Tuesday, April 11, 2017

The Marx Brothers International Trade Policy

If you didn’t notice, two weeks ago we had some name-calling and hair-pulling in this quiet little blog. What fun! Chuck T posted a guest blog that argued against protectionism, and this energized the Tuna to take the other side. The battle was on, and I was among a few others who jumped into the fray. Along the way I was accused of being a two-handed economist, and after I figured out what that meant, I decided I needed to keep pursuing this topic. Two-handed economist indeed! 😊

The last time I looked, I had two hands. The issues of hands and economists apparently started when President Harry Truman got fed up with economists who couldn’t make up their minds and he demanded a one-handed economist who would not say on the one hand this and on the other hand that. He wanted someone who would take a firm position one way or the other. He realized that all national policy topics were multifaceted and wanted an economist who would weigh all the important elements. But he wanted someone who would then take a stand. Be on one side or the other!

So I am going to do that today. International trade and the benefits of trade are definitely complicated and multifaceted. No question. But this one-handed economist has little use for recently posed ideas about trade and trade policy.

But let’s start with the apparent problem with trade. Widely quoted data show that manufacturing employment in the USA has declined. They also show a deficit in our trade account and many stories corroborate that companies have moved their production abroad attracted by apparent favorable business conditions. These conditions might be lower wages or tax rates, but they also include closer locations to key parts of their supply chains, including materials or proximity to rapidly growing customer markets.

Some argue that policies that would thwart either imports of goods or the relocation of US firms will solve employment problems in America. A novel recent policy proposal would essentially make trade part of corporate taxes – wherein any export of goods from America would not be taxed while all imports would be. This pretty much reverses what used to be and would greatly favor firms that export from the USA. A second but complementary policy would somehow prevent other countries from depreciating their currencies so as to favor their exports in world markets while damaging US exports. A third policy would aim America-first principles at past and future trade agreements. Let’s call this set of three policies the Marx Brothers (Harpo, Chico, and Groucho).

There is much intuition to these polices. On the surface they seem to directly improve the situation. If other countries can’t cheat, this will help US export sales and jobs. If America matches subsidies given to exporters in foreign countries with similar subsidies at home, then those companies will have higher sales and employ more workers. If America penalizes companies for moving abroad, then even more jobs would be preserved at home. If past US trade negotiators “gave away the factory,” a new group of negotiators can get the factories back.

But just as a sticking one’s finger in the hole in a leaky dike sounds good in a moment of panic or frustration, such an act endangers the dam and all that live below it. What we need is a policy that works – not one that sounds like it might. So let’s think about what’s wrong with the three Marx Brothers.

First, economists who have studied the new tax proposal believe it will cause the value of the dollar to rise enough to offset the impacts of the tax incentives on the trade deficit. Thus, the desired remediation would be at best temporary. In addition, a permanent increase in the value of the dollar could make potential producers wary of locating in America, because it makes investment in the US more expensive. If they project a continued rise in the dollar that makes America a great place to import and makes it more expensive for foreigners to locate in America. 

Second is retaliation. A quick review of figures shows that US exports of goods and services is a mere 13% of US GDP. While we think this is large, exports are much more important to key trading partners. World Bank data for 2015 includes these ratios. Japan exports 19% of its GDP, China 22%, Canada 31%, Mexico 35%, Germany 47%, Vietnam 124%. Some might say Aha!  But that Aha! misses the point. These are countries whose medium-term survival is predicated on export success. They will not quietly nod as the US employs a new policy that threatens to harm their exports. They will retaliate quickly and with gusto. They will make it very difficult for their citizens to purchase US goods.

Third, it is possible that a new team of negotiators will do better with respect to past and future trade pacts. But keep in mind that the new team will be faced with increasingly motivated adversaries and a single unbending truth. The truth is that all sides to an agreement want the best for their own country. In doing so they have to make tough decisions because they know that every negotiation requires one to “give a little” to “get a little.” As in the above discussion about taxes and trade, the US is not going to be the only player in the room.  If the US wants to open services markets, protect intellectual property on foreign shores, or ask countries to reduce non-tariff barriers against US goods,  the US is going to have to give something up. If the US wants lower foreign tariffs on some of our manufactured exports, we may have to lower the tariffs on some of their manufactured exports. Whatever they choose, these negotiators will not be coming home with only trade benefits.

