The Emperor Has No (Trade Deal) Clothes

Nobel Prize economist Paul Krugman comments on Trump's "trade deal" with the European Union: 

On Tuesday Donald Trump went on CNBC to explain why the European Union is facing a tariff of “only” 15 percent. But what he said was simply delusional — and the delusion should be even more concerning than the tariffs.

The Europeans, Trump asserted, had agreed to cough up $600 billion, which he described as a “gift,” not a loan. And he emphasized that this is “$600 billion to invest in anything I want. Anything. I can do anything I want with it.”

So Trump apparently believes that the European Union has agreed to provide him with a personal $600 billion slush fund.

In fact, as I pointed out after the “deal” was announced, the EU agreed to no such thing.

 

In fact, it literally couldn’t have made such an agreement. European nations aren’t command economies in which government can tell the private sector where to invest, and in any case the European Commission, which negotiated with Trump, can’t tell the governments of member states what to do.

So think of it as the emperor’s new trade deal: Trump is strutting around, feeling very impressed with himself, but in substantive terms he’s stark naked.

Does it matter? I’ve seen some commentary to the effect that it doesn’t. Hey, it’s just another Trumpian self-aggrandizing fantasy, like his belief that we have zero inflation, he has a 71 percent approval rating and “people love the tariffs.”

But I don’t think we should feel reassured about Trump’s trade delusions because he’s lost touch with reality across the board.

What will happen if and when Trump realizes that Europe hasn’t actually promised what he thinks it has — or, as he’s likely to see it, that the EU has gone back on its promise? He’s already given us an answer: He’s going to put the tariff on Europe back up to 35 percent.

He may not be able to carry out that threat. In fact, there’s a very real possibility that the courts will rule many of the tariffs Trump has already imposed illegal (which they surely are) and order the administration to refund the money it has already collected.

But assume that the Supreme Court does its usual thing and decides that the Constitution allows Trump to do whatever he wants. How afraid should Europe be of the possibility that Trump will put the tariffs back up, higher than before?

Well, I’ve been trying to do the math, and as far as I can tell putting U.S. tariffs up from 15 to 35 percent would do less damage to Europe than many people imagine. Yes, it would hurt, but not all that much. By making a 15 percent tariff the baseline — what countries pay even if they do make “deals” — Trump has used up a lot of his trade war ammunition, greatly reducing the effectiveness of any further threats.

After all, Europe has never been all that dependent on access to U.S. markets. In 2024 the EU’s exports of goods to the United States were slightly less than 3 percent of its GDP — not a trivial sum, but not enough to make European prosperity dependent on U.S. goodwill.

Trump’s tariffs will make the EU even less dependent on the U.S. market. In Sunday’s primer I explained that the crucial number is the “Armington elasticity,” which measures how sensitive trade flows are to tariffs, and that a reasonable estimate of that elasticity is 3. If we go with that number, we would expect the 15 percent tariff currently in place to cut EU exports to America by roughly a third, to around 2 percent of GDP.

That’s a palpable hit, but not a huge one. Writing in the Financial Times, Richard Milnetells us that reports from European companies are showing surprising resilience. Furthermore, the loss of U.S. business will be partially offset by higher government expenditure in Europe, with Germany in particular boosting spending on both infrastructure and defense.

That’s with a 15 percent tariff. But what happens if Trump pushes tariffs up to 35 percent? My back-of-the envelope calculations say that this would reduce Europe’s exports to the United States by another 0.7 percent of GDP. That is, the hit to Europe if Trump makes good on his threats would be smaller than the hit he has already imposed with the tariffs he plans to keep in place regardless.

This makes sense if you think about it. The higher the tariffs Trump imposes on imports, the less other countries sell to America. And the less they sell to us, the less they have to lose if we push the tariffs even higher.

And that argument doesn’t even take into account the strong possibility that another round of Trump tariffs would provoke retaliation from Europe and other trading partners.

The EU has so far chosen not to retaliate against Trump’s tariffs because its officials decided that making a deal, or at least seeming to make a deal, was better than getting into a tit-for-tat trade war. But if it turns out that Trump sees a deal not as the end of the story but simply as the jumping-off point for new demands, I suspect that even the timid bureaucrats in Brussels will eventually decide that enough is enough.

