Who decides what’s “fair?”

We’re from the government, we know everything, and we’re here to make international trade “fair.”

From Cafe Hayek:

First, there’s no reason to suppose that even saintly government officials possess, or could possibly obtain, the knowledge necessary to obstruct in welfare-enhancing ways their fellow-citizens’ trade with foreigners.

Second, there’s no reason to suppose that even stupendously well-informed government officials would, when obstructing their fellow-citizens’ trade, act to promote the general welfare rather than to promote the welfare of special-interest groups.

Third, there’s no reason, if government officials are to be trusted with such extensive powers as you desire, to limit the exercise of those powers only to economic change sparked by trade that crosses political borders.

RTWT

See also: A Failure to Adjust, a long, well documented, explanation of the results of assuming complete knowledge, while complaining that “better complete knowledge” would prevent the problems.

Good, fast, cheap

The followup to that is usually, “Pick two.” In this case, pick none.

General Motors, the President, and the Trade War

GM announced that it will soon close five plants: four in the U.S. and one in Canada. There are many reasons behind the move, including lower sales of some of GM’s models and the additional cost of $1 billion imposed by the metal tariffs.

The announcement led to another round of complaints and bluster from President Trump who seems to believe it is appropriate for him to tell American companies what they can and cannot do to make sure they’re able to survive in business.

Well, why not? He’s certainly willing to use tariffs to tell consumers what they can and cannot buy.

Reminds me of the Obamacare mandate. Republicans were comparing that to forcing people to buy broccoli. How about forcing people to buy Volts? Apparently not: Even if you subsidize the Volts, batteries, windmills, and solar panels.

Saving jobs where wages make producing cost competitive products problematic (though an argument can be made that most of those products weren’t actually market-competitive anyway, as the plant closings indicate) was, at best, a long shot. Add to that a billion dollar increase in material cost…

Well, at least there are a few more US steelworkers employed than there would have been. For now.

Presiding over spilled milk

The United States has applied its central planning acumen to the dairy industry for many decades. It has worked as you might expect.

Not only does America have milk – it’s got a surplus of over 8 million metric tons, forcing dairy farms to shutter and farmers to simply start dumping millions of gallons of milk that far exceeds domestic and foreign demand

The State of Wisconsin has seen a net loss of more than 400 dairy farms this year alone, and in December last year, the state’s farmers dumped a record 160 million pounds of skim milk they couldn’t sell. That’s three times the amount they were forced to dump in 2012, according to CSMonitor.

By July, farmers in the Northeast had dumped 145 million pounds of milk, and 23.6 million pounds of that was dumped in July alone, according to Bloomberg.

Predictably, we have a bureaucrat to step in for comic relief:

“Dairy farmers are free-market guys – they don’t want to be told how much to produce,” Richard A. Ball, commissioner of New York’s Department of Agriculture and Markets, told Bloomberg.

Ahem. The free market is what would be telling dairy framers how much to produce; if there was one. Since there isn’t, maybe they do have to be told. Which, to be fair, is what they asked for.

With just the right combination of lobbyists, legislators, and bureaucrats I’m sure we could convert this glut into a shortage, or maybe a bigger glut, in short order. At least we could ensure a glut of lobbyists and bureaucrats as a source of campaign contributions to legislators.

As to signs of dairy farmers being “free market guys,” I don’t think lobbying for protective tariffs, USDA price regulation, demanding trade war, or rent-seeking after subsidies actually qualify.

U.S. dairy imports are restricted through quotas, tariffs and licensing requirements. Prices are regulated through a complex system managed by the USDA, which sets minimum prices. When prices fall below regulated minimums, farmers can apply for federal assistance.

US dairy farmers didn’t manage to get into this situation all on their own, they have had a lot of government “help.” They did, however, ask for it – including their share of $20 billion a year in subsidies from the farm bill, a hodge-podge of other price support programs, and the building of America’s strategic cheese reserve.

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.

