China and the United States

“Biden describes the China challenge as a global, ideological struggle between democracies and autocracies…. Any event from the pandemic to the Olympics will occasion commentary, particularly in the United States, of who “won,” China or America, and what it means for the epic struggle for global supremacy.” “There is no unified front against China”

I am not sure what it is that we want to win. We don’t seem to mind selling planes and bombs to other autocracies (Saudi Arabia, Qatar, etc.). Anything to keep the defense industry’s profits flowing short of yet another war seems a (relatively) good deal. And why might “global supremacy” matter?

Winning things sounds to me like rooting for our own basketball team and cheering when it wins the championship. How do we go about striving to have the best basketball team? First, we recruit the best basketball players we can find and hire the best coach to train them. Everyone must play by the agreed rules, and we win by playing the best game. In short, our efforts go into being the best team possible, not into poisoning the drinking water of the other teams.

But sporting contests are zero sum. One side wins and the other losses. Global cooperation and trade is win–win. The goods we produce and sell (for example) to China, with which to pay for the goods we buy from China make us and China both richer. The citizens of both countries benefit from this exchange. Win–win. Sharing information on the source, nature, and potential cure of a virus (which knows no borders) benefits all of us. Win–win.

The world’s output is maximized when our productive assets (labor and capital) are allocated to their most productive uses globally. That requires that market prices reflect the true productivity and value of each activity. Thus, the world as a whole benefits from rules governing government interferences in market prices and allocations. The World Trade Organization is the forum for agreeing on these rules of fair trade and enforcing them. “Econ 101- Trade in very simple terms”

The airplanes built by Boeing and Airbus benefit from government support of one sort or another. For years they have fought one another over whether this support conformed to fair trade rules. A settlement has finally been reached. “Boeing – Airbus settlement”

Trade restriction in the name of national security, while potentially legitimate, can easily cross the line into wealth reducing protectionism. Does the use of Huawei 5G equipment really threaten U.S. national security or U.S. business interests (protectionism). Some of these cases are hard to call but we must look carefully at narrow business interests in protecting their markets to the detriment of the rest of us. “Huawei ban could crush US aid efforts”

Global supremacy suggests that we would set these rules. To be successful the rules of international trade must be very broadly followed. Thus, their formulation must be a collective undertaking. It is fine for the U.S. to exert influence in setting these rules, but unfortunately, we have a poor record of even following them. We have caused the demise of the WTO dispute resolution body. We have strangely and counterproductively withdrawn from the Trans-Pacific Partnership (TPP), which was then replaced by the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). These set high standards for more open trade that China will hopefully have to meet to join. The self-image of supremacy has corrupted U.S. behavior. Former President Trump’s protectionist tariffs on trade with China, EU, Canada, etc., which President Biden has so far failed to remove, have further reduced U.S. and world income. “Trade protection and corruption”

So, what should our policy be toward China? China has no intention or interest in attacking the United States. They care about their own economies and their own neighborhoods. We should keep our nose and military home to look after our own neighborhood. We should work with China (and Russia and others) to formulate win-win rules for international interactions and behavior. We should apply the mechanisms of the WTO and other international bodies, and diplomacy more generally, to hold China (and others) to the agreed rules. But we must abide by them as well. The rule of law is not just for others.

We should fix the problems in our own economy. We should work to make our domestic rules of commerce fair and efficient so that our economy will be the best in the world. We should work with other countries, including China, to maximize the productivity of their resources because we and everyone else will benefit (win-win).

The United States was founded on principles that have served us well providing a model that the rest of the world would do well to follow. The idea that we should (or can) impose our principles on others rather than provide an example like “a shining city on a hill,” is a violation of those very principles. We have repeatedly failed to uphold those principles, but we keep trying. We must continue trying and must try harder.

Is Huawei a Security Risk?

This question is quite beyond my technical competence to answer.  Even the experts disagree amongst themselves.  President Trump thinks it is too risky to use Huawei equipment and insists that Britain and our other allies not use Huawei equipment for building out their 5G telephone infrastructures. British Prime Minister Boris Johnson thinks its OK (plus it is available and cheaper than its potential future competitors) for many but not all uses.  President Trump, who likes to think he is protecting American jobs even though our economy is fully employed, was so angry at Johnson’s unwillingness to bow to his demands that he hung up on Johnson in their most recent phone conversation.  Johnson promptly cancelled his planned trip to the White House. Ukraine President, Volodymyr Zelensky, must be shaking his head in disbelief.

Trump has reason to be suspicious of foreign produced equipment following the recent disclosure that a CIA owned Swiss company, Crypto AG, sold encryption devises to 120 countries that enabled the U.S. and Germany to “easily break the codes that countries used to send encrypted messages.”  This went on for over 40 years allowing us to spy on our friends and foes alike. “National-security/cia-crypto-encryption-machines-espionage”

But these days security is much more sophisticated and wouldn’t allow such hardware to slip through undetected. On the other hand, the spying technology is more sophisticated too. Britain and other European countries are avoiding Huawei equipment for sensitive applications and using it for the rest. My point is not to join the debate over whether and where to use Huawei equipment but rather to argue that the more promising approach to convincing our friends of potential dangers (the more Adult approach, if I may) is to present our evidence and endeavor to convince them of our views. Trump’s approach, as in so many other areas, is to threaten and bully. “The-basis-of-American-world-leadership”

It is not easy to determine when trade restrictions reflect genuine security concerns and when they are just another manifestation of Trump’s protectionist, central planning direction of our resources.  He has imposed and threatened to impose tariffs with abandon, inflicting harm on our own economy as well as the tariffs’ targets. “Trumps-recent-trade-moves-show-adversarial-approach-has-only-just-begun”  “The United States has also threatened duties of up to 100% on French goods, from champagne to handbags, because of a digital services tax that Washington says harms U.S. tech companies.”  “Trump-threatens-big-tariffs-on-car-imports-from-EU”  This use of tariffs has nothing to do with trade and violates WTO rules, which Trump seems to pay little attention to in any event.

