Category: trade

U.S. – Japanese trade agreement

Free trade of goods and services produced without government subsidies or restrictions would maximize the incomes of all involved. To promote this result, the World Trade Organization has led the effort to reduce or eliminate tariff and other trade restrictions and has authorized the use of tariffs carefully targeted to nullify the distorting effect of government subsidies or other interferences in the competitive market production of goods and services.

This is not how President Trump has used or threatened in his usual bully style to use tariffs. For Trump, tariffs are not established to improve a level playing field for world trade, and not even always to protect inefficient American manufacturers such as the 50% tariff on imported Steel. An outrageous example was his threat to impose a 50% tariff on all Brazilian imports, effective August 1, 2025, if Brazil went forward with the prosecution of his ally, former President Jair Bolsonaro, who is charged with attempting to stage a coup d’état to overturn the results of the 2022 presidential election in Brazil. Incidentally, the U.S. currently has a trade surplus with Brazil. Go figure.

On July 23, “President Donald J. Trump announced a landmark economic agreement with Japan…. [In exchange for a reduction of US tariffs on all Japanese imports from 25% to 15%, it] will invest $550 billion directed by the United States to rebuild and expand core American industries…. The United States will retain 90% of the profits from this investment…. In addition to raising billions in revenue, this new tariff framework, combined with expanded U.S. exports and investment-driven production, will help narrow the trade deficit with Japan and restore greater balance to the overall U.S. trade position.” “Whitehouse fact-sheets/2025/07/”  

As an aside, Trump has also threated to punish any country that stops using U.S. dollars as its reserve and trade vehicle currency. Somehow, he fails to understand that for a country to acquire these dollars (and for Japan to acquire the $550 billion it is to invest in the US) they must have a trade surplus (US trade deficit). Oh well.

“Japanese officials said there was no written agreement with Washington — and no legally binding one would be drawn up — after Trump administration officials claimed Tokyo would back investments in the US from which American taxpayers would reap nine-tenths of the profits.”  https://www.ft.com/content/c1183b13-9135-41f6-9206-7b52af66f0a5

In addition to the fact that Japanese officials are disputing that they have agreed to such a deal, I hope that you are surprised that the American government is proposing to create new state owned companies. The world’s experience with state own companies has not been good. Our private enterprise dominated economy has served us (our standard of living) very well.

If this all seems rather confusing, welcome to Trump land.

Taxation norms

Taxes are levied to raise money but also to influence behavior. What is taxed and how much influences how much of it is demanded. To take an example of a tariff (tax) on steel imports, the resulting higher price of imported steel increases the relative attractiveness of domestically produced steel. Under the rules of the World Trade Organization, such a tariff would be justified if it offsets an artificial (and thus economic efficiency undermining) subsidy of the foreign produced steel.

President Trump has introduced a totally different way of using tariffs/taxes. He uses them as threats to pressure a country to take action totally unrelated to the item to be taxed. This follows his general bully approach to negotiations. To pressure a country or firm to agree to his requests, he threatens harm if they refuse. If a university or newsman behaves in ways he doesn’t like, he attacks them or threatens them with harm.

In the most recent example Trump is threatening a 50% tariff on all imports from Brazil primarily due to Brazil’s legal proceedings against former President Jair Bolsonaro, which Trump characterizes as a “witch hunt,” and to address what he claims is an “unfair” trade relationship between the two countries.

“Trump demands that the trial against former president Bolsanero, who had tried to instigate a military coup after he had lost the last election, should be immediately end.”  “First casualties from Trump’s increasing tariff craze”

 It’s not clear what Trump means by “unfair” trade relationship. His positions on trade, which he clearly does not understand at all, are contradictory. He has threatened to raise tariffs on imports from countries that avoid using US dollars in their FX reserves and foreign trade payments. For countries to use US dollars they must have a trade surplus with the US (a US trade deficit with such countries) in order to acquire them. “Why Does the World Need a Reserve Asset with a Hard Anchor?”  But Trump doesn’t seem to like or want such deficits. The US actually has a trade surplus with Brazil.

