of trading bloc:

Preferential Trade Area

Preferential Trade Areas (PTAs) exist when countries within a geographical region agree to reduce or eliminate tariff barriers on selected goods imported from other members of the area. This is often the first small step towards the creation of a trading bloc.

Free Trade Area

Free Trade Areas (FTAs) are created when two or more countries in a region agree to reduce or eliminate barriers to trade on all goods coming from other members.

Customs Union

A customs union involves the removal of tariff barriers between members, plus the acceptance of a common (unified) external tariff against non-members. This means that members may negotiate as a single bloc with 3rd parties, such as with other trading blocs, or with the WTO.

World Trade Organisation

There are then the WTO rules of trade engagement which were devised when the US economy was a lot more robust than it now is and when the US was willing to make sacrifices of all kinds to help others withstand the spread of communism. None of this is applicable today. The US is therefore no longer willing to watch others cheat their way into a stronger trade position, at the cost of its own national security and economic strength. Here is part of what the WTO is up to.

WTO Rules

1. Most-favoured-nation (MFN): treating other people equally Under the WTO agreements, countries cannot normally discriminate between their trading partners. Grant someone a special favour (such as a lower customs duty rate for one of their products) and you have to do the same for all other WTO members.

2. National treatment: Treating foreigners and locals equally Imported and locally-produced goods should be treated equally — at least after the foreign goods have entered the market. The same should apply to foreign and domestic services, and to foreign and local trademarks, copyrights and patents.

3. Developing countries have transition periods to adjust to the more unfamiliar and, perhaps, difficult WTO provisions — particularly so for the poorest, “least-developed” countries – so these basket case economies are allowed to whittle away at the economic strength of the developed world.

The quote at the top, by the way, is from Joan Robinson, who has quite a lot to say about free trade that ought to be read by the economic illiterates who populate the world, who are now found speaking on behalf of the status quo, as harmful as the status quo is to most of the lower half of the income distribution. Robinson was not just a Keynesian but a Maoist, but she remains one of the clearest and most penetrating economic writers of the twentieth century.

Trump and trade

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An introductory text on economic theory won’t get you very far in trying to make sense of what is going on in international trade. Here, therefore, are two bits of background on PDT’s policies on trade. The first via Conservative Treehouse:

Clearly, nobody was paying attention when Commerce Secretary Ross laid out at the Davos World Economic Forum exactly what the administration was intending to do in the coming months:

1. POTUS Trump is delivering an awakening to a generation who have never known trade policy as applied to a balanced U.S. economy.

2. America-First is a nationalistic approach to U.S. economic and trade policy that seeks to protect and elevate the standard of living for U.S. workers and specifically the American middle-class. Obviously the application of “economic nationalism” is adverse to the interests of multinational corporations who have been purchasing U.S. policy through DC politicians for decades with the last 30+ years seeing exceptionally high increases.

3. Both Democrats and Republicans have been selling out Main Street interests in favour of the financial interests of multinationals on Wall Street. The results have been exported jobs and manufacturing.

4. Resetting the economics to restore a thriving middle-class requires reversing policy and re-establishing priorities. Government cannot force investment and economic policy can only create the conditions for investment.

5. Creating the conditions for investment inside the U.S. means shifting policies that previously made investment outside the U.S. the “best play.” That’s where tax policy, trade policy, tariffs and renegotiated trade deals drive the action.

6. Trump assembled a specific set of economic policies to reverse the 30 year exfiltration of American wealth. Each policy move is connected to the prior policy move. Each initiative builds on the preceding initiative. Each current sequential step is established to deconstruct a historic policy step that might be decades old.

7. Opposition to America-First economic policy is from those who benefited from the prior policies, i.e., multinational corporations, multinational financials, Wall Street, purchased politicians and corporate media.