While this type of bully approach might work sometimes, it is unsustainable in the long run.  Needless to say, world confidence in the U.S. to do the right thing has plummeted. While for now other countries bow to and follow orders from the U.S., not out of respect but out of fear of retaliation, they follow a strategic waiting game. They know that Trump will not always be in power. And after he is gone, the U.S. will no longer have allies but adversaries ready to bare their claws for revenge.  https://www”9-charts-on-how-the-world-sees-Trump”

 

 

 

The Sources of Prosperity

I am an economist so I can’t help writing about the virtues of trade in the (futile?) hope that what is obvious to economists might be better understood and appreciated by the general public. https://wcoats.blog/2016/12/22/save-trade/https://wcoats.blog/2017/01/06/the-liberal-international-order/,   https://wcoats.blog/2018/03/03/econ-101-trade-in-very-simple-terms/, https://wcoats.blog/2017/01/06/the-liberal-international-order/, https://wcoats.blog/2019/02/09/tariff-abuse/

So please bear with me one more time. If you join with ten, or a hundred, or a thousand others to cooperatively produce things, you can jointly produce much more than ten times, or one hundred or one thousand times as much as you could all produce individually as one person factories. But that huge increase in productivity and output is not possible unless you can sell your joint output to others for the many other things you need and want to consume that they produce. In short, none of this is possible without trade. The wider the area over which we can trade the greater are the possible gains in productivity from the specialization of labor and capital that a larger market makes possible. The American constitution recognized this when it prohibited restraints on trade between the states (across state lines).  The ultimate limit in the size of the market is given by the world itself.

But markets—the “places” or the arrangements through which trade deals (purchase and sales agreements) occur—require trust that deals will be honored.  The rule of law, which protects private property and the enforcement of contracts, provides the certainty needed for a manufacturer or other service provider to invest in the productive capacity and facilities needed to generate the promised supply of products that is the foundation of our relative affluence. When trade extends beyond national boundaries the rule of law takes the form of international agreements to rules of the game.  Bilateral, multilateral and global trade agreements establish the rule of law within their domains.  The World Trade Organization (WTO) was created to oversee this process. The astonishing skyrocketing of the standard of living of the average (even the poorest) earthling rest on, i.e. would not have been possible without, trade.

The uneven but persistent history of trade has seen the protection of less efficient and uncompetitive firms and industries reduced over time via trade agreements that reciprocally reduced the taxation of imports (i.e. tariffs).  Starting with President Trump’s misguided withdrawal from the Trans Pacific Partnership (TPP) trade liberalization has been thrown into reverse. Trump vs Adam Smith  TPP modernized and further liberalized existing trade agreements between the U.S. and a number of Pacific countries.  The agreement was to be between 12 Asian Pacific countries until the U.S. withdrew.  It would have provided a strong magnet to further draw China into the global system of rules for increasingly free trade. It was ultimately signed by 11 countries without the U.S. and renamed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The US withdrawal from the agreement was a serious mistake.

The United States as well as much of the rest of the world is beginning to pay the costs of Trump’s trade wars. In January of this year Deutsche Bank estimated that Trump’s trade wars have cost the U.S. stock market $5 trillion in forgone returns so far. Costs of trade war  “Bloomberg economists Dan Hanson and Tom Orlik have… concluded: If tariffs expand to cover all U.S.-China trade, and markets slump in response, global GDP will take a $600 billion hit in 2021, the year of peak impact.” US China trade war-economic fallout  “The import tariffs proposed by President Trump could wipe out the income gains provided by the Republican tax cuts for low- and middle-income earners, Jim Tankersley of The New York Times reported Monday.”  ”Trump-Tariffs-Could-Wipe-Out-Tax-Cuts-Most-Americans”

Are Trump’s import taxes old fashioned protectionism (protecting relatively inefficient domestic industries from foreign competition), a legitimate response to national security concerns, or a reflection of Trump’s “famed” negotiating style?

Protectionism

For starters Trump’s steel and aluminum tariffs of 25% and 10% respectively (following his earlier imposition of tariffs on solar panels of 30% and washing machines of 50%) are clearly protectionist and reflect an alarming over reach of executive authority. Using the “authority” given the President under Section 232 of the Trade Expansion Act of 1962, U.S. Department of Commerce found that imports of steel and aluminum “threaten to impair the national security” of the United States.  Canadian Prime Minister Justin Trudeau called the claim that reliance on Canadian steel could be considered a national security risk “absurd”.  Trump removed these tariffs on Canada and Mexico last month, but they remain in effect on our other friends (e.g., EU) and enemies. On several occasions Trump has threatened to raise tariffs on car’s imported from Europe on the same phony national security grounds.

The patters of trade that minimize costs of production and maximize labor productivity can be complex. While protecting a few inefficient American steel producers and their related jobs might be good for those few firms, it is bad for American consumers and the economy at large. Workers in less productive protected industries are thus not available to work in more productive activities. Moreover, more jobs were lost than saved as the result of high prices and lost sales by steel importing manufactures.  One study estimated that these tariffs could result in the loss of 146,000 jobs.[1]

Peterson Institute for International Economics study estimated that American businesses and consumers paid more than $900,000 a year for each job that was created or saved as a result of the Trump administration’s tariffs on steel and aluminum. The cost for each job saved as a result of the administration’s tariffs on washing machines was $815,000.[2]

National Security

The distinction between legitimate security concerns and protectionism is not always obvious. Trump’s approach is often more protectionist and bargaining chips than concerns for security.  An early indication of this was the U.S.’s treatment of ZTE Corp, China’s second largest telecoms gear maker.  In April 2018 the U.S. band U.S. companies from selling their products to ZTE in connection with its violation on U.S. restrictions on trade with Iran, Sudan, North Korea, Syria and Cuba.  “That means no Qualcomm chips or Android software for its phones, and no American chips or other components for its cellular gear.” NYT The company was effectively shut down and heading for bankruptcy when in early June of 2018 Trump ordered these restrictions lifted to save Chinese jobs!!  According to the NYT: “The Trump administration is pressuring China to make trade concessions. It may also need Beijing’s help to strike a deal with North Korea as Washington and Pyongyang plan a high-profile meeting on June 12 in Singapore.  Mr. Trump appears to be using ZTE’s punishment as a bargaining chip in negotiations with China, rather than a matter of law enforcement.” What is ZTE–A Chinese Geopolitical Pawn

Trump’s more recent banishment of Huawei, a Chinese tech company leading the world in 5G development, from the American market and efforts to convinces our once British and EU friends to do the same provides another example. In some applications security concerns when dealing with a Chinese company may be justified, but these areas are limited and Huawei has gone to great lengths to allay those concerns. “Google has been arguing that by stopping it from dealing with Huawei, the US risks creating two kinds of Android operating system: the genuine version and a hybrid one. The hybrid one is likely to have more bugs in it than the Google one, and so could put Huawei phones more at risk of being hacked, not least by China.”  “Google warns of US national security risk of Huawei ban” FT June 6, 2019

The Trump administration has expressed its anger with the refusal of many other countries to follow its lead thus incurring a diplomatic cost as well as the economic one of restricting access to the best and/or most cost-effective products. The dangers and potential damage of using trade threats for other objections are clearly express by seven former US Ambassadors to Mexico in a joint letter published June 5: Ex US Mexico Ambassadors-Tariffs would destroy partnership we built

Moreover, the US’s exploitation of the importance of the dollar as a reserve and payment currency in forcing its political agenda on the rest of the world has incentivized the EU, Russian, China and others to look for alternatives. As another example of the growing risks of relying on American markets, Alibaba, China’s national champion internet giant whose share are currently only listed on the New York Stock Exchange, will raise its next round of capital on the Hong Kong exchange.

Bargaining

But some of Trump’s threats of tariffs no doubt reflect his approach to a trade negotiation. While it is not the usual approach to a trade negotiation, in which the parties should be looking for win-win reductions in tariffs and other impediments to freer trade, it could occasionally work to achieve greater concessions from the other side than otherwise. There is really little evidence that it has, however. The renegotiated NAFTA, given the new name United States-Mexico-Canada Agreement or USMCA, is no better than a normal review and updating of the existing NAFTA would have been expected to produce. It incorporates most of the updated provisions of the TPP, as was expected. But Trump started the NAFT review and update, by tearing up the old agreement and threatening to revert to the bad old days. Trump’s threated 5% tariff on imports from Mexico if it doesn’t do more to reduce or deal with the flow of refugees across the US Mexican border seems to be a counter example of a threat that worked.

___________________________________________________________________________

Donald J. Trump‏Verified account @realDonaldTrump

FollowFollow @realDonaldTrump

On June 10th, the United States will impose a 5% Tariff on all goods coming into our Country from Mexico, until such time as illegal migrants coming through Mexico, and into our Country, STOP. The Tariff will gradually increase until the Illegal Immigration problem is remedied,..

4:30 PM – 30 May 2019

______________________________________________________________________________

What if Trump doesn’t back down as China matches each of Trump’s escalations with new tariff increases of their own? Such a true trade war was not a necessary approach to the negotiations and could be terribly detrimental to both economies as well as those of our trading partners. Some of China’s behavior should be challenged. Its theft of intellectual property, state aid to some of its companies, and restrictions on foreign companies operating in China violate the spirit of the competitive deployment of resources to their most productive uses. But these criticisms are shared by most other countries (UK, EU, Japan, Korea, India, etc.). The US should negotiate with China together with these allies. It should use and strengthen the mechanisms of the World Trade Organization rather than ignoring and weakening it.

Even if Trump does backdown, as he generally has in the past, considerable damage has already been done that could take years to undo. The development of the cost saving, productivity enhancing global supply chains took time and were built with confidence in the rules that would apply—the rule of law. These very much included the maximum taxes (tariffs) and other regulations that would apply. The trust in that framework of rules has now been badly damaged.

Supply chains are already being restructured to reduce the risks of US policy shifts. While new arrangements may avoid or reduce these risks, they do so at the cost of efficiency.  Refusing to buy Russian booster rockets or Chinese semiconductors because of concerns that the Chinese or Russian government might exploit their companies’ products militarily or to steal our trade secrets, forces us into more expensive and/or inferior products and thus keeps us and the world poorer than otherwise. We had better be sure that the costs are necessary.

[1]  Timmons, Heather (March 5, 2018). “Five US jobs will be lost for every new one created by Trump’s steel tariffs”Quartz (publication).

[2] Long, Heather (2019). “Trump’s steel tariffs cost U.S. consumers $900,000 for every job created, experts say”The Washington Post.

Tariff Abuse

The U.S. constitution gives Congress the authority to enact and control tariffs (taxes on American consumers of imported goods and services).  Over the years Congress has increasingly delegated that authority to the executive branch (the President) under certain specified circumstances. Section 232 of the Trade Expansion Act of 1962 gives the President the authority to restrict (impose tariffs on) imports that threaten national security without the need for congressional approval.

Last year President Trump imposed a 25 percent tariff on steel imports and a 10 percent tariff on aluminum on the grounds, confirmed upon the President’s prompting by the Commerce Department, that relying on steel from Canada and the EU (fellow NATO members) was a threat to our national security.  If this were a skit on “Saturday Night Live” we would have a good laugh, but unfortunately it is for real.  It is the launching of a very ill-advised trade war by a President who had promised when campaigning for office to reign in executive overreach.  Sen. Ben Sasse, Republican from Nebraska, called Trump’s decision “dumb.”

Trump’s stated motive was to restore American jobs to an industry in which we are relatively inefficient. The few additional workers in steel and aluminum resulting from these tariffs were outweighed by the loss of jobs in industries dependent on these now more expensive metals as inputs. Bestowing financial favors on a selected group to the detriment of the rest of us can rightly be called corruption. https://wcoats.blog/2018/09/28/trade-protection-and-corruption/  Such policies do not reflect America First. They reflect My Friends First.

Trump has apparently asked the Commerce Department to “evaluate” whether importing cars is a national security threat that would allow him to impose tariffs on them without Congressional consent. So much for rolling back executive overreach and any consideration of the national interest.

Both Republicans and Democrats may have had enough of this.  “While the Trump Administration ponders whether to claim that imported Volkswagens threaten national security, some on Capitol Hill are trying again to rein in the President’s tariff powers.”  WSJ: “Two-bills-to-defend-free-trade”

Two bills have been introduced in the House that would shift the responsibility of determining if an import is a national security risk from the Commerce Department, which naturally leans toward protecting American commerce, to the Defense Department, which should better understand real security risks. “The stronger bill was introduced last week by Senator Pat Toomey, the Pennsylvania Republican….  Mr. Toomey’s bill would require Congress’s blessing. Once a tariff is proposed, lawmakers have 60 days to pass a privileged resolution—no Senate filibuster to block consideration—authorizing it. No approval, no tariff.” WSJ 2/9/2019  A somewhat weaker bill has been introduced by Senator Rob Portman, Republican from Ohio, on the grounds that it has a better chance of passing over a Presidential veto.

Please write your congressional representatives to support one of these bills (preferably the Toomey bill) before this President fights another war that we all lose.