It may sound like this is all from the Onion, but sadly it is not. I don’t expect it to end well.

Looking for win-win

The essence of trade is that both the seller and buyer benefit (win-win). Without that feature the trade would not take place. The expansion of trade locally and then globally increased the output and thus incomes of the average person dramatically.

In 1820, about 80% of the world’s population lived in extreme poverty (defined as living on less than $2.15 per day in today’s terms). By 2019, this figure had fallen to roughly 10%. This decline is especially notable given that the global population increased more than sevenfold during this period.


The pace of poverty reduction accelerated in recent decades. From 1990 to 2019, the global extreme poverty rate dropped from 43% to below 10%, with the fastest declines occurring since the 1990s. This progress was driven largely by rapid economic growth in Asia, particularly in China and India.

The increase in win-win gains in income from trade have been promoted by broad agreement on rules and norms for “fair trade” to maximize the increase in incomes that results. These have been developed over time through what is now called the World Trade Organization (WTO). Tragically, rather than further improving its rules, the U.S. has undermined the WTO by refusing to appoint new members to its dispute resolution body.

The benefits of such collaborative cooperation have been sought and gained in other areas as well. To take one, the climate benefits of nuclear energy also carries the risks of destruction from nuclear bombs. Agreements among the countries with such capacity to contain and minimize the associated risks are reflected in the Treaty on the Non-Proliferation of Nuclear Weapons (NPT) of 1968 (extended in 1995). The Comprehensive Test Ban Treaty (CTBT, 1996), several bilateral agreements with the USSR/Russia and others have further reduced the risks.

The dramatic development of Artificial Intelligence (AI) programs promises incredible increases in our incomes but also carries risks. As with nuclear energy, all would benefit from agreements that limit these risks. Cooperating in developing such guard rails is in everyone interest. The US is making a big mistake in attempting to stifle  China’s AI development rather than a win-win cooperation with them to maximize its promise while minimizing its risk.

The case for such cooperation with China is powerfully made by Alvin Graylin in a recent presentation to the Committee for the Republic (on whose board I serve) the other day. https://www.youtube.com/watch?v=Jg6brPvFJGw.

A perfect world (economically)

The goal of policy should be to maximize world income (output) and its distribution that reflects the contribution of each player. That occurs when resources (capital and labor) are allocate to their most productive uses. But how is that achieved? First by ensuring that the government does not interfere. If the government subsidizes an activity, it will draw resources from its most productive use to the subsidized one thus reducing income.

The government’s role is important for defining and protecting property rights and the rule of law and the basic infrastructure on which firms operate. For example, in the U.S. the government funded basic research because there is no market incentive to undertake it. Much of it provides knowledge that is never used or exploited, but some is exploited by private firms for purposes the government could not guess in advance.

In the real world, consumers’ tastes change and the products and services being offered evolve and the optimal allocation of resources (capital and labor) must evolve as well. Those that are not the most productive tend to go out of business, freeing those resources for better uses. When governments intervene via subsidies or differential taxes they invariably reduce the efficiency of resource allocation and thus lower incomes. Bilateral trade deals introduce large distortions in resource allocation and thus lower global income.

The global maximum thus requires common rules for fair trade globally. The World Trade Organization is the institution through which such rules are developed and enforced (or at lease it should be). Bilateral deals undermine the level playing field optimal resource allocation requires and thus lower world income. With the weakening of the WTO and other international rules and norms, the world is increasingly falling below the income it is capable of.

Econ 101: On-Shoring

What would be the consequences of on-shoring the production of all of our military needs? We would gain supply resilience in exchange for being poorer.

If the US makes everything it needs at home rather than buying it at lower cost abroad, it will reduce the risk of supply interruptions. The risks of domestic interruptions from natural disasters or labor strife are much smaller than the risk of foreign suppliers cutting us off for one reason or another.

But like insurance more generally this increase in resilience does not come free. Moving the capital and labor from what it was producing before to produce what we used to buy abroad means it moves from more productive to less productive activities. Our overall income will be lower.

