The Donald's Got Milk

By David Stockman

In Part 1 we noted that the Donald is on a noble mission---to blow up the G-7----even if for the wrong reason. We are referring, of course, to his dunder-headed view that America's giant trade deficits and vanishing breadwinner jobs are due to unfair foreign trade practices, high tariffs and bad trade deals.

Before heading for Quebec

 today he reiterated the point, taking direct aim at Canada and France:

"'Please tell Prime Minister Trudeau and President Macron that they are charging the U.S. massive tariffs and create non-monetary barriers,' Trump wrote on Twitter. 'The EU trade surplus with the U.S. is $151 Billion, and Canada keeps our farmers and others out. Look forward to seeing them tomorrow.'"

As a statistical matter, the Donald is full of it. Last year the US goods deficit totaled a staggering $796 billion, but only 1.9% of that was accounted for by France ($15 billion ) and just 2.1% by Canada ($17 billion).

And as for France's "massive tariffs", we are not exactly convinced that its weighted average tariff of 1.6% on the value of imported goods during 2016 fits the definition.

That's especially the case because the US weighted average rate (red line) also happens to be an identical 1.6%. While we are at it, it should be mentioned that Germany's tariff rate is also 1.6%.

Actually, Canada's weighted average tariff is even lower---just 0.85% of the value of goods imported. And as is evident from the chart below, even today's miniscule tariff rates for all four countries have been steadily declining for decades.

France, Germany and Canada Vs. US: Weighted Mean Tariff Rates, 1988-2016

Needless to say, foreign tariff barriers have nothing to do with what ails the US economy because essentially they don't exist. For the last 40 years, tariff rates have been coming down and now average in the low single digits for most major economies; and in the case of US trade with the EC, average tariffs are less than 2% on both sides of the transaction.

Moreover, of the $720 billion in combined two-way trade between the US and the EC in 2017, fully 50% or $360 billion was subject to zero tariffs, and the total levy on $283 billion of US exports to Europe was well less than $5 billion.

The Donald's doddering old Commerce Secretary, Wilbur Ross, is always talking about how the Administration's idiotic 25% tariff on steel amounts to less than one penny per can of Campbell soup. Well, here's de minimis for you: The total tariff paid by US exporters to Canada and the EC---the Donald's targets of the day----amounts to 0.03% of GDP!

Apparently, what gets the Donald (and other protectionists) aroused on the matter of tariffs is that there are isolated cases where powerful domestic lobbies have built a wall of protection over the years. The high rates in these selective cases can be loudly harped upon to obscure the fact that overwhelmingly tariffs are a non-issue.

For instance, Trumps is always harrumphing about the EC's 10% tariff on passenger car imports compared to only 2.5% for the US. Yet he has never mentioned that the US has a 25% tariff on pick-up trucks, and that the so-called free trade US auto industry would literally burn down the Capitol Building if Congress ever tried to reduce it.

After all, the industry sold 2.7 million pick-ups last year and while this accounted to just 15% of US light vehicle sales---these Chevrolet Silverados, Ford F-150s and Dodge Ram trucks accounted for virtually all of the Big Three's North American profits.

Likewise, when it comes to train carriages, the shoe is on the other foot: The US imposes a 14% duty versus a EU duty of just 1.7% on imports from the US.

Then it's also true that the EU imposes a 30% tariff on shoes and clothes---but those are obviously aimed at China and Vietnam, not the US which doesn't make these products anymore, anyway.

Likewise, the US imposes duties of 350% and 130% on tobacco and peanuts, respectively, and its not hard to see the fine hand of the farm lobby's crop-by-crop log-rolling operation at work. Still, we doubt whether this lobbies are much skin off the back of European farmers, who essentially don't grow these crops.

Even then, the obvious point is that tariffs are actually a tax on the consumers of c0untries which impose them. Rather than punishing foreign producers, their major effect is to internally transfer income from the country's broad base of consumers to a narrow set of protected firms and industries, which benefit from the resulting price umbrella, thereby earning higher revenues and profits.

In any event, this zero-sum game has fallen out of favor around the world as demonstrated by the steady drop from an average worldwide tariff rate of 30% (blue line)  in the early 1980s to well into the single digits today; and in the case of the so-called rich countries (yellow line), the average rate is approaching the vanishing point.

Even the statist and socialist authorities who run trade policy in most countries today have recognized that tariffs do not create net domestic jobs and growth---just an arbitrary re-allocation of the pie.

Indeed, even the Red Ponzi's weighted average  tariff rate is just 3.5% currently, and that represents a considerable drop from the 32% rate which prevailed back in 1992 when Mr. Deng announced that it "is glorious to be rich" and that the route to that blessed state was through a dramatic increase in trade with the rest of the world.

Stated differently, most everyone seems to "get it" on the tariff matter except for the Donald and the two protectionist fools---Wilbur Ross and Peter Navarro---who advise him on trade and have managed to keep their White House passes in good standing.

China: Weighted Mean Tariff, 1992-2016

Yes, we do know about non-tariff barriers (NTBs). These are more subtle forms of discrimination against foreign goods used by mercantilist governments around the world---such as "health and safety" regulations that are biased against foreign suppliers or require a license or certification that never seems to be forthcoming from the host government.

In fact, that was one of the original research assignment we got from our boss, Congressman John Anderson, way back in 1970. He represented Rockford Illinois, and in those days the area was a powerhouse exporter of corn, soybeans, machine tools and much else.

He also had Nixon's ear on trade---so our job was to dig up NTBs that could be waved at the Japanese and others during negotiations to open up foreign markets for US export products.

Admittedly, most of these NTBs are blatantly protectionist in purpose and often so far-fetched as to strain credulity. For instance, a Japanese agriculture minister of that era insisted that Japanese intestines were  much smaller than American ones, and that US beef was therefore a dire health hazard!

