Tags
aluminum, border adjustment tax, China, European Union, FDI, foreign direct investment, intellectual property theft, Made in China 2025, metals, overcapacity, steel, subsidies, tariffs, tax reform, Trade, Trump, value-added tax, {What's Left of) Our Economy
Never let a good set of talking points go to waste! Earlier this morning, one of the broadcast networks asked if I was available for a segment on the latest Trump administration tariff announcements, and wanted to get an idea of where I came down. Even as I was typing up the following, though, I was told that the plan had changed, and that the program in question had decided to go with a Member of Congress instead.
Yet since they’re still relevant to this latest phase of U.S. trade policy, I thought you might find them useful in this slightly edited form.
1. If the Europeans and other major economies retaliate vs the new U.S. steel and aluminum tariffs, they’ll make clear their indifference to the government-subsidized Chinese output has flooded global markets with both these metals, and seriously distorted trade flows. In recent years, these foreign governments have paid lip service to the need to curb Chinese overcapacity, but many have enabled it by transshipping Chinese metals (mainly steel) to the US market or stepping up their own exports to the US to relieve the pressure China has put on their own producers.
2. As a result, (as I’ve previously documented) during the current global economic recovery, the US is the only major steel producing country that has seen its share of world output fall significantly.
3. Moreover, (as I’ve also shown), the higher input costs resulting from the new metals and other tariffs pale beside the benefits recently received by U.S.-based businesses (including metals users) due to tax reform and regulatory relief.
4. Re both the steel and China tariffs, I wish that Trump had backed a superior alternative: the Border Adjustment Tax contained in the original version of the House GOP tax bill.
The BAT would have functioned like a value-added tax (a levy imposed by virtually every other country) — imposing a tax on imports heading for the U.S. market, and providing a subsidy for U.S. exports. Since the BAT would have been across-the-board, no U.S. industry (e.g., metals-using manufacturers) could have argued that it was going to be disadvantaged because its products would have received the same benefits.
Moreover, the BAT was backed not only by House GOP leaders with staunch pro-free trade records. It was also supported by many major multinational manufacturers. In addition, it would have been perfectly legal under the WTO, since it so closely resembles the value-added taxes so many other countries have had in place for decades. But President Trump – for reasons that remain unclear – never came on board.
5. In the absence of the BAT, though, the metals tariffs are essential for correcting major distortions in global trade flows caused by Chinese overcapacity, and the China-specific tariffs are essential for offsetting the impact of Chinese trade predation (including rampant intellectual property theft and extortion) on high tech industries, exemplified by the “Made in China 2025” program.
6. Nonetheless, re China specifically, I have criticized some of the Trump response as being internally inconsistent. If for example the United States convinces the Chinese to treat U.S. companies operating in China more equitably, U.S. corporate investment in the PRC could well increase, and the trade deficit that Mr. Trump wants to shrink is likely to grow, as much US investment in China creates products exported to the US.
7. More generally, I’m deeply skeptical that any Chinese promises to halt or reduce these forms of protectionism can be verified — because the Chinese bureaucracy operates so secretively, the Chinese national manufacturing complex is so vast, and because the United States will never be able to send over to China enough officials to monitor compliance effectively.
8. As a result, rather than seeking to improve Chinese behavior, I believe U.S. policy toward the PRC should aim first and foremost to reduce the extensive linkages between the two economies. In this vein, ever more sweeping U.S. moves and proposals to curb Chinese direct investment in key industries in America is a good first step.
RealityChek 
Dear Sir, I don’t know all the trade deals and numbers like you do, but today our President succinctly summarized his core trade stance.
“The United States must, at long last, be treated fairly on Trade. 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!”
— Donald J. Trump (@realDonaldTrump) June 2, 2018
In related news, the manchild of Canada blew any chance for his country in saving NAFTA.
From my knowledge, NAFTA has screwed the lower and middle classes in America. Yes, it may have helped Wall Street, not Main Street. Canadian and American dollars ate already shifting back to America. The only thing left is the annoucement.
Further, Mexico is on the verge of electing a Marxist president, so we know that’s a disaster.
Stunningly positive jobs numbers. Wow!
Unemployment at 3.8%? I learned in college the so-called “natural rate of unemployment” was 4.0% – 5.0%.
Fantastic news! Sourpuss Paul Krugman must be furious!
Mr. Taylor, very interesting and positive times! We have a stark contrast between Big Government and pro-American free markets.
The young Canadian PM looks like he just ended NAFTA by his poor choices with the Vice President. Maybe he underestimated President Trump. Mr. Tonelson here wants a trade plan, wants to know the deal.
