Trade War Casualties

In addition to US tariffs raising the cost of the steel and aluminum Harley uses to make motorcycles for Americans, TrumpTrade is driving US manufacturing jobs to Europe. Doesn’t say how many jobs will be lost, but 40,000 motorcycles a year are no longer going to be made here. Meanwhile, Harley has to eat $30 to $45 million in 2018.

Tit-for-tat going as expected. It’s all the fault of those dumb Europeans, of course.

Harley-Davidson To Move Some Production Outside US Over EU Tariffs

This is new

But it still shows President Trump’s confusion on trade and tariffs. From whitehouse.gov:
Press Conference by President Trump After G7 Summit

Emphasis mine.

Q Mr. President, you said that this was a positive meeting, but from the outside, it seemed quite contentious. Did you get any indication from your interlocutors that they were going to make any concessions to you? And I believe that you raised the idea of a tariff-free G7. Is that —

THE PRESIDENT: I did. Oh, I did. That’s the way it should be. No tariffs, no barriers. That’s the way it should be.

Q How did it go down?

THE PRESIDENT: And no subsidies. I even said no tariffs. In other words, let’s say Canada — where we have tremendous tariffs — the United States pays tremendous tariffs on dairy. As an example, 270 percent. Nobody knows that. We pay nothing. We don’t want to pay anything. Why should we pay?

We have to — ultimately, that’s what you want. You want a tariff-free [sic], you want no barriers, and you want no subsidies, because you have some cases where countries are subsidizing industries, and that’s not fair. So you go tariff-free, you go barrier-free, you go subsidy-free. That’s the way you learned at the Wharton School of Finance. I mean, that would be the ultimate thing. Now, whether or not that works — but I did suggest it, and people were — I guess, they got to go back to the drawing and check it out, right?

So, they did teach him that tariffs are a bad thing in his Econ 101 course. One would think this attitude would have made NAFTA easy to re-negotiate.

Since this is the first time I can recall any mention of it in the President’s otherwise protectionist, multitudinous rants; maybe he’s just now remembered it. Better late than never, but his recall is incomplete and confused.

Canada does, indeed, levy a 270 percent tariff on milk imported from the US. However, it is not the US that pays that tariff, it is Canadian consumers. Just like it’s American consumers and businesses who pay US tariffs on softwood lumber, steel, aluminum, washing machines, cars, etc., etc..

As to no subsidies: If Canada wants to subsidize US purchases of steel, aluminum, softwood lumber, or cars: I say let them. Those are subsidies given to US consumers by Canadian taxpayers. It’s stupid for Canada to do it, but it isn’t our problem.

President Trump is confused about who pays tariffs, and he appears to view trade as a zero sum game. If one side wins the other side must lose. Nothing could be further from the truth. By definition, in any freely conducted trade all the traders win.

If he could just remember that lesson from Wharton, he’d be a much better CEO. Maybe he missed class that day.

Looting and Freedom

Whether political freedom or economic freedom is more important is a moot question.

The most basic property right is self-ownership. To the degree that right is compromised, so is freedom. A commenter at the linked article above noted this:

“I propose in the following discussion to call one’s own labor, and the equivalent exchange of one’s own labor for the labor of others, the ‘economic means’ for the satisfaction of needs, while the unrequited appropriation of the labor of others will be called the ‘political means’.”

   – Franz Oppenheimer, The State. New York: Free Life
      Editions, 1908 (1975), pp. 24-25

Beyond the unabashed wealth redistributionism of a Bernie Sanders, ‘unrequited appropriation of the labor of others’ includes all forms of rent-seeking: Regulation favoring entrenched business (from tariffs to requiring hair braiders to take hundreds of hours of training, to subsidies for solar panels, movies, art, mortgages, etc., etc., etc.); union shops; civil asset forfeiture and eminent domain; and zoning laws.

We may agree politically to give some portion of some of those freedoms to the State, but we will, by definition, be less free; and bureaucracies will always take more than is granted.

Principled resistance to the looting is a requirement of freedom.

Negotiating tactic

I keep seeing this defense of the President’s tariff policy: “The threat of trade war is just a smart negotiating tactic. Chill out.”

I concede the possibility that it is a negotiating tactic. However, that doesn’t make it an intelligent or wise negotiating tactic.

One problem is that lying about the economic effects of tariffs encourages Americans’ economic ignorance; which is already a yuge, yuge problem.

If Trump was insisting global warming is caused by humans and that female pay is 75% of male pay, how would that work out? Those are economic negotiating positions, too. And they are lies.

Trump Doesn’t Understand How Tariffs Work, Brags About Making Up Trade Stats

Update 5:50PM
Edits for clarity

Squandered

A very short history of US steel making after WWII.

How the U.S. Squandered Its Steel Superiority

In the early 50’s the Europeans were rebuilding their steel industry with new technology:

“The cost of building steel mills using the basic-oxygen furnaces was 40 to 50 percent lower than conventional open-hearth factories; operating costs were 25 percent lower, though some studies suggested even greater cost savings.

