• Tag Archives tariffs

  • The Laws of Economics Cannot Be Wished Away

    Posted on by Azrael 1 Comment


    In areas such as rent control and minimum wage laws there’s an increasing tendency to ignore the basic laws of economics, and hope they somehow don’t apply to the policy being considered.

    President Trump provided another example in this recent tweet:

     

    There are multiple errors here. The first sentence is incorrect; the yuan was much lower when I first visited Beijing in 1994. The second sentence is also incorrect, for two different reasons. Currency manipulation is defined as artificially depreciating a currency to create a current account surplus. China’s current account is roughly balanced, and the depreciation reflected market forces. So there is no currency manipulation, no “major violation” of any agreement.

    One irony here is that it is President Trump’s policies that have caused the yuan to depreciate, as is explained in any principles of economics textbook. When country A puts tariffs on the exports of country B, the currency of country A will appreciate and the currency of country B will depreciate. This is ECON 101.

    In a world with more than two countries, there will be additional effects. China’s currency depreciation will push it to sell more goods to third parties, such as Europe. That will cause depreciation of the euro—another issue that Trump has complained about. Because the dollar would be expected to appreciate against almost all currencies, the US will buy more goods from third parties.

    Textbooks also teach us that tariffs will not improve the trade balance, which depends on saving/investment imbalances. Textbooks also tell us that a major fiscal stimulus will cause the trade deficit to get larger. And that’s exactly what has happened, the trade deficit has become even “worse” over the past two years in response to Trump’s enormous fiscal deficits.

    Trump’s reference to the Fed is an allusion to his earlier plea that the Fed manipulate the dollar lower. It’s not clear why he would want the Fed to do that, as in the final sentence he says that currency manipulation will weaken China over time. So why encourage the Fed to manipulate the dollar? Wouldn’t that also weaken America over time?

    Here’s King Canute:

    This article is republished with permission from the Library of Economics and Liberty.


    Scott Sumner

    Scott B. Sumner is the director of the Program on Monetary Policy at the Mercatus Center and a professor at Bentley University. He blogs at the Money Illusion and Econlog.

    This article was originally published on FEE.org. Read the original article.


    📂This entry was posted in News and Politics 📎and tagged

  • Trump’s Trade Plan: Raise Taxes on Americans to Punish Mexico Over Immigration

    Posted on by Azrael Comment


    President Trump, frustrated that Congress has not approved the funding for his border wall, proposed escalating tariffs on Mexico until Mexico ends illegal immigration. According to the president, the tariffs—akin to a tax on US consumers—would start at 5 percent on all Mexican imports in June but could escalate as high as 25 percent by the fall.

    This comes on the heels of a threat (later withdrawn) to close the US-Mexico border for a “long time” unless Mexico prevents all illegal immigration into the United States. Reasonable minds can disagree on immigration policy and border enforcement strategies. However, disrupting North American trade would harm American consumers and businesses across the country.

    And President Trump knows it.

    While discussing closing the border, Trump cavalierly admitted that doing so would hurt the US economy. Mexico has traditionally been the United States’s number three trade partner (behind China and Canada). But earlier this year, Mexico became our number one trade partner. For 2018, the United States’s total trade with Mexico was about $671 billion. Total US exports to Mexico last year were about $299.1 billion. It should be pointed out that about one-half of the total imports into the US are actually inputs into final products produced by the United States.

    While all states would be affected, Texas, the nation’s top exporter, would be disproportionately harmed if cross-border trade were disrupted. Texas alone exports over $97 billion annually in goods that include computers and electronics, transportation equipment, energy, and agriculture to Mexico, our top trade partner. It is estimated that approximately 36.9 percent of Texas’s exports are sent to Mexico. Texas has an $8.5 billion annual trade surplus with Mexico. Sales into Mexico constitute about 5.7 percent of the Texas Gross State Product.

    Jeffry Bartash, writing in Marketwatch, estimated that “if all the costs were passed on to US customers, they would pay an extra $17 billion over a full year under a 5% tariff. The price tag could jump to $87 billion if duties were set at 25%.”

    Disrupting the integrated North American supply chain could have a lasting negative impact. If international customers can’t rely on the supply of goods from US-based manufacturers, those customers might turn to manufacturers elsewhere (such as Europe and Asia). Once market share is lost, there is no guarantee that American manufacturers will win back foreign customers after America’s supply lines are restored.

    After NAFTA came into place in 1994, US agricultural exports to Canada and Mexico increased 288 percent. But a trade war that cuts off American farmers and ranchers from the Mexican market would jeopardize revenue and jobs, as well as strain their way of life.

    Trump has made the threat to close the Mexican border for commerce before, walked it back, and renewed it, but he now seems intent on unilaterally imposing tariffs—presumably under the guise of national security. This move jeopardizes the ratification of the USMCA (United States-Mexico-Canada Agreement), or the renegotiated NAFTA 2.0. Business decision-makers are getting whiplash. One moment Trump is removing his steel and aluminum tariffs on Canada and Mexico. The next moment he is threatening tariffs on all Mexican imports. This basket case trade policy is making it exceedingly difficult for businesses to plan their operations, decide on capital expenditures, and manage their supply chains.