This is the basic story of specialization in the production of our comparative advantage and trade for the rest versus self-sufficiency I have written about so many times before. Both are valuable—resilience and income. The US and the rest of the world have grown wealthier at a dramatic pace over the last several centuries because of the growth in trade from neighbors to the rest of the world following millennia of no growth. Where do you want to be in this trade off and who do you want to make that decision for you?

Say what?

During his very busy first few days President Trump did some things I liked and some things I didn’t like.

Among the many executive orders I liked were: a) DEI rollback in federal agencies; b) Plan to reduce US troops in Europe by 20,000; c) Freeze on Federal hiring (hopefully reviewing where more employees are needed and where fewer are needed; and d) Delay in TikTok ban (though I doubt he can legally override Congress with an executive order).

Among those I disliked were: a) Pardoning  over 1,500 convicted of storming the Capital on Jan 6 in an effort to overturn the election results; b) Joining Israel’s genocide of Palestinians by lifting American sanctions on illegal Jewish settlements in the West Bank “Trump-Israeli settlers in West Bank”; c) Halting Afghan refugee application processing and canceling flights for refugees approved to resettle in the U.S. This decision impacted thousands of refugees, including over 1,600 Afghans who had already been cleared for resettlement. “Refugee flights canceled”; and d) dropping government security protection for some of Trump’s enemies ( John Bolton, Mike Pompeo, Anthony Fauci, etc.)—This in America!!!

But in Trump’s address to the World Economic Forum in Davos on Thursday he said that the US is back under new management and “open for business”, turbo-charged by the “largest deregulation campaign in history”. In the same speech he warmed our trading partners to “come make your product in America” or face more tariffs. Aside from the direct contradiction between these two statements the shocking ignorance (or Trump babble) of the second statement left me (almost) speechless. “Trump’s Davos speech”

For starters the US work force is fully employed. Though some German cars, for example, are already assembled in the US, to produce Porsche here would require taking workers from whatever they are now producing (perhaps those producing exports to Germany that Germany would no long be able to afford). Or we could increase legal immigration (badly needed already anyway as birth rates fall and our aging population increases retirees relative to workers) and bring German workers here to build their cars. If Trump really meant what he said, it would not benefit the US (America First) or anyone else. We do not enjoy a high standard of living because we are self-sufficient but because we trade globally for the best deals. But Trump doesn’t seem to believe in free markets.

https://wcoats.blog/2018/03/03/econ-101-trade-in-very-simple-terms/  

The politics of Trade
Econ 101: Trade balance

Trump

President Reagan pointed to our beacon on the hill as the foundation of our relationship and leadership with the rest of the world. Soon to be President Trump’s approach is to threaten and bully the rest of the world.

“US President-elect Donald Trump’s trade policy challenges the post-war global trading system. By rejecting the World Trade Organization’s principles of non-discrimination and reciprocity, Trump proposes a power-based approach that would fundamentally alter international economic relations, risking the predictability and fairness that have underpinned global trade for seven decades.”  “How Trump threatens the world trading system”

But he hasn’t stopped there.  Though promising to end our “forever wars” and restraint in our international relations, Trump is coming on as the most aggressive President in memory:

“Many people have been understandably astonished by Donald Trump’s recently proclaimed desires to “take back” the Panama Canal “in full, quickly and without question” and to take over the self-governing Danish territory of Greenland.

“While Trump has written that “For purposes of National Security and Freedom around the world, the United States feels that the ownership and control of Greenland is an absolute necessity,” he would at least appear to be willing to pay Denmark for Greenland, as the U.S. paid Denmark for the Danish West Indies, renamed the U.S. Virgin Islands, in 1917.” “A thought on the Panama Canal and Greenland”

A bully, who forces rules on others that he disregards himself, will not serve America’s nor the worlds interests. We all want America to be safe, prosperous, and free. Thus, we must hope for and where possible promote a successful term for this and any other President. An important role can be, and hopefully will be played by the Republicans in Congress, starting with careful vetting of Trumps cabinet nominations. “Trump-bully-world-America-foreign-policy”

Econ 101: Our standard of living

In 1900, US income (GDP) was $4,096 per capita in 2023 dollars, while in 2023 it was $81,695. The US poverty rate fell from 56% to 11.1% over the same period. How was such a dramatic increase in our widely shared standard of living possible? The answer (without explaining how it came about) is increased labor productivity. Each worker has been able to produce more and more and hence earned a higher income.

Putting this differently, more and more people were automated out of their old jobs allowing them to find new ones and produce new things increasing overall output/incomes. Such dynamism does carry the temporary cost of finding new jobs and developing new skills. At any point over the last century that cost could have been prevented by freezing productivity improvements, but that would also have ended the growth in our incomes. Thank heavens such crazies did not win out. But it seems they never stop trying.

The International Longshoremen’s Association (ILA), the union that represents some 47,000 dockworkers, is threatening to strike if the United States Maritime Alliance (USMX), which oversees port operations, goes forward with plans to automate more of these port activities.

“’There has been a lot of discussion having to do with ‘automation’ on United States docks,’ Trump wrote in his post Thursday. ‘I’ve studied automation, and know just about everything there is to know about it. The amount of money saved is nowhere near the distress, hurt, and harm it causes for American Workers, in this case, our Longshoremen. Foreign companies have made a fortune in the U.S. by giving them access to our markets.’

“’For the great privilege of accessing our markets, these foreign companies should hire our incredible American Workers, instead of laying them off, and sending those profits back to foreign countries,” Trump wrote.” “WP: Trump – port-strike-automation”

Whether out of ignorance or deliberate obfuscation, Trump again misstates who gains and who pays. When foreign ships are unloaded in American ports it is the American consumers who benefit from any cost savings at the ports.  Trump also claims (though he surely knows better) that China would pay for his high tariffs on imports from China.

A tariff, of course, is a tax the US levies at our borders on goods we import from abroad. It’s paid in the first instance by the American importers. Like any other tax, it is added to the price of selling these imports to the American public. It’s very purpose is to reduce domestic demand for such imports in order to encourage (more expensive and less efficient) domestic production of such goods. Please, let’s not stop technical progress and the higher income it enables.

The Bitcoin Act

“With the introduction of the BITCOIN Act this summer, Senator Cynthia Lummis (R-Wyo.) called for the creation of a strategic Bitcoin reserve with the goal of reducing the government’s near-$36 trillion national debt. But can this kind of reserve actually solve our debt crisis?”  FREOPP: “Can a bitcoin reserve save the US?”

Wow. This is one of the dumbest ideas I have seen in a long time.

For starters, sovereign reserve funds consist of investments of foreign currencies earn from a country’s exports (usually oil) that it did not chose to spend on imports, i.e. the result of a trade surplus. The U.S. has a trade deficient (we buy more from abroad than we sell) not a surplus and thus have no extra foreign currency to invest. The US would need to borrow the money to invest in bitcoin when the US government is all ready $36 trillion in debt. But if it were a relatively sure way of earning more than the cost of borrowing it, it could help reduce the national debt.

Is bitcoin such an investment? As I write this, bitcoin is selling at $96,479, a 146% increase from one year ago. Not bad to say the least. If instead the bitcoin fund had purchased bitcoin in 2013 (at about $450) and sold it at the end of 2016 ($434) it would have earned a bit less than nothing. But if it purchased it at the beginning of 2018 at $13,657 it would have lost its shirt by the end of the year at $3,709. In short bitcoin prices have been all over the map. They are not redeemable for anything, cannot be used to pay for anything with rare exceptions, and are thus a purely speculative form of gambling. WC: “Bitcoin”   WC: “Bitcoin2”

Creating a bitcoin reserve would be beyond stupid.

But in the currency area there is competition for destructive stupidity.  The US dollar is by far the most used currency for international transactions for good economic reasons. The US recently has been making the dollar less attractive by freezing Russian and Afghan dollar accounts: WC: “The dollar again” But rather than focusing on measures that would preserve or restore the dollar’s attractiveness (Make the Dollar Great Again), president elect Trump has threatened any country that does not use it with 100% tariffs. Such bullying is enough to embarrass even the worst bullies. WP: “Trudeau Trump tariffs”

America’s Trump style Foreign Policy

The world benefits from rules of interaction that provide peace and cooperation. Rather than building more weapons of war, we could build more temples of beauty. Championing rules most countries respect and aspire to and being the largest (or perhaps second largest) economy in the world, the United States has naturally led such an international order. Retaining that role would be jeopardized if the U.S. did not diplomatically fashion such rules that were embraced and respected by most other countries and if the U.S. did not itself abide by the rules it had championed.