But again, at this point the math of the trade war matters less than the madness that lies behind it.

There has always been a whiff of megalomania about Trump’s tariff policy — a belief that he can use the threat of tariffs to compel other countries to do his bidding on multiple fronts, from promising not to move away from the dollar as a reserve currency to abandoning the prosecution of wannabe dictators who tried to overthrow democracy.

However, by making 15 percent tariffs the new normal — by keeping tariffs high even when countries make, or pretend to make, concessions to the United States — Trump has used up much of whatever trade ammunition he had.

However, Trump will be the last person to recognize that there are limits to his ability to bully the world, on trade or anything else. And that lack of awareness should worry us all.

Public Disapproves Of Trump's Handling Of Foreign Trade

The chart above reflects the results of the Economist / YouGov Poll -- done between April 13th and 15th of a nationwide sample of 1,512 adults (including 1,329 registered voters). The margin of error is 3.4 points for adults and 3.3 points for registered voters.

Trump's Claims About His Trade War Are All Wrong

Donald Trump has claimed that trade wars are easy to win, and he repeatedly claims that he is close to winning the trade war he started. He is lying.

In fact, every claim he has made about the trade war is wrong. In fact, our trade deficit with other nations is higher now than when Trump started that war with his tariffs. The following is part of an article about Trump's false trade war claims by Veronique de Rugy in The New York Times:

Mr. Trump and his team of unrepentant protectionists have made wild claims about what big tariff hikes and aggressive negotiating tactics will achieve. Let’s pick the top five claims. Have any actually panned out? The answer will not come as a surprise. (It’s no.)

Claim 1

Let’s start with an easy one. On March 2, 2018, when Fox Business Network’s “Mornings With Maria” asked whether China would retaliate against the metal tariffs, Mr. Trump’s economic adviser Peter Navarro replied, “I don’t believe any country in the world is going to retaliate for the simple reason that we are the most lucrative and biggest market in the world.” 

He was wrong: Everyone has retaliated against us. A recent studyby the economists Mary Amiti of the Federal Reserve, Stephen J. Redding of Princeton and David Weinstein of Columbia shows that our trading partners, “especially China, have retaliated with tariffs averaging 16 percent on approximately $121 billion of U.S. exports.”

Claim 2

The president said that tariffs are “a powerful way to get companies to come back to the USA.” Mr. Trump can’t do much more than point to anecdotes of companies relocating to the United States. But the broader trend tells a different story. Most companies can’t afford to shift their supply chains to use domestically produced parts or move their production back home. Data show that when companies move out of China, they’re relocating to other countries in Southeast Asia.

Even the Commerce Department acknowledges that companies face a tariff-related challenge when thinking about moving back here. Expect this trend to continue because the future of most manufacturing in America — including the automobile industry — is in exporting. Rising production costs in the United States means that to stay competitive, an increasingly large number of businesses will shift their production abroad.

The bottom line: It means fewer manufacturing jobs here than otherwise, not more.

Claim 3

On that same day that Mr. Navarro was talking nonsense, the president tweeted that “trade wars are good, and easy to win.” Wrong again. Instead, we found out that they are bad and difficult to wind down. We are nowhere near a trade deal with China. In fact, apart from a deal with South Korea, which required no congressional approval, no comprehensive and better trade deals are yet on the books, and most pending agreements are subpar when compared with what was agreed to in the Trans-Pacific Partnership.

Meanwhile, the trade war has pushed our trading partners to sign trade deal agreements — not with us, but with one another. The list includes Japan and Europe, Europe and the Mercosur zone in South America, and Europe and Mexico. As Chad Bown of the Peterson Institute for International Economics documented, China’s tariffs against the United States rose to 20.7 percent on June 1, 2019 from 8 percent on Jan. 1, 2018 — but its tariffs against all other countries went down from 8 percent to 6.7 percent during that same period.

