Wednesday, July 11, 2018

Trump and His Three Stooges of Protectionism: The Definitive Analysis of Trump's Trade War

By David Stockman

The Donald apparently believes that ever since Smoot-Hawley worked out so well in the 1930s that the US has foolishly been engaged in unilateral disarmament on the trade front.

In fact, if trade is all about bilateral export/import scoreboards and whose tariff is bigger, then to hear the Donald tell it you would think America has the shortest one on the planet at barely 2% of imported goods' value.

So call it the Tiny Tariff Syndrome (TTS), if you must. But it's not the source of America's massive trade imbalances.

In fact, during the last 30 years worldwide tariff rates have fallen by a stunning 80%. On the current $17 trillion of worldwide two-way merchandise trade, the average tariff is now just 2% or virtually identical to that of the US.

Besides, tariffs are taxes on domestic consumers since
they tend to create an above market price umbrella for products where imports form a significant share of the market. So the burden on commerce is not just the tariff dollars collected at the border; it's the tariff rate times the totality of domestic consumption, which includes the windfall transfer to domestic producers resulting from tariff-bloated selling prices.

To be sure, some countries do subsidize their exports through currency repression or direct government fiscal and tax aids.

But at the end of the day, that amounts to a transfer of foreign aid to the importing country. It's a windfall gain to domestic welfare that shows the stupidity of mercantilist export promotion, but most certainly does not merit taxing domestic consumers for the economic sins of foreign governments.

So when the Donald gets to calamity-howling about Canada's 270% tariff on milk and Germany's 10% tariff on cars he's basically grasping at non-representative outliers.

Worse still, he often just makes it up as in this infamous riff before the June G-7 meeting:
“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!”

In fact, Trump's proficiency at finding these tariff rate aberrations puts you in mind of the keen-eyed young boy looking for bubble gum in the chicken coop!

At least, that's what the chart below suggests. At the recent G-7 summit, the Donald was especially hard on France, Germany and Canada on account of their allegedly "unfair" tariffs, but that amounts to splitting hairs at the second decimal point---and not always in the America's favor.

Thus, at 1.70% of imported value, the average US tariff (red line) is virtually identical to the "massive tariffs" Trump claimed to be imposed by France, which actually average out to just 1.96%; and that figure happens to be the same as Germany's weighted average rate of 1.96%, as well.

Actually, Canada's weighted average tariff is a tiny tad lower than the US rate---just 1.56% 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.

More importantly, these differences are rounding errors---great big nothingburgers in the scheme of things.

Contrary to the duplicitous rhetoric of Larry Kudlow and other White House free trade shills, you could get rid of all tariffs in the world today---and it would have virtually no impact on America's $800 billion annual deficit in merchandise trade or add a blip to US growth and jobs.

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

Tariff rate, applied, weighted mean, all products (%)

So the facts are absolutely clear: It is beyond lunacy to launch a global trade war based on "unfair" tariffs or to cite outlier examples as proof of nefarious foreign practices.

Consider, for example, the de minimis role of tariffs in the $720 billion of combined two-way trade between the US and the EC in 2017. Fully 50% or $360 billion of that trade turnover 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. So here's a real empty soup can for you: The total annual tariff paid by US exporters to Canada and the EC---the Donald's targets at the G-7 meeting---- amounts to 0.03% of GDP!

The truth is, what gets the Donald (and other protectionists) aroused on the matter of tariffs is one-off situations where powerful domestic lobbies have built a wall of

protection over the years---even though they amount to rounding errors in the total value of trade.

For instance, Trump 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. Perhaps that's because the so-called free trade US auto industry would literally attack the Oval Office door with tire irons if he ever tried to reduce it.

After all, the Chevrolet Silverados, Ford F-150s and Dodge Ram trucks thus protected account 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 these US lobbies take much skin off the back of European farmers, who essentially don't grow these crops.

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% in the early 1980s to well into the low 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.

That gets us to the Red Ponzi---but even there the nation'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 three stooges of protectionism---Wilbur Ross, Peter Navarro and Robert Lighthizer- --who advise Trump on trade and have thereby managed to keep their White House passes in good standing.

Still, the Donald has declared a tariff war on China like no other in modern history. In his own words and tweets it could extend to 91% of China's exports to the US ($450 billion out of $505 billion) owing to a threatened $200 billion of additional tariffs because Beijing has countered the first $50 billion of US tariffs; and then another $200 billion on top of that if they counter the counter to the counter.

This is the art of the deal?

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.

There is also "buy America" style preferences for government procurement. Everybody does it, but the US is the grand champion because its massive military spending plus domestic infrastructure and other procurements amounts to $1.5 trillion per year at all levels of government-----and virtually all of it is under "buy America" type strictures.

Still, the fact of life is that 0n an overall basis even these traditional NTBs have been considerably reduced in recent decades; and if the truth be told, the US isn't much cleaner on the NTB front than most of its major trading partners.

