On March 6, Peter Navarro in the
Wall Street Journal alleged that exports were good in the sense they promote economic
growth while imports are bad. He is the
newly-appointed director of the newly-created “National Trade Council” which is
evidently influential in the White House. Presidential advisors, especially
Steve Bannon, espouse economic nationalism as a way to bring vigor back to the
labor force. “Economic nationalism” means government interference with imports
and help for exports. The G20 recently dropped its language against
protectionism at the urging of the Secretary of Treasury, Steven Mnuchin. While
macroeconomists have repeatedly criticized the logic and empirical foundations
of economic nationalism, I think there is a simpler approach to this
“intellectual” argument. Lets make some money off of these guys. I will travel
to Canada where I will send Navarro – or anyone else in the White House--$10
Canadian. He can send me $20 US. His exports will be more than twice his
imports making him better off by the logic of economic nationalism. If he is
confused by currency and wants to trade products, I’ll send him a six-pack of Molson
Golden--- actually five beers after I drink one—and he can send me a fifth of
good Kentucky Bourbon which will also make him better off and will improve
employment in Kentucky.
Where does this Alice-in-Wonderland
view of the world come from? For Navarro, a recent Politico article (3/11) gives
us a clue. Twenty years ago he was running for Congress as a Democrat and first
lady Hillary Clinton campaigned for him. He was focused on the costs of
international trade while completely ignoring the benefits and this sold in the
Democratic Party. He spoke at the 1996 Democratic convention. After he was soundly defeated by sensible
Californian voters, he went on to write a book and produce a movie on how
Chinese trade hurts the US. His book and movie got the attention of Trump who
has also continually focused on the costs of international trade while ignoring
the benefits. Navarro believes that China is manipulating currency by lowering
its value with the intent to take over US production and control much of the US
defense industrial base, threatening America’s freedom and prosperity. The
mechanism of all this bad stuff is that the low currency induces us to buy
Chinese goods which increases our imports and decreases our exports. Let’s
engage in a thought experiment and suppose the Chinese were so successful at
manipulating that we could buy everything in China for $100. China would be
making everything for us and we would be making only $100 worth of stuff for
them. All we would have left is our wealth. What we do with all our money? We
could pay each other to write poetry while the Chinese would, according to
Navarro, threaten our freedom. We would respond with sonnets. But we would be
so wealthy that we could buy weapons from the Germans and hire Indians to protect
our freedom from the manipulators.
The reality is that we have 200
years of experience with economic nationalism. Protectionism destroys the protectors
and strengthens those who have the courage to trade. Every administration after
World War II, knew this. These economic nationalists will leave a trail of
economic destruction if they are successful, but before they figure this out, I
want my fifth, Larceny Bourbon will do just fine. I’ll send them the five-pack
of Molson. Your choice Navarro, put up or shut up.
Dear Chuck and LSD. The sentiment in the blog suggests that pursuing free trade and fair markets benefit both trading partners but that DJT and his protectionist sympathizers shun that belief and reckon that trading has been unfair and has hurt the U.S.
ReplyDeleteI believe in free markets and fair trade and agree that trade should be mutually beneficial—at least that’s how the theory goes. In practice, however, not all benefits accrue equally and partners do not bear the costs of trade similarly equal. Big imbalances have resulted in partners’ standard of living, employment, currency valuations, and other social/political costs resulting from trade. I don’t think Ricardo expected that.
Here’s another thought experiment. Suppose we continue trade with China as is without any intervention/modification on the part of DJT et al and therefore allow the trend in U.S. manufacturing employment/off-shoring to continue. Despite govomit programs, such as TAAP and others, to retrain workers out of yobs due to import competition, most won’t find suitable new yobs paying commensurate wages to support/maintain their standard of living—or find them in the nearby geography. Maybe the yobs the govomit programs trained the former workers for weren't the right ones—maybe they should have trained them to write poetry and create sonnets—or better, yet, train them to make bourbon- and beer-flavored sugar cookies.
DJT might be focusing on the costs of trade and ignoring its benefits, but I’ll bet a Molson to a Larceny that the millions of former manufacturing employees are well aware of the costs and are trying to find the enjoyment in its benefits. Let them eat round sugar cookies and contemplate squaring the theoretical benefits of international trade with its realities.
The benefits of trade are not theoretical. The British and American experience shows that paying little attention to how the benefits accrue is the path to wealth. We can then compensate those who lost. Furthermore, the loss of manufacturing jobs is related to automation which is not at all related to trade with China. The high-tech manufacturing jobs are created by trade not destroyed.
