Tag: Trade Protectionism

Monday Wake Up Call – February 11, 2019

The Daily Escape:

The Piedmont Kilns, Wyoming. They were built in 1869 to supply charcoal for the iron smelting industry in Utah. Part of a ghost town, three remain.

A wave of bankruptcies is sweeping the US Farm Belt, and Trump’s trade disputes are adding to the pain. The primary cause is low commodity prices that American farmers have experienced for the past few years. Throughout much of the Midwest, US farmers are filing for Chapter 12 bankruptcy protection at levels not seen for at least a decade.

From the WSJ:

“Bankruptcies in three regions covering major farm states last year rose to the highest level in at least 10 years. The Seventh Circuit Court of Appeals, which includes Illinois, Indiana and Wisconsin, had double the bankruptcies in 2018 compared with 2008. In the Eighth Circuit, which includes states from North Dakota to Arkansas, bankruptcies swelled 96%. The 10th Circuit, which covers Kansas and other states, last year had 59% more bankruptcies than a decade earlier.”

Those states accounted for nearly half of all sales of US farm products in 2017, according to USDA data. Since 2000, China’s share of our agricultural exports has increased from two percent to about 19% in 2017. China has become our largest agricultural trading partner.

The rise in farm bankruptcies tracks a multi-year slump in prices for corn, soybeans and other farm commodities caused by a world-wide glut. Prices for soybeans and hogs further declined after Mexico, along with China, retaliated against US steel and aluminum tariffs by imposing duties on our AG products, and then slashing purchases.

Farmers generally supported Trump’s tariffs when he started the trade war in 2018. China’s retaliation was to virtually cease purchasing American agricultural products. As an example, China moved the sourcing of soybeans from the US to Brazil. When a low margin business like farming loses 20% of sales, only those who aren’t in debt can survive. And most US farmers owe quite a bit to their bankers.

The Trump administration recognized the potential problem, and approved funding to bridge farmers across the decline in Chinese purchases, but the trade war has gone on for longer than anticipated.

Now, bankruptcies are way up, and exports to China are way down:

Source: Econbrowser

Unfortunately, we keep importing from China. But in the past year, the Chinese have stopping buying as much of our goods. Clearly, the bull our farmers got isn’t in their barn, but in the White House.

Republicans are saying that the surge in farm bankruptcies isn’t Trump’s fault, that the problem with the farm product glut started years ago. But, if Republicans want to give Trump credit for the good employment numbers, and a still-robust stock market, they have to blame him for the bad as well.

Time to wake up America! Disruption without a strategy brings chaos. And think back to the SOTU, when Trump said how he stood between us and socialism. But Trump’s picking winners and losers with his trade wars. He’s using tax-payer money to subsidize farmers damaged by his self-imposed trade wars. That sounds eerily like socialism to Wrongo.

Wake up to the fact that farmers are pawns in Trump’s capricious tantrums against China. Those who have played chess know that most of your pawns are gone by the end of the game.

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Monday Wake Up Call – April 9, 2018

The Daily Escape:

Canada Warbler

Are you worried yet? Last week ended with the stock market falling off the cliff. The Dow was down over 700 points, but recovered slightly to lose “just” 572 points. With the stock market, no matter what you plan on investing in, there are always risks. Before you do decide to get into this industry though, it is important to understand that there are some things you should know about stocks. It only makes sense to do your research into this before committing to anything. The volatility of the stock market makes it essential that you swallow your ego and seek professional guidance based on thorough and extensive research. Stocktrades can be of service to anyone looking to up their game and make sure their choices are as safe as possible. You’ll never be able to have a 100% success rate, with the risks summed up by recent events involving the President. Trump caused this by seemingly being pissed that the Chinese would fight back after his in-your-face tariff announcements.

Now, the Dow Jones average is down 9% from its January high.

And the administration couldn’t seem to get its messaging straight. Former TV pundit Larry Kudlow, now Trump’s economic advisor, told reporters on Wednesday the threat of trade sanctions was only a negotiating tactic. A rally of more than 3% followed. But Trump upended that notion on Thursday, ordering a review of even larger tariffs. So, on Friday, Kudlow said the opposite, claiming he had just heard about the additional $100 billion in tariffs Trump announced on Chinese imports.

From Bloomberg:

The Republican president’s renewed ramblings on trade dominated US equity markets this week, with a tweet-induced swoon on Friday leaving the S&P 500 Index 1.4 percent lower than where it started on Monday.

And there goes Trump’s reputation as the stock market president. A retired former colleague of Wrongo’s at the big NY bank is all over Facebook touting the Donald’s success at driving the stock market, but this chart from Bloomberg shows he’s wrong. It compares Trump’s first 444 days with the first 444 days of other presidents:

So, what to do? Do investors ride the roller coaster that is the Trump approach to trade, and watch Mr. Market deal with it by hammering their 401k? Or do they jump into cash and lock in a loss? From Benjamin Studebaker:

Theoretically, a full blown trade war with China could be really damaging. If the US and China were to stop trading tomorrow, the total value of US-Chinese trade lost would be about $648.5 billion. That’s about 3.5% of US GDP and 5.7% of China’s.

US inflation would increase, since American consumers will try to substitute more expensive goods for those they can’t import from China. Chinese unemployment would rise, as non-Chinese firms relocate from China to other developing countries to evade the tariffs.

The US wouldn’t be hurt as badly, because after a while, firms would find new locations to operate from. But the trade war won’t create many new American jobs – the offshore firms would either stay offshore, or they’d automate production in North America. The Chinese would be more lastingly damaged, as there isn’t a consumer market large enough to replace America’s.

That’s what Trump means when he says that trade wars are “easy to win” for the US. We can damage China more than China can damage us. Studebaker concludes:

But make no mistake–such a trade war would be highly disruptive. In 2009, the US economy contracted by 2.8%. A full blown trade war would blow this figure out of the water. It would be political suicide for the administration.

Trump’s stated goal is to get China to negotiate to protect US intellectual property rights. This is why his proposals have been relatively small – he’s not looking to break Beijing, just to bring it to the table.

If Trump can get China to make a deal with him, he can pass this off as a major foreign policy achievement. And because the stock market has been in panic mode, any positive result could make Trump look good in the eyes of his supporters.

OTOH, his supporters, like my former Bank colleague, think everything Trump does looks good.

Maybe the trade war won’t happen. But, maybe Trump should remember what Luke Skywalker said in the Last Jedi:

This is not going to go the way you think…

The “Art of the Deal” guy should know there are two sides to any negotiation.

So, wake up, Mr. Market! Stop jumping off a cliff with every tweet. To encourage you, here are Elvis Costello and the Attractions with their 1978 hit “Pump It Up”. Maybe it will give Mr. Market an idea about the right direction for the stock market:

Sample Lyrics:

Pump it up, until you can feel it

Pump it up, when you don’t really need it

Those who read the Wrongologist in email can view the video here.

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Steel Tariffs Against China Make Sense

The Daily Escape:

Winter Morning, Moscow Oblast, Russia – 2018 photo by kostya8. Good luck to those in New England today!

“Shortly, the public will be unable to reason or think for themselves. They’ll only be able to parrot the information they’ve been given on the previous night’s news” – Zbigniew Brzezinski

Did Wrongo ever tell you about meeting Zbig? We had lunch together in the officer’s dining room at the big NY bank that Wrongo was with, sometime in the early 1980’s. It must have been a real comedown for him, lunching with an international department strategic planner, after serving four presidents. We focused on the (then) current state of the Asian economies, but his eyes scanned the room, looking (maybe hoping) for a better deal than simply talking to a young vice president.

Zbig’s quote is on the money. It is America today: We don’t figure things out, because everyone is an expert. Today, anyone you meet already knows everything. They’ve taken a quick look at Wikipedia, and they know that their opinions are worth as much as any expert.

If average people can be experts, why is Trump’s effort to do a better deal on trade so off the mark?

His proposed steel and aluminum tariffs are levied against all producers. The table below from a 2016 Duke University study, shows production by country. You can see the extent to which China is an outlier:

Note that the US is fourth on the list. Take a look at where Canada ranks. It’s hard to see Canada as a strategic risk to US military needs, but since Trump plans to deploy a blanket steel tariff, everyone suffers, at least until the retaliation begins. The Duke study makes the point:

The global steel sector is once again in a state of overcapacity. The sector, predominantly fueled by China’s expansion since 2000, has grown to over 2,300 million metric tons (MT) while only needing 1,500 MT to meet global demand. The result is a global steel sector at unviable profit levels and an influx of cheap steel in the global trading system adversely affecting companies, workers, and the global trading regime.

