Archive for the Category Trade

 
 

Commodities are fungible

Here’s the Financial Times, discussing recent trade negotiations with China:

They said that after two days of “constructive talks” China had agreed to “significantly increase” its purchases of US goods and services and on the need for “meaningful increases” in US agricultural and energy exports to China.

Beijing had agreed, they said, to amend relevant laws and regulations, including its patent law, to address US intellectual property complaints that have fuelled Mr Trump’s recent threats to impose tariffs on up to $150bn in imports from China. They also pledged to continue engagement to resolve their differences.

In recent years we’ve heard a lot of complaints about a “China Shock”, the idea that a surge in Chinese exports to the US has cost jobs in manufacturing.  And now the US is pushing China to import more US food and energy, which would create an even bigger China shock, if it were successful. That’s because any trade policy that leads more food and energy exports also tends to lead to more imports of manufactured goods.

On the other hand, the policy is not likely to be successful.  If the Chinese buy more corn and oil for the US, they will buy less corn and oil from Brazil.  Brazil will send those goods to the countries that previously were buying the US corn and oil that are being redirected to China.  The bilateral deficit with China will shrink, but the overall US trade deficit with the rest of the world will not change.  Commodities are fungible.  All that will happen is that trade patterns will be rearranged, imposing more transportation costs.  A deadweight loss for the global economy.  And of course Trump’s fiscal policy will make the trade deficit “worse”.

The Chinese surely understand this, but I suspect the Trump administration does not.  Or perhaps people like Larry Kudlow do understand, but are keeping quiet because they wish to avoid something much worse.

Saturday’s vague statement did not mention telecommunications company ZTE and its lack of firm targets highlighted a continuing gap between both sides’ priorities.

The apparent failure came as political reaction forced the Trump administration to back away from a presidential commitment to resolve a dispute over ZTE, which was forced to suspend business operations after being banned from buying US components. . . . Mr Trump’s tweet provoked a backlash from both Republicans and Democrats in Congress who pointed to US intelligence agencies’ longstanding security concerns about ZTE. Politicians across the US political spectrum warned the president on Friday not to cave in to China.

Trump’s negotiating has been so ineffective that both Dems and Republicans are complaining he’s too weak on China, not nationalistic enough.  ROFL.

Trump is discovering that trade is like health care, much more complicated than he imagined.  It’s already clear that the Bannon wing of the GOP has lost on trade; there will be no meaningful actions to reduce the US trade deficit.  Indeed Trump’s policies will likely widen the deficit.  The alt-right has successfully transformed the GOP into an alt-right party in terms of rhetoric.  You see mainstream GOP politicians like Mike Pence heaping praise on criminal, racist, right-wing extremists like Sheriff Arpaio.  The alt-right can also take comfort in the fact that we have despicable, stupid, bigoted preachers represent the US at the Jerusalem embassy opening.  But the alt-right is losing on policy.  They failed to get an alt-right foreign policy, they failed to get a Mexican wall or a sizable cut in immigration (except refugees, a tiny portion of immigration), they failed to get a big increase in infrastructure spending, and they will fail to get an alt-right trade policy.

The one signature success of Trump—big tax cuts for corporations—is not an alt-right policy. It’s from the traditional Mitt Romney GOP playbook.

How would consumers feel about the Federal government tripling the gas tax?

Even the previous 4-cent increase in the gas tax was controversial.  Now suppose the federal gasoline tax (currently 18.4 cents) was tripled.  I’d expect consumers to freak out over the news.  And yet even a 37-cent increase is relatively small compared to some of the wild gyrations in gas prices that we’ve seen in recent years.  So why would the reaction be so strong (assuming that I’m correct?)

I think the answer is that consumers know that gas prices gyrate up and down, but also that a gas tax is permanent.  Thus future gyrations would be around a trend line that is 37 cents higher than before.

Commenter Plucky directed me to a very good Tax Foundation article on the proposed border tax.  This caught me eye:

Another consequence of dollar appreciation is that debts denominated in U.S. dollars will become more expensive in foreign countries. This is because a foreign country or business would need to raise money in the local currency and convert it into more expensive dollars to pay the debt. Emerging markets may be hit hardest by this.[33] However, many policy changes in the United States and natural movements in the market have impacts on the value of the U.S. dollar that could impact dollar-denominated debts.[34] It isn’t clear why a border adjustment would be a special case.

I’d make two points here:

1.  A border tax would be relatively permanent.  The dollar would continue to fluctuate over the business cycle, but (so it is claimed) around a 25% higher trend line.  That’s a lot.  For instance it would give Canadian tourism a big advantage over American tourism.  Hawaii would find it harder to attract Asian tourists.  Ditto for Florida vs. the Bahamas.  It certainly won’t destroy our tourism industry, but don’t assume that 25% is not a big deal—it is.  How about our airlines?

2.  In the past, a strong dollar has often been associated with a relatively strong US economy.  Thus the pain of emerging markets having to repay dollar debts at a higher rate is partly offset by strength in EM exports.  This would be different, a sudden 25% jump in the cost of repaying debt, without the associated macro benefits.  Again, I’m not saying it would necessarily cause a debt crisis, but don’t assume that adding 25% to trillions in dollar debts is not a big issue.

PS.  I actually think the tax reform proposal has a lot of merit. Debt and equity would finally be on a level playing field.  But I still have a few lingering doubts about suddenly imposing an exchange rate shock of that size.  (Perhaps because I own some overseas mutual funds.  But then even US multinationals will see foreign profits translated back into US dollars at a considerably lower value, and yet the US stock market seems to be doing fine.  So who knows?)

Don’t confuse free trade and trade deficits

Here’s Benjamin Cole:

As David Glasner recently noted, no plank of orthodox macroeconomics is more sacred today than that international free trade is good, and that even large and chronic trade deficits don´t matter.

But an overlooked 2012 paper from the New York Federal Reserve, entitled House Price Booms, Current Account Deficits, and Low Interest Rates, raises serious concerns about chronic trade deficits, particular given the deeply entrenched ubiquity of property zoning.

This is not true.  The claim that large trade deficits do not matter is certainly not “sacred”, indeed many economists disagree.  But even if it were true, this makes no sense.  Trade deficits are one thing, and free trade is another.  Both the US and Germany have relatively free trade, but we have a large deficit (although much of that is measurement error) and Germany has a large surplus.  The cause of our current account deficit is saving/investment imbalances.  If you want a smaller deficit you do not install tariffs, you install pro-saving (or anti-investment) fiscal policies.  You encourage saving by lowering the tax rate on capital income, and you reduce government dissaving by making the budget deficit smaller.  Yes, tariffs could reduce the budget deficit by a tiny amount, but it’s an extremely inefficient way of doing so.

If you are worried about trade deficits, the last thing you should be doing is protectionist trade policies.

The paper posits, “One of the most striking features of the period before the Great Recession is the strong positive correlation between house price appreciation and current account deficits, not only in the United States but also in other countries that have subsequently experienced the highest degree of financial turmoil.”

The short story is this: When a nation consumes more than it produces, and imports the difference, it must sell assets to finance the shortfall. Foreigners are especially keen on the perceived security of real estate, and, of course, can leverage up with the ready assistance of domestic banks.  The term “commercial bank” has become a misnomer, as more than 75% of U.S. bank lending in is on property. Thus, huge trade deficits equal huge capital inflows into domestic real estate.

Property Zoning

The universal culprit in this trade-deficits-results-in-house-price-booms scenario is property zoning, a feature of modern economies deeply embraced by both the propertied and financial classes, but (consequently?) rarely a topic in macroeconomic discussions.

To mix metaphors, property zoning is the Achilles Heel of macroeconomic blind spots.

Without property zoning, nations such as Australia, Canada and the United States could produce more housing to soak up the foreign capital inflows, even after those flows are leveraged five-to-one by domestic banks. The U.S. runs about $500 billion a year in trade deficits.

But with ubiquitous zoning, house prices soar to equate supply and  demand, generating inflation and reducing living standards of the domestic population.

Ben is right that lots of people complain about foreigners snapping up real estate (more so in places like Sydney, Vancouver and London, than in the US.)  But he’s wrong about the economics.  Housing construction during periods of house price booms like 2005 is far higher than during house prices busts like 2009-12.  The irony here is that the very same protectionists who complain that foreigners don’t buy enough of our cars, thus depriving Detroit auto workers of jobs, also complain that foreigners buy too many of our houses, thus providing jobs to our construction workers.


