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TRADE THREAD- President Trump signs Phase One of China agreement, China promises to double its purchases in 2020 (5 Viewers)
- Thread starter timschochet
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fatguyinalittlecoat
Footballguy
Gotta say I have pretty mixed feelings on this and I’m pretty put off by the perspective of many of you that anti-free trade people are necessarily ill-informed. Look, I’ve taken college economics. I understand that free trade makes countries richer. But I don’t think the analysis should end there.
From my perspective of the last 30 years or whatever, the benefits of freer trade have accrued primarily to the investor class in this country. If the country is getting richer as a result of the richest 5% of the population getting even richer while everyone else is stagnant, then I think it’s perfectly reasonable for the other 95% to say that the rich need to do a better job sharing or we’re not gonna help them get any richer.
I should make clear that my statements are related to free trade generally not the specific tariffs contemplated by Trump here. I don’t feel knowledgeable enough to weigh in on the merits of those.
From my perspective of the last 30 years or whatever, the benefits of freer trade have accrued primarily to the investor class in this country. If the country is getting richer as a result of the richest 5% of the population getting even richer while everyone else is stagnant, then I think it’s perfectly reasonable for the other 95% to say that the rich need to do a better job sharing or we’re not gonna help them get any richer.
I should make clear that my statements are related to free trade generally not the specific tariffs contemplated by Trump here. I don’t feel knowledgeable enough to weigh in on the merits of those.
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Sheriff Bart
Footballguy
There are about 140k people employed in the steel industry. There's 16x that many in steel related businesses that is going to have to absorb these extra costs which will more than likely lead to layoffs. In 2002 when Bush put tarrifs on steel 187k jobs were created in the steel industry and 200k were lost in related businesses.fatguyinalittlecoat said:
RedmondLonghorn
Footballguy
I don't know where people are coming up with the number 140K for those employed in the Steel industry. If you look at only iron and steel mills, the employment number is closer to 80K.
Those 80K workers produce approximately 80 mm metric tons of steel per year, or about ~1,000 tons per employee. At the absolute peak of employment and production in the US steel industry, in the very early 70s, the industry employed about 600K workers, and they produced 110-120 mm mt per year, or 185-200 tons per year.
So during my lifetime, the steel industry has lost approximately a half a million jobs as it has become about 5-6x more efficient. Even if you look at just the last 20 years, output per employee has essentially doubled. That is the real story here. Not unfair foreign competition, or bad trade deals, or whatnot.
Early last week I got a call from an old friend to talk about steel prices. His business buys a lot of steel to go in their natural gas fractionation plants. His vendors are attempting to tack a 25% premium on to the steel price from last week. It is clear that prices already moved a bit when the inquiry into Chinese dumping began; the market was building some premium into the price for possible tariffs. So his vendors attempting to pass through a 25% surcharge is clearly "double dipping".
It would amount to close to a 40% premium from the market price from the end of December. That is far above what is economically justified and is essentially profiteering/price gouging. Benchmark prices outside the US are generally below US prices, so the new equilibrium price should become foreign price + price of transport + tariff. That shouldn't amount to a 40% bump, but in the chaos of current uncertainty vendors are trying to extract economic rents.
This is how real markets work when a market distortion (the suddenly announced tariffs) are introduced. I am not sure how anybody would think this could be a positive for the US economy and for US jobs. My friend is based in East Texas and he builds plants in that region and hires people in that region. The tariffs are likely to enrich his vendors (mostly middle-men) on their current inventories in the short term--rewarding classic rent-seeking behavior.
Longer term, they are likely to do significant damage outside of the steel industry. That's how economics tell us it should work and that is what real experience tells us about how it basically always works.
My dad was in the lumber business in the PNW for about 50 years and he has some experience with tariffs and quotas on Canadian forest products. He saw them both as a middle man and also as a supplier of raw US timber. He told me the other day that while the experience differed a bit, depending on his role, he never saw the "protection" of US products as being a net positive for the business. Quite the opposite, in fact.
Protectionism is one area where economic theory squares with real world experience quite neatly. Yet there are still people who laud protectionist policies. Are they dishonest or just ignorant? Or some of both?
Those 80K workers produce approximately 80 mm metric tons of steel per year, or about ~1,000 tons per employee. At the absolute peak of employment and production in the US steel industry, in the very early 70s, the industry employed about 600K workers, and they produced 110-120 mm mt per year, or 185-200 tons per year.
So during my lifetime, the steel industry has lost approximately a half a million jobs as it has become about 5-6x more efficient. Even if you look at just the last 20 years, output per employee has essentially doubled. That is the real story here. Not unfair foreign competition, or bad trade deals, or whatnot.
Early last week I got a call from an old friend to talk about steel prices. His business buys a lot of steel to go in their natural gas fractionation plants. His vendors are attempting to tack a 25% premium on to the steel price from last week. It is clear that prices already moved a bit when the inquiry into Chinese dumping began; the market was building some premium into the price for possible tariffs. So his vendors attempting to pass through a 25% surcharge is clearly "double dipping".
It would amount to close to a 40% premium from the market price from the end of December. That is far above what is economically justified and is essentially profiteering/price gouging. Benchmark prices outside the US are generally below US prices, so the new equilibrium price should become foreign price + price of transport + tariff. That shouldn't amount to a 40% bump, but in the chaos of current uncertainty vendors are trying to extract economic rents.
This is how real markets work when a market distortion (the suddenly announced tariffs) are introduced. I am not sure how anybody would think this could be a positive for the US economy and for US jobs. My friend is based in East Texas and he builds plants in that region and hires people in that region. The tariffs are likely to enrich his vendors (mostly middle-men) on their current inventories in the short term--rewarding classic rent-seeking behavior.
Longer term, they are likely to do significant damage outside of the steel industry. That's how economics tell us it should work and that is what real experience tells us about how it basically always works.
My dad was in the lumber business in the PNW for about 50 years and he has some experience with tariffs and quotas on Canadian forest products. He saw them both as a middle man and also as a supplier of raw US timber. He told me the other day that while the experience differed a bit, depending on his role, he never saw the "protection" of US products as being a net positive for the business. Quite the opposite, in fact.
Protectionism is one area where economic theory squares with real world experience quite neatly. Yet there are still people who laud protectionist policies. Are they dishonest or just ignorant? Or some of both?
timschochet
Footballguy
Great post Redmond.
To answer your last question, I believe mostly ignorant. As I have pointed out many times, protectionism is very popular among people who prefer simple answers to complicated questions.
To answer your last question, I believe mostly ignorant. As I have pointed out many times, protectionism is very popular among people who prefer simple answers to complicated questions.
fatguyinalittlecoat
Footballguy
I don’t think it’s necessarily either of these things. Lots of people do not seem to have had their lives improved by freer trade.
AAABatteries
Footballguy
This is my going in position with most threads around here.fatguyinalittlecoat said:
RedmondLonghorn
Footballguy
Are these people the Amish, or do they live in some other kind of self-contained and self-sufficient community?
Because virtually everybody else has had their lives improved, in some way, by free trade. If they are consumers, their purchasing power as consumers has been improved by free trade.
Now there are some people who have also lost jobs because of international competitive forces, so for those specific people, the cost to them of free trade may have outweighed the benefits. That's an an unfortunate fact. But on a net basis, the benefits of free trade have massively outweighed the costs for our society as a whole.
And that number is probably a lot smaller than many people think it is. There was a fairly recent academic study that determined that something like 75-80% of job losses in manufacturing have come as a result of automation, rather than do to foreign competition. Which is why over the past 25 years, while jobs in manufacturing have dropped sharply in the US, the total value of manufacturing output is basically at its all time high. See Chart. I said "basically", because this chart is based on data that is a year old and the inflation-adjusted output index was a little below its mid-2000s peak at that time. As of the new data from the end of the 4th quarter (and this data was released just five days ago), the total real value of manufacturing output is within a whisker of where it was at the peak. See Chart The US is also exporting more durable goods, in terms of real value, than it ever has before. See Chart.
As you can see, the narrative that the US manufacturing sector is dying and we "don't export anything anymore" because of competition from China and others is patently false.
Maybe - if you have a myopic short-term view.
@fatguyinalittlecoat is correct that the real beneficiaries of free trade have been shareholders. The consumers do see a short-term benefit - consumable products are less expensive. But, long-term, this is not sustainable.
