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.



20 Responses to “Commodities are fungible”

  1. Gravatar of bill bill
    20. May 2018 at 12:48

    I love your political commentary. Thanks. Keep it up!

  2. Gravatar of ssumner ssumner
    20. May 2018 at 14:46

    Thanks Bill.

  3. Gravatar of XVO XVO
    20. May 2018 at 15:35

    Isn’t China agreeing to remove trade barriers a good thing from a free trade perspective? Won’t it be a good thing to have more trade? You say that any increase in trade will be a wash globally but won’t it reduce prices because barriers are being removed and thus cause more goods to be traded overall, providing a net benefit. I assume this will also lead the US to remove trade barriers in exchange, so this would be a good thing and should be applauded by those who support free trade.

  4. Gravatar of Scott Sumner Scott Sumner
    20. May 2018 at 17:09

    XVO, Yes, it would be good if China removed barriers. But it would also create an even bigger “China shock”. Thus it’s hard to understand what Trump is trying to do. He used to complain that China’s exports were costing jobs in America.

  5. Gravatar of Benjamin Cole Benjamin Cole
    20. May 2018 at 17:45

    I dunno. This picture is murky.

    Suppose that China “should” buy US-produced LNG (by market-based metrics), but for political reasons they did not. As a centrally planned economy, Beijing directed energy consumption to domestic sources in regions that were in desperate need of higher incomes, or to African nations in exchange for entry and good relations and a military outpost, etc.

    I rather suspect US LNG is very competitive and China would be upping it purchases of LNG anyway. There is a growing infrastructure and shipping business around US LNG. In Asia, LNG and LPG vehicles are common (run on pressurized natural gas).

    Still, the goods that China buys internationally are determined in Beijing. Everything is a political deal to some extent. Beijing is now choosing to buy more US LNG, possibly as a result of Trump prodding.

    Whether Beijing actually does, or whether anyone in the Trump-land will be around to see the deal through, or will even care to, is another matter. Perhaps US-based natural-gas producers will lobby to make the deal stick. They are pretty strong.

  6. Gravatar of Benjamin Cole Benjamin Cole
    20. May 2018 at 19:36


    Scott Sumner’s day at the Fed may be coming. The new Fed guy Clarida is described as open-minded regarding NGDPLT.

    On the downside, Ben Bernanke was open-minded on helicopter drops before joining the Fed—and look what happened. Never a topic again–I mean, not even discussed.

    The Fedification of officials is powerful.

  7. Gravatar of dtoh dtoh
    21. May 2018 at 07:01

    Utility is fungible.

  8. Gravatar of ssumner ssumner
    21. May 2018 at 07:40

    dtoh, That’s too deep for me.

  9. Gravatar of Justin Justin
    21. May 2018 at 10:18

    You can always rely on Benjamin to give the sober, real-world take. The Chinese economy is highly managed and intentionally “inefficient”, simply because they have long term goals that require a more holistic optimization, namely advancing the hegemony of the Han nation.

  10. Gravatar of DanielJ DanielJ
    21. May 2018 at 11:32

    Hey Scott, been reading this blog since 2010. As much as I agree on your assessments of Trump, I worry that the pro-growth wing of the democratic party is going extinct.
    The choices seem to be:
    1) A xenophobic president that at least allows in those that would push for free markets and lower government intervention, at the cost of dog whistling to anti-trade, anti-immigration wings.
    2) A party that has little to no direction on whether they want French (not nordic) levels of government intervention, a decline in social cohesion through identity politics, and an adversarial stance against a nuclear power.

    It sucks but I got to go with option 1. And I think there are more centrists out there who agree with this. While the devil we know is scary as hell, I am not ready to roll the dice on the current iteration of the Democratic Party.

  11. Gravatar of ssumner ssumner
    21. May 2018 at 14:26

    Daniel, I appreciate your comment, but I think you underestimate just how bad Trump is, and how far he’s dragged the GOP down into the mud. It’s not just about xenophobia, it’s about a profound level of corruption. It’s about a culture of complete dishonesty, where facts mean nothing. It’s about paranoid conspiracy theories of a deep state. It’s about a reckless fiscal policy, and an impulsive foreign policy. It’s about bigotry. In the long run, it will hurt the US if we become just another banana republic—and thus I can’t agree that Trump should ever be considered a lesser of evils, even against someone like Sanders. Don’t make a deal with a devil.

    But yes, the Dems are also going downhill on economics, in a very discouraging fashion.

  12. Gravatar of Benjamin Cole Benjamin Cole
    22. May 2018 at 01:48

    No comment.

    Australia tames home prices by squeezing foreign buyers
    Sydney’s overheated market cools as Chinese investment drops off
    FUMI MATSUMOTO, Nikkei staff writer
    May 22, 2018 07:25 JST

    New homes line a street in the Sydney suburb of Moorebank. Inflows of foreign money contributed to Australian cities’ torrid housing price inflation. © Reuters
    SYDNEY — Tougher rules designed to bring down Australia’s high-flying urban real estate market appear to be working, with reports that once-brisk Chinese investment into the country’s property sector has fallen sharply.