In any event, even NTB's have been steadily chipped away since the 1970s owing to several rounds of world trade negotiations, and are far less significant obstacles to trade flows today.

And that gets to the heart of the matter. The  trend growth rate of the US economy has been steadily falling since the 1970-----virtually in tandem with the decline of tariff and non-tariff barriers to commerce. So unfair trade practices abroad absolutely do not explain why growth is faltering at home.

The chart below helps to crystalize this point by showing the rolling 10-year average GDP growth rate in order to even out the cyclical fluctuations. Self-evidently, what was a 4.0% per annum growth trend between 1954 and 1974 (i.e. after the distortions occasioned by WW II and the post-war demobilization worked out of the 10-year average) has steadily diminished , and in recent years has actually bottomed at just 1.3%.

Indeed, as we explained yesterday, what the chart below actually correlates with is not bad trade deals and rising unfair trade practices, but the arrival and apotheosis of bad money after Richard Nixon ash-canned the Bretton Woods gold exchange standard in August 1971.

And that gets us to the heart of the Donald's incorrigible trade protectionism. In fact, it has nothing to do with economic analysis, policy principles or the observable empirical trends with respect to trade barriers---which all go the other way.

Instead, it all about the Art of the Deal---the lens through which Trump views the entire world and which informs everything he does.

That this winning versus loosing worldview boils down to a crude form of tit-fort-tat tariff math was made crystal clear in his recent tweet storm in preparation for the G-7 summit. Said the Donald,

“The United States must, at long last, be treated fairly on Trade,” Mr. Trump tweeted as G-7 finance ministers finished the pre-summit meeting in Canada last weekend. “If we charge a country ZERO to sell their goods, and they charge us 25, 50 or even 100 percent to sell ours, it is UNFAIR and can no longer be tolerated. That is not Free or Fair Trade, it is Stupid Trade!”

Of course, what is actually Stupid here is the presumption that the trade issue boils down to a 10% tariff on passenger car imports in Europe versus a 2.5% rate on imports to the US.

As demonstrated above, that kind of imbalance is far more the exception than the rule and it's off-set by an equal number of examples that go the other way. The fact is, the relevant tariffs in the world today range between zero and 5%, and thereby have virtually nothing to do with the America's $796 billion deficit in traded goods.

Nevertheless, when it comes to the Donald's Art of the Deal framework any number will do, and the dairy industry provides a whopper.

Trump essentially won the electoral college on the margin in the once and former "Dairy State" of Wisconsin. During the course of his campaigning there, he surely found his mark.

As one writer recently noted:

Canada's 270% milk tariff is Trump's favorite whipping boy and hit in  his Wisconsin speech, but its to protect a relic of New Deal cartelism: It's not unfair, its stupid and massive penalty to its own citizens.But that has not held Trump back from speaking out about trade with Canada. At an event in Wisconsin last week, Trump called Canada’s dairy pricing scheme a “disgrace” and “another typical one-sided deal against the U.S.” He has promised to “stand up for our dairy farmers” and “get the solution,” though he has not specified what that solution is.

As it happens, even FDR's down on the farm socialism was never as absurd as Canada's cartelized diary industry. Every one of its 12,000 dairy farms has a production quota in gallons of milk that can be sold legally.

In return, it is illegal to sell milk in Canada below a government mandated support price that is way above the world price----nor to import it at the drastically lower world price without paying the 270% tariff upcharge.

Obviously, without the high tariff, the whole cartel arrangement would collapse in a heartbeat.

So Canada's 30 million milk consumers are getting hosed to a fare-the-well by a tiny but politically powerful phalanx of dairy farmers, who are supported by all three political parties. In fact, less than 1,000 large farms account for a signification share of Canada's total production, and undoubtedly laugh all the way to the bank with their fulsome monthly milk checks.

The question recurs, of course, as to why Canada's wanton punishment of it's own milk consumers merits starting a trade war.

After all, Canada's total milk production is worth only $6 billion annually compared to $38 billion in the US; and like the case of Canada, the US dairy industry has been coddled with heavy subsidies and production controls ever since the New Deal.

In any event, even a 30% share of Canada's market for US producers would amount to only $1.8 billion per year---compared to $282 billion of existing US exports of other products to Canada.

So we are not sure what kind of "deal" the Donald is after in this instance--- or whether the cure would be worse than the disease.

Moreover, it turns out that what US dairy farmers are actually squawking about is very, very small beans. To wit, they want the Donald to obtain a reopening of an arcane loophole in Canada's protective wall for its domestic milk cartel.

That is, the 270%  tariff rate applies to whole milk and certain products, but not "unfiltered milk" which is used in cheese-making and for which the tariff is zero. Not surprisingly, U.S. dairy processors used to export this essentially dewatered milk product to Canada----generating about $500 million per year in sales.

However, that unfiltered milk trade began to taper off recently, when the socialist dairy farmers in Canada’s largest province, Ontario, finally woke up: They simply got government approval to drop the price of domestic unfiltered milk to a point that priced out U.S. competitors.

As a result, Canadian cheesemakers stopped doing business with several U.S. dairy processors, and 75 farmers in Wisconsin lost their processing contracts.

And there you have it.

After being snookered by 75 US dairy farmers, the Donald's got milk.

Needless to say, what he doesn't have is a plan to deal with the real source of America's yawning trade deficit and failing industrial economy.

But as a reminder, here's the real problem: massive monetary expansion and the relentless inflation of America's domestic prices, wages and costs.

In fact, the CPI has risen by 120% during that period and nominal wages by 140%. Not surprisingly,  the number of jobs in goods-producing industries has declined by 17%.

 The above originally appeared at David Stockman's Contra Corner and is reprinted with permission.