Claim 4

“Our great Patriot Farmers will be one of the biggest beneficiaries” of the trade war with China, Mr. Trump tweeted in May. Also wrong. Farmers have suffered on all fronts in this trade war. For starters, they saw their production costs rise thanks to the metal tariffs that increased the cost of farm equipment. 

Farmers have also been devastated by the retaliation from many countries. For instance, soybean exports to China will most likely — and perhaps permanently — be one-third of what they were last year. Exports of dairy products to China have dropped more than 50 percent, too. Obviously, if farmers did so well under Trump’s trade war, he wouldn’t need to provide them with $28 billion in aid.

Claim 5 

During his campaign, Mr. Trump said that he would wipe away the trade deficit. Aside from the fact that this is a foolish goal, his trade disputes have achieved quite the opposite. As my colleague Daniel Griswold documents, “During President Obama’s second term in office, from 2013 through 2016, the monthly trade deficit in goods and services averaged $40.7 billion; under President Trump the monthly deficit has averaged $50.1 billion.”

A reduction in the bilateral trade deficit is a meaningless measure of success because when one deficit goes down, many others go up. Case in point: The deficit with China is going down, but it has been more than offset by rising bilateral deficits elsewhere, including with Vietnam and Mexico. Imports from China are also down 12 percent, but exports to China are down 19 percent. So even by the president’s own mercantilist standard, he is failing.

The bottom line is that pretty much everything Mr. Trump has promised on the trade front by imposing tariffs hasn’t panned out, even if the president persists in saying the opposite.

Another Broken Promise - 2018 Trade Deficit At Record Level

Donald Trump promised to lower the trade deficit between the U.S. and other countries, saying it showed that those countries were taking advantage of the United States. To do that, he instituted a series of tariffs on imported goods.

Those tariffs are bringing in 91% more revenue than at this time last year. Trump would like us to think this is money other countries are paying the U.S., but that is not true. What the tariffs really amount to is a new tax on American consumers.

But have the tariffs lowered the trade deficit (their purpose according to Trump)? NO! The trade deficit has risen for the last two years -- and in 2018 was at the highest level in United States history!

Here's part of how The Washington Post reported it:

The Commerce Department said Wednesday that — despite more than two years of President Trump’s “America First” policies — the United States last year posted a $891.2 billion merchandise trade deficit, the largest in the nation’s 243-year history.

The trade gap with China also hit a record $419 billion, underscoring the stakes for the president’s bid to reach a deal with Chinese President Xi Jinping as soon as this month.

The department’s final 2018 trade report, which was delayed by the partial government shutdown, showed that the United States bought far more in foreign goods than it sold to customers in Africa, Asia, Europe and North America. The shortfall topped the 2006 record of $838.3 billion, set as the housing bubble was peaking, and marked the third consecutive year of rising deficits. . . .

It has been evident for months that Trump was not shrinking a trade gap that he calls “unsustainable” and that he says represents a major transfer of wealth from Americans to foreigners. Over the past year, even as he imposed tariffs on foreign-made solar panels, washing machines, steel, aluminum and assorted goods from China, imports roared ahead of exports.

The president thus begins his reelection drive with a core campaign promise unfulfilled — and with a recent flurry of economic research showing that his embrace of tariffs is damaging the U.S. economy.

Economists say the trade deficit is swelling because of broad economic forces, including a chronic shortfall in national savings that was exacerbated by last year’s $1.5 trillion corporate and personal income tax cut. As cash-flush businesses and consumers increased their spending, purchases of imported goods rose while the overvalued dollar weighed on exports.

“Macroeconomics end up ruling. You can’t wish it away. You can’t tariff it away,” said William Reinsch, a former Commerce Department official now at the Center for Strategic and International Studies.

Trump's Tariffs Have Been A Huge Failure

Trump's reason for imposing tariffs on some other countries was because of the trade deficit. He thought he could force those countries to balance the trade between them and the U.S. (by importing more and exporting less). But Trump's move to impose tariffs has been a spectacular failure.

The trade deficit has not gone down. It continues to rise. The only thing Trump has accomplished with his tariffs is to impose a hidden tax on American consumers.