8. The implementation of the policy requires two elements: Tax and Trade. Inside the Trump administration there are economic policy advocates who agree on the tax element but disagree on the trade element. The combined Trump policy is part of the larger America-First initiative. The Wall Street crowd align with Trump on taxes but split with him on trade

9. Commerce Secretary Wilbur Ross is critical as he is the person creating the fulcrum in the balanced economy reset. Trump and Secretary Ross always knew they would need to jettison part of the administrations’ economic team once they accomplished and moved past tax reform. Their focus is now laser targeted policy toward Main Street.

10. This is phase #2 of the total policy execution. During a panel discussion at the Davos World Economic Forum, Secretary Ross outlined how the ‘America First’ economic policy and phase-2 platform engages with the global community, conveying to the larger multinational interests an explanation of the high-level shift in U.S. trade policy and reinforcing the Trump Doctrine of economic nationalism. He said: “The Chinese for quite a little while have been superb at free-trade rhetoric and even more superb at highly protectionist behaviour. Every time the U.S. does anything to deal with a problem we are called protectionist.” Cue the audio visual demonstrations over the past few days surrounding Steel and Aluminium tariffs.

11. At Davos, after three decades of Trump outlining his trade views, Secretary Ross also said President Trump has a forceful leadership style that some people don’t like but “While we don’t intend to abrogate leadership, leadership is different from being a sucker and being a patsy. We would like to be the leader in making the world trade system more fair and equitable to all participants.” He challenged all the panelists, including World Trade Organization Director-General Roberto Azevedo and Cargill Inc. CEO David MacLennan, to name a nation less protectionist than the U.S. He got no responses.

12. Secretary Ross then cited a study of more than 20 products that showed China had higher tariffs on all but two of the items on the list while Europe had higher tariffs on all but four. The panel sat agape at Ross’s delivery of irrefutable facts to the audience.

13. “Before we get into sticks and stones about free trade we ought first talk about whether there really is free trade or is it a unicorn in the garden,” said Ross. Again, there was no response from the panel. The Corporate and Financial media never reported on the severity of what Ross said at Davos – because the Main Street policy he was explaining is so directly against their interests.

14. Despite the tariffs Trump imposed in January on solar panels and washing machines and despite the proposition of Steel and Aluminum tariffs, according to their own Commerce Ministry, China is hoping for a “bumper year” for new trade deals.

15. For the past 30+ years, DC politicians have been selling out the U.S. economy to corporate interests, Wall Street and multinationals. POTUS Trump is simply saying “no more.” They hate him for it but he doesn’t care.

And then there is this from Forbes: China Is Not A Market Economy, And The WTO Won’t Survive Recognizing It As Such.

China’s status as a “market economy” is once again under dispute. Not, of course, by anyone who knows anything about the Chinese economy, but within the councils of the WTO, where the issue is being argued between the European Union and China. The U.S. Trade Representative Robert Lighthizer has notified the body that the U.S. also — in support of the EU’s case — opposes China’s recognition as a market economy.

China has reacted with predictable hostility, restating its longstanding view that market economy status would simply become a fact on the 15th anniversary of joining the WTO, almost exactly a year ago, when China first filed a complaint at the WTO about the refusal of the U.S. and the EU to grant this recognition. According to a strict reading of their accession treaty, they have at least an argument. In this agreement, a 15-year period was assumed to be enough time for China to implement its many provisions and emerge, more or less, as a functioning market economy. Had China made faster progress, they could have made their case and been granted this status earlier, according to the agreement.

There’s more after that, all worth reading to the end. And then there’s this.

“The greatest asset of our whole economic system is its effect upon commerce, agriculture, industry, the wage earner, and the farmer, and practically all our producers and distributors, is our incomparable home market. It has always been a fundamental principle of the Republican Party that this market should be reserved in the first instance for the consumption of our domestic products…Our only defense against the cheap production, low wages and low standard of living which exist abroad, and our only method of maintaining our own standards, is through a protective tariff. We need protection as a national policy, to be applied wherever it is required.” — Calvin Coolidge.

Classical economic theory and the American recovery

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UPDATE ABOVE: Birthday pressies from the family who seem to know me quite well.