ReplyDeleteDear Mr. Yachts. The reduction of U.S. manufacturing employment due to automation/technology is as real as U.S. multi-nationals setting up shop in Asia to sell into both Asian and U.S. markets. The effect is the same: Loss of U.S. manufacturing yobs. However, if it were simply a matter of swapping automation/technology for labor then U.S. multi-nationals could have easily made that capital investment here rather than move off-shore to achieve the significant reductions in production costs. Moving off-shore apparently was the better reality due to the siren call of lower foreign labor cost—even with higher quality and logistics costs. Despite automation/technology advances companies still found it cheaper to move/produce off-shore—automation/technology were not the drivers/causes of lost U.S. yobs.
DeleteI don’t think the millions of former manufacturing workers would be sympathetic to your characterization that, “We can then compensate those who lost.” The “compensation” they have received in training for lower-paying yobs and relocation to those yobs hardly compensates for the loss of standard of living and disruption to families. Further, I doubt they warm up to the notion that benefits of international trade are not theoretical—but they know the costs are real.
I was personally involved providing trade adjustment assistance to a Ft. Meyers, FL yacht manufacturer that eventually closed its doors due to foreign competition. Should China significantly increase its U.S. market penetration of low-priced yachts would you settle for a Sunfish or dinghy—as “just” compensation? Would you consider that beneficial?
The plot thickens...
DeleteI am well aware of those who have lost to foreign competition. My 58 yr old brother is about to lose his job to foreign competition. I’ve lived in communities that were wiped out by trade. Buffalo NY was a vibrant place when I arrived 30 yrs ago, "vibrant" is not a word that people outside of Buffalo use now. Western Massachusetts had twice the population when I was growing up. No amount of protectionism would have prevented this. All that would have happened is that the parts of the countries that benefited would have lost if these areas were protected from trade. Our only choice is to embrace it as every administration up to DJT recognized. We really do need the courage to embrace trade.
ReplyDeleteDJT is not against trade. He wants fair trade—fair, balanced, and unafraid. Apparently many folks don’t get that nuanced subtlety.
DeleteI really don't get the meaning of "fair trade-- fair, balanced and unafraid". This means government will decide on the definition of these words. All voluntary trade is fair and balanced otherwise nobody would enter into the agreement. Only Mnuchin, Navarro and Bannon are afraid of trade-- I hope not the Donald.
ReplyDeleteIt wouldn't surprise me that govomit decides to word-smith definitions; does it all the time. But, if all voluntary trade is fair then why have the WTO—why have agreements at all—why have rules? If all voluntary trade is balanced why did the U.S. experience a trade imbalance of $500 billion last year? I admit I’m not up-to-speed on the inner-thoughts-and-hidden-mechanisms of Mnuchin, Navarro and Bannon regarding trade—but I can only surmise that a generalization such as “ . . . . are afraid of trade . . . .” is out of context, not factually kerect, and that a reasonably edukated person would imagine that Mnuchin, Navarro and Bannon are sympathetic to trade as long as it is “fair (partners play by the rules) and balanced” (or not too out-of-balance), and are “unafraid” to tell it like it is—to call out partners that don’t play by the rules, pursue kerective akchun, and to shed light on trade that disadvantages U.S. interests. That is patriotism; not nationalism.
DeleteTrade imbalances mean that we receive more than we give up. If imports are greater than exports we win, As I said in the article, I'll send you $10 from Canada (you import $10) and you send me $20 from the US (you export $20). That's a trade surplus and it should make you Navarro, Mnuchin and Bannon happy.
DeleteImports > exports = deficit/imbalance = win? Really? Yet econs in general say exports > imports is a more desirable condition, particularly now to boost the U.S. economy. Seems that should be the win.
DeleteReceiving $10.00C buys $7.50US; sending $20.00US buys $26.67C. Don’t like the deal—would rather keep the $20.00US and Larceny—you can have the Molson; DJT, Navarro, Mnuchin and Bannon probably wouldn’t like the deal, either.
Net exports is one way to measure trade. It is true that a trade deficit causes money to flow out of a country. But all welfare statements that people usually make about net exports are not so true. We have a surplus in services trade. We have a surplus in financial and real capital trade. Money might flow out for goods imports but it flows in to finance business and government. And goods imports are not unambiguously bad since imports can add to national productivity and innovation. It is the whole picture that matters and that is why welfare statements are hard to make. As I said in a another comment -- rich countries like the US have all sorts of strengths that give us amazing leverage. Those leverages are better exploited without governments mucking up the field.