OK, here’s the deal. My quick skim shows with NAFTA we went from a surplus with Canada to taking it in the shorts for $1.2 Trillion since 1994. It could be more, depending on how exports are counted that go from China, to Canada, to the US.
Trump has prepared the field. Massively cutting regulations and taxes. Both Canadian and US dollars, in Canada, have been moving to America the past 2 years. The market and leaders are reacting.
I’ve read Japan / Toyota makes 50% of their RAV 4s in Japan, and 50% in Canada. Those imported from Canada pay 0% tariff. NAFTA. Can you imagine those jobs in America? New Toyota plants? Wilbur Ross handled media questions deftly, and he is now on his way to China?! Interesting times! No longer a naive patsy in the White House!
Though I did study the dismal science (economics), not an expert on trade.
This said, regarding the larger economy, after 8 years of Obama policies, many economists hypothesized that maybe we are now a mature economy, and 1.6% GDP rate is the new norm.
Obviously, Presudent Donald Trumo and his advisors felt differently. They confidently stated 3-4% GDP growth was possible after the Obama malaise, and potentially even 5%.
To crib the Brits, are they mad? (Crazy)
New GDP estimates out.
The Atlanta Federal Reserve’s most recent GDP forecast: 4.7% — May 31, 2018!
The GDPNow model estimate for real GDP growth (seasonally adjusted) in the 2nd Quarter of 2018 is 4.7% on May 31st … up from 4.0% earlier in May.
Given the dynamic, positive GDP and unemployment numbers, shouldn’t we give PDJT and his advisors a little more credit?
Thanks again, and I have no problem giving Trump some credit for the pickup in economic growth (although the first quarter is currently down to 2.16 percent annualized). That said, it’s simply not valid to look at the Obama record (which I have had no problem criticizing) and ignore how he took office as the worst economic downturn in decades – triggered by a global financial crisis stemming largely from the mismanagement of the economy under his predecessor and the Fed – nosedived toward its low point. Similarly, it’s not valid to ignore how recessions triggered by financial crises do much more lasting damage, and generate much weaker recoveries, than those resulting from the workings of a normal business cycle. One other point: I’ve written regularly about why it’s more important to start generating much healthier U.S. economic growth, as opposed to more of the same kind of unhealthy, debt-drive growth that’s predominated during this recovery. Under Mr. Trump, we’ve seen some signs of progress along these lines, but they’ve been modest so far. I’m hopeful that the tax cuts and other Trump/GOP policies (including a new approach to trade) spur more, but we’ll have to wait for more evidence.
Briefly. You seem reticent to give President Trump credit. Obama never achieved 3% GDP growth for a year, and President Trump is knocking on the door. Obama left us with 1.6% GDP growth his last quarter, I believe. (Butchered grammar.) First quartet traditionally slow, plus we had to deal with 3 massive natural disasters.
How do you lay the poor economy at Bush’s feet? A huge reason for the recession (not Great) was the collapse of the housing market, right? Who caused that?
Democrat Barney Frank threatened bankers with jail time in his zeal to have every American and American “of color” own a home. Frank and other Democrats threatened bankers. It’s on the record. Hence new instruments, liar loans, etc. We had decades of data on how home mortgages work, how borrowers who put 20% down or 10% down behave, etc. Then we got liar loans, 80 / 20 loans (no money down), and banks had to find a way to deal with the mess. I don’t believe Bush created those problems, problems henceforth with Frannie and Freddie, or consumers buying homes they could never afford.
Apples to Apples, worst economic recovery since WWII. And then he slaps ObamaCare on top of corporate America. Ugh.
And why was so much capital made available to the U.S. housing market in the first place? Largely because under Bush 43, U.S. deficit spending (including on the trade account) spiraled out of control, and sucked in so much foreign investment that the kind of moral hazard that resulted in ever more arcane and less productive Wall Street “innovation” became inevitable. Combine this with regulators both in the Bush administration and the Fed who were completely asleep at the switch (as confessed by Alan Greenspan’s remark that he mistakenly believed that self-regulated markets would curb dangerous excesses), & it’s clear that Obama’s predecessors deserved plenty of blame for the crisis. BTW, you’re the first person I can recall who considers me too tough on Trump. I want him to succeed, but believe that’s only possible if his supporters hold him to high standards.
The last two comments are excellent! The best thing about the last recession is that it turned the religion of Greenspan, Rand and Hayek on it’s head. It was a wonderful failure to watch!
Thanks as always, Arthur! I agree that the last recession put the free market zealots on the defensive in general. But they still seem pretty influential on the trade front, at least with Mainstream Media journalists!