Could-Be-Worse Trade Policy?

by Ray Keating

The Keating Files – January 21, 2020

The benefits of free trade have been well known since Adam Smith published his Wealth of Nations in 1776. Unfortunately, President Donald Trump seems to have missed the last 244 years on the issue. 

The result is that Trump stands out as a modern-day mercantilist focused on meaningless and yet deceptive “balance of trade” numbers, and using costly protectionist measures in a futile attempt to reduce the U.S. trade deficit. Make no mistake, President Trump’s trade policies amount to government interfering in markets via tariffs (i.e., taxes), quotas and other regulations. Trump trade policy has nothing to do with somehow advancing free trade, but instead is all about government managed or manipulated trade.

In fact, being against free trade stands out as perhaps the lone issue where Trump has not switched positions since the 1980s. And that’s unfortunate. After all, no matter how hard any politician tries to wish away reality, politics cannot erase or change the laws of economics.

It’s no secret what protectionism leads to, that is, reduced trade, increased costs for U.S. consumers and businesses, and less economic growth.

From pulling the U.S. out of the Trans-Pacific Partnership free trade effort on his first day in office to the recent signing of a “Phase 1” agreement with China, the Trump presidency has been waging a trade war, while failing to realize that the real attack has been primarily on U.S. businesses and workers. 

Exiting TPP meant making U.S. products less competitive in those 11 Pacific Rim nations. 

Imposing tariffs on steel and aluminum imports has meant increased costs for U.S. industries that use steel and aluminum, which, of course, far outdistance U.S. steel and aluminum manufacturers in terms of numbers of businesses and employees.

Waging a trade war against China has meant increased costs for U.S. businesses given that almost all imports are inputs to American firms, and given lost markets and opportunities for U.S. exports. This “Phase 1” deal basically pushes off, for now, future increases in tariffs, leaves higher tariffs in place (at more than six times higher than prior to the trade war, according to Oxford Economics per an NPR report), and in effect, has the United States in the very strange position of working against efforts to push China toward greater economic freedom by demanding that China hit certain targets in terms of buying U.S. goods, which can only be accomplished via greater government control over the economy.

Meanwhile, the U.S.-Mexico-Canada Agreement (USMCA), which has been approved by the U.S. and Mexico, at this point, and awaits action by Canada, largely leaves the much-maligned NAFTA (the North American Free Trade Agreement) in effect, and makes some improvements regarding, for example, the digital economy, reducing custom duties on cross-border shipments, and intellectual property protections. But it also takes serious steps back from free trade by, for example, injecting wage, labor, auto-content, and environmental regulations into the trade agreement, as well as diminished investor protections. 

Clearly, the pro-trade positives of the USMCA could have been achieved through cooperation with Mexico and Canada without going down the path of adding in anti-trade measures. Indeed, the case can be made that the biggest plus with the USMCA is that it avoided a U.S. pullout from NAFTA, as threatened by the president.

As for the results, there have been no surprises. Real exports and imports, which have each grown at an average annual real rate of better six percent since 1960, for example, have slowed to a crawl. Since the start of 2018, real export growth has managed to average a mere 0.2 percent rate, while imports have advanced by an average rate of only 1.9 percent. The result has been that trade has shaved a significant 0.5-to-0.7 percentage points off of average overall real U.S. economic growth – if not more when you factor in the reach of trade across sectors, including the role that the trade war has played in the recent decline in business investment.

Manufacturing has suffered, given the rise in input costs, reduced export opportunities and added uncertainties. Consider that manufacturing production (i.e., the physical output of manufacturing sectors) effectively moved into a recession in 2019, with the December level of output down by 1.3 percent compared to a year earlier. 

Hmmm, and I thought I heard that protectionism was supposed to help U.S. manufacturing? Go figure.

Finally, study after study, namely by Federal Reserve economists, has confirmed the negatives of recent protectionist, trade-war measures, such as increased costs for U.S. businesses (including manufacturers) and consumers, and reduced U.S. exports. (See a Wall Street Journal summary of these studies.)

The health of our economy as it relates to trade is not measured by the size of trade deficits. Instead, it’s about whether or not exports and imports are both growing robustly or not. The answer of late is that trade is suffering.

Could trade policy be worse? Well, sure, it could be worse. But as it is, it’s anti-consumer, anti-business, anti-worker and anti-growth, and that’s really bad.

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Ray Keating is a columnist, a novelist (his latest novel is The Traitor: A Pastor Stephen Grant Novel, which is the 12^th book in the series), an economist, a nonfiction author (among his recent works is Free Trade Rocks! 10 Points on International Trade Everyone Should Know), a podcaster, and an entrepreneur. The views expressed here are his own.

Trump’s Huge Recession

by Ray Keating

Way back in 1970, the late Nobel Prize-winning economist Milton Friedman wrote, “I have been impressed time and again by the schizophrenic character of many businessmen. They are capable of being extremely farsighted and clearheaded in matters that are internal to their businesses. They are incredibly shortsighted and muddleheaded in matters that are outside their business but affect the possible survival of business in general.”

This phenomenon has only spread over the past 45-plus years. We now are constantly berated by corporate executives and high-profile investors saying things about the economy and public policy that make absolutely no economic sense. These leaders in business turn out to be economic illiterates.

Unfortunately, one of these economic illiterate businessmen just happens to be leading the race for the Republican presidential nomination in 2016. Of course, I speak of businessman and reality TV star Donald Trump.

It’s not easy figuring out how Trump came to rise and stay atop the GOP field. But to a significant degree, the Trump train keeps chugging along due to the fuel of populism. Specifically, Trump has played on or ginned up people’s fears, in particular, irrational fears of foreigners. After all, Trump is the guy who is going to fix “bad trade deals,” apparently by imposing massive tariffs on products from nations with which we run trade deficits, like Mexico, China and Japan. Trump also plans to create a “deportation force” to move 11-12 million illegal immigrants out of the nation.