DeleteSpoken . . . er, worded . . . like a two-handed economist.
DeleteTouche!
DeleteMy only foray into this discussion is to say that "government negotiators" is similar to the term "military intelligence." In the trade world as with any other area of "government negotiation," we tend to come out on the short end of the wooden rod. Trade is only fair when there is negotiation on a level field, and our side usually sucks at negotiation. I've seen it in action in the defense field. Trust me, the best negotiators don't go to work for the federal government.
ReplyDeleteYou guys are having too much fun! Let me try a different approach. We all learned that the only constant in life is change. Without globalization there were massive and possibly unfair changes impacting many regions of our country. Eg. recall when all the textiles left New England. Most of us writing here know that the best way to prepare for change is to be educated, trained, and to never believe anyone who tells you they are going to protect you -- or sell you a bridge. I fear that Trump's trade ideas are nothing but populist poop and send the wrong message. The government is here to help you. Ha ha. Worse yet, trade is even more important to most of our trading partners. They will retaliate. Already our farmers are very worried. We are one of the richest countries in the world. We need to figure out how to trim the flab and get down to fighting weight. We need to quit bellyaching about fairness and instead educate our people that we are going to have to be smart and flexible if we are going to maintain our very high quality of life.
DeleteI love your comment "bellyaching about fairness" even though its really insensitive to people losing their jobs. My brother is not a "bellyacher" even though he's about to be unemployed. He's not one of the "bellyachers". Trump's messages are often mixed but his "economic" advisors are not. They are fundamentally illogical. Bannon, Navarro and maybe Mnuchin are really just playing on the biases of people.
DeleteI guess when I used the word belly aching I was not talking about those directly impacted by trade. I was referring to the politicians who make promises they can't really keep. A positive attitude combined with positive policies that make our workers and companies more competitive would help those negatively affected more than the finger pointing and blaming.
DeleteThere is no question about the political use of "fairness". Politicians should be prohibited from using the word. They should just be forced to talk about winners and losers. For free trade there are more winners than losers and the winners win more than the losers lose. Its just that the losers are concentrated and the winners are disperse so the politicians like the Donald and his crew can babble about "fairness".
DeleteLet me know how getting rid of the flab goes. I've been trying for at least 10 years.
ReplyDeleteOnly 10?
DeleteAnyone would be stupid to take the deal I propose in the article. But saying that imports are "bad" and exports are "good" is just as stupid. Larry makes a much more sophisticated argument that all flows need to be taken into account since the one-for-one deal I propose is not exactly what the export and import numbers are measuring. But they could measure this. Robert Solow once told me that Michigan has to have a large deficit with California but nobody in either state cares at all. We don't even try to measure it. So why does a national deficit matter??
ReplyDeleteWell, Mr. Yachts . . . someone proposing a deal that he himself says is stupid . . . is well . . . leaves one scratching his head. One would question the wisdom, logic—or point—of even making such a proposal. Curious . . . verwy-y-y curious.
DeleteUnless you’re indifferent about borrowing from foreigners or selling off capital assets or other long-term assets to pay for imports/trade deficits then a trade deficit doesn’t matter. I believe it’s fundamentally unsound to run deficits—whether budgetary, national, or trade—someone’s got to eventually pay for it. But, I guess there are folks that think surpluses are stupid and prefer to keep kicking the repayment can down the road. It’s like Burger King . . . have it your way. But at some point ya gotta pay the piper.
LSD’s argument that all flows need to be considered is sound and typical of a two-handed macro econ—can’t argue with it. But, there are consequences of imbalances/deficits. Given the lackluster state of the economy I think increasing imports would have a negative effect = "bad"; while increasing exports would be beneficial = "good".
Enjoy your Whopper at the King—maybe a cold Molson would go good with it . . and don’t fergit to pay the piper on your way out.
The deal is stupid for the other side not for me. I always want my imports to be greater than my exports. Exports are a cost, imports are a benefit.
DeleteWell, Mr. Yachts . . . . as the author of the stupid (your characterization) proposal you must know stupidity when you see it. Quoting a famous macro-econ, “Stupid is as stupid does,” and extrapolating the logic of your desire that imports always > exports—and further that exports are a cost not a benefit—suggests to me that you must have very deep pockets and are ready, willing, and able to pay the piper. Please, have at it. Donald and his crew, Bannon, Navarro and maybe Mnuchin, despite your presumption of them being fundamentally illogical, will surely find the searing logic and wisdom in your infinite trade imbalance desire that imports always > exports interesting and babble about how "fair" you are to contribute to U.S. economic stimulus. Alas, you are a patriot . . . . fair, balanced, and unafraid (to open up your checkbook and pay the piper).
DeleteAll, I greatly appreciate how Chuck (
DeleteCustomer Yachts) and Tuna have enlightened us on two pretty different ideas about international trade and policy. I doubt either one of them is going to cry Uncle and I hope all of you have enjoyed and learned from their interchange! I wish all of my readers a wonderful April Fool's day on Saturday!
Great news in the WSJ today:
ReplyDeleteU.S. Softens Call for Shift on Nafta
The Trump administration is signaling to Congress it will seek mostly modest changes to Nafta in upcoming negotiations with Mexico and Canada despite President Trump having called the trade deal a “disaster” during the campaign.
To Tuna: put up some money if you are so sure exports are great. I can easily scale this up beyond $10 Canadian.
Dear Mr. Yachts. Your characterization of your own proposal as stupid apparently was not a learning experience for you. Upping the ante only makes it more . . . . er, stupider? Ah-h-h-h-h, the gift that keeps on giv’n! Keep your $10C, buy yourself a cold Molson or two, and don’t fergit to pay the piper at B’ King.
DeleteBTW, eliminating the $500B trade deficit would generate 3,000,000 jobs—plus or minus a couple, according to my econ advisors and 20th century Wham-o calculator. That payroll and attendant taxes would significantly reduce the national deficit, shore up Social Security and Medicare, and effectively eliminate unemployment taxes, welfare, and food stamps . . . . and, and, and . . . . . drum roll . . . . . increase GDP by $390B/2.4% . . . = a start to DJT’s projected increase. Ah-h-h-h-h, the magical wonders of deficit/imbalance reduction/elimination.
Do trade deficits (the elimination of) matter . . . you betchya! Go ask Alice at her new yob . . . she’ll tell ya twue. And, Bannon, Navarro and Mnuchin will be ‘a smil’n . . . and hum’n a precision tune. Maybe they’d even be motivated to babble about writing poetry and creating sonnets.
I'm not sure you understand the bet. Its stupid to give me $20 and I give you $10. Eliminating the trade deficit would eliminate more jobs according to any economics advisor.
DeleteDear Mr. Yachts. Here’s a bet you might want to consider not taking—not because it’s inherently stupid—but because you’ll surely lose. (But taking the bet surely would be an act of stupidity.) I bet that I can talk to a number of econs or advisors—or produce their writing/position papers—and I’ll find those saying trade reduction generates yobs and those saying it does not.
DeleteTake the bet? I accept Am Ex, Visa, MasterCard, PayPal, checks, and cash—U.S. of course. I’ll even provide you a teaser: https://ourfuture.org/20140321/rebuild-our-economy-by-reducing-our-trade-deficit-and-opposing-the-tpp. Consider this link as talking or referencing “any” advisor. You’ll find in the link that my 3 million new yobs via deficit reduction is grossly under-estimated: One source estimates 4 million new yobs directly and an additional 6 million indirectly. A second source estimates 5-6 million new yobs.
I reference not “any” econ advisor but “two” randomly. Double your pleasure; double your fun. See, I just saved you some $US ‘cause I’m that kinda guy—generous and kind, just trying to get by being quiet and shy in a wirld full of push’n ‘n shov’n.
Enjoy yer Whopper and cold Molson and . . . . please, please, please . . . . pay the piper on yer way out.
If this is unconvincing I’ll loan you my 20th century Wham-0 calculator to run your own numbers.
Dearest Tuna,
DeleteI'm surprised by the link you cited since the organization is one you would usually dislike -- it's existence is to push progressive causes as it rails against conservatism. Anyway, the general idea of stacking up economists has been denied elsewhere so I won't go into that. I might be a two handed economist but you seem to be favoring one-finger economists. I won't say which finger.
Dearest LSD. Glad to see yer still involved/interested. Mr. Yachts suggested that any econ advisor would agree with him in that “eliminating the trade deficit would eliminate more jobs according to any econ advisor.” My reference to those two references (pardon the duplication) wuz to evidence the obvious—that there are two sides of the trade imbalance argument—and that saying “any” econ advisor would agree that imports should always be greater than exports is . . . well, simply . . .
