Protectionism

The Tariff King

The Tariff King

Trade War Deadline Winner
Staff member
With the recent news of Trump instating tariffs, what are your thoughts on protectionism for the future of the US Economy. Trade war phrase being thrown around.

Somehow stumbled upon the President of the American steel union on MSNBC last night ripping in to China. Thought it was very interesting. He didn't seem interested in punishing Canada but just China for inflating the market.
 
Since I pretend to be an economist in real life:

1) Some jobs are lost to foreign competition.

2) Consumers benefit from lower prices and greater choice due to foreign trade. There is a virtual cottage industry comparing the gains from this compared to the job losses. Lets just say it aint close.

3) There is a more subtle but perhaps even more important effect in the long run. Which is that closed economies grow more slowly than those that are relatively open to trade. It is a small effect in any given year but through the magic of compounding it becomes significant over time.

These are general considerations that hold in general.

There are some particulars with respect to current circumstances which bear watching. Having mostly to do with having an economy operating at very high capacity. Combine a tight labor market, restraints on immigration, an easing of fiscal policy (over $200 billion increase in the deficit), rising commodity prices with protectionism and I think you have a combination that could ignite a wage-price spiral. We haven't seen anything like this since the LBJ years. We had a long period of low inflation in the 1950s and first half of the 1960s. Then boom inflation became a problem and it took a long time to tame.
 
I'm not, as I'm sure you can guess, a dedicated free-marketeer. OTOH I've always been, due to a sometimes regrettable pragmatic streak, something of a free trader, although a tepid one. I see the attraction of protectionism having worked in and around some domestic businesses that lost livelihood to foreign competition with less protections and workers' rights, so that's where my "protectionist-curious" sentiments come from. I also see the inexorable, if sometimes cruel, market-logic of so-called "free trade." I can't say I really understand enough about the big picture to have a hot take here. It really boils down to the extent that it's a kitchen-table issue for most Americans. I envy those of you who have more well-developed opinions.
 
Julio3000 said:
I'm not, as I'm sure you can guess, a dedicated free-marketeer. OTOH I've always been, due to a sometimes regrettable pragmatic streak, something of a free trader, although a tepid one. I see the attraction of protectionism having worked in and around some domestic businesses that lost livelihood to foreign competition with less protections and workers' rights, so that's where my "protectionist-curious" sentiments come from. I also see the inexorable, if sometimes cruel, market-logic of so-called "free trade." I can't say I really understand enough about the big picture to have a hot take here. It really boils down to the extent that it's a kitchen-table issue for most Americans. I envy those of you who have more well-developed opinions.
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There is a paradox related to competition. Each of us would like to live a comfortable life working in a niche free of competition. If an economy was structured that way there would be maybe less stress. But almost surely it would be less wealthy than one where we each had to be continually on our toes because of competition.
 
More Chinese aluminum in America than Chinese steel.

Currency manipulation/IP thieving/market muscle
 
There is also an equilibrating effect to tariffs from movements in foreign exchange rates. The Canadian dollar for example has depreciated 2% against the U.S. dollar this week. So while their steel exports to the U.S. will surely fall, the depreciation in the Canadian dollar will help their other export sectors. It is also worth noting that the strong U.S. dollar will partly offset some of the inflationary effects of the tariffs (not mainly the effects on steel prices but through the effects on other prices).
 
Hawk said:
I think that's the point.
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I think that's a bit of a stretch. Our tariffs won't affect China's market share in India much. There will be some second-order effects but those are small.

I suspect our trading partners will play the politics of this in a fairly shrewd way by hitting us in politically sensitive areas. Farmers for example are a fairly noisy group on trade issues. So I expect the retaliation might be concentrated on agriculture. Good luck to the White House explaining the politics of this in Iowa and Kansas.
 
nsacpi said:
I think that's a bit of a stretch. Our tariffs won't affect China's market share in India much. There will be some second-order effects but those are small.

I suspect our trading partners will play the politics of this in a fairly shrewd way by hitting us in politically sensitive areas. Farmers for example are a fairly noisy group on trade issues. So I expect the retaliation might be concentrated on agriculture. Good luck to the White House explaining the politics of this in Iowa and Kansas.
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https://www.nytimes.com/2018/03/02/...column-region&region=top-news&WT.nav=top-news
 
nsacpi said:
Our tariffs won't affect China's market share in India much.
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If this happened as a byproduct of increased American production I'm sure it would be welcomed, but I don't think anyone expects that kind of shift driven entirely by a single American tariff.
 
Hawk said:
If this happened as a byproduct of increased American production I'm sure it would be welcomed, but I don't think anyone expects that kind of shift driven entirely by a single American tariff.
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I agree it is mostly symbolic. Trade deficits are driven by differences between spending and income:

GDP=Consumption + Investment + Government Spending + (Exports-Imports)

Rewrite so that

(Exports-Imports)= GDP - Consumption - Investment - Govt Spending

Now consider the Income side: Income = Consumption + Savings + Taxes

Since GDP has to be equal to Income

Exports-Imports= (Consumption+Savings+Taxes) - Consumption - Investment - Govt Spending

Trade Surplus (exports-imports)= (Savings-Investment) + (Taxes-Govt Spending)

Trade Surplus = (Net of savings and investment) + (Govt Surplus)

This is very important

If you want to increase the trade surplus (or decrease the deficit) you either have to increase the govt surplus (or reduce the deficit) or find a way to finance more of your investment from domestic savings (either increase savings or decrease investment).

It is an iron law...the trade surplus or deficit reflects the private sector surplus (savings minus investment) or government sector surplus.

To reduce the trade deficit one of those two things has to happen. Tariffs are not exactly an efficient tool for making these things happen. But yes they have symbolic appeal. And I'm sure the other countries will find symbolically important ways to retaliate.

And after the sound and fury has died down our trade deficit will go up because our government deficit is going up.
 
I'm not interested in reducing the deficit.

I am interested in the health of individual, poor-performing (traditionally job rich) private industrial sectors.
 
nsacpi said:
GDP=Consumption + Investment + Government Spending + (Exports-Imports)

Rewrite so that

(Exports-Imports)= GDP - Consumption - Investment - Govt Spending

Now consider the Income side: Income = Consumption + Savings + Taxes

Since GDP has to be equal to Income

Exports-Imports= (Consumption+Savings+Taxes) - Consumption - Investment - Govt Spending

Trade Surplus (exports-imports)= (Savings-Investment) + (Taxes-Govt Spending)

Trade Surplus = (Net of savings and investment) + (Govt Surplus)
Click to expand...

Overlay this macro on the Japanese economy.
 
Hawk said:
I'm not interested in reducing the deficit.
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