Tariffs and Trade

Two Articles on tariffs and trade, with consideration of Trump’s recent move: 


Why Trump Is So Clumsy About Fighting ‘Free Trade’, 
by Marshall Auerback  

Here's a summary of the points:

• Our trade deficit means that we are buying more from other countries than they are from us.
• Thus, money is leaving the country instead of circulating here.
• The Chinese and other countries enable this by accumulating (hoarding) US dollars (including Treasury bonds) as foreign exchange reserves.  This is a form of mercantilism.
• Foreign central banks use local currencies (e.g. yuan, yen) to purchase U.S. dollars which are then invested in Treasury bonds. 
• By reducing US dollars from circulation and increasing the amounts of other currencies in circulation, the value of the U.S. dollar is propped up, and the value of other currencies such as yuan and yen is kept down.
• U.S. consumers are strapped for cash because money is leaving the country.  (This is only partially offset by our government’s fiscal deficit, which puts additional money into the economy.)
• U.S. consumers are encouraged to accumulate private debt to keep consuming at high levels.
• Uncle Sam and foreign investors financed the housing market, resulting in an historic housing bubble. That housing bubble resulted in a false signal of a wealth gains that were then invested in the stock market leading to a stock market bubble, both of which financed over-consumption, and the buildup of yet more trade imbalances, until the entire system came crashing down in 2008, destroyed the savings of millions of Americans (including among others, Steve Bannon’s father)
• re-emergence of the trends that led to the 2008 crisis: a capitalism characterized by securitization, globalization, the proliferation of complex financial derivatives, deregulation and a corresponding reduction in supervision and legal oversight
• vendor financing (China investing money in U.S. to keep U.S. consumer spending)
• even the modest regulations introduced via Dodd-Frank are steadily being gutted a mere 10 years later

In sum, trade deficits cause leakages of money (and consumer demand) which in turn require private debt to sustain consumption levels.  Eventually, the private debt becomes unsustainable.  One way to deal with this is to discourage imports via measures such as tariffs.  Another way (preferable to the author and to me) is to regulate the financial industry so that consumers are not encouraged to spend beyond their means (by accumulating debt).  This tightening can be offset by government spending where no private debt is incurred.  The public “debt” will lower the value of the dollar, offsetting the mercantilism of our trading partners. 

Of course, they are many possible alternatives for dealing with the problems caused by the trade deficit.  But the status quo perspective, that currently existing trade deficits are not a problem, is wrong according to this perspective.

Trump’s Travesty of Protectionism,

by Michael Hudson

Summary:  Protectionism has historically been used to build developed (industrial) economies.  However, once a country such as the U.K. or U.S. becomes industrialized, then it generally tries to import basic goods such as steel and aluminum as cheaply as possible, while promoting high value added industries.  Trump's tariffs do just the opposite and will accordingly have an overall negative effect on the U.S. economy.

Trump himself has a history of breaking deals, and now the U.S. he leads is getting that reputation.  Ultimately at issue is how much policy asymmetry the rest of the world is willing to tolerate. Can the United States still push other countries around as it has done for so many years? How far can America push its one-sided agreements before other countries break away?