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Tariffs and the Politics of Bizarro World

One knows it’s a strange, new political world in the US when Paul Krugman attacks a Republican President from the right. Krugman criticized President Trump’s tariff proposal for steel and aluminum imports for being insufficiently pro-free market.

A few thoughts about the President’s proposal.

First, the tariff proposal holds little but political upside for Trump. It is economic nationalism par excellence; red meat for the most enthusiastic part of Trump’s base. Relatedly, given what I would guess is the high correlation between economic nationalists and pro-gun Trump supporters, the timing of Trump’s tariff announcement can’t but help offset some of the sting his supporters felt from his comments favoring heightened gun controls in response to the Florida shooting.

On the other hand, despite Krugman’s criticism of Trump’s proposal, the most committed free traders are on the right. They either became “Never Trumpers” long ago, or reconciled themselves to the Trump trade-off (that is, being willing to trade off the decrease in national domestic economic regulations for the occasional anti-market implications of Trump’s economic nationalism). More substantively, even if the tariffs result in negative economic outcomes overall, they would take years to realize and would be difficult to disentangle from other causes.

Irrespective of these claims, the case against Trump’s tariffs is not as straightforward as critics like Krugman would have it.

In his column, Krugman criticizes Trump’s proposal for potentially starting “a cycle of tit-for-tat” cycle of trade restrictions. Whether one’s actions actually “start” such a cycle, however, depends on whether one is titting or one is tatting.

As an abstract matter, in repeated prisoner dilemma games, tit-for-tat strategies are simple ways actors can deter defection and to sustain cooperative play. If in fact other nations subsidize their production, and thereby under-price American domestic production, not because of a cost advantage but because of the political subsidy, then a U.S. tat for the other countries’ tits could be justified.

It gets complicated, however. On the one hand, even asymmetric free trade can be a good thing for the importing nation. Think of it: If an exporting country subsidizes production of a particular good, then it effectively transfers its wealth to the importing country; the exporting country’s subsidy gives money to consumers in the importing country.

But it’s not always as simple as that. If one company uses subsidized pricing to drive a rival company out of business, and there are substantial startup costs to entering the market, then one has purchased a modicum of market power by the subsidy, with the ability to reap higher profits in the future. This is sometimes easier said than done, however. One theory for the dip in oil prices a couple of years ago had the Saudis and the Russians lowering their prices in order to drive U.S. frackers out of business. While many U.S. firms closed down marginal wells during the price dip, they simply opened them up again when the price of oil increased again.

The time and cost to restart domestic production relates directly to the national security rationale for Trump’s proposal for tariffs on steel and aluminum imports. This is a classic case for tariff protection, as Adam Smith observed centuries ago in The Wealth of Nations. (And repeated by Alexander Hamilton in his Report on Manufactures.)

The risk, however, is in all the noise of the signals. How do we know the other countries are subsidizing their exports, as opposed to offering goods at lower prices simply because of their cost advantages in production, which allows them to pass that advantage on to consumers in importing nations? Relatedly, how do other countries know Trump’s proposed tariffs stem from bona fide security concerns, as opposed to him using security concerns as a cover for politically-motivated economic nationalism? This is not just a challenge to the case for Trump’s tariffs. The lack of transparency as to what’s really the motivation for this policy cuts as much against Krugman’s criticisms as it does against Trump’s. But there are no grays in Krugman’s world when it comes to Trump’s proposals.

Reader Discussion

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on March 06, 2018 at 10:41:28 am

Well, it is complicated as Mr Rogers asserts:

Hat tip to R. Richard Schweitzer for this link:

https://www.trade.gov/steel/countries/pdfs/imports-us.pdf

One item to note, among many others, is that there are currently 144 separate Trade Remedies (111 Anti-dumping. 35 countervailing duties, and 3 Suspensions) in place in the steel market. Even with this we must import fully one-third of our steel consumption.

What is the effect upon defense and war-fighting capabilities, presently and in the event of some cataclysmic failure of diplomacy (otherwise know as the fecal-fan syndrome)? Me, I prefer we have the FULL capacity to provide for the "common defense."

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gabe
on March 06, 2018 at 11:02:51 am

The time and cost to restart domestic production relates directly to the national security rationale for Trump’s proposal for tariffs on steel and aluminum imports. This is a classic case for tariff protection, as Adam Smith observed centuries ago in The Wealth of Nations. (And repeated by Alexander Hamilton in his Report on Manufactures.)