DeleteHere’s my question to you and Mr. Yachts. You argue both sides as should a two-handed macro guy so I don’t expect a finite answer. But to Mr. Yachts . . . . should he reply . . . since he’s staked his position that he “wants imports to be greater than . . exports.” He likes thought experiments, so let’s do this one: If U.S. imports should be greater than exports ad infinitum would that increase U.S. employment or decrease it? This mindless inquiring mind desires to know.
I put my numbers out there based simply on my 20th century Wham-0 calculator and econ advisors Ouija board, Siri, and Dr. Oz to show that eliminating/reducing the trade deficit would result in increased employment. Coincidentally, at random, two references sharing that view showed up who apparently have liberal views—that somehow dispel Mr. Yachts’ assertion that “any” advisor would agree with him. Would you and Mr. Yacht—presumably being of the conservative side—be so kind as to share with this humble person, just trying to get by being quiet and shy in a wirld full of push’n ‘n shov’n, that imports > exports will make ‘merica great again?
Please, please, please me . . . just want to see your numbers ‘splain’n how increasing the trade deficit will increase employment, create wealth for the middle class, work to reduce the deficit, shore up Social Security and Medicare, etc.
I show’d you mine; now show me yerz.
Dearest Tuna,
DeleteI am sensing this communication will never converge but I have a cold and will be staying warm and dry inside today -- so what the hell.
You asked what would happen if imports were greater than exports ad infinitum. I love Jack and chili dogs. Would I be equally pleased with the 12th consecutive Jack and chili dog in a given evening? That's not quite ad infinitum but it does suggest that sometimes answering such questions is not productive. So I beg off.
But if you focus on things I have said in this blog consistently about trade I am very clearly against protectionism including attacking other countries for currency manipulation. So while you like to call me a two-handed economist -- on this score I am clearly not two-handed. You don't like the fact that I am arguing against your position but very clearly I am taking a stand on one side of the issue.
Finally, it is possible to argue that protectionist policies will not greatly improve employment and not have to argue that trade deficits are somehow good for employment. Clearly in the growth of America we had huge trade deficits because we were importing a lot of infrastructure and capital goods and that raised employment and output. So it is not far-fetched to think that trade deficits might improve employment. But you don't need that data point to worry that any particular protectionist policy might backfire on employment and mostly because other countries can and will retaliate.
So that's it for me on this score today.
Cheers,
Larry
Most dear LSD. I sense you sense I advocate/favor protectionism. No. I favor enforcing existing trade agreements/rules/regs etc. and where they work against our interests—such as causing long-term/chronic unemployment and diminished standard of living—to be revised. I think that approach reasonable and fair and not protectionist. Despite some readers’ angst about the concept of fairness, it is a clear and simple concept that most folks get. In theory establishing fairness should provide stasis to trade. We’ll have to wait and see, as my wife likes to say.
ReplyDeleteThe $500B+ trade deficit represents U.S. demand that is not met with U.S.-produced goods. Simply put, should U.S. production capacity evolve to meet that demand the deficit would decrease and employment increase. That evolution, should it occur, would not have to be achieved via protectionist measures. Feb. ’17 industrial capacity was 75.4%, a rate that is 4.5 percentage points below its long-run (1972–2016) average and well below its peak in the upper 80s%. We’ve got capacity to grow without going crazy over what Trump said about trade; maybe take him less literally but more seriously. It’s just a matter of boomeranging the demand curve.
Hope you feel better . . . I’m told that Jack—applied properly—does wonders for a cold. Probably stay away from the chile dawgs, though.
Tis tis. Fairness is like love and beauty so simple in concept and virtually impossible to measure and difficult to obtain. When experts pointed out that a tax on imported steel negatively impacted steel using employees much more than it helped steel-producing. Was it fair to import such a tax?
ReplyDeleteFairness in applying rules should be simple—assuming rules are clearly defined and the penalties just as clear. When you were penalized for intentional grounding did you tell the ref to go jump in a lake? Did you argue that the penalty should be a re-do and not 5 yards, or 10, or even not enforced?
DeleteI don’t equate rules (apples) with a tax (bananas). The ref did not levy a banana on your Mustang motorcycle just because you grounded the ball (5 yards for that apple). I know, bad analogy but I think you git my drift.
To avoid the import tax on steel, couldn’t the steel users just buy ‘merican from steel producers and avoid the tax? Wouldn’t that have the effect of leveling the playing field?