Mercantilist revivalism

Used to be when you said “conservative” people had a clear idea of what you meant philosophically. Adam Smith, W. F. Buckley, Goldwater, Reagan, or Cruz might come to mind. Maybe it would invoke the tea party, free trade, Constitutional originalism, free markets, and opposition to deficit spending. Now, it’s all a mess thanks to a long run of “conservatives” like John McCain, George Bush, and Donald Trump

There’s “conservative,” “neo-conservative,” “cuckservative,” “Trump conservative,” “Alt-right,” etc.. TOC has worried in the past about this philosophical dilution – defining freedom down. The current round of internecine attacks, including selective rejection of long standing principles, have been more damaging than anything the Progressives have accomplished.

Cronyism and protectionism are seen as fine if the correct people do it. Now protectionism is “conservative,” along with corporate bailouts.

We all need to reread Friedrich Hayek’s Why I am Not a Conservative: “The tug of war between conservatives and progressives can only affect the speed, not the direction, of contemporary developments.” Hayek was a classical liberal, a qualifier required since the collectivists stole the original word. Now we’re witnessing the further muddling of what has been meant in the United States by “conservative,” i.e., “classical liberal.”

The latest example; “Conservatives” who defend Trump’s populist trade shenanigans as ‘bargaining positions’ are expediently abandoning moral leadership.

Why Trump’s Higher Tariffs Now are Unlikely to Result in Lower Tariffs Later

I think it is absurd to assume that Trump’s real intention is to get us to a new equilibrium with lower tariffs all around the world. He does not understand the value of free trade and his closest adviser on this issue is an ardent protectionist. Trump’s negotiation experience is all in zero-sum games where he is trying to extract the most of a fixed pie for himself, not in trying to craft win-win solutions across multiple parties.

But here is the real reason this won’t work: The current relatively-free trade regime that exists today was built almost totally on America’s moral leadership on the issue…

[M]many of the most powerful political actors in our trading partners actually represent large corporations (some state owned and some just highly-aligned with the state) and powerful labor unions who would be perfectly happy to pursue additional crony protectionism of their industry even at the expense of the majority of their country’s consumers and businesses. All these forces for protectionism have always been kept at bay in large part by America’s leadership on the issue.

Not any more.

A thought on President Trump’s apparent renewed Trade War

Any price increase due to import taxes, aka protectionist tariffs, exactly equals the reduction in the disposable income of consumers in the country imposing the tariff.

While this benefits the general government coffers, it loots every citizen’s pocket – even those who never buy the good in question: The consumer is forced to either buy less of that good or less of some other good.

DesaliNation

Protectionism is trickling down from Washington, and leading the charge is Michigan state Senator Rick Jones, yet another economically undereducated Republican.

At present, Michigan buys road salt on a best price basis. However, our legislators are discussing a 6% tariff (note: this was originally 8%, as some of the articles quoted below state) on salt purchased out of state. There seems to be only one company which would benefit from the tariff.

Road salt bid bill could raise prices for Michigan

In 2017, the state awarded nearly $16 million in contracts for 349,265 tons of salt. Detroit Salt Co. was awarded $4.4 million of that, while Compass Minerals was awarded $9.8 million, according to the DTMB. The remainder went to Morton Salt and Cargill.

More purchases are made by local governments, according to Caleb Buhs, a spokesman for the DTMB. State and local governments spent a combined $48.1 million on road salt in 2017…

Detroit Salt has about $20.1 million worth of contracts with Michigan, about one-fifth of the state’s total, according to a House Fiscal Agency analysis.

This Detroit News article is confusing. If $20 million is one-fifth of the state total it adds up to $100 million – more than the $64 million (16+48) the article otherwise suggests. Or is $48 million the total of “State and local government” salt purchases?

The numbers also don’t square with the statement that Detroit Salt has one-fifth of the state contracts AND $4.4 million of $16 million in state contracts – which is more than a quarter. Either we already pay Detroit Salt above market prices, these are multi-year contracts or something else is going on that the article fails to reconcile. In any case, we can derive some reasonable approximations using other sources.