Trade protection and corruption

Starting with the repeal of the Corn Laws in England (tariffs on grain imports) in 1846, cross border trade and incomes blossomed. “Global life expectancy in the past 175 years has risen from a little under 30 years to over 70. The share of people living below the threshold of extreme poverty has fallen from about 80% to 8% . . . . Literacy rates are up more than fivefold, to over 80%. Civil rights and the rule of law are incomparably more robust than . . . only a few decades ago.” From The Economist’s 175 anniversary issue September 13, 2018: “A-manifesto-for-renewing-liberalism”

Post World War II trade agreements reflected a process of progressive reductions in tariffs and other impediments to trade. Unfortunately and misguidedly, President Trump has reversed this trend by introducing new tariffs and raising old ones. Import tariffs are taxes on American consumers. Why is Trump doing this? He says that he wants to bring manufacturing jobs that have moved off shore back to the U.S. by making their output cheaper than taxed imports.

As the U.S. economy is fully employed (there are currently more job openings than people looking for work), increasing employment in one area can only occur by reducing it in one or more other areas. Starting with Trump’s 25% and 10% tariffs on steel and aluminum, the shift from imported steel and aluminum to domestically produced steel and aluminum as a result of tariff protection is only possible by shifting workers from other more productive activities lowering the value of over all output. Given that these products are inputs into some American exports, which are thereby made more expensive, it is estimated that more jobs will be lost than created. “Econ-101-trade-in-very-simple-terms”

The U.S. has already imposed steep tariffs on China’s steel and aluminum to offset Chinese government subsidies to its steel and aluminum industries and thus we import almost no steel and aluminum from China. Trump has justified his new steel and aluminum tariffs on national security grounds thus bypassing usual World Trade Organization (WTO) rules for justifying tariffs. It stretches credibility, to say the least, to claim that depending on Canada and Mexico for steel is a security risk, not to mention that existing domestic production by itself exceeds our military needs. “Trump-says-steel-imports-are-a-threat-to-national-security-the-defense-industry-disagrees”

Some claim that Trump’s tariffs and threatened tariffs are just part of his negotiating strategy to achieve fairer trade agreements by a free traders at heart. This is belied by the fact that steel and aluminum tariffs remain on Mexico even after tentative agreement on a NAFTA replacement/update with Mexico. The question is why would someone benefit one small sector of the economy while imposing much larger harm on the economy more generally? The short answer is corruption.

Corruption in this context refers to bestowing benefits on a few at the expense of others in exchange for something else. In government, corruption generally takes the form of vote buying, though sometimes it is for personal financial gain. My bottom line here is that in addition to reducing an economy’s output and thus its resident’s incomes by protecting inefficient or less competitive industries, tariffs and other forms of economic protection reflect, or at the least open the door for and encourage, corruption.

When the government has or takes the authority to tax or exempt from tax individual industries or firms, it invites, if not begs for, corruption. Read the story of the Dixon Ticonderoga pencil company and weep. “How-dixon-ticonderoga-has-blurred-lines-of-where-its-pencils-are-made”

Trump and interest rates

There seems to be no norm or conventional wisdom that President Trump is not willing to overturn. Following Fed Chairman Powell’s congressional testimony Tuesday in which he confirmed the Fed’s intention to continue its gradual increase in its policy interest rate, Trump said: “I don’t like all of this work that we’re putting into the economy and then I see rates going up.”  The statement is wrong on multiple accounts.

The economy is now fully employed and interest rates probably should have been returned to normal some time ago.  The alarming current and projected fiscal deficits of the federal government will force interest rates and trade deficits still higher.  This is Trump’s fault– not Powell’s.  “Who pays uncle Sam’s deficits?”  The major policies threatening to undermine the economic boost from tax and regulatory reforms are Trump’s trade policies (pulling out of the Trans Pacific Partnership, stalling and threatening U.S. withdrawal from NAFTA, Steel and Aluminum tariffs (taxes) on our friends in Canada, Mexico and the EU, and a deepening trade war with China).  Leaving the TPP  Resisting the interest rate increases needed to keep inflation at 2% would increase the most regressive tax around (inflation).

But Presidential interference in implementing monetary policy, as is now being undertaken by President Erdoğan in Turkey, violates a long established principle and practice of central bank independence.  Historically, inflation, which falls heaviest on the poor and undermines economic efficiency and growth, has resulted primarily from governments turning to their central banks for financing in misguided and ultimately futile efforts to keep interest rates (government borrowing costs) low.

President Trump can save the economic benefits of his tax and regulatory reforms by rejoining the TPP, rapidly concluding amendments to NAFTA that improve productive efficiency and fairness, dropping the steel and aluminum tariffs, ending the trade war with China, joining with the EU, Canada, Japan and others to bring China into compliance with the rules of a strengthened WTO, and establishing a fiscal budget surplus primarily through entitlement reform.

Econ 101: Trade deficits

Responding to critics of the administration’s proposed steel and aluminum tariffs, Commerce Secretary Wilbur Ross stated on CNBC: “I think this is scare tactics by the people who want the status quo, the people who have given away jobs in this country, who’ve left us with an enormous trade deficit and one that’s growing. [The trade deficit] grew again last year, and if we don’t do something, it will keep growing and keep destroying American jobs.” “Wilbur-Ross’s-star-rises-as-trump-imposes-tariffs”

Though the forces determining our trade deficits have many moving parts, it is not that complicated to explain why everything in the above statement is wrong. In this note I explain why:

  • Our trade deficits are caused more by U.S. government fiscal deficits than by the mercantilist export promotion policies of China, Japan, and Germany;
  • Mercantilist policies that subsidize exports and restrict imports don’t cost American jobs but rather reallocate workers and capital to less productive jobs that lower our standard of living; and
  • Challenging mercantilist policies using the tools and provisions of the WTO and other trade agreements better serves our long run interests than unilaterally imposing tariffs and inciting trade wars.

To understand the relationship between our fiscal deficit and trade balance, it is essential to understand the macro level relationship of our trade deficit to the other broad categories of our national income and expenditures. So take a deep breath as I explain the national income identities through which I will explore that relationship.

The economy’s total domestic output, known as Gross Domestic Product (GDP), can be broken into the broad components of our output/income that reflect how that income is spent. I understand how a little math can discourage some from reading further, but this is necessary and I hope you will indulge me. Starting with the components of expenditures:

GDP = C –M + I + G + X, or GDP = C + I + G + (X-M)

Where:
C = household consumption expenditures / personal consumption expenditures
I = gross private domestic investment
G = government consumption and gross investment expenditures
X = gross exports of goods and services
M = gross imports of goods and services

C-M is household consumption of domestically made goods and services, while M is household consumption of foreign made goods and services. If we subtract M from X (foreign expenditures on domestically made goods and services) we have the famous trade balance. When we buy more foreign goods and services than foreigners buy of our output, i.e., when X-M is negative, we have a trade deficit. As discussed further below, it is important to note that the trade balance (deficit or surplus) is between the U.S. and the rest of the world. Bilateral deficits or surpluses with individual countries are irrelevant.