That’s a lovely exposition on an abstract principle. But it has shit-all to do with the proposed tariffs.

Regardless of how much other nations have subsidized their steel exports, the US is still the third largest steel producer in the world. And the second-largest, Japan, is our ally. So the suggestion that predatory pricing might extinguish US steel manufacturing is ludicrous. (Although it might extinguish certain TYPES of steel manufacturing….)

So what if the US needed to shift to a war footing? Two answers: 1.) Oh wait, we ARE on a war footing—we’ve been a war since 2002! 2) If the US needed more steel for military purposes, well, we’d just shift more steel to military purposes—and less for civilian purposes. So perhaps as a result of all this foreign predatory pricing, the US steel sector is sufficiently diminished that during a national emergency we’d have to cut back on the number of new SUVs we produce in order to save steel for tanks and planes. A lack of new Land Rovers is hardly a threat to national security.

Finding a bona fide rationale (other than a political rational) for these tariffs is gonna take more than a lovely exposition of an abstract principle.

How do we know the other countries are subsidizing their exports, as opposed to offering goods at lower prices simply because of their cost advantages in production, which allows them to pass that advantage on to consumers in importing nations? Relatedly, how do other countries know Trump’s proposed tariffs stem from bona fide security concerns, as opposed to him using security concerns as a cover for politically-motivated economic nationalism?

Under what circumstances does the distinction matter? As Rogers just explained, an importing nation benefits from getting foreign goods cheap. Whether the cheapness comes from comparative advantage or subsidy, it’s all the same to the importing nation.

Well, Rogers suggests, the distinction might matter in the context of predatory pricing. But no, it wouldn’t matter to the importing nation. If the importing nation has to defend some domestic industry for national security purposes, it doesn’t matter whether the protection is required because of foreign subsidies or foreign comparative advantage. The protective policies would be the same.

Now, perhaps the distinction matters to the World Trade Organization. That is, I could imagine that the WTO has a general prohibition on tariffs, but permits exceptions to guard national security industries from predation by subsidized foreign competition. I see no economic justification for the distinction, but WTO rules are the result of political, as well as economic, forces.

The lack of transparency as to what’s really the motivation for this policy cuts as much against Krugman’s criticisms as it does against Trump’s. But there are no grays in Krugman’s world when it comes to Trump’s proposals.

Valiant effort to find some kind of equivalency. When it comes to finding something nice to say about Trump’s tariff proposal, I guess this is about as good as it gets.

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nobody.really
on March 06, 2018 at 11:24:07 am

So, if a lack of transparency is the norm for both the exporter and the importer, then the voters cum consumers in either country are at the mercy of the politicians who manipulate them in both countries. And, in the face of no transparency on either side do the politicians who manipulate consumers/voters really know whether the tariffs are warranted and economically justifiable or protectionist and economically counter-productive?

It's no wonder that economists have become mere manipulators of statistics at the mercy of models and the pretensions of economics to science but dismal self inflation by the over-ambitious (like the windy, self-admiring Krugman.)

It seems to me that national security is the anchor of certitude in the storm of tariff criticism.

When Democrats like Krugman become free traders and crypto-Progressives like Baby Bush and Never Trumpers like Romney and Ryan oppose the tariffs, go with your instincts for self defense and national preservation, go with Hamilton (the real hero, not the one on Broadway.)

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timothy
on March 06, 2018 at 11:40:26 am

It’s no wonder that economists have become mere manipulators of statistics at the mercy of models....

Too true. Once those models start to flirt and bat their eyelashes, economists are just putty in their hands.

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nobody.really
on March 06, 2018 at 11:47:55 am

nobody:

Sensible analysis as to "meaningfulness" of whether "subsidy-comparative advantage" - all the same to the schmuck buying a car / dishwasher or rebar.

But as to defense, perhaps there is more to the argument than would admit. We import, or in other words are incapable (at present) of producing FULLY ONE-THIRD of our steel requirements. Bear in mind, this number does not include the amount of *finished* steel that arrives on our shores in the form of fully finished end-products, so our capabilities relative to past periods, i.e., WWII, is quite diminished. Consider what was required to effect a fully mobilized war economy. It was not simply a case of " cut[ting] back on the number of new SUVs" produced; rather, it was a matter of CEASING all domestic vehicle production AND washing machines, dishwashers, pots and pans, etc etc etc.