    Senate Finance Committee Chairman Chuck Grassley (R-Iowa) responded to the president’s latest tariffs threat against Mexico by saying, “This is a misuse of presidential tariff authority and counter to congressional intent.” But it is not clear at this time what legal authority the president has to impose a tariff across the board on Mexican imports. It is risible to claim, for instance, that imports of avocados are a threat to national security (thus justifying tariffs under Section 232 of the Trade Expansion Act).

    Immigration, border security, and trade are complex issues that require thoughtful deliberation. However, Congress (which through 2018 was controlled by the president’s party) has failed to reach a consensus on border security. Unless Congress acts to rein in the president’s authority to impose “national security” tariffs, one man will make a decision that could unilaterally cause tremendous damage to our economy. If that happens, there could be electoral consequences.

    Again, Texas is the nation’s top exporter, and it relies on trade with its neighbor to the south. With Texas looking more and more like a 2020 swing state, the president’s indifference to the economic well-being of Texans, as well as the failure of elected officials to reach reasonable solutions, may bring political risk for the president and his allies if Texas consumers and businesses feel the pain of his misguided trade policies before election day.

    Doug McCullough

    Doug McCullough is Director of Lone Star Policy Institute.

    This article was originally published on FEE.org. Read the original article.


    📂This entry was posted in News and Politics 📎and tagged

  • Trump’s Washing Machine Tariffs Cost Consumers $800,000 Per Job Created

    Posted on by Azrael 1 Comment

    Three economists at the University of Chicago and the Federal Reserve Board studied the effects of Trump’s 2018 tariffs on imported washing machines in a new research paper titled “The Production, Relocation, and Price Effects of US Trade Policy: The Case of Washing Machines” and concluded that (italics added):

    Despite the increase in domestic production and employment, the costs of these 2018 tariffs are substantial: in a partial equilibrium setting, we estimate increased annual consumer costs of around $1.5 billion, or roughly $820,000 per job created.

    Jim Tankersley reviews the new research on Trump’s washing machine tariffs in a New York Times article “Trump’s Washing Machine Tariffs Stung Consumers While Lifting Corporate Profits,” here’s a slice (italics added):

    President Trump’s decision to impose tariffs on imported washing machines has had an odd effect: It raised prices on washing machines, as expected, but also drove up the cost of clothes dryers, which rose by $92 last year. What appears to have happened, according to new research from economists at the University of Chicago and the Federal Reserve, is a case study in how a measure meant to help domestic factory workers can rebound on American consumers, creating unexpected costs and leaving shoppers with a sky-high bill for every factory job created.

    Research to be released on Monday by the economists Aaron Flaaen, of the Fed, and Ali Hortacsu and Felix Tintelnot, of Chicago, estimates that consumers bore between 125% and 225% of the costs of the washing machine tariffs. The authors calculate that the tariffs brought in $82 million to the United States Treasury, while raising consumer prices by $1.5 billion.

    ……
    The goal of all those moves [tariffs] was to push production….to America. The study authors credit Mr. Trump’s tariffs with 200 new jobs at Whirlpool’s plant in Clyde, Ohio, and a further 1,600 jobs for a Samsung factory in South Carolina and an LG factory in Tennessee. That’s 1,800 new jobs, at the cost—net of tariff revenues—of just under $1.5 billion for American consumers. Or, as the authors calculate, $817,000 per job.

    The researchers’ empirical findings that Trump’s washing machine tariffs cost consumers more than $800,000 per US job created is consistent with previous research including a 2012 study by the Peterson Institute (Gary Clyde Hufbauer and Sean Lowry) that estimated that the 2009 tariffs on Chinese tires cost consumers $926,500 for each of the 1,200 US jobs saved (see CD post on that research here).

    A previous and more comprehensive study by Hufbauer of 26 different case studies of trade protection in the US revealed that the average annual cost to consumers per job saved was more than $500,000 (in 2016 dollars) and in some cases exceeded $1 million per year per job, see related CD post “Yes, protectionism can save some US jobs, but at what cost? Empirical evidence suggests it’s very, very expensive” that featured the table below.

    As the cartoon above by Michael Ramirez illustrates graphically, the tariffs imposed last year on imported washing machines that launched Trump’s insane trade war are imposing YUGE costs on American consumers and businesses that make the US economy worse off, not better off. Assuming the new 1,200 factory workers at Whirlpool and Samsung are making the average annual pay for US manufacturing workers of $43,000, the costs to American consumers exceeds the value of each new job by a factor of 19-to-1.

    If the Dealmaker-in-Chief thinks it’s a good deal to force US consumers to pay $820,000 annually in higher costs to create a new $43,000-per-year factory job, then he might have to re-think his deal-making strategies or take some remedial economics courses in the economics of trade protection. Is that Trump’s idea of the kind of “winning” we’re supposed to get sick of?

    Mark J. Perry

    Mark J. Perry is a scholar at the American Enterprise Institute and a professor of economics and finance at the University of Michigan’s Flint campus.

    This article was originally published on FEE.org. Read the original article.


    📂This entry was posted in News and Politics 📎and tagged