But another way of breaking up total output (and thus income) is into how households allocate it:

GDP = C + T + S

Where:

T = household tax payments (personal and corporate income taxes plus sales taxes)

S = household saving

These two equations each provide definitions of the same quantity (GDP) and thus can be set equal to each other. This enables us to arrive at a useful formulation of the trade deficit:

C + I + G + (X-M) = C + T + S, or M-X = I-S + G-T;

The relationships in the identity can be described in several ways. Our fiscal deficit (G-T) must be financed by domestic net saving, i.e. a negative I-S, or by foreigners (M-X), i.e. a trade deficit or a mix of the two. Government finances its deficits by selling treasury securities domestically or abroad. If they are purchased domestically, residents must save more for that purpose or investors must borrow less from existing saving. If a fiscal deficit doesn’t crowd out private investment or increase private domestic saving (e.g., if I-S = 0) then it must be financed by foreigners who get the dollars with which to buy U.S. treasure securities by selling their goods and services to us in excess of what they buy from us, i.e., a trade deficit.

The above relationships are derived from definitions. They are tautologies. If the government’s spending exceeds its tax revenue it must borrow the difference from someone: a diversion of spending that would have financed investment (crowding out), a reduction in consumption (i.e., increase in saving), or an increase in the share of consumption spent abroad (increase in imports) giving foreigners the dollars they lend to the U.S. government. The interesting part—the underlying economics—is how markets bring about these results (usually a mix of all three).

When the government increases its need to borrow, other things equal, the increase in the supply of treasury securities relative to the existing demand for them increases the interest rate the government must pay. Higher interest rates generally encourage more saving and discourage investment. If we have no trade deficit (X-M = 0 so that G-T = S-T), the government’s deficit (G-T) must be financed by net saving (S-T). Depending on how much of the net saving comes from an increase in saving and how much from a decrease in investment, government deficits are bad for investment and economic growth in the long run (abstracting from countercyclical budget deficits and surpluses meant to offset cyclical swings in aggregate demand).

However, much of our fiscal deficits have been financed by foreigners (predominantly China and Germany) through their trade surpluses and our trade deficits. The market produces this result because the higher interest rates on U.S. treasury securities (and until now their perceived low risk of default) attracts foreign investors. The foreign demand for dollars in order to buy these treasury securities increases (appreciates) the exchange rate of the dollar for other currencies. An appreciated dollar makes American exports more expensive to foreigners and foreign imports cheaper for Americans. The resulting increase in imports and reduction in exports increases the trade deficit, which then finances our fiscal deficit.

As Alan Blinder put it: “Nations that invest more than they save must borrow the difference from abroad. Happily, the U.S. can do that because foreign countries have confidence in American securities. When we import more than we export, foreigners get IOUs in return for goods and services Americans want. That sounds more like winning than losing: We get German cars, French wines, and Chinese solar panels, while the Germans, French and Chinese get paper assets. America’s tremendous ability to export IOUs has been called our “exorbitant privilege.” Yes, privilege.” “This-is-exactly-how-trade-wars-begin”

If you have made it this far, you will be better able to understand the errors of Secretary Ross’s statement above: “if we don’t do something, it [the trade deficit] will keep growing and keep destroying American jobs.” If the United States government wants to reduce our trade deficit, it should reduce, rather than further increase, our fiscal deficit.

As noted above, however, our trade deficits reflect many moving parts. In the above example, foreigners want to increase their holdings of U.S. dollars (and dollar assets) in part because the dollar is a widely used international reserve asset. Our trade deficit is the primary way in which we supply our dollars to the rest of the world (and its central banks). However, what if our trading partners were manipulating their exchange rates in order to produce trade surpluses for themselves?

In the past, China followed such a mercantilist policy of promoting its exports over imports as part of its economic development strategy. In that case our trade deficit would result in foreign investments in the US with the net dollars accumulated abroad even without U.S. fiscal deficits. If they are not soaked up financing government debt they will be invested in private securities or other assets (such as Trump Hotels). Just to keep it complicated, these foreign investments would either add financing to increased domestic investment (if they lowered U.S. interest rates) or would buy existing American assets freeing up funds of the sellers to help finance government deficits or new investment. As I said, there are many moving parts, which adjust depending on prices (interest rates) and the public’s buying and investing propensities.

Tariffs don’t violate the above national income identities. Rather they potentially change the allocation of resources toward or away from traded goods. The Better Way tax reform proposals of Congressman Kevin Brady in 2016 included a so-called border adjustment tax, which taxed all imports equally and exempted all exports from the domestic expenditure tax. The tax on imports would have been, in effect, a tariff on all imports. Interestingly Brady’s border adjustment tax would not have affected our trade balance nor distorted resource allocation. The dollar’s exchange rate would have adjusted to nullify the impact of the tariff/tax on the prices we would pay domestically on imports.

Contrast this with the tariffs proposed by President Trump on steel and aluminum imports. These tariffs were meant to prop up inefficient American steel and aluminum firms by increasing the cost of their imported competition. As such it would reallocate our workers and capital to activities that are less productive than they would otherwise be used for (i.e., to the increased production of steel and aluminum). Once all of the adjustments were made we would be poorer, though still fully employed. “Econ-101-trade-in-very-simple-terms.”

It turns out, however, that Trump’s tariff threats were probably a negotiating ploy (He has temporarily exempted Canada and Mexico from the tariffs and is making deals with other suppliers in exchange for suspending the tariff). China is already paying special tariffs on these products to counter Chinese government subsidies and only sells the U.S. 2% of its steel imports. Thus the tariff is largely irrelevant for China. The net short-term affect of Trump’s ploy may well result in almost no tariff revenue and no protection for U.S. steel and aluminum producers and some improvements in other trade deals with our trading partners (or at least what the President considers improvements). In short, Trump’s tariff threat could turn out to be helpful. However, given Trump’s generally negative and/or ill-informed views on trade, this may be an overly generous interpretation.

