U.S. Chamber Chief Dredges Up Smoot-Hawley Boogeyman

September 20, 2018

https://www.reuters.com/article/us-usa-trade-chamber/u-s-chamber-chief-says-trump-can-still-avoid-a-damaging-trade-war-idUSKCN1LZ1ZO

I’m surprised that free trade globalists haven’t done it sooner but, as reported in the above-linked Reuters article, the president of the U.S. Chamber of Commerce has dredged up the old Smoot-Hawley boogeyman to try to scare people into opposing the Trump trade agenda.

“No, I don’t think the tariffs will be permanent,” Donohue said, adding that this would “screw the economy” in ways similar to the 1930s Smoot-Hawley Tariff, referring to a protectionist law that raised thousands of U.S. tariffs and which many economists believe exacerbated the Depression.

My apologies to those who have followed this blog for a long time, as I’ve posted on this topic many times before.  But the message bears repeating anytime anyone resorts to this tired argument against tariffs.

The above quote would leave those unfamiliar with trade history with the impression that the Smoot-Hawley Tariff Act represented a turn away from free trade toward protectionism, triggering a global depression.  Nothing could be further from the truth.  Here are the facts:

  • From its founding, the U.S. relied upon tariffs to establish itself as the world’s preeminent industrial power.  In fact, until 1913 when the constitution was amended to establish an income tax, all federal revenue was derived from tariffs.
  • The Fordney-McCumber Tariff Act of 1922 was widely credited for the economic boom times of the “roaring ’20s.”
  • The Smoot-Hawley Tariff Act represented only a very minor tweaking of tariff rates – on average only a 2.7% change from the Fordney-McCumber Act.
  • Smoot-Hawley wasn’t enacted until June, 1930, a full seven months after the stock market crash of October, 1929 which caused the failure of thousands of banks.
  • At the worst depth of the Great Recession that followed the market crash, America’s exports had contracted by only $6.5 billion, while the economy, as measured by gross domestic product, contracted $33.1 billion.  It was actually the world-wide depression that caused exports to shrink, and not vice versa.  We saw exactly the same phenomenon during the “Great Recession” which began in 2008.  That came at the peak of free trade policy and yet trade contracted dramatically as the world sank into recession.

“U.S. Chamber of Commerce President Tom Donohue said on Wednesday that the Trump administration could still avoid a full-blown global trade war …”

It doesn’t seem to occur to Mr. Donohue that the Trump administration may not want to avoid a “full-blown global trade war.”  In fact, the U.S. has been in such a war since the signing of the Global Agreement on Tariffs and Trade in 1947, a war we’ve been losing badly because we weren’t willing to put up a fight.  The free-traders that gained traction in the wake of World War II had pulled the wool over our eyes.  Thankfully, we finally have a president who sees what a failure that approach has been.

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Tariffs on China!

September 19, 2018

https://www.reuters.com/article/us-usa-trade-china-tariffs/china-says-trump-forces-its-hand-will-retaliate-against-new-u-s-tariffs-idUSKCN1LX2M3

Monday evening, President Trump took the first meaningful step to extricate the U.S. from its decades-long trade policy nightmare that has wreaked havoc on the American people and economy.  He imposed a 10% tariff on $200 billion worth of imports from China, adding to the similar tariff he imposed earlier this year on $50 billion worth of Chinese imports.  His goal is to eliminate America’s massive trade deficit with China and restore a balance of trade.  When the Chinese failed to respond to the initial round of tariffs with voluntary measures to re-balance trade, the president was left with no choice but to take steps to assure that it happens.

Chinese reaction, and reaction by pro-trade lobbying organizations, has been predictable.  China threatened retaliation and yesterday announced small tariffs on $60 billion of U.S. exports.  Why only $60 billion?  Because that’s all that’s left after they already imposed tariffs on U.S. exports in response to Trump’s first round of tariffs.  In essence, they’re already out of ammo in the trade war.  Commerce Secretary Wilbur Ross said as much yesterday and Trump warned China that any retaliation against our farmers or industries would immediately result in tariffs on all remaining imports from China.

As reported in the above-linked Reuters article:

… Foreign Ministry spokesman Geng Shuang told a news briefing later that the U.S. steps have brought “new uncertainty” to talks between the two countries.

“China has always emphasized that the only correct way to resolve the China-U.S. trade issue is via talks and consultations held on an equal, sincere and mutually respectful basis. But at this time, everything the United States does not give the impression of sincerity or goodwill,” he added.

I can’t let that pass.  Let’s get one thing straight.  Red China is not America’s equal in any respect.  (I refer to them as Red China because their annointing of Chairman Xi as chairman for life proves that they are still nothing more than the totalitarian, communist regime that they were under Mao Tse Tung.)  Such regimes aren’t worthy of American respect.  Red China’s economy – formerly an economic backwater – has been propped up by dumb American trade policy.  It’s time to kick away that prop.

Business groups warned of disruptions to their supply chains.  Funny.  They had no problems with disrupting their long-standing American supply chains when they moved them to China in the first place.

Others warned of economic harm to American consumers:

“President Trump’s decision … is reckless and will create lasting harm to communities across the country,” said Dean Garfield, president of the Information Technology Industry Council, which represents major tech firms.

Seriously?  Recently, Trump was criticized for denying the death toll in Puerto Rico in the wake of hurricane Maria last year.  That death toll figure was arrived at by comparing the death rate in Puerto Rico to the death rate preceding the hurricane.  OK, let’s apply that same logic to American trade policy.  In the wake of engaging in free trade with China, Americans’ life expectancy has actually declined and death rates have risen as despair set into communities where one factory after another closed.  So, applying that same death toll methodology to U.S. trade policy, it’s clear that previous administrations are responsible for not a few thousand deaths, but millions.  And as the economy continues to recover in response to Trump’s trade policies, he can be credited with saving millions of lives.  Anyone with a brain can see that it was the export of American jobs to China that did “lasting harm to communities across the country.”  Reversing that process, as Trump is doing, can only be a huge boon to American communities.

One group has been conspicuously silent during this whole process and no one has reported on it.  For decades, American trade policy has been paralyzed by fear of the World Trade Organization.  Now we can see what an irrelevant, toothless tiger that organization is.  In Five Short Blasts, I pointed out that the WTO was actually powerless to do anything that nations weren’t already free to do before the organization existed.  Why have we waited all this time to take our trade policy back in our own hands and impose tariffs to restore a balance of trade?  Why have we stood idly by and racked up trillions of dollars of debt and devastated our communities out of fear of this organization?  Stupid.  There’s just no other word to describe it.

I honestly thought I’d never live to see the day when America would stand up for itself again.  It seemed that the sappy globalist mentality, reminiscent of the ’70s Coca Cola ad where everyone held hands and sang “I’d like to teach the world to sing in perfect harmony,” had condemned America to live out the rest of its existence as a sick host, lying helplessly as it’s fed upon by a horde of trade parasites.  But that day that I thought I’d never see came on Monday.  America has stopped being a trade chump.  There’s much more to be done.  The European Union has been as much of a trade parasite as China and needs to be dealt with in the same way.  So too does Mexico.  But this is a good start.

 


The Federal Reserve Thinks Unemployment Is Too Low!

September 13, 2018

https://www.reuters.com/article/us-usa-fed-rosengren/fed-says-it-whipped-u-s-unemployment-maybe-too-well-idUSKCN1LT0F0

As reported in the above-linked Reuters article, Boston Fed bank president Eric Rosengren worries that the Federal Reserve has been “too successful” is lowering unemployment.  He explains:

“The recurrent pattern (of recessions) was one where the tightening of monetary policy was expected to slow the economy down gently…to full employment,” Rosengren and three Boston Fed co-authors noted. But “Once the unemployment rate starts to rise by a relatively modest amount, dynamics take hold that tend to push the economy into a recession.”

The Fed considers an unemployment rate of 4.5% to represent “full employment.”  The current rate of unemployment, as reported by the Labor Department on Friday, is 3.9%.  So the Fed worries that there’s no place for the unemployment rate to go but up, and even a small rise could start a recessionary downward spiral in the economy.

This is ridiculous for two reasons:

  1.  The Fed ignores its own role in choking off the economy and precipitating recessions by constantly tightening monetary policy (i.e., raising interest rates) as unemployment drops, and
  2.   The Fed has bought into bogus employment figures propagated by the Labor Department in an effort to stabilize confidence in economic policy in the wake of the Great Recession.

Regarding point 2 above, consider the following:

  • In November of 2007, just before the collapse of Lehman Bros. triggered the Great Recession, 48.4% of the U.S. population was employed and the unemployment rate stood at 4.7%.
  • As of August of 2018, the U.S. population has grown by 25.6 million people.  But, according to the Labor Department, the work force has grown by only 7.9 million workers, and the nation’s employment level has grown by only 8.9 million workers.  And in August of this year, only 47.4% of the population was employed.  Yet, thanks to the unnaturally low rate of growth in the labor force reported by the Labor Department, instead of rising, official unemployment has fallen to 3.9%
  • An honest accounting of the labor force that grows proportionately with population growth would produce a current  unemployment rate of 6.8% – nowhere close to “full employment.”
  • In spite of the decline in unemployment, wages have barely risen, confounding economic experts.  They haven’t risen because unemployment is still quite high – not anywhere close to being low enough to put upward pressure on wages.

Even the definition of “full employment” used by the Fed – 4.5% – is subject to debate.  If that level is “full employment,” how do you explain that some states and some countries routinely operate well below that level?  During World War II, unemployment fell to approximately 1% in the U.S.

The Federal Reserve is making a big mistake with its program of hiking interest rates just because the economy is doing better.  President Trump has been right to criticize its policies.  How can he “Make America Great Again” when the Fed’s policy is to “Let America Get Just a Little Bit Better – But Not Much?”


Trade Deficit in Manufactured Goods Hits Another Record in July

September 6, 2018

Yesterday the Commerce Department announced that the overall trade deficit rose to $50.1 billion in July – bad, but still in the $37-55 billion range where it has hovered for years.  Only by doing a deep dive in the data – removing services, food and oil – can you arrive at the really bad news in the report – that the trade deficit in manufactured goods shot to yet another all-time high in July of $69.3 billion, beating the previous record of $68.4 billion set in February earlier this year.  Here’s the chart:  Manf’d Goods Balance of Trade.

Over the past few months, we’ve heard a lot about the Trump administration’s “trade war” with the rest of the world in an effort to restore a balance of trade.  But so far, there’s no evidence of any positive results to be found in the trade data.  What’s going on here?

Several things.  First of all, it’s important to note that, for all the talk we’ve heard about this issue, so far it’s been mostly talk.  There’s been talk of slapping tariffs on another $200 billion of imports from China.  More recently, that’s escalated to include all $500-some  billion of their imports.  There’s been talk of imposing tariffs on all auto imports from the European Union.  There’s been a lot of talk about tough negotiations to revise the North American Free Trade Agreement with Mexico and Canada.  But the reality is that, so far, the Trump administration has imposed small tariffs on aluminum and steel imports and on about $50 billion of Chinese imports.  That’s a small drop in the bucket compared to the $3 trillion of imports from around the world.  In essence, the trade war really hasn’t started yet.  The U.S. and the rest of the world have simply been exchanging steely stares across the battlefield.  The only shots fired have come from BB-guns.

If anything, other Trump economic policies may actually have exacerbated the deficit.  The tax cut that went into effect this year has boosted the economy by as much as 4% (according to the most recent GDP data), but the trade deficit in manufactured goods has worsened by 18% since the tax cut went into effect.  It’s clear that much of the tax cut has been spent by Americans on more imports.  It’s actually boosted the global economy much more than the U.S. economy.

However, all that may soon change.  The tariffs on an additional $200 billion of Chinese imports has been on hold during a public comment period.  That period actually ends today.  So the tariffs may very soon be implemented.  The Chinese will begin feeling the pain and, admittedly, so too will American consumers.  They’ll feel that pain until manufacturing begins to return to the U.S. and drive up wages.

The talk of tariffs has so far had little effect on corporate supply-chain strategies.  Corporate leaders still think it’s all a bunch of bluster by Trump, and that all will return to normal if he manages to win some token concessions from other countries.  They’re not going to revise their sourcing strategies and investments in foreign countries until they really start to feel pain from the tariffs.  But there is evidence that it’s beginning to happen.  Earlier this week, Ford announced that it was cancelling plans to begin importing a car model from China, explaining that the expected tariffs on those cars would wipe out what was already a thin profit margin.  GM already imports the Buick Envision model from China.  If Ford sees importing cars from China as a losing proposition, surely GM is considering similar action.

Then there’s the new trade deal between the U.S. and Mexico which promises to shift some car and parts production back to the U.S.  It’s not a signed deal yet, but it’s coming.

So the message here is to be patient.  But at the same time, the Trump administration needs to feel some sense of urgency to start producing results.  The tax cut will only carry the economy so far and for so long.  Real economic reform is totally dependent on a re-balancing of trade that hasn’t actually begun yet.