While this might be classic populist politics, it’s also classically wrongheaded populist economics. Trump misses simple economic facts.

For example, in the U.S., periods of higher economic growth usually coincide with shrinking trade surpluses or mounting trade deficits, while economic slowdowns and recessions coincide with declines in trade deficits. The U.S. trade deficit shrank dramatically during the 2007-2009 recession, declined during the slowdown and recession in 1990-91, and during the economic woes of 1979 to 1982, the trade deficit not only declined, but shifted to a surplus during two of those years. Indeed, the surest way to “cure” a trade deficit is with a recession.

For good measure, the last time the U.S. went down the path of protectionism, it did not turn out well, to say the least. As a result of protectionist tariff measures passed in 1921 and 1922, and, most egregiously, the Smoot-Hawley Tariff Act of 1930, trade declined. Most egregious, the Smoot-Hawley measure triggered the Great Depression. It took decades for trade to regain previous levels.

Make no mistake, free trade – that is, reducing governmental barriers and costs to trade – is a positive for economic growth; for increased opportunity for U.S. entrepreneurs, small businesses and workers; as well as for expanding choices and reducing costs for U.S. consumers.

And trade is increasingly important to the U.S. economy. From 2000 to 2015, for example, the growth in real U.S. exports equaled 22.5 percent of the growth in real GDP, and the expansion in real total trade (i.e., exports plus imports) came in at 41.6 percent of real GDP growth. Also, consider that in 1950, U.S. exports equaled 4.2 percent of GDP, and imports registered 4 percent, while in 2015, exports had jumped to 12.6 percent of GDP, and imports to 15.5 percent of the U.S. economy.

Donald Trump misses all of this, apparently.

As for immigration, few disagree that the current system, which allowed for 11-12 million people to be in the nation illegally, needs to be fixed. Indeed, respect for the rule of law demands immigration reform. At the same time, it must be recognized that most immigrants – both legal and illegal – come to this nation seeking a better life, and they contribute as workers, business owners and consumers. For good measure, immigrants also benefit the economy by overwhelmingly doing work that is complementary to the native born.

Given these economic realities, the Trump agenda of tariffs and deportation would inflict serious harm on the U.S. economy.

On trade, American Action Forum, a free enterprise group, has estimated that Trump’s plan for imposing significant tariffs on imports from China and Mexico would hit U.S. consumers with $250 billion in annual costs.

For good measure, the U.S. Chamber of Commerce has projected that the Trump tariffs on China and Mexico would bring about a significant recession: “The U.S. recession would set in within the first year under Trump’s proposed trade policies, which include a 35 percent tariff on imports from Mexico and a 45 percent tax on goods coming in from China. Over the next three years, the U.S. economy would shrink by 4.6 percent and the unemployment rate would nearly double to 9.5 percent.”

As for the Trump – as well as Senator Ted Cruz – deportation agenda, the story for the economy gets even worse. The American Action Forum offers the following points and estimates:

• To deport all illegal immigrants in the nation in two years, as Trump proposes, the federal taxpayer costs would be massive. These would include federal immigration apprehension personnel increasing from 4,844 positions to 90,582 positions; the number of immigration detention beds jumping from 34,000 to 348,831; immigration courts rising from 58 to 1,316; and the number of federal attorneys legally processing undocumented immigrants increasing from 1,430 to 32,445.

• As for the economic costs, they are even more frightening. AAF reports: “The result is a sudden and deep recession similar to what the United States recently experienced during the Great Recession. Let’s say that full immigration enforcement starts at the beginning of 2017 and the U.S. government successfully removes all undocumented immigrants by the end of 2018. At the end of 2018, the labor force would be 6.4 percent smaller than if the government had not removed those immigrants. Relative to CBO baseline projections, the labor force would decrease by 10.3 million workers. As a result, the labor force would fall to its lowest level since 2006. In addition, the labor force participation rate would fall from about 62.3 percent to 60.7 percent, the lowest level since the 1970s. The steep decline in the labor force would cause the economy to decline sharply. At the end of 2018, the economy would be 5.7 percent smaller than it would be if the government did not remove all undocumented immigrants. For purposes of comparison, note that the decline in real GDP during the Great Recession was quite similar – 6.3 percent. This suggests that real GDP would be about $1 trillion lower in 2018 than CBO’s baseline estimate, wiping out all economic growth that would have occurred during the previous three years.”

The most likely outcome of the Trump tariff and deportation agenda? A huge recession.

None of this should be surprising to anyone who understands the economics and history of both trade and immigration.

But maybe Trump has an excuse. After all, his business career seems to be best known for four high-profile business bankruptcies in a span of 18 years. Milton Friedman was bewildered by businessmen being “farsighted and clearheaded” in their own businesses but “shortsighted and muddleheaded” on matters outside their business. It can be argued that Trump is shortsighted and muddleheaded on matters both inside and outside his businesses.

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Mr. Keating is an economist and novelist who writes on a wide range of topics. His Pastor Stephen Grant novels have received considerable acclaim, including The River: A Pastor Stephen Grant Novel being a finalist for KFUO radio’s Book of the Year 2014, and Murderer’s Row: A Pastor Stephen Grant Novel winning Book of the Year 2015.

The Pastor Stephen Grant Novels are available at Amazon…

Murderer’s Row: A Pastor Stephen Grant Novel

The River: A Pastor Stephen Grant Novel

An Advent for Religious Liberty: A Pastor Stephen Grant Novel

Root of All Evil? A Pastor Stephen Grant Novel

Warrior Monk: A Pastor Stephen Grant Novel