As The Economist magazine put it: “If this were the extent of Mr. Trump’s protectionism, it would simply be an act of senseless self-harm. In fact, it is a potential disaster—both for America and for the world economy.” “Trumps-tariffs-steel-and-aluminum-could undermine-rules-based-system” Why? Even if the tariffs are waved sufficiently to avoid the retaliatory trade war Europe and others are threatening, Trump’s use of the national security justification for his steel and aluminum tariffs can’t be taken seriously. “That excuse is self-evidently spurious. Most of America’s imports of steel come from Canada, the European Union, Mexico and South Korea, America’s allies.” The Economist My long time friend Jim Roumasset noted that “Wilber Ross did indeed make such a finding [of a national security threat], but then declared that the tariffs are “no big deal.” In other words, the tariffs won’t improve national security. Unfortunately, there is neither check nor balance against the ignorance of commerce secretaries.”

The large expansion of international trade made possible by removing trade barriers, including lowering tariffs, has enormously benefited us (the U.S. and the rest of the world). In 1980 60% of the world’s population earned less than $2.00 a day (inflation and purchasing power parity adjusted). Because of economic growth, significantly spurred by expanding world trade, this number as plummeted to 13% by 2012 (latest figure available). This incredible feat was made possible by the collective agreements of virtually all of the world’s countries to increasingly lower tariffs and other trade barriers and to agree on global rules for fair competition. These trade rules were developed under the General Agreement on Trade and Tariffs (GATT) created after WWII as one of the three Bretton Woods institutions (the International Monetary Fund, the World Bank, and the GATT), which became the World Trade Organization (WTO) in 1995.

With its large and diverse membership of 164 rich and poor countries, the GATT/WTO has not been able to conclude new global trade agreements since 1995. Thus attention shifted to regional, multilateral agreements such as the 11 country Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) successor to the Trans-Pacific Partnership (TPP) from which Trump very foolishly withdrew the U.S. last year. “The-shriveling-of-U.S.-influence”

When China was admitted to the WTO in 2001 we expected that it would continue to liberalize and privatize its economy in accordance with the requirements of the WTO’s rules. The expectation was that China’s membership in the WTO would draw it into the liberal international rule based trading system.

In 2002, the IMF sent me to China to discuss these requirements in the banking sector with the Peoples Bank of China. We had high expectations. Unfortunately, China’s liberalization has gone into reverse in recent years. While not a trade issue, China’s recent launch of its centralized rating of the good behavior of its citizens, drawing on its extensive surveillance capacities, and its just announced intension to bar people with low “social credit” scores from airplanes and trains is certainly not an example of the more bottom up civil liberties, human rights views and approaches of most other countries. “China-to-bar-people-with-bad-social-credit-from-planes-trains.”

China’s behavior has been a disappointment. From its accession into the WTO, China began flooding the world with its “cheap” exports while continuing to restrict its imports from the rest of the world. The normal market reaction and adjustment to the inflow of dollars to China from its resulting trade surplus would be an appreciation of the Chinese currency (renminbi), which would increase the cost of China’s exports to the rest of the world (and lower the cost of its foreign import). However, China intervened in foreign currency markets to prevent its currency from appreciating and as a result China accumulated huge foreign exchange reserves (peaking at 4 trillion U.S. dollars in 2014). Not only did China intervene to prevent the nominal appreciation of its currency, but it also sterilized the domestic increase in its money supply that would normally result from the currency intervention, thus preventing the domestic inflation that would also have increased the cost of its exports to the rest of the world.

China’s currency manipulation was not seriously challenged at that time. Economic conditions in China have more recently changed and since 2014 market forces have tended to depreciate the renminbi, which China resisted by drawing down its large FX reserves (all the way to 3 trillion USD by the end of 2016—they have risen modestly since then). China is no longer a currency manipulator as part of an export promotion (mercantilist) policy.

But China does continue to violate other WTO rules with many state subsidies to export industries and limits and conditions for imports and foreign investment (such as requiring U.S. companies to share their patents as a condition for investing in or operating in China). A government subsidy of exports distorts resource allocation and thus lowers overall output in the same way but in the opposite direction as do tariffs. Both reduce the benefits and gains from trade and are to be resisted. The WTO exists to help remove such barriers and distortions in mutually agreed, rule based ways. A tariff that balances a state subsidy helps restore the efficient allocation of resources upon which maximum economic growth depends. These are allowed by WTO rules when it is established that a country’s exports violate WTO rules. President Trump is considering such targeted tariffs (his steel and aluminum are certainly not an example of this type of tariff) and hopefully they will conform to WTO requirements. “Trump-eyes-tariffs-on-up-to-60-billion-chinese-goods-tech-telecoms-apparel-targeted”

Trump’s bypass of WTO rules for his steel and aluminum tariffs, undermine the WTO and the international standards that have contributed so much to lifting the standard of living around the world. Despite its many weaknesses and shortcomings our interests are better serviced by strengthening the WTO rather than weakening it. “Trumps-tariffs-aren’t-killing-the-world-trade-organ”

“Whatever the WTO’s problems, it would be a tragedy to undermine it. If America pursues a mercantilist trade policy in defiance of the global trading system, other countries are bound to follow. That might not lead to an immediate collapse of the WTO, but it would gradually erode one of the foundations of the globalised economy. Everyone would suffer.” The Economist

As an aside, our bilateral trade deficits (e.g., with China) and surpluses (e.g., with Canada) are totally irrelevant and any policy designed to achieve trade balance country by country would damage the extent and efficiency of our international trade and thus lower our standard of living. See my earlier discussion of this issue in: “The-balance-of-trade”

“Even though trade policies are unlikely to change the long-run trade balance, they are not unimportant. Americans will be better off if the United States can use trade negotiations to open foreign markets for its exports, not because more exports will increase the US trade surplus, but rather because US incomes will be higher if more US workers can be employed in the most efficient US firms that pay high wages, and if those firms can sell more exports at higher prices. Similarly, US living standards will be higher if the United States reduces its trade barriers at home because this will give consumers access to cheaper imports and make the economy more efficient. Ultimately, therefore, the goal of US trade policies should not be focused on trade balances but instead on eliminating trade barriers at home and abroad.” This is quoted from the excellent and more detailed discussion of many of these issues that can be found here: “Five reasons why the focus on trade deficits is misleading”

There is another, very important negative byproduct of Trump’s transactional, confrontational, zero sum approach to getting better trade agreements. Mutually beneficial trade relations strengthen political and security relations and cooperation. These have been important non-economic benefits, for example, of NAFTA. Trump’s confrontational approach undermines these benefits. Pew Research Center surveys in 37 countries found that: “In the closing years of the Obama presidency, a median of 64% had a positive view of the U.S. Today, just 49% are favorably inclined toward America. Again, some of the steepest declines in U.S. image are found among long-standing allies.” Senator Ben Sasse delivered an exceptional speech on this subject followed by an outstanding panel discussion of the NAFTA negotiations at the Heritage Foundation. I urge you to watch the following video of that event: “The-national-security-implications-of withdrawing from-NAFTA”

Econ 101—Trade in very simple terms

Trade allows people and firms to specialize in what they produce. This enables them to be more productive. This raises the income (standard of living) of both the seller and the buyer (who must also sell something in order to buy something)—i.e. both the exporter and importer. https://wcoats.blog/2017/09/15/a-basic-human-right/  https://wcoats.blog/2016/12/22/save-trade/

So what does Trump’s steel and aluminum tariff do?