America’s leadership role is being jeopardized by our hypocrisy, such as condemning Russia’s invasion of Ukraine while given a blank check and American weapons for Israel’s invasion of Gaza and Lebanon and ignoring its abuse of its occupied territories in the West Bank of Palestine. America’s embrace of the International Criminal Court’s (ICC’s) arrest warrant for Vladimir Putin for Russia’s invasion of Ukraine and America’s condemnation of the ICC’s arrest warrant for Israel’s PM Benjamin Netanyahu’s and its former Defense Minister Yoav Gallant is the very definition of hypocrisy.  

President elect Donald Trump’s style of negotiating international agreements reflects more the behavior of a bully than a diplomat. Last Monday Trump threatened to levy a 25% percent tariff on all imports from Mexica and Canada, despite the large economic harm to the US as well as Mexica and Canada and despite the laws and agreements it would violate, if they did not stop the illegal drugs and aliens entering the US across their borders. WC: “tariffs”

“Trump’s threat spurred outrage across the northern and southern U.S. borders, prompting backlash and warnings of retaliatory tariffs from both Mexico and Canada.”  The Hill: “Takeaways from trumps new tariff threat”

“Donald Trump’s angry threat to impose 25 percent tariffs on all U.S. imports from Mexico… is widely being depicted as a bluff….

“But amid all this parsing of Trump’s intentions, a crucial fact about his new move is getting lost: At the center of it is a lie. This lie is hiding in plain sight: It’s the underlying suggestion that Mexico is not doing anything to stop migrants from coming and that Trump’s threat of tariffs is needed to change that….

“All this is laid bare by the sharp response to Trump’s threat that new Mexican President Claudia Sheinbaum issued Tuesday. Her statement is getting attention for its barbed claim that American guns trafficked to Mexico are fueling crime and violence there among gangs supplying U.S. markets with drugs. ‘Tragically, it is in our country that lives are lost to the violence resulting from meeting the drug demand in yours,’ Sheinbaum noted acidly, suggesting that the two countries’ interrelated national challenges underscore the need for cross-border cooperation rather than Trumpian confrontation.”

She further noted that: “You may not be aware that Mexico has developed a comprehensive policy to assist migrants from different parts of the world who cross our territory en route to the southern border of the United States. As a result, and according to data from your country’s Customs and Border Protection (CBP), encounters at the Mexico-United States border have decreased by 75% between December 2023 and November 2024….

“What this polite (and euphemistic) language says is that Mexico is already acting extensively to thwart migrants who travel through that country—originating south of Mexico—so they don’t reach our own southern border. As Sheinbaum notes, this is partly why border apprehensions in the United States have dropped sharply of late.” New Republic: “Mexico’s Sheinbaum responds to Trump tariffs”

So, what did our bully in chief do next?  “President-elect Donald Trump has said he had a “wonderful” conversation with Mexico’s President Claudia Sheinbaum, in an apparent easing of the tensions raised this week over trade tariffs….  After Wednesday’s phone call, both leaders described the conversation in positive terms. Trump said on Truth Social, his social media platform, that it was a ‘very productive conversation’ and thanked Mexico for its promised efforts.”

Perpetuating his original lie, “Trump indicated that Sheinbaum would stop migration through Mexico, ‘effectively closing the southern border’.

“Sheinbaum said she had explained her country’s efforts to deal with migrants and that her position would ‘not be to close borders but to build bridges’”.  https://on.ft.com/49czcol

Trump may or may not be a good negotiator (6 of his businesses have filled for bankruptcy) but his approach is that of a bully. Given America’s dominant status in the world, bullying rather than leading and negotiating in the search for mutually beneficial compromises will hasten American decline from leadership.