(The chart above was found at The People's View.)

The Trade Deficit Has Increased Since Trump's Trade War

The chart above shows the tariffs imposed by Donald Trump, the tariffs imposed in retaliation, and the tariffs Trump has threatened to further impose. Trump has started this trade war because he thinks the trade deficit is hurting this country (many economists disagree). He thinks his tariffs will make other countries import more American goods and export less to the United States. Has it worked?

It has not worked, at least so far. The truth is that the trade deficit is on target to be the largest in a decade (since 2008, during the Great Recession). Here is how Heather Long , in The Washington Post, describes what is happening:

The United States trade deficit widened in June and is on track to be the biggest in a decade despite President Trump’s efforts to slash it.

For the first half of 2018, the trade deficit in goods and services hit $291.2 billion, the federal government reported Friday, which is higher than last year and puts the nation on track to have the largest annual deficit since 2008.

Trump has repeatedly promised to reduce the trade deficit during his White House tenure, but so far, it has grown under his watch.

He claims America’s “massive” trade deficit is a sign the country is getting beaten by China, Germany and others, and he blames the deficit on “very stupid” trade deals. Most economists do not view the trade deficit as a problem. They point out that a big driving factor behind the higher trade deficit this year is that U.S. consumers are buying more stuff. That’s happening largely because the U.S. economy is doing well and people feel bullish enough to shop more for goods. Trump’s tax cuts have also helped fuel the buying spree for foreign products.

“While the administration is intent on reducing the trade deficit — which it wrongly perceives to be the result of unfair trade practices — the implementation of a late-cycle fiscal stimulus package will put further upward pressure on the trade deficit in the coming months,” said Gregory Daco, head of U.S. economics at Oxford Economics, a research firm.

But Trump doesn’t see it that way. He views trade as a zero-sum game where one country is winning and the other is losing. He claims trade wars are “easy to win” and he has launched battles with numerous countries in an effort to pressure their leaders to come to the negotiating table. Trump has put tariffs on just under 4 percent of imports so far, according to The Washington Post Tariff Tracker (see above). . . .

Trump stood outside the White House a week ago and declared victory that he had reduced the trade deficit in the spring, but the figure he was using to make that claim was that there was a slight reduction in the trade deficit from the first quarter of this year to the second quarter. He left out the fact that the first quarter deficit was the highest since before the financial crisis.

U.S. exports had an unusual surge this spring as other countries rushed to buy U.S. goods before tariffs went into effect. The vast majority of economists expect that rush to buy before the trade war escalated will be followed by lower than usual exports in the second half of the year. The widening trade deficit in June is a sign it’s starting to play out that way.

Economists think Trump is wrong to be so fixated on reducing the trade deficit. The only way to really cut it is for Americans stop buying so much, they argue, and they point out that the U.S. doesn’t “lose” on trade. Americans get cheaper items from abroad and the dollars to go to China and elsewhere mostly end up returning to the United States through foreign investment and purchases of U.S. Treasury bonds. Under Trump, the United States is returning to $1 trillion annual budget deficits and looking to foreign investors to help fund it.

Donald Trump's Trade War Will Hurt All Americans

Donald Trump has said a trade war is good, and can easily be won by the United States. He is wrong, and his new tariffs, that have kicked off a trade war will wide up hurting all Americans.

Let's be clear about one thing to start -- the tariffs are a new tax on American consumers. They may be levied on the products coming from other countries, but those countries won't be paying the higher tariffs (taxes) -- American consumers will be paying them.

Some of you may be thinking that consumers can avoid paying those new taxes by just buying American products instead. That's wrong. Why did Trump impose the tariffs to begin with? It was because those foreign products (aluminum and steel) were cheaper that the aluminum and steel produced in the United States. Whether you buy the foreign products or the American products, you will be paying more -- and that excess payment amounts to a new tax (a tax NOT approved by Congress). And the higher prices won't just be in aluminum and steel, but will be seen in every American industry that uses aluminum and steel.

In other words, there is no way an American consumer can avoid paying Trump's new tax -- and that new tax will hurt ordinary Americans far more than it will hurt the rich (since the rich pay a much smaller percentage of their income for consumer goods than most Americans must pay).

And it won't just be higher taxes that will affect Americans. The entities that had a tariff placed on their products are responding with tariffs on American products. Those tariffs will negatively affect American farmers and industries -- and could cost workers their jobs.

The chart above is from Business Insider. It shows the effect the new tariffs levied by Canada will have on the individual states. The states in the darker colors will suffer the biggest hit, but all states will be affected. And that chart just shows Canada's reaction. Don't forget that Mexico, the European Union, and China are also responding with tariffs on American products. This could get real ugly really fast.

And we may not be seeing the worst. The White House advisors have said there may be more tariffs to counter the tariffs put on American products. This could be just the start of an escalating trade war.

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This would be a good time to look at a bit of American history. In the late 1920's, the gap in wealth and income between the rich and the rest of America was enormous. And Republicans decided that they needed large tariffs to help American industries (especially after the stock market crash of 1929), so they passed a huge tariff bill (Smoot-Hawley Act) in 1930. The result was the Great Depression.

We now have a wealth and income gap as large as that of the 1920's, and a new tax law that will make that gap much larger. And we have the start of a trade war with new tariffs -- a trade war that could easily get out of hand. Are we setting ourselves up for a repeat economic disaster? It's certainly not beyond the realm of possibility.

if there is a saving grace in all this, it is that most Americans don't think tariffs are good economic policy (see chart below). Even Republicans are opposed. Maybe public opposition can compel Congress to stop the trade war.

The chart below shows results from a recent Politico / Morning Consult Poll -- done between May 23rd and 29th of a national sample of 1,995 registered voters, with a 2 point margin of error.

American Public Opposes Trump's Trade Policies/Actions

A few days ago, Donald Trump announced that he would be imposing a 25% tariff on imported steel and a 10% tariff on imported aluminum. This kicked off fears among those in both political parties that the action would kick off a trade war, with other countries responding by putting stiff tariffs on American products -- a move that could hurt American businesses and cost American jobs.

Trump responded to that backlash against his tariffs by tweeting that a trade war would be good for the United States, and would be easy to win.

As these charts show, the American public doesn't agree with Trump. With the tariffs, he has created another issue where he is at odds with what the public wants. The public disapproves of how Trump is handling trade policy by a 20 point margin (34% to 54%), opposes the tariffs on steel and aluminum by a 19 point margin (31% to 50%), and disagrees with his remark that a trade war would be good and easy to win by a 36 point margin (28% to 64%). And that opposition holds for both genders, all age groups, and across racial lines.

These charts reflect results contained in a new Quinnipiac University Poll -- done between March 3rd and 5th of a random national sample of 1,122 voters, with a margin of error of 3.5 points.

Donald Trump Foolishly Decides To Start A Trade War

The tweet above by Donald Trump is in response to the backlash on his decision to kick off a trade war. On Thursday, he announced that he would be imposing a 25% tariff on foreign steel entering the United States and a 10% tariff on foreign aluminum.

The tweet shows just how ignorant Trump is to think that it's easy to win a trade war. It may seem easy to a hotel/real estate magnate, because he doesn't depend on exports to make a living -- but the same is not true of many others in our economy. There are many farmers, ranchers, and manufacturers in the United States that depend on exporting their goods to other countries -- and if another country puts a stiff tariff on those goods (in retaliation for the Trump tariffs), they could be devastated.

The higher cost of their goods could send consumers in those other countries to buy goods from a country other than the U.S., and that would cost both profits and jobs here in this country.

And the idea that we could win a trade war by just stopping all trade with those countries is simply ludicrous. For example, most foreign steel comes into the U.S. from Canada, Brazil, China, and Mexico. Is the U.S. going to cease trading with those countries? Of course not! Such a thing would be disastrous for business, jobs, and the economy in general.

Here is what the traditionally conservative Wall Street Journal had to say about Trump's tariffs:

Donald Trump made the biggest policy blunder of his Presidency Thursday by announcing that next week he’ll impose tariffs of 25% on imported steel and 10% on aluminum. This tax increase will punish American workers, invite retaliation that will harm U.S. exports, divide his political coalition at home, anger allies abroad, and undermine his tax and regulatory reforms.

I don't often agree with the Wall Street Journal on economic policy, but this time they are right. Our economy is still fragile and many are still recovering from the Bush recession. Trump's tax plan is bad enough (further widening the gap between the rich and the rest of the country), but the addition of a trade war could seriously damage the economy. It could even trigger a new recession.

Trump Changes His Tune On China And Trade Deficit

(Caricature of Donald Trump is by DonkeyHotey.)

On the campaign trail, Donald Trump was very hard on China, accusing them of doing all sorts of nasty things to create the trade imbalance between the two countries (China and the U.S.). In May of 2016, Trump said:

"We can't continue to allow China to rape our country and that's what they're doing. It's the greatest theft in the history of the world."

He certainly changed his tune once face-to-face with Chinese leaders though. He said while in China:

"I don’t blame China. After all, who can blame a country for being able to take advantage of another country for the benefit of its citizens? I give China great credit."

One could say that Trump wimped out when facing the Chinese leaders, and that would be partially true. Trump is a blowhard who loves to denigrate from a distance. But it's also true that he lies a lot, and it's a lot harder to lie about someone when facing them in person.

China is not blameless in the question of trade balances, but they are not the ones most guilty of that unbalanced trade. And neither are previous administrations (who Trump blamed while in China). The real culprits, the ones most guilty, are the corporations who ship American jobs to China (and other low-wage countries) -- and the Republicans in Congress who give them a tax break for doing that. Trump's own companies (and Ivanka's) are guilty of doing this, and must accept some of the responsibility.

But Trump won't blame himself or other greedy corporations. For him, there is always someone else to blame (even if they are truly innocent).

English Voters Make A Huge Mistake In Leaving The E.U.

The voters in England and Wales shocked the world on Thursday by voting to take the United Kingdom out of the European Union. They chose to leave the largest economic marketplace in the world (larger than even the United States or China) -- a market where they enjoyed very favorable trade policies with other European countries (and through the E.U., the rest of the world). The vote seems to have been spurred by a virulent anti-immigrant feeling and the fact that only the rich have recovered from the worldwide recession of 2008 (much like here in the U.S.).

They were warned that leaving the E.U. would have serious economic consequences, but either didn't believe those warnings or didn't care. Now they will have to suffer those consequences. The British pound has dropped precipitously, as has their stock market. Since the U.K. depends on imports a great deal, the devalued pound will make all imports cost citizens more money (and that includes basics like food). The lower financial markets will affect their economy as a whole, causing it to falter even worse that it already was -- and most of the negative effect of that will be felt by middle and lower class citizens.

Some on the side of leaving the E.U. say these effects will be felt in the short-term only. I tend to disagree. It will take a couple of years for the U.K. to disengage itself from the E.U., and no one knows what kind of agreements on trade and other things will be reached -- and financial markets don't like not knowing the future.

Some think the U.K. will wind up with the same kind of good trade agreements with the other European nations in the final analysis. That's unlikely. The E.U. is going to want to punish the U.K. for leaving to prevent other nations from doing the same thing -- and the easiest way to do that is through trade agreements.

Leaving the E.U. could also have political ramifications within the United Kingdom. While both political parties (Conservative and Labor) were split right down the middle on the issue of leaving, the Conservatives are currently in power -- and they are the ones that will be blamed for lost jobs, higher prices, and a slower economy in general. The economic suffering could easily last until the next election -- and could even hasten that election. It could easily mean the Conservatives will be voted out of power.

It could also result in Scotland leaving the United Kingdom. The Scots voted recently to stay within the U.K., but that was on the understanding that the U.K. would be remaining in the European Union. Scotland voted heavily to stay in the E.U. last Thursday, and they are very unhappy that England and Wales are now going to take them out of the E.U. Scottish leaders are already calling for a new referendum on leaving the U.K., and it just might pass this time.

The English and Welsh voters have shot themselves in the foot with this vote -- maybe both feet.