The American economy is now fully employed (ok, maybe some of those who left the labor market in recent years, not all of whom are old, can be coaxed to return). Thus if high tariffs on steel and aluminum make previously non competitive and inefficient American steel and aluminum producers competitive again, where will the workers come from to do that work? They must be attracted away from what ever they are producing now—lets call it good A. So we will produce less of good A, which was competitive without taxpayer subsidies or regulatory favoritism, in order to produce more steel and aluminum, which was not competitive before given tariff protection. Add it up and our overall income goes down. The economy over all will be less efficient, less productive, and our overall incomes and standard of living will be reduced.

This reallocation of our resources from more productive to less productive products will make owners of steel and aluminum companies and property owners around closed foundries happy. Trump-may-prosper-from-tariffs-even-if-this-faded-port-town-doesnt/2018/03/02/. But what about those who buy steel and aluminum made more expensive by the tariffs? What about Boeing and other aircraft manufacturers who are the fourth largest American exporters, whose products will now be more expensive and less competitive with Airbus, etc.? When steel tariffs were imposed in the year 2002, 200,000 Americans in steel using industries lost their jobs. That is more than the total of around 150,000 workers in the steel industry! “If-the-US-steel-industry-employs-150000-people-then-how-can-imports-threaten-500,000-jobs?”

Subsidizing inefficient industries with tariffs hurts consumers, who will have to pay the higher prices of aluminum beer cans, etc., as well as exporters like Boeing. We will all (except steel and aluminum producers) pay the cost of this increased inefficiency. Commerce secretary Wilbur Ross thinks we should just get over these modest increases in the costs of our purchase of goods that include steel and aluminum for the greater good of American steel and aluminum producers and the 150,000 people who work for them. In case there are children listening I am withholding what I would like to say to Mr. Ross.

Only 2.2% of our steel and aluminum imports come from China while Canada (hardly a security threat to the U.S.) provides 16.1% of our imports of these products: https://www.washingtonpost.com/world/the_americas/canada-top-exporter-of-steel-and-aluminum-to-us-flabbergasted-by-trumps-tariff-proposals/2018/03/02/7c906c2a-1e22-11e8-98f5-ceecfa8741b6_story.html?undefined=&utm_term=.294884487749&wpisrc=nl_headlines&wpmm=1. The rest of the world will not roll over and play dead. The EU is already preparing counter measures to punish American exporters to Europe. “EU-vows-to-hit-back-against-trump-in-trade-war”

Following the end of WWII the world, lead by the U.S., has built up mechanisms for promoting fair trade (first the General Agreement on Trade and Tariffs—GATT—now called the World Trade Organization—WTO). Where countries violate these rules, and China frequently does, they should be addressed via the WTO. American interests, and the world’s interests more generally, are served by strengthening the WTO not weakening it. Trump’s unilateral tariffs do not serve our interests. Not only has he persistently undermined free markets with his misplaced attack on bilateral trade deficits https://wcoats.blog/2017/07/23/the-balance-of-trade/ but he has systematically undermined the WTO and the international rule of law. Please, Mr. President, stop this nonsense before it gets even worse.

Trade wars are never good, and no one wins in the end. Instead we should be enforcing and improving the rules of trade via the WTO, which has helped left millions of people out of poverty and raised the standard of living of the average person.

 

Econ 101 – Jobs and Income Growth

At long last the economy has more or less reached full employment. The December 2016 unemployment rate was 4.7 percent while the Federal Reserve’s assessment of normal full employment (NAIRU—non-accelerating inflation rate of unemployment) is 4.8 percent. More over, wage growth has picked up, increasing 2.9 percent over a year earlier. The producer price index increased 0.3 percent in December (4.3% annualized). The economy is heating up. The Federal Reserve raised its overnight interbank interest rate target (Fed Funds rate) from 0.5 to 0.75 percent in December.

What does this mean for PEOTUS Trump’s goal to create jobs and increase the economy’s growth rate? At his press conference January 11, 2017 he claimed to be: “The greatest jobs producer God ever created.”

A new job is created when a company demands an additional worker for some reason or other and the desired worker is supplied. More jobs (by which I mean more new ones than the loss of old ones, i.e., a net increase in jobs) can come from any of three sources: a) an increase in the labor participation rate (more people looking for work from those of working age who are physically able to work); b) more young people entering the labor force than retiring old people leaving it; and c) a net immigration of working age foreigners. An increase in the demand for workers that cannot be filled will put upward pressure on wages and ultimately on prices.

In December the labor participation rate rose to 62.7 percent from its low in November of 62.6. It had been around 66 percent in the years just before the great recession of 2008. While we don’t really understand why so many people have dropped out of the labor force, there is scope to increase employment if some of them return. Some of the new jobs are filled by immigrants, especially those jobs requiring information technology skills, which creates additional jobs to feed, cloth, and entertain the new residents. http://wapo.st/2irYDYW. While 7.4 million people were looking for work in November 2016 (latest available), there were 5.5 million unfilled vacancies. If you like data: 5.1 million were hired in October while 4.9 million left their jobs for a net increase in employment of 0.225 million. Of those leaving their jobs 0.372 retired or died.

In short, the economy does not lack jobs and the number of jobs is growing at about the rate of growth of the working age population. If the government increases employment for infrastructure projects, those workers must be attracted away from their existing jobs, which will require higher wages. Increasing employment at much faster rates would be inflationary. Higher inflation would undermine the real value of excessive nominal wage increases.

The problem—issue or challenge—is that the new jobs offered often require skills that do not match those of the workers looking for work. Most layoffs and discharges result from automation and other productivity improvements (not from trade), which increases the wages offered for the new jobs needed as a result. This process—increased worker productivity—is the source of per capita income growth, i.e. of our increasing standard of living. However, the benefits of increased productivity will only be broadly shared if workers are trained (or retrained) in the new jobs needed. In addition, the increased income inequality in the U.S. since the 1970s is largely the result of increased rent seeking from government as government regulations have expanded to protect the established companies from outside competition.