Long-term, the US, and US companies, are not doing enough to efficiently allocate US labor to different jobs. That is the true benefit of free trade - the efficient allocation of resources. Right now, we are simply efficiently allocating our wealth to other countries so we can buy cheaper consumable products. What we should be doing, as a country, is sharing the benefits of free-trade more evenly. Taxing corporate profits and using those funds to pay for job training, education, R&D into developing industries.
We need to reverse the trade deficit - but not through tariffs - we need to start producing more goods and services that the world wants - by efficiently allocating our resources towards those goods and services.
The alternative is that the trade balance will eventually even out when we no longer can afford to ship our wealth overseas, and countries stop shipping goods to the US, and our standard of living will drop accordingly.
RedmondLonghorn
Footballguy
If your position is that the US hasn't done enough to promote development of new industries or to aid those who have been negatively affected by changes to their industries (which again, tend to come more often from automation than from foreign competition), that is a different discussion. And I might not differ too much with you on those comments.
But that isn't the fault of free trade.
Describing the benefit to consumers of increased purchasing power as a minor benefit is something I would differ sharply on, however. It is a substantial benefit, especially for those people with limited means.
I would also add that the idea that a trade surplus is always good and a trade deficit is always bad is an overly simplistic analysis. There are pros and cons to both a deficit and a surplus. I would probably agree that running a large and persistently increasing trade deficit carries certain risks that we don't want to bear, however.
msommer
Footballguy
As @RedmondLonghorn eloquently states above - not the fault of free trade - and also not the fault of free trade agreements.
Yup - and to some extent you (the US) already have: See Google, Apple, etc profits. Where the US has failed is in unquestioningly allowing the markets most short term thinkers to determine how to spend the profits. Share buy backs don't promote growth, R&D spend does.
I've never been opposed to free trade.
I am opposed to how we allocate the benefits of free trade. I am not into protecting jobs - I am into promoting new growth. I am into efficiently allocating our resources into more productive roles. We don't do that. We tout cheap consumer products.
Long term, you simply cannot run a trade deficit - it really is that simple. And long-term, the trade deficit will balance out - one way or the other. Yes, in the short-run, there are times when you can go on a spending spree. But, long-term you are simply giving away your wealth, and when it is gone, people will stop selling to you at prices you can afford. So, when you have built up a surplus - the best way to utilize free trade, is to use that surplus to invest in the future - not buy more TVs.
msommer
Footballguy
Doing that, and at the same time expecting quarterly results to
a) be then end all on performance and
b) always go up
are incompatible
Sheriff Bart
Footballguy
msommer
Footballguy
It seems relevant to bring up as a reason for the way wealth continues to be allocated to the 1%ers over actual growth thaty could even the trade balance.Ok? Not sure what I said that contradicts that....
If you have an idea on how to change the current allocation mechanism in a way that provides for longer term growth for the country I'd be happy to discuss it.
Triple Bottom line and Shared Value are stabs at that I suppose, but have yet to have measurable impact beyond the CSR pages in the annual reports
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RedmondLonghorn
Footballguy
That's good.
There are, unfortunately, some people who are opposed to free trade. Including, apparently, the POTUS and several people who have his ear.
msommer
Footballguy
I think this is the first time I can remember that one of the panelists hadn't read the question wrong and had to change his/her vote later to go with the majority...
I agree with RedmondLonghorn here. Free trade has resulted in higher incomes mostly for managers and investors rather than unskilled workers. But not everything is about income. Unskilled workers benefit from being able to purchase reasonably priced cell phones just like everyone else does. If we're just counting heads to see how many lives have been improved by freer trade, it's going to be a really big number.
That may just be a nitpick about phrasing, though. I agree with what I take to be your main point: that the wealth generated by international trade has been more concentrated in recent decades than is ideal. (I'm talking only about the increased wealth in America. I believe the increased wealth worldwide has been much less concentrated.) The solution should not be to hamper international trade. The solution should be greater general income redistribution through things like a more progressive income tax, higher standard deduction, expanded EITC, introduction of a basic income guarantee, etc. As I've argued before, you can't redistribute wealth that was never generated, so wealth-enhancing opportunities like international trade are pretty important precursors to robust redistribution policies.