Do not be as dismissive of warfighting needs as you (and so many others) are of SUV's.
Like Mikey said: "Try it, you'll like it." I certainly do. And may I suggest a nice pickup truck. They may take more steel and aluminum but they sure do roll over those little Priuses with their lower steel content - Ha! And they last forever and presumably their owners (such as I) would not need to "hamper" the war effort as they would not be in need of a replacement. Ha, again!

BTW: did you read the report at the link I included (from Richard Schweitzer). There are numerous Trade Actions in effect in the steel market; yet, we still are either unable or unwilling to ramp up production.

Question: Do you think that The Trumpster's new tax policies will encourage domestic producers to increase their own production? This, of course, assumes that the reduced tax rates will offset foreign firms' alleged "compartive advantage."

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gabe
on March 06, 2018 at 11:50:31 am

Hey are these the same "models" that parade around in front of all those SUV's and pickup trucks at the Major Auto Shows?

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gabe
on March 06, 2018 at 12:24:24 pm

Wow! Never thought of it that way.

That would explain why the IPCC warms to all those climate models.

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timothy
on March 06, 2018 at 12:26:03 pm

Yeah, but that was before we had to shift all domestic production to military purposes. We can still see them strutting their stuff in front of armored personnel carriers during Trump's military parades, but it's just not the same....

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nobody.really
on March 06, 2018 at 12:28:26 pm

You never saw the old bumper sticker, "Economists do it with models"?

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nobody.really
on March 06, 2018 at 13:52:07 pm

We import, or in other words are incapable (at present) of producing FULLY ONE-THIRD of our steel requirements.

First, no, I see no evidence that we are incapable of producing additional steel, any more than I find evidence that we are incapable of creating those little umbrellas that adorn frou-frou drinks. Rather, I see evidence that firms find it advantageous to buy these things from abroad. But if the foreign supply of tiny umbrellas evaporated, I expect we'd boost our domestic production. Same for steel.

Moreover, I suspect your data overlooks the fact that the US also EXPORTS a lot of steel. No, not as much as we import—but during a national emergency, we could reallocate those supplies.

Bear in mind, this number does not include the amount of *finished* steel that arrives on our shores in the form of fully finished end-products.

I wonder how much that is. Because most “foreign” cars sold in the US are, in fact, manufactured in the US. Indeed, it becomes challenging to identify a “foreign” product, given that many manufacturers’ supply chains move partially-assembled products across boarders multiple times. So I wouldn’t be surprised to learn that the steel in those “Made in Mexico” dishwashers actually comes from the US.

[O]ur capabilities relative to past periods, i.e., WWII, is quite diminished.

Nope. US steel production is up since WWII, although pig iron production is down. That said, production of both peaked in the mid-1970s.

Consider what was required to effect a fully mobilized war economy. It was not simply a case of ” cut[ting] back on the number of new SUVs” produced; rather, it was a matter of CEASING all domestic vehicle production AND washing machines, dishwashers, pots and pans, etc etc etc.

Yeah. And that was a bummer. But not a threat to national security.

So the question becomes, should we enact policies that will forever reduce world-wide and domestic productivity, increasing the cost of everything made from steel or aluminum, all for the purpose of preparing our economy for some hypothetical period in the future when we’re reduced to a WWII-type economy?

What’s the downside of not making such preparations? If such an emergency condition is short, the deprivation won’t be so bad. If it’s long, people will adapt by gradually building more productive capacity.

Moreover, how likely is this feared scenario? There have been a lot of changes since WWII—for example, nuclear weapons. So can you describe a plausible scenario in which the US waging a years-long war requiring all of our productive capacity a la WWII, yet not resulting in nuclear incineration?

[M]ay I suggest a nice pickup truck.

Oh here we go again. Look, I put up with this condescension when you wanted to rub my nose in your fancy wines, or even your football team. But now you’re gonna school me in the finer points of the extended cab 4x4? You’re pushing it, bub.

BTW: did you read the report at the link I included (from Richard Schweitzer).

Yup; interesting stuff—but not especially relevant to the concerns you’ve raised. You’re asking about how the demand for steel by the US military compares to the US’s ability to supply that demand. I don’t see how a discussion of imports and exports driven by civilian consumption addresses your concerns.

Do you think that The Trumpster’s new tax policies will encourage domestic producers to increase their own production? This, of course, assumes that the reduced tax rates will offset foreign firms’ alleged “comparative advantage.”