Den ganzen Beitrag lesen…

Don’t tell Trump that border taxes are not protectionist

Here’s the Washington Post:

The leaks coming out of the Trump White House cast the president as a clueless child

All White Houses leak. Sometimes the leaks are big, sometimes small. But there are always people willing to talk to reporters about the “real” story or about why the chief executive made a mistake in regards to some decision he made.

That said, I’ve never seen so much leaking so quickly — and with such disdain for the president — as I have in the first six days of Donald Trump’s presidency. . . .

Time and again, the image of Trump pushed by his “aides” is one of a clueless child — someone who acts on impulse, disregarding the better advice of people who know better. We know he needs to be managed or else he will say and do stupid things, the message seems to be. We’re working on it.  .  .  .

Trump has shown that his tendency to obsessively consume media — especially cable television — is unchanged in the six days since he has become president. He appears to be making policy decisions via things he watches or reads. (Remember Trump’s famous/infamous statement that he got his military information and advice “mostly from the shows.”)

At odds with all of this, however, is the fact that Trump is both deeply proud and hugely image-conscious. Having to read and watch allegedly loyal “aides” casting him as a sort of feckless child constantly in need of guidance wouldn’t seem to be the sort of thing that would sit well with him. . . .

The frequency — and nature — of these leaks are yet another reminder that the Trump presidency is nothing like anything that’s come before it. There is no blueprint. We’re through the looking glass.

But my educated guess is that these leaks must be driving Trump absolutely crazy. And when he gets mad, history suggests he will try to get even. And quickly.

Of course I warned people of this a year ago, but was told I was “deranged” and that Trump is perfectly fine.  I look forward to the scene where our Furher discovers that his aides have sold him a bill of goods on how the border tax/subsidy would “protect” America.

Dear God!  I never realized that life could be so much fun.

Do current account deficits costs jobs?

Over at Econlog I have a post that suggests the answer is no, CA deficits do not cost jobs.

But suppose I’m wrong, and suppose they do cost jobs.  In that case, trade has been a major net contributor to American jobs during the 21st century, as our deficit was about 4% of GDP during the 2000 tech boom, and as large as 6% of GDP during the 2006 housing boom.  Today it is only 2.6% of GDP.  So if you really believe that rising trade deficits cost jobs, you’d be forced to believe that the shrinking deficits since 2000 have created jobs.

screen-shot-2016-12-22-at-11-53-25-amSo why have manufacturing jobs plummeted since 2000?  One answer is that the current account deficit is the wrong figure, since it also includes our surplus in trade in services.  If you just look at goods, the deficit is closer to 4.2% of GDP.

But even that doesn’t really explain very much, because it’s slightly lower than the 4.35% of GDP trade deficit in goods back in 2000.  So again, the big loss of manufacturing jobs is something of a mystery.  Yes, we import more goods than we used to, but exports of goods have risen at about the same rate since 2000.  So why does it seem like trade has devastated our manufacturing sector?

Perhaps because trade interacts with automation.  Not only do we lose jobs in manufacturing to automation, but trade leads us to re-orient our production toward goods that use relatively less labor (tech, aircraft, chemicals, farm produces, etc.), while we import goods like clothing, furniture and autos.

So trade and automation are both parts of a bigger trend, Schumpeterian creative destruction, which is transforming big areas of our economy.  It’s especially painful as during the earlier period of automation (say 1950-2000) the physical output of goods was still rising fast.  So the blow of automation was partly cushioned by a rise in output.  (Although not in the coal and steel industries!)  Since 2000, however, we’ve seen slower growth in physical output for a number of reasons, including slower workforce growth, a shift to a service economy, and a home building recession (which normally absorbs manufactured goods like home appliances, carpet, etc.)  We are producing more goods than ever, but with dramatically fewer workers.

screen-shot-2016-12-22-at-12-08-01-pmUpdate:  Steve Cicala sent me a very interesting piece on coal that he had published in Forbes.  Ironically, environmental regulations actually helped West Virginia miners, by forcing utilities to install scrubbers that cleaned up emissions from the dirtier West Virginia coal.  (Wyoming coal has less sulfur.)  He also discusses the issue of competition from natural gas.