Steel yourself for Trump’s Trade Wars

Yesterday, Donald Trump took the opportunity to bash Wisconsin’s Governor Scott Walker on economics and “hatred” in Wisconsin. He turned in a typical self-awareness-free stream of consciousness. The hatred aside, apparently referencing demonstrations by public service union thugs, was amusing mostly for its utter lack of introspection. Applying similar logic to violence at Mr. Trump’s rallies would mean Trump was responsible for it.

The economic comments also provided some comedic relief from the difficulty involved in following Mr. Trump’s train of mouth. These included a claim that Wisconsin has a $2.2 billion budget deficit. It doesn’t. He said he got the information from his senior economic advisor – Time magazine. When challenged, he said if Time was wrong they should apologize. Then he might. In fact, “[t]he only time that number appeared in print at Time was when they quoted…Donald Trump.” LOL.

Mr. Trump went on to say that Wisconsin is “getting killed” on trade and to complain that Walker hadn’t raised taxes. The latter would not generally be viewed as a negative in a GOP primary. The former invites us to examine Mr. Trump’s prescription for trade.

When you hear Donald Trump talk about 45% tariffs on imports, you might be curious (certainly more than he is) about how such protectionism has worked historically. We’ll take as examples George Bush’s 2002 steel tariffs and the Smoot-Hawley Tariff Act of 1930.

From Sorrell College of Business, Troy University:
THE 2002 STEEL TARIFFS: DEJA VU ALL OVER AGAIN

On March 5, 2002, President Bush announced the imposition of tariffs ranging to 30% on steel imported into the United States for a three year period. While being touted as new protection for the industry from unfair foreign competition, since the late 1960s US steel producers have already enjoyed high tariff and low quota barriers to imports. This paper first reviews the three historical phases of steel protection from 1969 to 1992 in terms of tariff and quota levels and the impact on steel consumers. This study tabulates that more than three decades of protection has already cost the American consumer $100 billion in inflated prices for goods containing steel. And not only will the 2002 tariff impose additional losses in consumer surplus above the $100 billion figure, it has already generated protectionist retaliation and repercussions that will be further felt in escalating prices of goods and services unrelated to steel and lost markets for US exports. In that there appears to be no economic rationale for this duty, the paper concludes that politics has superseded economics as the President’s justification.

From Donald Trump’s alma mater, the Wharton School of the University of Pennsylvania:
U.S. Steel Users Claim Tariffs “Protect a Few at the Expense of the Majority”

Some 200,000 jobs have been lost in the steel-consuming industries since prices jumped by around 40% in early 2002, according to the Consuming Industries Trade Action Coalition (CITAC), which represents steel users such as makers of automotive parts.

And let’s not forget the granddaddy of protectionism, Smoot-Hawley. From the Foundation for Economic Education:
The Smoot-Hawley Tariff and the Great Depression

In 1930 a large majority of economists believed the Smoot-Hawley Tariff Act would exacerbate the U.S. recession into a worldwide depression. On May 5 of that year 1,028 members of the American Economic Association released a signed statement that vigorously opposed the act. The protest included five basic points. First, the tariff would raise the cost of living by “compelling the consumer to subsidize waste and inefficiency in [domestic] industry.” Second, the farm sector would not be helped since “cotton, pork, lard, and wheat are export crops and sold in the world market” and the price of farm equipment would rise. Third, “our export trade in general would suffer. Countries cannot buy from us unless they are permitted to sell to us.” Fourth, the tariff would “inevitably provoke other countries to pay us back in kind against our goods.” Finally, Americans with investments abroad would suffer since the tariff would make it “more difficult for their foreign debtors to pay them interest due them.” Likewise most of the empirical discussions of the downturn in world economic activity taking place in 1929–1933 put Smoot-Hawley at or near center stage.

In short, protectionism causes higher prices and lost jobs. Wharton most certainly attempted to plant these seeds in Mr. Trump’s mind, but they fell on infertile soil.

Obama’s corporate tax increase on foreign operations of American companies gets results

I am generally not a fan of Microsoft, or Steve Ballmer, but to this I say: GO STEVE!

Ballmer Says Tax Would Move Microsoft Jobs Offshore

High paying jobs, but easily moved. Perhaps our President will realize he is proposing to make it happen.

Can you say "Smoot-Hawley?"

The “stimulus” bill’s “Buy America” provisions are having negative effects on international trade. Our trading partners are suffering, as are we, through higher costs and lower efficiency.

Adding injury to insult, President Obama’s budget posits a massive tax increase on American corporations with foreign operations. As this Cato Institute video notes, the advantages foreign corporations already enjoy as a result of US tax policy will increase.

Tax increases cost jobs. A targeted American tax increase targets American jobs. Such jobs will not be “exported,” they will just disappear. The world only needs so many people who can assemble a computer or fasten a lugnut. These jobs will only be available where free employers can profitably provide them. Government, as a pseudo-employer, can only provide them by incurring ever increasing debt.

Given Obama’s demonstrated preference for union ownership of the means of production, his astounding ignorance of economics and his aforementioned protectionist tendencies, his tax increase will lead to demands for higher tariffs – to “level the playing field.”

These tariffs will have been unnecessary except for American policy. Remember that when your job disappears, or if you contemplate asking for a subsidy or tariff to preserve it.