I looked to a state of Michigan Attorney General’s report on the Winter of 2014-2015. Following are some notes from that report:

It was recently reported that public agencies in Michigan use nearly 2 million tons of salt annually to clear snow and ice.8

The contracts expire on August 31, 2016, with two 1-year options, but prices are rebid every spring. The contracts serve MDOT, and approximately 300 local public entities.

According to MDOT, the 2014-2015 winter season average cost of road salt for the state and local road agencies was $65.81 per ton…

Compass [Minerals] was also the only bidder in 2014-2015 in all of the counties in the top half of the Lower Peninsula, including Missaukee County…

The mine is [2014] currently running at full capacity…

Detroit Salt did not have enough inventory to bid on all of the MiDEAL requests.

What does this tell us?

1- The cost of the 2 million tons of salt used in 2014-2015 was approximately $132 million.

2- Contracts are multi-year, but get repriced.

3- Northern counties in the lower peninsula can be glad they had out of state suppliers.

4- In 2014 Detroit Salt was running at capacity and had depleted inventory. Employment couldn’t be increased.

And if you read pages 20 and 21 of that report, you’ll see some of Detroit Salt’s problems were self-inflicted. Notably, their choice of delivery methods.

To preserve some fraction of Detroit Salt jobs, Senator Jones is asking taxpayers for $8 million in taxes. That’s nearly $113,000 per job/per year, assuming all 70 jobs are at risk. It’s likely, though, that we’re not talking about total layoffs, so the cost per job “saved” would be much higher.

The minimum annual $113,000 cost per job also ignores the cost to distributors, private users of road salt, and truckers. Neither does it consider the negative effect on employment in salt related businesses. It doesn’t contemplate the possible deterioration of roads, or increases in accidents due to more parsimonious use of road salt. It doesn’t recognize lost opportunity costs; every extra dollar spent on salt could have gone to fix potholes. Those things are unseen by Senator Jones.

It’s worth noting that Detroit Salt is a subsidiary of the Kissner Group, a Canadian company.

Detroit Salt’s leading competitor, Compass Minerals, is a US company operating a mine in Canada (Goderich, Ontario), while Detroit Salt is a Canadian company operating a mine in the US. So, the only possible point of this tariff is to “save” a few jobs at a single Michigan company outside of Senator Jones’ district. More from Crain’s: Bill seeks to help Detroit Salt gain edge over Canadian firms

The only Michigan company that sells a mined product to the state is Detroit Salt, which employs about 60 people on Sanders Street in southwest Detroit…

Sen. Rick Jones, a Republican from Grand Ledge who sponsored the bill, says the state should do what it can to protect Michigan workers’ jobs. He said he’s not concerned that the state might grant an incentive to a company with Canadian ownership, in part to offset competition by other Canadian suppliers.

“You call it a Canadian company,” Jones said. “I call it Americans, Michiganders, working here in the state of Michigan, and we need to support them and not workers somewhere else. If it is based here and providing 60 to 80 jobs to people here in Michigan, I consider it a Michigan company.”

I call it a subsidy to the Kissner Group.

Purchases of salt mined in Ohio would also be affected. Ohio already has tariffs on salt similar to the Michigan proposal, but they don’t apply them to Michigan. Senator Jones’ bill would apply our tariff to Ohio. I wonder how long Ohio will continue Michigan’s exemption?

One would have expected this to be a violation of the Commerce Clause in either case. Apparently, “an exception to the U.S. Constitution’s commerce clause applies to states if state government is acting as a participant in the market and not a regulator.” This is semantic gymnastics. It’s regulation by price-fixing.

All this central planning seems to be at cross purposes, with taxpayers caught in the middle by politicians pandering to populist economic ignorance. It’s just too complicated for them to pick winners and losers. One reason for the lower price for Canadian salt is said to be the $CDN/$US exchange rate: Something our president complains is an economic weapon in China’s hands. Simultaneously, he is doing his best to weaken the Canadian dollar by threatening to blow up NAFTA. Meanwhile, Rick Jones is clueless about anything except buying votes with your money.

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: