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Trumpian Trade Triumph, and making America great again

30 Aug 2018

Much of Mr. Trump’s economic success has been challenging the way things have been done under the Obama administration, and charting a decidedly different course.  Tax cuts instead of tax hikes, deregulation instead of regulation.  And it’s working; yesterday’s revision of 2nd qtr GDP was positive, and the composition was even better–consumer spending was down while business investment was up.  This is continuing evidence that focusing on the supply side works, and I want to commend Mr. Trump and his administration for staying the course in this regard.

Unfortunately, Mr. Trump doesn’t want to win as much as I do, and he continues to charge his team to use tariffs to strike better trade deals.  This week we see the initial framework for a deal with Mexico, and now a focus on Canada for a revised NAFTA.  Now Mr. Trump would say that this is going a different direction from previous administrations, that sold out American workers.  Yet I would argue that while he is going in a different direction in one sense, in the most important sense he is not–the swamp is fully in charge with his blessing, as we’ll see below.  It certainly is not going to take us in the direction of freer trade, it is going to take us in the reverse, and ensure that there are slightly different set of winners and losers.  This fits into Mr. Trump’s view of trade; if we win, China, Mexico, etc. loses. So what does the proposed deal do?  It’s really too early to tell, since this is just a framework and we have little officially to work with, but CATO has a summary here. One of the key demands of the Trump Administration is:

NAFTA eliminates tariffs on trade between Canada, Mexico, and the United States, but only for products that meet specific requirements to qualify as being made in North America. For example, you couldn’t make a car in China, ship it to Mexico and put the tires on, and then export it to the United States at the NAFTA zero tariff. Under current NAFTA rules, in order to qualify for duty free treatment, 62.5 percent of the content of a vehicle has to be from the NAFTA countries.

The Trump administration has been opposed to this content threshold, arguing that it needs to be higher. A key part of the bilateral talks between the United States and Mexico was to address this issue, and also add some conditions related to wage levels.

With regard to the content threshold, the United States has asked for this requirement to be raised, and according to the fact sheet released by USTR, the new content requirement will be increased to 75 percent. On the wage levels, the United States has pushed for a provision that requires 40 percent of the content of light trucks and 45 percent of pickup trucks to be made by workers that earn at least $16 an hour, and Mexico appears to have agreed to this as well. These changes make it harder for Mexican producers to satisfy the conditions to get the zero tariffs, while Canada and the United States would not be affected by this change.

So Mr. Trump is wanting for force the price of Mexican built cars higher, so we’ll buy more American cars.  But any of my principles students can tell you that decreasing supply will result in an increased price of cars to U.S. consumers.  So Mr. Trump just wants to provide concentrated benefits to a key political constituency, and spread the costs to millions of Americans.  The irony of course, is that Mexico’s loss will likely not be the U.S.’s gain, but rather the marginal buyer who will now buy a Japanese car, or a South Korean car.  But who would want to consider the economic logic of “what next” when you can make a favored constituency happy?  But this is nothing compared to the swamp that exists in Mr. Trump’s steel policy.  To be fair, steel has been a swamp for decades, and political support for this industry has come from many presidents, including most recently G.W. Bush.  Yet Mr. Trump promised he’d drain the swamp, and what I read is that after he drained the swamp he didn’t like, he filled it back up with a bigger swamp he did like.  So the indefatigable Veronique De Rugy writes in the NYT:

Today, steel executives have an iron grip on the White House thanks to the deep ties of the president’s advisers to the industry. Mr. Ross made his fortune buying and selling steel companies and was sitting on a steel company’s board until his confirmation as commerce secretary. Robert Lighthizer, a private lawyer who represented the steel industry for years, is now the United States trade representative. The upper levels of both the Office of the United States Trade Representative and the Commerce Department have predictably been populated by other individuals with close ties to Big Steel. And the trade adviser Peter Navarro’s 2012 documentary, “Death by China,” was funded by one of the top beneficiaries of these tariffs — the steel producer Nucor.  This cronyism explains how the steel industry is directly involved in deciding which companies do or don’t receive exemptions from the steel tariffs and why so few exemptions have been granted.

As another writer suggested,

The ability of a single industry to exert so much influence over the exclusions process is striking even in Mr. Trump’s business-friendly White House, given the high stakes for thousands of American companies that depend on foreign metals.

The continuing lesson for us is this:  business friendly is not free enterprise friendly, and certainly not consumer friendly.  Business friendly is usually just picking different business friends.  If this philosophy of picking winners and losers in business seems familiar–Mr. Trump, meet Mr. Obama.

So what to think in a Christian political economy sense?  Well, in a fallen world, I’m actually grateful if Mr. Trump claims his win and we get one soon with Canada in an agreement that only harms us a little.  Of course I’d like to not harm us at all, but Mr. Trump is determined to do that.  And if we can conclude this trade craziness soon, his other policies (especially his deregulatory agenda) are so positive that we’ll be able to continue to do well economically even with a new and different swamp in place.  But another important point of our ability to criticize Mr. Trump is this:  we are not on his team.  We are not on the other team.  In a constitutional republic which allows us both free expression and the right to vote, we are on the side of applauding those actions which make our country better off and criticizing those which do not.  That is both our right and our duty.  Mr. Trump’s overall performance may indeed win him our vote in the next election, but it will not spare him from criticism where criticism is justified.

So what do you think?  Comments are now open!