Both George W. Bush and Barack Obama applied steel tariffs. Bush imposed broad tariffs of up to 30% on steel imports in 2002. His tariff was supposed to last three years, but was withdrawn after the World Trade Organization (WTO) ruled against them. In 2016, the Obama administration imposed duties on some Chinese steel imports by more than 500%, on Chinese cold-rolled steel, which is used to make appliances, cars and electric motors. Subsequently, Chinese imports to the US dropped by almost two-thirds. China now ranks as the 11th largest exporter of steel to the US.

WaPo notes that Chinese steel accounts for about 6% of US steel imports, but China’s capacity is eight times that of the next biggest producer, Japan. Clearly, its Chinese capacity that must be addressed.

On Tuesday, the European Commission announced it had renewed tariffs on Chinese steel imports, some as high as 71.9%, saying producers in France, Spain and Sweden face a continued risk of imports from China at unfairly low prices. The Commission concluded that Chinese producers had significant spare capacity. This was likely to lead to large-scale imports into the European Union at dumped prices if the measures were lifted.

And even though China’s share of the EU market for stainless steel seamless pipes and tubes has hovered around 2% since 2013, Brussels had no problem with pursuing what it thought was a fair remedy, despite the possibility of blowback.

Ironically, that’s similar to what Trump says he wants to do. Similar, but far from the same.

Trump’s plan hits all global steel producers, not just China, which, as the chart above shows, produces 52% of the world’s supply. So instead of confronting only China, we will face blowback from everyone.

OTOH, the politics of Trump’s tariffs may play out differently than the economics. The economics suggest they are a loser. According to a January Bureau of Labor Statistics report, about 377,000 Americans work in metal manufacturing jobs that could be protected by these tariffs.

That’s a lot of votes in the Rust Belt. And the steel company CEO’s will also see bigger bonuses.

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Will Tariffs Bring Prosperity?

The Daily Escape:

Detail of art painted on a truck, Pakistan – 2017 photo by Caren Firouz. South Asian “truck art” has become a phenomenon, inspiring gallery exhibitions.

Will new tariffs help our economy? The view of a typical Trump supporter:

Some of us are happy about these tariffs because it starts a long overdue conversation about trade: Everyone knows that the press, congress, economists, and the multinationals love existing policy, and that most of them couldn’t care less about trade imbalances. If this is the only avenue our democracy has to change trade policy, then we’re all for it.

Yet, the conventional wisdom is that Trump’s tariffs on steel and aluminum will do more harm than good. There are several concerns. To the extent we need steel and aluminum to use in our domestic production, it will cost more, and prices will have to go up, assuming that the manufacturers are unwilling to lower their profit margins. Ultimately, those increased costs hit the American taxpayer.

Another concern is retaliation. Our trade partners can block our exports, or charge retaliatory import tariffs of their own. Just 12% of US GDP are exports, so we’re less exposed to that threat than other economies that have a larger percentage of their economies dependent on exporting. However, jobs can be easily lost if China, Brazil, or the Euro Zone block some of our exports.

Trump’s rationale for new tariffs is two-fold. First there is a national security risk caused by diminished capacity in sensitive industries. Second, good jobs will come back to America if we produce more stuff.

Let’s deal with national security first. No doubt we have surrendered some of our strengths in sensitive products and technologies. But, it’s not a critical issue for steel or aluminum. We can get them from many countries that are currently our allies.

Artificial intelligence, advanced semiconductors, and software are an entirely different matter. There are legitimate national security-based rationales for restriction in those areas.

But, we are in trouble with some of the exotic steels that the Defense Department uses in weapon systems. For example, the Belgian firm Fabrique Nationale is the prime contractor for a lot of the high end small arms. Some of these specialty steels are only manufactured in annual production lots. Trump’s tariff won’t shift the production of those exotic steels to domestic sources.

So even in the few cases in which a tariff might serve a national security purpose, the Trump tariff will fail.

And while the Chinese dump steel below cost on global markets, most others (Canada, Brazil) do not, and we buy a lot more from them than we do from China. And there is no scenario whereby Canadian steel exports are a “national security” risk, Trump’s primary rationale. And the Trumpets seemingly can’t see the difference between primary aluminum (China exports nearly none) and semi-manufactured aluminum products, such as bars, plates, and wire rod, which they export a lot.

But, don’t foreign governments subsidize their steel industry? China does. However, that means that China is essentially giving us cheap steel. The question for Trump is: Will we gain enough jobs in our domestic steel industry to outweigh the losses to us in higher prices across all industries?

Maybe, but it hasn’t worked that way in the past.

