GMU Econ alums Ed López and Jon Murphy provide a balanced treatment of the Trump administration’s unbalanced treatment of the balance of payments. A slice:
A country’s overall BOP must sum to zero. That is by accounting definition. When domestic buyers send money out to bring imports in (the current account), foreign exporters return money domestically as investment (the capital & financial account). The BOP is a form of double-entry bookkeeping applied to international trade.
But it also means that the current account—composed mostly of trade in goods and services—can be in deficit, while the capital & financial account is in surplus. When Americans run a current-account deficit, foreigners are simultaneously acquiring more dollar-denominated assets: Treasury bonds, corporate equity, real estate, and direct investment in U.S. commerce. The United States remains, by a wide margin, the world’s top destination for foreign capital. Inflows run several times those of the next-largest country recipient of foreign investment.
This reality is difficult to square with the concerns raised in Section 122. So-called “sudden stop” or currency crisis scenarios, both emphasized in the CEA report, were the types of exigencies that gave “balance-of-payments deficit” its urgency under the Bretton Woods currency peg regime. Whatever is happening in the modern U.S. economy, it isn’t a drawdown of reserves in defense of a currency peg. The U.S. formally abandoned the Bretton Woods system in 1976.
The CEA’s [Council of Economic Advisors’] argument is selectively assembled. It cites reputable studies, claiming that they endorse using the current-account deficit is a reasonable and reliable measure of a BOP deficit. But the cited studies don’t say that. In fact, they argue the opposite. The two studies, both published by the Federal Reserve in 1975, argue that fixating on any single balance, including the current account, is likely to mislead policymakers into unnecessary trade restrictions. One of the sources goes further, warning that expecting a construction of the basic balance to provide reliable insights of balance of payment conditions is “doomed to disappointment.” A reader who checks the footnotes finds the literature arguing against the report’s central premise, not for it.
As filing deadlines for the administration’s appeal arrive soon, the Courts and the public are being asked to treat the CEA report as neutral economic expertise rather than as advocacy manufactured for litigation. But it is a reverse-engineered definition to fit a legal conclusion already reached, and it falsely portrays its arguments as having support from reputable studies. The courts, and the rest of us, should notice the difference.
Wall Street Journal columnist Mary Anastasia O’Grady reflects wisely on U.S.-Mexico trade, and on the destructive disruption of that trade by “Tariff Man.” A slice:
This is a dangerous moment for continental free trade. Mexico may get some tariff relief. But odds are that the Trump administration will want to extract a pound of flesh in return: Mexican acquiescence to the end of zero-tariff trade in North America and an increase in its own tariff barriers with the rest of the world. Such a bargain would undermine the economic freedom that has made North America the envy of the world.
Mexico wants the U.S. to lower the Trump duties of 50% on Mexican steel, aluminum and manufactured derivatives (like household appliances) and the 25% tariffs on finished autos from Mexico.
Obviously washing machines, refrigerators and sedans don’t threaten American sovereignty. Mr. Trump is blatantly abusing the 232 statute and violating the USMCA. In response Mexico might have imposed punitive tariffs on American goods coming from politically sensitive congressional districts. Trade wars hurt everybody, but ahead of the U.S. midterm elections it would have been the fastest way to end the shooting coming from across the Rio Grande.
Instead President Claudia Sheinbaum did nothing. You can see why. She’s battling organized crime, funded by America’s voracious appetite for illegal narcotics. It’s in her interest to maintain a cooperative relationship with the U.S. on security. A trade war also would damage the economy and cost her politically. So rather than demand that Washington meet its USMCA free-trade obligations, Mexico is in search of half a loaf.
The USMCA already requires that duty-free passenger-vehicle imports contain 75% North American content and 70% North American steel and aluminum. The car’s core components also must be made in North America and at least 40% of its labor has to be valued at $16 an hour or more—in other words, American. But that isn’t good enough for the geniuses running Trump trade policy.
Chatter from behind the closed-door talks with Washington suggest that Mexican negotiators are hoping U.S. tariffs on Mexican steel might be reduced to 25% and Mexico might get the same 15% auto tariff that Japan and Europe now enjoy. If the U.S.-made content of the car (normally around 40%) remains duty-free, cars finished in Mexico would then be subject to an effective 9% or less tariff when entering the U.S.
While this might help restore some of North America’s edge globally, it would also mark the end of the zero-duty era launched under the North American Free Trade Agreement in 1994. And those aren’t the only concessions Tariff Man wants for his friends in the steel and aluminum industries.
The USMCA isn’t a customs union. It has no restrictions on how much metal Mexico can import from around the world for use in its domestic market or the tariff rate it charges. Mexican companies manufacturing for the domestic market are known to use non-North American metals. Remember too that 30% of the metal contained in duty-free USMCA cars from Mexico can be from outside the region.
This helps U.S. auto manufacturers remain globally competitive. But it’s a problem for American steel and aluminum protectionists. To solve it they want a North American common-market tariff for metals.