I’d guess so. It’s not a matter of a tax change alone fully offsetting some advantage. Each firm has advantages and disadvantages relative to its competitors; the tax change will simply be one more factor in the mix, tending to give US firms some advantage relative to the status quo. So I would expect it to have some marginal benefit for domestic production relative to the status quo—all else being equal.

Of course, someday the US’s growing debt may have some effect on the world’s economy, and that may affect US steel manufacturing, too. But the effect is harder for me to anticipate. For example, when the US defaults on paying its Chinese lenders, perhaps this would trigger a war. That might boost US steel production—at least until the bombs start falling. Hard to say.

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nobody.really
on March 06, 2018 at 15:17:18 pm

I see you eventually got my [point about US producers being *unwilling* and thus my question as to whether The Trumpsters' tax policies would "motivate" them to produce more.

Yep, we do produce more in terms of total numbers - but we consume so much more.
Two points on that shortage:
1) Productive capacity is rather hard to bring online, in particular, NEW capacity / facilities (and not just the silly gubmint regs). It takes time which we may not have. think another European *adventure* spurred on by the infamous Vladimir's potential missteps OR The Trumpsters. ( And hey, bro, we are engaged in a "years long war - two of them in fact). Recent reports indicate that equipment failure has already set in with substantial portions of fighting equipment, air, land and sea experiencing inordinate (but not unexpected) failures. How is it that we cannot "ramp" up that production. Recall how difficult it was during the Iraq War to provided proper armor plating for our tanks, APC's, etc.
2) It has been shown that technology / industrial growth is either sustained or impelled (more likely both) by the presence of "like" industries / technologies. As an example, certain manufacturing efforts require the presence not simply of those skilled and employed in that particular manufacturing effort / product / pursuit BUT ALSO those skilled tool makers. die-makers, testing specialists AND the related equipment that supports first the related industry BUT ULTIMATELY the industry / manufacturing process/product at the top of the pyramid.
What many economists have observed is that when a nation uses a substantial share of a major industry, it also loses all those supporting industries and technological supports and thus proceeds on a downward spiral. Conversely, these same folks have observed that the rapid growth in developing industrial nations has been aided by the rise of these supporting technologies / industries / toolings, etc. It is curiously strange that a number of US manufacturers, The Boeing Company, as an example, not only offshored major parts of its manufacturing BUT ALSO PROVIDED THE SUBCONTRACTING COMPANY WITH THE TOOLS, EQUIPMENT AND TECHNOLOGY (sorry for the caps) necessary to perform those tasks previously performed by the Boeing Company which then found itself in the odd position of having to depend upon others for technology that it developed (and at considerable expense).

I do not blame some amorphous *they*, or the gubmint (directly) for this; rather, as you rightly point out, for whatever reason the geniuses running American corporations became infatuated with the notion of offshoring, thereby improving their profit-to-assets ratio and pleasing the 24 year old MBA geniuses on Wall Street. Oh, did I mention that pleasing the "whiz(z?) kids resulted in larger bonuses for the corporate titans of our day!

As for civilian vs military consumption, the link makes no distinction. It says only general consumption; but the key is the shortfall of 33% in productive capacity. And yes, we do export - AND WE ALWAYS DID. The trick is to both export and more fully support domestic consumption, inclusive of military consumption with an ability to rapidly scale operations as needed.

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gabe
on March 06, 2018 at 15:19:16 pm

Oops, that should read:
"...when a nation LOSES a substantial share of a major industry....."

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gabe
on March 06, 2018 at 15:20:56 pm

Yep, reacting to "the old bumper sticker, “Economists do it with models”?, I would think they would soon burst into a chorus of #METOO!!!!

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gabe
on March 06, 2018 at 15:45:01 pm

I once was blind, but now I see.

This theory of models is a revelation that may lend intellectual gravitas to Trump behavior previously thought merely misogynistic.

Exempli gratia, Trump's life-long attraction to fashion models, including all of his wives, and his association with the Miss Universe Pageant are, at heart, an economist's slavishness to impressive statistics, learned, no doubt, at the Wharton School.

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timothy
on March 06, 2018 at 18:23:03 pm

And just how "impressive" are those *statistics* - Ha!

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gabe
on March 09, 2018 at 12:45:07 pm

statistics, learned, no doubt, at the Wharton School.

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