Faster income growth, therefore, will depend on improving productivity and its rate of growth over time (not creating more jobs). Improved and simplified regulations will free up some of the large armies of compliance officers to work in jobs that actually produce things we want. It will also increase market competition by reducing regulatory capture and related rent seeking. The same is true for any reforms in the provision of medical services that lower their cost (e.g. from greater transparency of costs of treatment options and patient responsibility for and interest in those costs). This is a different issue than who pays for medical care (insurance) but the nature and structure of medical insurance profoundly influences the incentives patients and doctors have to choose cost effective medical services. Tax reforms that lower the cost of investing in the U.S. will also increase productivity and income growth.

Investments in plant and equipment and new technology increase labor productivity and income in the future but require workers and materials to build them in the present. In an already more or less fully employed economy the resources used for investments must come from giving up other uses, primarily from producing consumption goods and services. To finance investment people will need to consume less and save more.

If none of the resources and their financing come from the government (and Trump plans the opposite), interest rates will need to rise in order to encourage more savings and to moderate the increase in investment. The Federal Reserve will have to raise its interest rate targets just to stay neutral (i.e. to keep inflation rates near their 2% per year target) as the tightening labor market puts upward pressure on wages and equilibrium interest rates. Thus interest rates will need to increase even more to encourage the additional savings needed to finance additional investment.

The new government has yet to propose its budget for the coming year, but Trump cannot simultaneously increase military spending and infrastructure spending and leave entitlement commitments unchanged (which imply significant increases in actual social security and medical outlays because of an ageing population and increased retirements relative to new entrants into the labor force) even if his tax reforms are revenue neutral (which current proposals are not). We don’t know yet which of his plans will have to give and to what extent. None of this takes into account the large impact not so far down the road of unfunded fiscal liabilities (unfunded social security, Medicare, and Medicaid obligations). https://wcoats.wordpress.com/2013/03/16/the-sequester/ https://wcoats.wordpress.com/2011/04/23/thinking-about-the-public-debt/ http://tinyurl.com/yjos2ed. Thus it is difficult to forecast how much interest rates will need to rise in order to keep inflation in check while crowding out private investment to finance the growing public debt.

Higher interest rates will also tend to strengthen (appreciate) the dollars’ exchange rate, which will increase our trade deficit unless Trump totally destroys our trade flows in a misguided effort to balance our trade account (balance imports and exports). A larger trade deficit would result in some of the increased investment being financed by foreign saving (capital inflow) and to that extent would reduce the upward pressure on interest rates. So far I have not taken account of possible changes in the economic conditions of the rest of the world. However, an appreciated dollar would improve the exports and thus economic activity of other trading partners but would increase their local currency cost of any borrowing their firms and citizens have done in dollars.

The bottom line is that any increase in economic growth in our fully employed economy will come from increases in productivity not increases in employment. Tax and regulatory reform should improve the allocation of our labor and capital resources to more productive uses. They should also lead to increased investment, which will enhance future productivity. Jawboning or pressuring the allocation of these resources into less productive uses (e.g. domestic production of goods that could be more cheaply imported) will reduce economic growth. Increased investment will require higher interest rates in order to generate the savings needed (reduction in consumption) to finance the additional investment. However, continued fiscal deficits will divert that amount of savings away from investment. Without significant cuts in future entitlement commitments (and/or defense spending) these deficits will grow larger at the expense of economic growth. New trade tariffs threatened by Trump or other new impediments to trade will also reduce our productivity and growth. While the Trump administration could increase our economic growth rate in the coming years, this outcome depends on it resolving existing internal contradictions in its proposed policies.

Save Trade

I have written about the importance of trade to our standard of living many times because it seems to be under attack. The graph below, which reflects Angus Maddison’s data showing a massive increase in income throughout the world over the last two centuries and which is reproduced, courtesy of Human Progress, provides a dramatic visual depiction of the impact of Trade.

Once households were able to trade what they produced for what they needed, the increase in their output as they specialized in what they were best at was truly staggering. But it is not surprising when you reflect on how limiting it would be if you had to be self sufficient in everything.

Following the disastrous imposition of high tariffs by the U.S. in 1930 (Smoot-Hawley Tariff Act) to save American jobs and the great depression and world war that followed, representatives of all 44 Allied nations came together under U.S. leadership at Bretton Woods in 1944 anticipating the end of World War II. They established the International Monetary Fund (IMF), the World Bank, and what is now the World Trade Organization (WTO) in order to establish, protect, and further a liberal international economic order (i.e., to protect and promote free markets globally).  Trade again flourished, as it had previously at the end of the nineteenth century, leading a resumption of dramatic growth in wealth and income across the globe.

The United States was the natural (indispensable) leader in promoting this liberal order for several reasons. By the end of WWII the U.S. was the largest economy in the world. And while the size of the United States and the guarantee of free trade within its boarders provided in the U.S. Constitution assured substantial trade within the U.S., opening the rest of the world to trade was very beneficial to all countries (win-win). The Boeing Company, for example, sells more of its planes abroad than domestically because the world market is larger than the U.S. market. So the U.S. is the natural leader because it is the largest trader. But more than that, most other countries respect the commitment of the U.S. to the rule of law and a level playing field for commerce. Thus they gladly accept our leadership.

The world is far from the ideal level playing field for trade but is much closer to that model than it was at the end of WWII. The WTO (the successor of the General Agreement on Trade and Tariffs – GATT) and regional and bilateral trade agreements keep moving us closer and closer to such a world. It is a very desirable goal for the United States and for the rest of the world (look at the above graph again). As with technical progress and the increasing productivity it brings, some capital and labor (workers) will need to move to new activities and we need to insure that displaced workers do not suffer in the process (we seem to care less about the displaced capitalists assuming, I guess, that they can take care of themselves).

While it is still early, President-elect Trump seems uncommitted to the U.S. leadership of our increasingly liberal (freer) international economic order. In fact, he is threatening to throw it away by unilaterally imposing tariffs on imports and behaving like a bully internationally. We need to recall the terrible consequences of the Smoot-Hawley tariffs and resist any moves in that direction.

It is true that following WWII the U.S. often gave favorable terms to Europe (the Marshall Plan) and less developed countries in order to promote their reconstruction and development (“Trade not Aid” we used to say). The world’s economies are now growing into better balance and the U.S. is no longer as dominant as it once was. The international rules of the game (trade agreements) can and should seek a better balance of mutual benefits. But we would be making a very serious mistake to give up our leadership of the world order and abandon our commitment to free and fair global commerce.