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“I’d Tax Every Benz,” “It’s A Corpse That Still Moves”: Are You Getting The Truth On Trade?

"At the same time, tariffs would weigh on US growth. If we assume that Mexico and China retaliate with equivalent tariffs, this would substantially reduce demand for US exports, depressing US GDP by around 0.7pp by 2019. In fact, tariffs would likely hit US GDP so sharply that the Federal Reserve would be prompted to reduce interest rates to cushion the blow—despite an increase in inflation."

Currently, when we ship products out of America, many other countries make us pay very high tariffs and taxes — but when foreign companies ship their products into America, we charge them nothing or almost nothing

That’s a quote from Donald Trump’s “celebrated” Tuesday night address to Congress and the nation. I put “celebrated” in scare quotes there because there’s something terribly ridiculous about the fact that, as one netizen put it, “a reality TV show host successfully reads off a teleprompter and everyone acts like a Christmas Carol miracle has happened.”

Of course the even sadder part about the whole thing is that it really was a Tiny Tim-ish miracle that Trump managed to make it through his entire 70 minute speech without deviating from the script or otherwise ad libbing us all to death.

While Democrats were quick to point out the hypocrisy and attendant undercurrents of racism in the President’s address, one thing that didn’t receive a lot of attention outside of financial circles was the rather antagonistic rhetoric with regard to global trade. While no one should be surprised by Trump adopting a protectionist bent (indeed protectionism was a pillar of his campaign), it is somewhat surprising that more people didn’t flag the tough trade talk as an example of why the President’s speech actually wasn’t as conciliatory as it was made out to be.

I’ve spilled quite a bit of digital ink in these pages about global trade and the extent to which it was already flagging before Trump took office.

“We have seen this burst of globalization, and now we’re at a point of consolidation, maybe retrenchment,” WTO chief economist Robert Koopman noted back in 2015. “It’s almost like the timing belt on the global growth engine is a bit off, or the cylinders are not firing as they should.”

“It’s fairly obvious that we reached peak trade in 2007,” Scott Miller, trade expert at the Center for Strategic and International Studies, a Washington, D.C., think tank told WSJ at the time.

This is perhaps the most telling chart of all:

trade

(Citi)

“Growth in international trade has been unusually weak – in absolute terms but also relative to GDP growth – in recent years,” Citi wrote, in a note out last month, adding that “even though other factors, such as the weakness of global investment growth, may account for the bulk of the weakness in global trade, the IMF has argued in its October 2016 World Economic Outlook that rising protectionism probably also played a role.

Indeed. Here’s the bank’s list of “developments that currently raise concern about potential protectionist momentum”:

  • That TTIP and TPP appear to have been shelved due to public and political opposition and that Brexit is likely to imply some trading restrictions between the UK and the rest of the EU (even though parts of TPP may reappear as part of NAFTA; both Mexico and Canada are in TPP).
  • The intent of the new US administration to renegotiate NAFTA, to reduce immigration into the US, to potentially impose tariffs on imports from China and Mexico.
  • The possibility that border tax adjustments (BTAs) will be introduced into the corporate income tax code (according to which exports would be exempted from the tax base and imports would be taxed). Even if the BTA does not end up having competitive impact, it is likely to be perceived as protectionist by the majority of US trading partners.
  • The protectionist campaign promises of French Presidential candidate Marine Le Pen.

Speaking of Marine Le Pen, Donald Trump and trade, the Front National leader was out on Thursday with some fresh bullsh*t for you to chew on.

To wit, from a speech in Paris:

Look at the jobs that Donald Trump has brought back to America. Economic patriotism is on the march. The European Union is last one left to still believe in the illusion of a borderless world.

It’s not a question of if we’ll leave the euro but when.

The euro is a corpse that still moves.

How charming.

Le Pen and Trump are quick to identify “problems” (which aren’t ever really problems, but are in fact just repackaged versions of the grievances expressed by their support networks) but what they won’t tell you is that the consequences of their “solutions” would be dire indeed.

For instance, regular readers are acutely aware of just what it would mean for the French citizenry if Le Pen were to take France out of the EMU. For those in need of a refresher, please see here and work your way back.

Along those same lines, let’s take a look at what the economic impact would be if Trump actually moved to implement the tariffs he discussed on the campaign trail. Consider the following from Goldman:

How would such tariffs affect the US economy? The 35% and 45% tariff rates mentioned [by Trump] translate into an increase in the average effective tariff rate of around 11%, reflecting the fact that the US trades with other countries unaffected by the proposed tariffs. Our analysis—which considers the forces influencing domestic consumers and firms at home, international trade, inflation, exchange rates and domestic financial conditions—suggests that the most immediate impact would be rising inflation. Given that around one tenth of the US CPI basket is imported, inflation would accelerate as a direct result of an increase in import prices. So the burden of tariffs on Mexican and Chinese imports would fall not only on firms there, but also on US firms and consumers. At the same time, tariffs would weigh on US growth. If we assume that Mexico and China retaliate with equivalent tariffs, this would substantially reduce demand for US exports, depressing US GDP by around 0.7pp by 2019. In fact, tariffs would likely hit US GDP so sharply that the Federal Reserve would be prompted to reduce interest rates to cushion the blow—despite an increase in inflation.

tradegrowth

Is that appealing to you?

Doesn’t sound quite as good as “we’re going to start winning on trade again”, does it?

As I’ve said on too many occasions to count, global trade is a good thing. Specialization is a good thing. The free flow of capital and labor is a good thing.

It’s like f*cking Tarzan: “Trade good.” “No trade, bad.”

Got it?

In addition to the above, Trump is (mostly) full of sh*t when it comes to his trade rhetoric. Here are some “alternative facts” from Politifact, who fact checked the quote excerpted at the beginning of this post. To wit:

In his address to Congress, President Donald Trump said there’s an uneven playing field when it comes to trade with foreign countries.

“Currently, when we ship products out of America, many other countries make us pay very high tariffs and taxes — but when foreign companies ship their products into America, we charge them nothing or almost nothing,” Trump said Feb. 28.

Taxes on imports and exports are important given that Trump has been highlycritical of America’s trade policies.

Is this United States getting a bad deal when it comes to trade?

Experts say Trump is exaggerating.

‘Many other countries make us pay very high tariffs and taxes’

Trump’s generalization that “many” countries make us pay “very high” tariffs and taxes is misleading.

Tariffs are another form of tax that are imposed on many goods as they enter a country. They’re designed to make homegrown products more competitive.

The United States has many trade partners, and most tariffs with key trading partners like the European Union, Australia and Canada are relatively low. (In Canada, we pay zero tariffs due to the North American Free Trade Agreement.)

However, American exporters trying to access particular markets for certain goods do pay much higher tariffs compared to what the United States charges exporters in those countries.

For example, tariffs in developing countries are typically higher. For example, Rwanda’s tariff rate was 13.9 percent in 2012, while the United States rate sat around 2.7 percent, according to data collected by the World Bank.

So, in a sense, many other countries make the United States pay higher taxes, but those countries are usually quite small and trade relatively little with the United States.

We charge them nothing or almost nothing’

The United States’ tariff rate is far lower than other countries. But Trump exaggerated when he said the United States charges nothing or almost nothing.

On average, tariffs imposed at the border in the United States is 1.5 percent, according to a March 2016 report from the U.S. International Trade Commission. That is below the 2012 world average, which was about 4 percent, according to the World Bank.

For a more specific example, you can look to China.

For non-agriculture products, the U.S. tariffs on Chinese goods sold in the United States is about 2.9 percent, while Chinese tariffs on U.S. goods sold in China faced a 5 percent tariff.

“Almost nothing is an exaggeration, but not wrong,” said Joel Trachtman, an international law professor at The Fletcher School of Law and Diplomacy at Tufts University.

Trump is exaggerating for effect. Imagine that.

The implication there is that the President is blowing things out of proportion to whip his base into a frenzy. Earlier on Thursday I bemoaned the fact that populist politicians are preying on the uneducated by perpetuating irrationality and/or pretending as though globalization can be rolled back when in fact it cannot.

Well, consider that discussion along with the following chart:

jobseducationtrumpswing

(Goldman)

Now Trump could make it easier for these voters and/or their families to get an education or enroll in programs that will help them develop skill sets that are compatible with a globalized economy.

But while that would help the workers and their families, it wouldn’t do as much for Trump in terms of creating a buzz around his campaign. So instead. he chooses to lie and say he’s going to usher in a new manufacturing renaissance and deglobalize the world.

So think about all of the above when you hear Trump and Le Pen and Theresa May talk about how their brand of populism is in your best interest.

I’ll leave you with a tear sheet of notable Trump trade tirades from past to present.

tradetearsheet

(Goldman)

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