But even these traditional NTBs are not exactly the essence of Trump's beef with China, anyway. What he and his three stooges of protectionism actually object to (besides the drastic $375 billion bilateral trade deficit) is that China runs, well, a communist economy!

That's right. They don't call it Red Capitalism for nothing. The entire financial system is rigged via giant government controlled banks and limitless credit fostered by the People's Printing Press of China (PPOC) and back-stopped one way or another by the state.

Moreover, that's to say nothing of the massive fiscal subsidies operated through local governments and the trillions of debt they have issued in behalf of developers and industrialists; and, even more significantly, that the PPOC has essentially fueled a $40 trillion mountain of printing press credit (implicitly subsidized) on which the whole so-called China miracle is based.

By the same token, the Chinese communist party also controls the non-financial economy top-to-bottom via a licensing and regulatory dragnet that pales into insignificance the Washington regulatory dragons incessantly slayed by GOP orators. And that includes extremely nationalistic controls on foreign direct and portfolio investors.

But here's the thing. The Red Ponzi's fiscal and currency subsidies on exports amount to a wealth transfer to the US. And its regulatory controls on foreign investment and imports cause as much harm to its own economy as they do to the US and other trading partners.

The truth is, if US based multinationals don't like China's requirements to establish joint ventures with local Chinese companies or agree to transfer proprietary technology to them-- there is a simple solution: Don't invest in places were you are not treated fairly and don't go on CNBC bragging about your "high growth" Chinese operations.

At the end of the day, in fact, the whole trade war against China has little to do with trade, but a lot to do with crony capitalist cry-babies lobbying Washington to act as their unpaid deal agent in China, or their patent protection attorney on the taxpayers' dime.

For instance, consider the White House screed against China written apparently by Peter Navarro and released a few weeks ago called "How China's Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World".

That unhinged exercise in anti-Chinese bellicosity was testimony to sheer economic ignorance and a nasty form of Big Government nationalism---not any valid issues about bilateral trade with China.

For instance, Navarro whined about "reverse engineering" as if this staple of business life from time immemorial were some insidious new trick invented by the Chicoms:

".....reverse engineering in China is widespread and entails the process of disassembling (products).... for the purpose of cloning something similar without authorization from the rights holder.....(which) is illegal when the unauthorized production is of technology under patent or other protection."

Goodness me. Illegal patent infringement is exactly why more than 7,000 patent cases are filed in the US court system each year.

Under the rules of honest capitalism, it is the job of the patent owner to protect his property rights in court----not some Trade Nanny in Washington.

The story is similar with respect to Navarro's complaint that China forces US companies doing business there to share their technologies and that getting a government license or regulatory approval can often require similar JV arrangements.

So what?

Exactly no one mandated US companies to do business in China. If the Red Suzerains of Beijing are stupid enough to enforce a "no tickee, no washee" policy on foreign capital, it's their loss, not the business of the US government.

As investors have long understood, capital goes where it is appreciated and treated nicely or at least fairly. If China wants to be hostile to foreign capital by imposing

unreasonable conditions, capitalists should take the cue and go elsewhere----not run to Washington seeking redress.

Stated differently, corporate America wants to have its cake and eat it too. But for crying out loud, China is a communist country, not Texas!

So of course the government will impose onerous conditions on business---foreign and domestic, too--- because that's what statist regimes do.

That's why China forces foreign patent and technology holders to accept below-market royalty rates; limits the time that a foreign patent or rights holder has exclusive control over the technology; uses security reviews to force foreign enterprises to disclose propriety information; and mandates the placement of foreign research and development facilities in China as a condition of access to its markets.

And that's why the White House's litany of grievances against Chinese controls on foreign capital is so off the mark and borderline ludicrous. Navarro actually worked himself into a boiling lather on this particular onerous requirement often placed on US companies doing business in China:

• "(mandate)including Chinese Communist Party Committees in corporate charters and in their corporate governance" Hmmm. That just might be a tip-off that Xi Jinping has revived the cult of Mao Zedong for a reason.

So here's the truth of the matter. If the Donald really wants to close the $375 billion trade deficit with China, he doesn't need a trade war---only a call to Jay Powell telling him to get the Fed out of the money market and to allow interest rates to find their own honest free market levels.

To be sure, that would cause one rip-roaring recession in the US as interest rates soared in the face of the Fed's disabled printing press. It would also cause US imports to plunge immediately, and US prices, wages and costs to steadily deflate over time versus those in China.

At length, the US overall trade deficit would substantially disappear in a world of honest money.

Needless to say, the Donald is a low interest man and is not about to permit the return of sound money and honest financial asset prices to the US economy.

By the same token, the bad money system that underlies America's $19 trillion of continuous current account deficits (current dollars of purchasing power) over the past 43 years has also reached its sell-by date.

So its ultimately a matter of choosing your poison.

And the Donald's global trade war is the very worst possible choice.

David Stockman served as the Director of the Office Management and Budget (1981-1985) under President Ronald Reagan. The above originally appeared at David Stockman's Contra Corner.

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