Trade war? What could go wrong?
By Scott Sumner
Bob Murphy sent me to this tweet:
Here are a few initial reactions:
1. How’d Smoot-Hawley work out?
2. Here are some job totals:
Steel industry (2016) = 87,000
Manufacturing employment = 12,555,000
Steel tariffs boost jobs in steel and lower employment in other manufacturing industries.
3. Some economists think the overall trade deficit is important, but I don’t know of any who think bilateral trade deficits mean anything. Does it matter whether Korea sends us computers directly, or has its parts assembled in China and then re-exported to the US?
4. Most people assume that the US runs a persistent trade deficit. But if the trade deficit really were persistently negative, properly measured, then this time series should also be negative and falling. Instead, the US surplus on investment income is strongly positive and rapidly increasing. If this is what it means to be a “debtor nation”, then lets have lots more debt!
5. Trade barriers hurt export industries, regardless of whether or not other countries choose retaliate. The “retaliation” comes from the normal workings of the market.
6. If someone you know shoots himself in the foot, is it a good idea to retaliate by shooting yourself in the foot?
7. There is no “national security argument” for steel tariffs. The military doesn’t use much steel and the US produces orders of magnitude more steel than the military needs. Future world wars will be nuclear, and future smaller wars will in no way restrict US access to Canadian or European steel.
8. All of Trump’s competent advisors opposed this move. Every single one.
On the same day, the courts reversed one of Trump’s more important moves toward deregulation. And less than a month ago the Congress removed cost controls on Medicare, which will increase the federal government’s unfunded liabilities by $52 trillion:
The most significant federal entitlement reform in our lifetime was a little noticed provision that Democrats included in the Affordable Care Act (Obamacare). The provision garnered almost no attention from the mainstream media or even from most conservative commentators. Yet according to the Medicare Trustees report that followed, this one provision eliminated $52 trillion of unfunded federal government liability – an amount that was more than three times the size of the US economy.
Here is a second surprise, one that has also been almost completely ignored. In last week’s bi-partisan budget agreement, Republican members of Congress agreed to completely undo the Democrat’s reform – recommitting the federal government to trillions of dollars of entitlement spending for which there are no dedicated future revenues.
It’s been a really bad 30 days.
PS. There is one silver lining here. Just as the steel industry is much smaller than most people assume, the cost of these tariffs will be smaller than many economists fear. It’s a tiny percentage of GDP. The bigger risk is what comes next.