Modern economics explains to governments how they and their crony capitalist mates can steal from you while pretending they are doing you good. And before we go any farther, here is something you should know before you listen to another word from anyone in government: Government spending never creates a net increase in employment. Government spending only creates jobs in one place at the expense of jobs somewhere else, and does it by giving money to the government’s best friends to run projects no firm, based on profit and loss, would ever undertake. And if the project is loss making, which government projects almost invariably are, it has taken the economy backwards – that is, people in general invariably become less well off than they otherwise would have been had these projects not gone ahead – even if those to whom the government has paid money are better off, which they almost invariably are. Government spending, unless there is a genuine and calculated return above the cost, is a ripoff, and it is you who are being ripped off. They pick your pockets and pretend they are doing you good.

Let us look at the alternative. The turnaround in the American economy over the past year is astonishing and almost unprecedented; you might have to go back to Harding in 1921 to find a parallel. No modern macroeconomist can explain it. The supply-side of the economy is not only invisible to almost every economist miseducated today, but so far as their demented demand-side models go, is irrelevant to raising growth and employment. Here is what I wrote in November 2016, with the only bit I got wrong being how quickly things have turned around.

Getting a recovery from here, from within the mess that Obama has left behind, will be a task of such Herculean difficulty that only because Trump is president do I think it is even possible. And one of the most important virtues he may have is not listening to economists such as this one discussed in the article at the link: The brilliant economist who designed the failed 2009 stimulus plan tells us that Donald Trump’s economic plans are going to fail. Here we are dealing with Harvard economist, i.e. Keynesian economist, Lawrence Summers, about whom the article states:

At this point, we have to note that the esteemed Dr Summers was the architect of President Obama’s 2009 stimulus program, the American Recovery and Reinvestment Act of 2009, an $831 billion boondoggle which was promised to hold unemployment to a maximum of 8%; it reached 10.0% in October of 2009, and stood at 9.2% in June of 2011, when it was projected to be below 7%. There are many economists who still justify the stimulus bill by saying that while the effects of the recession were worse than estimated, they’d have been worse yet without the ARRA. That, of course, is unprovable, but when the designer of such a huge, failed program tells me that someone else’s economic plans won’t work, I have to look at his statements with a jaundiced eye.

Trump has spending plans of his own that aside from The Wall, which if it significantly reduces the size of the American welfare bill may pay for itself many times over, will also add to the burdens on the economy. But he also intends to cut energy costs, improve decaying infrastructure, free up the regulatory framework that suppresses industry, renegotiate trade deals that are intended to work for American industry, and lower government outlays generally. He will also remove Obamacare, which has raised the cost of full-time employees, while lowering the cost of health insurance. Interest rates will also start to rise which should assist in the shifting of resources into more productive areas of the economy, and will also add to the willingness of many to save.

I definitely do not say it’s easy, and no one can guarantee things will turn round rapidly enough to show results soon enough to work politically, specially in the midst of the hostile media circus Trump will have to deal with. But at least I feel that for the most part the changes that will be introduced will generally shift things in the right direction. Here is the alternative Summers has in mind:

I have long been a strong advocate of debt-financed public investment in the context of low interest rates and a decaying U.S. infrastructure, so I was glad to see Trump emphasize it. Unfortunately, the plan presented by his advisers, Peter Navarro and Wilbur Ross, suggests an approach based on tax credits for equity investment and total private-sector participation that will not cover the most important projects, not reach many of the most important investors and involve substantial mis-targeting of public resources.

There is no learning from history other than that economists never learn from history. You also know that Congress will fight like cats to maintain expenditure since that is almost entirely what they have to maintain their support. Whether there is a constituency for re-building the private sector is still to be discovered, but at least with Trump you know he will want to try.

You really do have to wonder whether economists will learn a thing from what they’ve just seen. Given the experience of the past, there is not the most remote chance in the world that they will. But what you’ve seen has been the result of following classical economic policy – the economics of John Stuart Mill – in just the way it would have been done before Keynes published his General Theory, a book that has destroyed the coherence of economic theory for three generations of economists and counting.