  13. Gravatar of Tom Brown Tom Brown
    22. May 2018 at 14:19

    Daniel, here’s a reason even an uncomfortably left president is better: Since podunk states like WY (population about 550,000 or 1/68th that of CA) have the same number of senators as states like CA and NY, and even a higher US rep to constituent count (1 WY rep for 550,000 ppl, vs 1 CA rep for more than 700,000 ppl), and, of course they’re overrepresented by presidential electors too out in the sticks — thus a Democratic president is likely to have at least one branch of Congress and now the Supreme Court against him/her. Thus it’s going to be gridlock, which is about a billion times better than what we have now.

  14. Gravatar of Basil Marte Basil Marte
    22. May 2018 at 14:37

    “[the alt-right] failed to get a big increase in infrastructure spending”
    The funny thing is that many on the left also point out the deteriorated state of infrastructure. This is not to say that a democrat presidency would spend meaningfully on infrastructure, but the rhetoric is there.

    “[clearer heads] are keeping quiet because they wish to avoid something much worse.”
    How about ridiculously high tariffs on a lot of stuff, that triggers an international tariff war?
    -> The volume of international trade would fall disproportionately more than the GDPs of individual nations.
    -> Comparative advantages upset, there would be a shortage of imported goods and unsold inventory of exports.
    -> The expected income stream from most stocks falls.
    -> Investors rebalance portfolios, hoard gold. (Despite the fact that the tariff law only passes several months later.)
    -> Defla… wait, this isn’t 1929. Gold is just another commodity.
    -> Anyway, some economist would notice the cheap piles of unsold inventory and simultaneously *miss* the shortage and expense of imported goods. Reasoning from the visible part of the iceberg, he would suppose an explicitly unexplained drop in AD that has no particular reason to occur now, rather than at any other time. (I’m not asking for foresight; I’m asking for asking a variety of businessmen, because *maybe* some of them know something about the cause of the sudden economic meltdown?) And that is a lesser failure than what most economists fall into, because most *also* reason from a price change and conclude that the problem is too much supply.
    -> The theory developed by this economist would include an undivided term of government spending. Politicians notice that the theory can be used to justify spending on anything, without regard to whether that is a wise/productive investment. Naturally, they embrace the theory absolving them of responsibility and use it to conveniently justify whatever they wanted to spend on anyway. (This lack of prescription is a form of max.entropy hypothesis.)
    -> A variety of governments raise taxes steeply, to make up for increasing deficits (and because the original C+I+G+NX didn’t include taxes!), drowning a wide variety of companies, further exacerbating the depression. I mean, at this point there are three overlapping depression-causes: a tariff war, a deflation and a set of steep tax hikes.

  15. Gravatar of Cameron Cameron
    23. May 2018 at 12:49

    Isn’t this just more pro-cyclical policy from the Fed?

  16. Gravatar of Christian List Christian List
    23. May 2018 at 13:05


    “a temporary period of inflation modestly above 2 percent would be consistent with the Committee’s symmetric inflation objective.”

    That’s really gold. Undershooting during the bust and overshooting during the boom. They do this all the time. Consistent? Yes. Consistently stupid.

  17. Gravatar of H_WASSHOI (Maekawa Miku-nyan lover) H_WASSHOI (Maekawa Miku-nyan lover)
    23. May 2018 at 14:20

    I recommend the POTUS Trump to use a Huawei Mate 10 pro

  18. Gravatar of Benjamin Cole Benjamin Cole
    23. May 2018 at 17:38

    Scott Sumner is a macroeconomist, so he tends to write in an elevated oblique style, and so it is hard to determine how Sumner really feels about President Trump. But I sense Sumner believes Trump has lowered the bar in DC, in terms of principled conduct and discourse.

    But I wonder.

    From Senator Chuck Grassley, GOP Senator Iowa:

    “As a free-market conservative, I believe that competition spurs innovation, encourages dialogue and ultimately delivers the best quality products to consumers. That’s one of the many reasons I believe so strongly in [mandated, subsidized] ethanol as part of an all-of-the-above energy strategy.”

    So, we now know the working definition of a “free-market conservative”: Towering hypocrite and emboldened prevaricator. The sober, principled ersatz mendicant on display.

    Some people say Trump has lowered the bar in DC.

    I wonder if the real beef with Trump is that he is a vulgar, tell-tale caricature of DC, rather than an aberration.

  19. Gravatar of Benjamin Cole Benjamin Cole
    24. May 2018 at 04:20

    I sometimes say the nice thing about macroeconomics is no one is ever wrong.

    Japan is helping out. It cannot balance its national budget. Thus a clean test of monetary stimulus alone is not possible

    So, whatever the strengths or failures of Japan’s economy, macroeconomists of all stripes—Keynesians, neo-Ks, MMT’ers, tight-money-ists, market monetarists, maybe even Neo-Fisherians—will be able to construct arguments explaining Japan.

  20. Gravatar of ssumner ssumner
    26. May 2018 at 13:21

    Cameron and Christian, Great minds think alike (check out my new post.)

    Ben, I’d encourage you to actually check the data on Japan, and not rely on newspaper articles.

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