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.

Americans Will Pay A 15% Tax On All Goods Shipped From The EU

 

Meeting with the European Union president in Scotland, Donald Trump announced he had completed another "trade deal". He said the European Union had agreed to a 15% tariff on all goods shipped from there to the United States.

The EU didn't have much choice in the matter. They either agreed to the 15% tariff or get a 30% tariff starting on August 1st. The EU president chose the lesser of two evils.

The "deal" is not yet final. It still must be approved by all of the countries in the European Union, but the 15% tariff will be effective on August 1st anyway.

Trump celebrated the agreement as a big win for the United States. It isn't. We must not forget who will pay this new 15% tax. It won't be the countries of the European Union. It will be American consumers who buy goods from the EU.

This "deal" just means inflation in the United States will continue to rise substantially.

Most Say U.S. & China Not Doing Enough About Climate

The charts above are from the Pew Research Center. They show that most people in developed nations think European Union and the United Nations are doing a good job in attempting to control climate change, but the United States and China are not.

Study Shows Europeans Don't Trust The U.S. Under Trump

The charts above are from a study of citizens in Europe by the European Council on Foreign Relations. Basically, they asked those citizens who they trusted to defend them in their own country. A few years ago, the United States would have been trusted the most by the bilk of Europeans, but that is no longer true.

The top chart shows that very few would pick the U.S. now over the European Union. Only between 3% and 19% would trust the U.S., while between 25% and 60% would trust the E.U. more.

The charts below that are even more troubling. One asks whose side their country should take in a conflict with Russia, and the other asks the same of a conflict with China. In both instances, the overwhelming majority says their country should side with neither.

Europeans don't trust the United States under Trump to back them in a conflict, so they see no reason why their country should back the U.S. That's scary, because it shows that Trump, in just a couple of years, has destroyed the trust Europeans had in this country.

The Biggest Export/Import Trading Partners Of Each State

The charts above are from the Business Insider. They used data from the U.S. Census Bureau to determine the biggest trading partners, both export and import, of each of the 50 states.

Donald Trump has recently initiated a trade war by placing tariffs on products from Canada, Mexico, China, and the European Union -- and those entities has said they will retaliate. Trump administration officials have said if they do, then further tariffs will be imposed (which of course will result in more retaliation). In other words, we are seeing the beginning of an increasingly devastating trade war.

Trump has said a trade war will be easy to win. After viewing the charts above, do you believe that. Isn't it obvious that Trump's trade war will hurt every state?

Is The U.S. Big Enough To Dictate Trade Policy To Others?

Right after World War II, the United States economy was undoubtably the strongest in the world. One reason for that is because the European and Asian countries were devastated by the war and trying to recover. It left the United States in a position to dictate economic policy to the world.

The United States continues to have the biggest economy in the world -- with a gross domestic product of about $20.41 billion. Is that big enough to bully the rest of the world into accepting U.S. trade policy. Donald Trump seems to think it is. He thinks he can put tariffs on other countries, and force them to give in to U.S. economic desires.

He is wrong. While there are a lot of smaller countries that the U.S. can bully, Trump is picking on some economic entities that are now big enough to withstand the pressure and fight back. He is trying to bully China, the European Union, and the G-6 nations (the G-7 without the U.S.).

Those entities do not have tiny economies anymore. China has a GDP of $14.09 billion (and its growing fast). The G-6 countries have a GDP of $19.22 billion (and Trump's performance last weekend has united them). And the European Union has a GDP of $19.67 billion (less than a billion below the United States).

They are big enough to play economic hardball with the United States -- and that is especially true if you combine the G-6 and China, or the European Union and China. Trump has said a trade war would be easy to win, but he's picking on economic entities that are strong and capable of fighting back. They can hurt the U.S. as much (maybe more) than the U.S. can hurt them in a trade war.

Trump is living in the past, but the world has changed. In this modern world, we must get along with our allies and follow policies that are good for all -- not just the United States.

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.

The Best Comment On "Brexit" That I've Seen

(Image was found on Facebook.)

A lot has been said about Britain's vote to leave the European Union by supporters of both sides. But the best comment and analysis I've read about the politics of the situation came from a commenter in The Guardian. That comment is posted below:

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.