David Henderson makes the case that Trump’s tariffs punitive taxes on Americans’ purchases of imports will hurt the North American automobile industry. A slice:
The new tariffs won’t hurt the auto industry directly. Although the 50 percent tariff rate is in the nosebleed seats of the tariff arena, that 50 percent rate applies to only about US $20 billion of Canada’s approximately $400 billion of annual exports.
The problem is that Trump has shown himself to be a volatile decision-maker who will change his mind from week to week. If you’re a manufacturer trying to decide whether to produce parts in Canada for the huge US auto market, what do you need? The opposite: some degree of certainty.
The beautifully integrated North American auto industry is likely to be a casualty of this latest rejection of relatively free trade. Justin Wolfers is an economist at the University of Michigan. The auto industry matters a lot to that state. Here’s how Wolfers recently put it:
Around a city like Detroit, a cluster of automotive specialists grew up that straddles the border and draws on American and Canadian ingenuity at once. The bet was that a cluster like that could beat any purely American or purely Canadian city on earth, and it did.
Now run a tariff wall through the middle of it. American factories can’t get the parts they need at the price they need, so they use costlier parts, or worse ones. Canadian factories lose their American customers. Both sides get weaker.
But take one super competitor and split it into two smaller ones, and the deeper loss isn’t that each half is smaller. It’s that neither half is competitive.
The Editorial Board of the Wall Street Journal decries Tariff Man’s new punitive taxes – a.k.a. tariffs – on U.S.-based biotech firms’ purchases of imported inputs for their operations. Three slices:
Beijing this month rolled out a five-year plan to dominate the global biotech industry. Hard to believe, but President Trump is assisting Xi Jinping at the same time by hitting U.S. biotech companies with new tariffs. This will raise drug prices for Americans and drive more investment to China.
…..
The tariff threat is intended to push small biotech companies to strike similar deals. But most of these companies fund research and development from the sales of one or two medicines that treat small numbers of patients. Sharply discounting their drugs would make it harder to invest in new cures.
They also can’t easily “on-shore” manufacturing. More than 90% rely on third-party manufacturers. It’s not economic for companies with small product portfolios to spend billions of dollars on manufacturing plants. Contract manufacturers have expanded abroad in recent decades because of lower costs and less burdensome regulation. In the U.S., it typically takes about seven years to build a new bio-manufacturing facility, compared to two in China and three in Ireland. Blame the U.S. permitting morass and Food and Drug Administration red tape.
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One small company says tariff compliance could consume 2% to 4% of its working capital before it commercializes its first medicine. That means less money for research. It’s hard enough developing a new drug. Tariffs add more uncertainty that will discourage investment in U.S. biotech. Another win for Mr. Xi.
Mr. Trump is invoking national security under Section 232, but his tariff exemptions for companies that agree to “most-favored nation” pricing deal show his real motivation is lower drug prices. His biotech tariffs will raise them. America doesn’t want to rely on China for critical medicines like antibiotics, but industry-wide tariffs resemble the medieval treatment of applying leeches to bleed a patient.
“Immigration crackdown hits Kansas, disrupts beef processing.” (HT Scott Lincicome)
The Editorial Board of the Washington Post explains what shouldn’t – but, alas, what nevertheless does – need explaining to the Trump administration: “Treating adversaries better than allies is a recipe for isolation.” A slice:
America’s adversaries, especially those with nuclear weapons, sometimes seem to be treated more kindly by President Donald Trump than the country’s oldest friends. Such U.S. unreliability risks encouraging nuclear proliferation by pushing countries to look out for themselves.
GMU Econ alum Paul Mueller and my GMU Econ colleague Dan Klein make clear that Adam Smith wrote wisely about how people should consume.
Nick Gillespie and Stephanie Slade ponder “why the right is embracing state power.”
Jeff Luse is correct: Trump’s joke about how he – Trump – would be “the greatest communist in history” is no laughing matter.
Michael Strain is a fan of Eric Zwick’s and Owen Zidar’s new book, The Everywhere Millionaire: Who Is Really Rich in America and How They Got There. A slice:
The reaction of many economists and journalists to the new book by Eric Zwick and Owen Zidar has been darkly comic. When these professional students of society discover that the wealthy are often engaged in activities considered unglamorous by coastal elites — building a hot dog empire, presiding over a fleet of car dealerships, or manufacturing and installing gutters — their reaction seems to be something like, “Hey, everyone, check out this new book; millionaires aren’t who you think they are!” Well, no, professor — millionaires aren’t who you think they are.
Bob Graboyes warns against falling for seemingly plausible false information.
It is always difficult to gauge the influence of ideas (or ideology) in policy. But practical observation teaches us that the prevailing climate of ideas, interacting with interests and events, can entrench or sway this or that set of policies.
Individuals are creative. They are able to conceive of changes in their environment, foresee the consequences thereof, and respond by creating new opportunities.
Freedom must be granted to all, even to base people, lest the few who can use it for the benefit of mankind be hindered.
Inveighing against any further tariff increases, [Léon] Say argued that the struggle was not just between protection and free trade, but rather a mere facet of “that great combat of the individual against the state.”