There's a separate political question of what leverage people who favor greater redistribution might have to get their preferred policies enacted. "We won't support free trade unless you agree to increase the top marginal income-tax rates" might be a decent bargaining position, but I don't see too many people making anything like that argument. Instead, it's mostly "We won't support free trade because we want to benefit Americans instead of foreigners" -- which is exactly the argument that professional economists all think is stupid because hampering free trade will end up hurting Americans, not helping them.
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Ilov80s
Footballguy
Very interesting conversations and points here guys. It does seem like we have an intersection of 2 issues. One is free trade and the other is wealth distriubution (greed?). Free trade is good, but I think some are right here that the investors and high level managers getting rich on it are failing to see the big picture as this wealth relates to the unskilled workers. America would be in a much healthier place if corporations were investing more $ back into their workers.
RedmondLonghorn
Footballguy
If people want to have a serious discussion about the real reasons for widening income disparity and misallocation of resources, those things have everything to do with tax policy and (especially) Fed policy, and almost nothing to do with trade.
fatguyinalittlecoat
Footballguy
Yeah I think mostly just me. With that said, I don’t see free traders trying to engage in that sort of negotiation either. They all just take the attitude that free trade is self-evidently good and therefore there’s no need to engage in discussions about how the benefits of such trade should be distributed. Maybe if they were more willing to advocate for that they wouldn’t be having the problems they are now.
RedmondLonghorn
Footballguy
I enjoyed the answer from one economist that was "Strongly Disagree", but only had a confidence level of 3. Either she was really hedging her bets, or she doesn't really understand what "Strongly" means.
fatguyinalittlecoat
Footballguy
Likely true, but for some reason the working class seems to have enough votes to hijack trade deals but not to stop tax breaks for the rich.
RedmondLonghorn
Footballguy
I don't engage in discussions that link the two, because the two aren't linked.
Trade policy, tax policy, and things like the social safety net are separate topics. The idea that they are inextricably linked is inaccurate.
fatguyinalittlecoat
Footballguy
Well if folks are voting against trade deals because they see the rich getting richer while their lives are getting worse, then you have a political problem you need to fix. Even if your personal view is that the issues are not linked.
RedmondLonghorn
Footballguy
Because, recently anyway, they have been manipulated into that by this wave of right wing populism.
There are also fairly complex psychological reasons why people don't vote in favor of higher taxes for the wealthy. There is also an agency problem, because outside of the most ardent progressives, there are relatively few mainstream politicians who really push for changing tax policy in that way. And those people, for better or worse, also advocate for other positions that makes it hard for them to build a "big tent" among the working class.
I can't find it now, but I think I've seen an explanation before that makes sense of this. Something like: confidence level indicates how certain a person is that they have the direction right, and "Strongly Agree" versus "Agree" indicates how big they think the effect is. Or something like that. So if you're 99% percent certain that there will be positive effect, but you think it will be very small, you might have a high confidence but only "Agree" rather than "Strongly Agree." But if you suspect there will be a huge positive effect but you're not at all sure you're right about that, you could have a low confidence but still "Strongly Agree" rather than just "Agree."
I'm sure I'm botching the explanation, but I think I remember reading something like that.
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RedmondLonghorn
Footballguy
But people aren't "voting against trade deals". There isn't some groundswell for protectionism, from what I can tell. It is something that really resonates with some people who are desperate for change, but it is just one of a number of things that got Trump elected. I would guess it isn't even in the top handful of things, outside of some specific locations in the Rust Belt. How many members of the House of Reps, in either party, campaigned on a platform in support of protectionism? I don't know the answer, but it can't be a very big number.
fatguyinalittlecoat
Footballguy
Bernie and Trump both made it a major part of their platforms and both did way better than expected.RedmondLonghorn said:
Also, how many candidates ran on a platform favoring free trade? I don’t think that’s a large number either.
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RedmondLonghorn
Footballguy
That's certainly true. I don't think it was the central appeal of either of them, but it was certainly a prominent feature.
Unfortunately, it is really a question of people being uninformed or, more likely, misinformed by campaigns for cynical reasons.
The fact the US hasn't engaged heavily in protectionism for decades also makes it harder to have "political memory" for the problems with that set of policy tools. Plus people clearly attribute a lot of disparate and complex changes in the economy, that haven't in fact been caused by free trade, to it. We see the same thing with immigration.
RedmondLonghorn
Footballguy
That's the de facto position of mainstream Republicans and Democrats.
There are a lot of things wrong with the mainstream of both major parties, but that ain't one of them.
AAABatteries
Footballguy
It’s definitely not as sophisticated and well implemented as the Offdee scale.Maurile Tremblay said:
RedmondLonghorn
Footballguy
I found an enlightening explanation of the linkage between trade deficits and budget deficits. Guess which direction the causality is in?
My favorite part of this is that it was written on January 1st...1987.
Link to the whole essay
My favorite part of this is that it was written on January 1st...1987.
Sheriff Bart
Footballguy
Pretty sure the trade war with China started with the solar panel tariffs.
RedmondLonghorn
Footballguy
The totality of Trump's economic policies are completely psychotic and destined to end very badly.
He is crowing about the stock market and economy now, but at this rate, it will be a major problem in 12-18 months. Hopefully it is a moot point before then.
Sheriff Bart
Footballguy
Yeah, I'd never thought about it in explicitly those terms before, but now that I have, it's actually pretty obvious.
Trade imbalances are, in a sense, just an accounting gimmick -- an artifact of the convention that the purchase and sale of goods and services are included, but not capital investments. Buying a car counts, but buying a treasury bill does not. When everything is included, including capital investments, there is no imbalance. Everything is accounted for and the overall ledger is (roughly) square.
So "are we buying more goods and services from foreigners than they're buying from us?" is basically another way of asking "are foreigners investing more capital in our country than we're investing in theirs?"
How much capital foreigners are investing in our country is largely a function of how many government bonds we're issuing, which is a function of the size of our budget deficit. So when we run a bigger budget deficit, we should expect our trade deficit to increase accordingly.
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RedmondLonghorn
Footballguy
Essentially, yes. Except for your use of the term "roughly".
When you get into the serious
stuff of the balance of payments, you become aware that the current accounts (which include the trade surplus or deficit) are only half of the equation. There is also the capital account, which must exactly offset whatever occurs in the current account.I have to admit, while I am pretty solid in my understanding of microeconomics and finance, I even get a little sketchy on macro when it comes to some of this stuff. It can be hard to grasp.
I suspect people glom onto the trade surplus or deficit because it is easier to understand, but, in so doing, they are prone to misinterpretation, because it is only part of the picture.
For instance, a corollary of we have been running a trade deficit for years is we have been running a surplus in the capital account for years. Which one sounds more worrisome?
The reality is, as usual, that neither is necessarily good or bad. There are pros and cons to both.
Ditkaless Wonders
Footballguy
I appreciate you sharing your expertise in this thread. If I am not careful I just might have learned something.Essentially, yes. Except for your use of the term "roughly".
When you get into the serious
I have to admit, while I am pretty solid in my understanding of microeconomics and finance, I even get a little sketchy on macro when it comes to some of this stuff. It can be hard to grasp.
I suspect people glom onto the trade surplus or deficit because it is easier to understand, but, in so doing, they are prone to misinterpretation, because it is only part of the picture.
For instance, a corollary of we have been running a trade deficit for years is we have been running a surplus in the capital account for years. Which one sounds more worrisome?
The reality is, as usual, that neither is necessarily good or bad. There are pros and cons to both.
RedmondLonghorn
Footballguy
Ditkaless Wonders
Footballguy
All I know about either is that if you overcook it try to hide that fact with some good sauce.
msommer
Footballguy
Here is what you need to know about the risks of a US trade war
From that bunch of liberals at World Economic Forum
From that bunch of liberals at World Economic Forum
RedmondLonghorn
Footballguy
The people who most need to read that almost certainly won't because they have no interest in learning more, would disregard it as globalist/elitist propaganda, or they couldn't read an article that long. Or some combination of the above.
Sheriff Bart
Footballguy
So yeah, I would say Trump wants a trade war and probably a real one resulting in the deaths of millions.
AAABatteries
Footballguy
Ha ha! You fool! You fell victim to one of the classic blunders - the most famous of which is "never get involved in a trade war in Asia" - but only slightly less well-known is this: "Never go in against a Russian when death is on the line"! Ha ha ha ha ha ha ha!
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