Finally we might need to come to grips with the idea that we are in a difficult transition, and whatever policies we impose to restore things to ways they used to be might work in surprising ways. Be careful what you wish for. 

We can close our borders to wonderful products produced abroad. Recall the cell phone took off when a Finnish company named Nokia made our lives incredibly better. We can make it unprofitable for US companies to locate abroad – when they are already not producing good results in the USA. Or by preventing our companies from locating abroad, we can deny them opportunities of innovation-sharing. If we are not careful, we will get what we ask for:  things like they used to in 1954. Aside from the TV show Father Knows Best, I think I like 2017 better. 

The Marx Brothers  and other America-first trade policies are most definitely not a slam dunk. Working to root out cheating. Trying to update relationships to current realities. These and other approaches are necessary, but even modest changes can backfire if not approached correctly. In today’s hypersensitive world with leaders who speak in riddles – even the smallest of changes can evoke recollections of Attila the Hun and reactions that go beyond the pale. Walking on egg shells is a better way to go. Meanwhile, we in the USA must figure out how a very rich country can grow and prosper as we fit into the world economy of the next 100 years. 


  1. I think I know of several very rich countries over the past 300 years that slipped into a lowe stature for different reasons. What happened to the free market? Just Kidding.

    All of the solutions requires immense controls. Jobs in the US will be and remain to be in the Tech area. so quit educating students to be in the manual manufacturing sector. Due to technical communication tools like Face Time, Skype, Cloud services on can work in Kenya from a home in Boston in the Tech services and production area. Like they told Bush in 1990...its the economy stupid....whereas today's call is it is the education stupid. None of the policies described by the Marx Brothers do not address education and the use thereof. The off-shore countries seem to have gotten this message since we rank 20 out of the 25 ...ooops. Maybe some politicians like it that we because they have an audience that believes their BS...but it needs to be changed across the US not just in a few places like my county.

    On the other hand i like French wine so maybe a strong dollar will again help stock my shelf with the good stuff. Local vinters cannot move their vines off-shore.

  2. Dear LSD. I like your two-handed intro and ‘la fin,’ but I don’t recall the last blog chitchat as “either/or”: to promote protectionism or not. Rather, I recall a description of the consequences of the last 60 years’ trade policies and agreements—and lack of enforcement of rules/regs/etc.—that significantly reduced U.S. manufacturing employment—acknowledging recessionary effects during that time—and resulted in a $500B+ trade deficit. I think my position was that these developments have proven very problematic and that future trade policy/action should seek to reverse them. Which is not to say that uber protectionism should be the “go to” policy. I agree with the first part of your statement, “International trade and the benefits of trade are definitely complicated and multifaceted. No question. But this one-handed economist has little use for recently posed ideas about trade and trade policy.” I think a lot of folks don’t like what DJT has said about trade, but I also think reactions are premature. So far, the only action by the administration (DJT/Wilbur Ross/Peter Navaro) is the exec order to address “the long-festering problem of undercollection of anti-dumping and countervailing duties.” A second exec order to better combat violations of U.S. trade and customs laws and to enable enhanced seizure of counterfeit and pirated goods is in the works. I don’t think those actions should concern free traders—they are not major changes in policy but simply the enforcement of existing rules, regs, and penalties.

    Regarding those fearful of trade wars—“let’s wait and see” what DJT et al do about Harpo and Chico—as my wife likes to say. I think Groucho’s ‘merica first principles are a good starting point in negotiations—but if as you say “ . . . a new team . . . will do better . . . . past and future trade pacts,” then my guess is that the outcome will be “fair and balanced” for all parties—and not the one-sided, finger-in-your-eye, trade-war-producing conclusion free traders fear.

    Walking on egg shells might be OK as a one-handed policy, but I think breaking a few yokes along the way—or at least saying some will be broken—would be a typical DJT initial negotiating ploy.

    You neglected to mention Jerome ‘Curly’ Howard, my fav Stooge. Maybe he could be resurrected to be the lead negotiator in the new team.

    1. Tuna,

      We agree about the uber protectionism. That's good. We also agree that trade outcomes could be improved in various ways especially by implementing the laws we already have. I guess my point to emphasize is that gains will be less than anticipated based on the rhetoric -- and the benefits of such gains to the average worker will be much less than expected. My bigger worry is that I didn't mention JD once in this post. I have fans who count on at least a little JD in each post. I gotta work on that.