Tariffs help lazy and/or incompetent businesses. Imposing new tariffs will just put off the day when the toxic combination of bad management, lack of investment, poor infrastructure, and bad government causes these protected industries to implode.

If you are a manufacturing company that is internationally competitive and well run, how would you like it if your steel and aluminum suddenly became 25% more expensive? All to protect some other lazy SOB who hasn’t invested in his plant in 20 years?

The correct response should be to find out why your product isn’t competitive, and then fix it. Much of American industry has done that, by automating, by moving abroad for cheaper labor, or to be closer to raw materials.

Ultimately, Trump’s tariffs will just postpone the day when our uncompetitive sectors must modernize, or go under.

And that result is always a net loss of jobs.

The best think tank idea is to establish tariffs (or quotas) based on the amount industries pay their labor in foreign countries vs. what US employers pay. If the foreign country’s prices are lower, than a tariff would kick in. This would help us with US firms who manufacture overseas. They would have the choice of paying higher wages to US laborers, or paying a tariff on their imports to the US.

Trump’s message is: If you want unfettered access to the US market, make it here. If the US consumer pays more, that is a price he’s willing to take to have the manufacturing base.

This is a debate worth having.

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February 22, 2017

The Daily Escape:

(Student dormitories surround the largest Buddhist Monastery in Tibet) 

Trump spoke at Boeing’s factory in South Carolina last Friday to help unveil the latest version of the company’s 787 Dreamliner. During his visit, he praised Boeing and its employees for the new jet and vowed to protect US manufacturing jobs:

We want products made by our workers, in our factories, stamped with those four magnificent words: Made in the USA…

Boeing, however, buys many parts for the plane globally. It assembles the plane in the US. In fact, foreign parts account for almost a third of the cost of the entire plane. So much for “Made in the USA“:

  • An Italian firm makes the center fuselage and horizontal stabilizers.
  • A French firm makes the aircraft’s landing gears and doors.
  • The Germans supply the main cabin lighting.
  • The Swedes make the cargo access doors.
  • A Japanese company makes parts for the lavatories, flight deck interiors and galleys.
  • Another Japanese firm supplies the system’s lithium-ion batteries.
  • The French make its electrical power conversion system.
  • The British company Rolls Royce makes the engines.

None of those countries are low wage/low tax places. Robert Reich has a good observation about Boeing’s partners: (brackets by the Wrongologist)

Notably, these companies don’t pay their workers low wages. In fact, when you add in the value of health and pension benefits – either directly from these companies to their workers, or in the form of public benefits to which the companies contribute – most of these foreign workers get a better deal than do Boeing’s workers. (The average wage for Boeing production and maintenance workers in South Carolina is $20.59 per hour, or $42,827 a year.) They [foreign workers] also get more paid vacation days.

These nations also provide most young people with excellent educations and technical training. They continuously upgrade the skills of their workers. And they offer universally-available health care.

To pay for all this, these countries also impose higher tax rates on their corporations and wealthy individuals than does the US. And their health, safety, environmental, and labor regulations are stricter.

We’re not talking about China or Bangladesh. Boeing’s partners are in high-wage/high-tax locations. Why? Because the parts made by workers in these countries are more reliable than parts made anywhere else. Boeing isn’t concerned about costs of personnel or parts (within reason), they are concerned with reliability and total cost of ownership of the plane for their clients.

There’s a lesson here: Trump’s idea of putting a wall around America and charging more for imports won’t make us more competitive with the rest of the world. Investing more, and investing smarter in the education and skills of working-age Americans is what has to happen. Subsidized and formal on-the-job training will also help make US workers more competitive.

Trump isn’t interested in the kind of education reform which would re-energize our middle class and improve our global competitiveness. He’s simply rehashing his campaign speeches. Trade is global, and has been for thousands of years. Capital is global; there is no way to restrict its movement. Trying to implement a protectionist system will fail.

The best weapon a country has in the global competitive environment is an educated people.

 

Here is the British rock group Ten Years After doing “I’d Love to Change the World”. This is the lead single from their 1971 album “A Space in Time”. It was their only Top 40 hit. The Vietnam War ended three years after this song was released, so the lyric, “them and us, stop the war” had relevance then, and still has relevance now. The lyric “tax the rich, feed the poor/ ’til there are no rich no more,” has more relevance today than it did in the early 1970s when it was written.

Here is “I’d Love to Change the World”:

Those who read the Wrongologist in email can view the video here.

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