But it was the productivity gains associated with the new process that should have really raised eyebrows. One factory that made the shift could produce 40 tons of steel per hour using the open-hearth process, but after installing basic-oxygen equipment, it managed to quadruple that figure.

Unfortunately, Big Steel was too proud to notice Europe gaining ground. In a typical advertisement from the era, U.S. Steel claimed it was a company “where the big idea is innovation.” But this claim — much like so many of the braggadocios claims of today — could not hide a more disturbing reality.

Indeed, throughout the 1950s, as Europe’s steelmakers built new factories around the basic-oxygen process and simultaneously demolished its remaining open-hearth furnaces, Big Steel made endless excuses. Representatives of the Big Three — Bethlehem, U.S. Steel, and Republic — repeatedly claimed that the jury was out on the new method, all evidence to the contrary.”

And by the 60’s little mammals were nipping at the heels of the Big Steel dinosaurs. It’s quite ironic that one of the biggest corporatists now whining for protection is Nucor, whose success was profiled by Clayton Christensen in Innovator’s Dilemma (2011).

Nucor and others started out making re-bar, which is easy. Bethlehem, U.S. Steel, and Republic saw no money in re-bar, and let Nucor have the business. The upstarts climbed the market chain by recycling scrap steel (with “mini-mills,” which don’t use blast furnaces), and eventually achieved continuous strip steel casting; the high margin product. They ate Big Steel’s lunch.

“But there’s a final twist to this tale that highlights the absurdity of Trump’s strategy. In the 1960s, a man named Ken Iverson took over a conglomerate that acquired a stake in the steel business that became Nucor. Iverson then bet the firm’s future on making steel using the electric arc process, building the first American facility in 1969. It began growing at an exponential rate, competing rather effectively with foreign producers, to say nothing of other American producers.

As other steel producers begged for protectionist trade policy, Iverson mocked the idea. In an interview in 1986, Iverson noted that protectionist measures already instituted hadn’t had the desired effect. “As soon as prices began to rise so that the steel companies began to be profitable, they stopped modernizing,” he said. “It’s only under intense competitive pressure — both internally from the mini-mills, and externally from the Japanese and the Koreans — that the big steel companies have been forced to modernize.””

Nucor is now the largest US steel maker. They used to understand the definitions of innovation, capitalism and competition.

Lack of innovation and unwillingness to compete – sustained by protectionism – is what toppled the big guys from overwhelming superiority. Maybe if Reagan hadn’t ordered “voluntary restraint agreements” in 1984 to reduce steel imports, and Dubya hadn’t put steel tariffs in place in 2002, US steel companies would by now have had an epiphany.

Trump’s tax increases

Tariffs are alleged to benefit the US at the expense of foreigners. In fact, they benefit a small coterie of businesses at the expense of everyone else.

The increased cost of houses due to the President’s lumber tariffs doesn’t just mean fewer houses being sold, it also means those who do buy houses have less money to spend on furnishings, or a new automobile. It doesn’t just mean fewer jobs in construction, it means fewer jobs building couches and cars.

The economic argument for tariffs is, therefore, nonsense. Tariffs neither increase US overall employment, nor raise US wages.

But, the President says, for steel it’s not economics, “It’s a national security issue!” Really? While it’s true the US steel and aluminum industries will benefit from forcing consumers to pay more to steel companies and to aluminum producers, the makers of tanks, airplanes and munitions will experience higher costs. How, exactly, does increasing the cost of the things our military uses to defend us increase national security? It does so only if “national security” is defined as “the profits of the steel industry.” Which, by the way, “posted a combined net income of $869 million in Q4 2017,” while “all the charted steel stocks, except for one, showed increases in average share prices.”

But, the President objects, “What if we can’t produce steel in the future because the US industry disappears?” Well, the US is the world’s 16th largest steel exporter. Nearly 60% of those exports go to Canada and over 30% to Mexico, markets our President is endangering by threatening to torpedo NAFTA. We could stop exports to “protect” domestic supply, but that would increase the “trade deficit”.

In 2017 (through September) we exported 7.6 million and imported 26.9 milliion metric tons of steel, for a difference of -19.2 million. For this to be a national security issue we need to assume a few things. 1) We don’t have spare capacity to handle the shortfall. 2) We do not stop exporting steel. 3) Extreme measures (like WWII scrap drives and diversion of steel to military from consumer production) cannot be taken.

Let’s see. According to the Department of Commerce, in 2017 (through December):
&nbsp&nbspUS Steel production “Capacity utilization was estimated at 73.9%.”
&nbsp&nbsp”Total U.S. steel production in 2017 was 81.6 million metric tons.” Which includes
&nbsp&nbsp8 mmt of exports.

&nbsp&nbsp”Total [domestic] steel demand in 2017 amounted to 99.7 million metric tons.”


This leaves us about 18.1 mmt short for the year.

81.6 mmt represents 73.9% of capacity, so another 28.8 mmt could be produced with the remaining 26.1% capacity. Or, comfortably more than we import and without ceasing to export.

Tariffs are taxes. The president is raising them – and threatening trade war.

Here’s 5 minutes of Milton Friedman on this question: