I am seeing a lot of confusion about the recent trade deal that Trump negotiated with the EU. There is talk of “concessions” being extracted from the EU. This is very misleading, in a number of different ways.
In earlier posts I pointed out that commodities were “fungible” and traded in highly competitive global markets. Thus if the EU agrees to buy more soybeans from the US, they simply buy less from Brazil. Then those exports go elsewhere, and displace American exports to those other markets. Unless the EU promises to consume more soybeans, the promise to buy more from the US means nothing. And even if they do consume a few more soybeans, it may be for reasons unrelated to the trade deal:
Trump appears to believe he got two important promises from Juncker. “European Union representatives told me,” he tweeted, “that they would start buying soybeans from our great farmers immediately. Also, they will be buying vast amounts of LNG!”
In fact, the EU, which barely produces any soybeans, is already buying them from the U.S. and will increase imports of the oilseed this year because of a low domestic rapeseed crop and smaller supplies of sunflower seed meal from Ukraine and Russia.
Natural gas is also a commodity, traded in highly competitive markets:
The EU cannot order member states to buy more from the U.S.: Unlike the market for pipeline gas, where costly fixed infrastructure dictates the sources, an LNG carrier can come to Europe from Peru, Trinidad or the U.S., and it makes little difference to the buyers as long as the price is right. Juncker’s “promise” to Trump means merely that demand for natural gas is growing in Europe and capacity exists to accept more imports if they’re competitive.
There is also a vague promise to work toward eliminating all tariffs on industrial goods, except cars. This is a big win for the EU, for several reasons. First, this “concession” on industrial goods shifts the trade agenda away from protectionism and toward freer trade, helping to defuse the threat of a trade war. Second, Trump had been railing against the 10% EU tariff on car imports (ours is 2.5%). Trump agreed to remove that specific demand from the deal. And this should be no surprise, as the US car market is now dominated by larger SUVs and pick-up trucks, where we have a huge 25% tariff protecting domestic producers. Trump would never even consider truly free trade in all industrial goods if it meant removing that 25% tariff.
This is not to say that even a free trade deal in non-car industrial goods is meaningless–if achieved it would be a significant achievement for Trump and would help both the US and global economy. But notice the irony here. Trump ran for President against free trade deals such as Nafta. It would be odd for his supporters to cite the possibility of even more free trade deals as a goal that is now within reach, due to pressure from Trump. Nor is it clear that pressure was needed. Free trade deals are happening all the time. The EU recently did a deal with Canada and is negotiating a deal with Japan. If Trump wanted to follow in the footsteps of free traders like the Bushes and Clinton and Obama, he didn’t need to use threats.
Some might argue that Trump will sign better deals. But the major criticism of deals like the TPP is that it has too much protection of intellectual property rights (a criticism I agree with.) That means the problem with the TPP is that it’s too slanted toward favoring big American corporations. But that’s not a problem in Trump’s eyes.
Donald Trump often seems to take pride in his refusal to read policy memos, or to reject the wisdom of 250 years of economic research on international trade. He believes that his instincts as a businessman are superior to those of eggheads like me. But businessmen see things from what economists call a “partial equilibrium view” missing all the interconnections in the economy.
European Commission President Jean-Claude Juncker proved on Wednesday that the EU isn’t the useless bunch of bureaucrats populists and nationalists make it out to be. He came to Washington with a bridge to sell, and in three hours of talks he sold it to Trump. . . . Juncker, often criticized by euroskeptics, deserves credit for his contribution to the meeting’s success for the EU. Where German Chancellor Angela Merkel failed with her cool directness and French President Emmanuel Macron with his slightly pompous verbosity, Juncker delivered with an easy bonhomie combined with an ability to run circles around Trump when it came to the subject matter.
Previously I’ve argued that Trump cares more about negotiating “wins” than achieving any sort of ideological goal, such as smaller trade deficits. But to “win” at highly complex negotiations you need to be on top of the issues. I see this as one of those rare cases where two types of error offset, creating a positive result:
1. Trump’s mercantilist instincts are misguided.
2. Trump lacks the knowledge to effectively negotiate trade agreements.
3. Trump ended up negotiating an agreement that did not further his mercantilist objectives.
And that’s good!
PS. Tyler Cowen cites a paper with a contrarian view. I’m skeptical, partly because Trump is already 18 months into his term. On current trends, if he serves one term he would leave office with no significant durable accomplishments in foreign affairs. Of course that may change, and he may serve two terms, but does Trump have the negotiating skills needed to achieve what his instincts tell him is the correct goal?
READER COMMENTS
zeke5123
Jul 26 2018 at 2:18pm
Scott,
Far from a Trump supporter (I don’t know why that caveat feels necessary, but it does), but wouldn’t avoiding a major increase in hostilities count? While he isn’t nearly as doveish as some might argue, he hasn’t had an Iraq, a surge, or a Libya. Based on the last two Presidents, I’d say that is downright impressive (low-bar).
Hazel Meade
Jul 27 2018 at 4:44pm
Just a quibble, but didn’t the “surge” actually work? IIRC, hostilities in Iraq peaked in 2006 and had declined to barely a trickle by 2008 when Obama took office, largely due to the surge/Awakening. They rose again when the war in Syria began but that was not on Bush’s watch. Just think it’s odd that the surge would be counted as a failure.
Daniel Kahn
Jul 26 2018 at 2:19pm
On topic but off post, I wonder what you think of this recent Ezra Klein interview of Dani Rodrik, who seems to have the most anti-trade views I’ve encountered of any serious economist.
https://player.fm/series/the-ezra-klein-show/what-economists-and-politicians-get-wrong-about-trade
Scott Sumner
Jul 26 2018 at 4:55pm
Zeke, Yes, better than Bush on that issue, but I don’t really see much difference from Obama.
Daniel, I’m not a fan of Rodrik on trade, although he’s certainly a thoughtful economist.
Without commenting on an interview I haven’t read, one common mistake of managed trade types is to cite countries that have done well, and have SOME trade restrictions (as do most countries) and assume that the trade restrictions helped. In most cases, they would have done even better with no trade restrictions.
Benjamin Cole
Jul 26 2018 at 8:26pm
I agree with large parts of this post.
But I have concluded there is no such thing as global fair trade, free-trade, or foul trade. The complexities of domestic and international law regulations and circumstance overwhelm any interpretation of whether global trade is free, fair, or foul.
Simple example: let us say a nation improves its infrastructure particularly in regards to exports. No one would begrudge a nation improving its infrastructure. Yet if exporters do not pay for the infrastructure improvements, they are in effect subsidized.
Or take China and Singapore. In those nations all the land is owned by the government. So are exporters favored through low rents? No one knows. WTO quibbling about tariffs appears silly in context.
Exporters in nations that use VAT are subsidized by default. Those exporters do not pay taxes but benefit from taxes paid by others that support first world infrastructure and government.
If you want to have a debate about global trade, first send in the clowns. So maybe Don Trump is right.
There is a case to be made for unilateral free-trade, that is let anybody import for free.
However, why anybody would ever risk capital to build an industry in the US, under such circumstances, remains a mystery.
EB
Jul 26 2018 at 9:11pm
Thanks to Trump’s style now Americans have a much larger degree of transparency in what the government is doing. Albeit still very low, the higher degree of transparency in negotiations has allowed us to know something about how players play their cards. Thanks to anti-Trumpers that have been working full-time to sow fears, many people around the world are confused about what is going on. Most articles reporting what happened yesterday have headlines that are not consistent with the text (of course, anti-Trump opinions are against of whatever happened yesterday and may happen tomorrow).
We should remember that Obama negotiated a big deal with Iran with no benefit for the U.S. while keeping all America in darkness –and bypassing Congress. Maybe there was no confusion about what Obama what’s going to sign and therefore the media preferred not to inform about that negotiation, or even worst, to hide what Americans should have known.
Benjamin Cole
Jul 26 2018 at 9:51pm
Add on, regarding unilateral free-trade:
Suppose a group figures out they can build an aluminum smelter in the US and produce at 90 cents per unit which is below the China price of one dollar per unit.
So this group seeks $2 billion in financing on Wall Street or from banks.
But the financiers tell the group that China will subsidize exports and prevent profits for as long as necessary to maintain market share.
In this example, US consumers will pay one dollar per unit of aluminum instead of $0.90— unless the US engages in “protectionism.”
As I said, if you wish to have a serious discussion about global free-trade, fair trade, or foul trade, first send the clowns.
Mark Bahner
Jul 29 2018 at 11:20am
Hi,
Here’s an interesting article about the aluminum industry in Australia. One important point made in the article is that Australia exports both alumina
https://www.smh.com.au/lifestyle/why-australian-factories-are-on-their-knees-20150209-139w1v.html
From the article, explaining how China undercuts Australian aluminum (or “aluminium”!) producers:
Hazel Meade
Jul 30 2018 at 2:16pm
if China is subsidizing it’s exports to maintain market share then, by necessity, they have to be charging LESS than the prices charged by other exporters. In other words, China would have to charge less than $0.90 a unit in order to maintain it’s share. Why should US consumers object to the Chinese government subsidizing the aluminum they are consuming?
Now you may say that the threat of those subsidies being implemented is enough to prevent the planet opening which means China doesn’t actually have to subsidize it’s exports, but there’s a couple problems with that. First, threats are not certainties and some investors may gamble that they won’t subsidize exports if the potential gains are large enough. Second, in order to make it’s threats credible, China has to be willing to subsidize exports in other cases, which is a harm to itself. The whole point of exporting is to make money. If you have to keep subsidizing your exports at a loss you are actually hurting yourself for the benefit of other countries consumers.
Finally, I keep wondering why things that benefit US producers are always equated to things that benefit the US as a whole. The US is made up of both producers and consumers, and some of those consumers are producers of other things. (I.e. consumers of subsidized chinese aluminum who make that aluminum into products for export). The welfare of the US as a whole should not be equated to things that are good for US exporters.
Bruno Duarte
Jul 26 2018 at 11:50pm
Why industrial products?
The comparative advantage the US enjoys with Germany (no WITS data for the EU) in capital goods and relatively narrower deficit with the EU (50b in capital goods vs 150b in consumer goods, a surplus in capital goods before 2008) are good hints of how economic agents may opt going forward.
I break it down on a blog post (written when the EU tabled a very similar deal to that agreed yesterday)
https://eunomicsblog.wordpress.com/2018/05/17/tariffs-cheatsheet/
S D
Jul 27 2018 at 2:55am
J-C Juncker’s term as EU Commission president will end next year. He’s not looking for another one.
He is looking like the most successful EU Commission president since Jacques Delor in the 1980s. He has:
-Helped to bring in GDPR. Now seen as ahead of the curve globally given what we’ve seen with facebook and Cambridge Analytica.
-taken a firm line on Brexit. The UK political system has fallen apart and no one else is contemplating leaving the EU.
-insisted that all EU countries share migrants. This has had less impact in effect, but the principle is important
-and if the deal with Trump goes through, he will see the biggest opening up of EU markets (and vice versa) to the world since the early 1990s.
And did I mention that public support for the EU is at its highest since the early 2000s?
EB
Jul 27 2018 at 6:31am
Yes, we should be discussing the strategies of the parties to the negotiation and what they may achieve. But Scott’s post is about confusion, that is, the one created to cover up how the negotiation may evolve after last Wednesday’s successful start –a big win for Trump. As David Burge wrote yesterday’s morning
“Internet 1998: social media will disrupt media monopolies and empower everyday people to connect and voice their ideas
Internet 2018: jfc tell Thought Engineering build some robots to shut these fuckers up”
https://twitter.com/iowahawkblog/status/1022501040183300098
EB
Jul 27 2018 at 9:56am
Scott, there is no confusion. The U.S. economy is doing well, regardless of what the data show and what politicians and their cheap sicarios say. More important, I understand that even today at least two-thirds of Americans, perhaps over 80%, don’t care about politics.
Indeed, as The Predictor has analyzed for decades (see https://fairmodel.econ.yale.edu), the state of the economy will be an important determinant of the midterm Congressional election. The question is then how far the anti-Trumpers are willing to go in sowing fears to offset Trump’s good-economy advantage. I bet that they will continue pursuing different strategies because of their serious differences among themselves and so we will have a great Circus with five rings (two Republicans, and three Dems). How important will the outcome be? Despite the noise, I think it will matter little because the next two years will be similar to the first two years of Trump’s presidency. If Trump gets a good result, never will be good enough to change anything important, and the anti-Trumpers will continue sowing fears. And if a coalition of anti-Trumpers gets a good result, they will fight among themselves to define a common position on anything, and Trump will continue doing what he has been doing with the hope of getting results before the 2020 election.
Scott Sumner
Jul 27 2018 at 2:01pm
EB, You said:
“Thanks to Trump’s style now Americans have a much larger degree of transparency in what the government is doing.”
How does banning reporters increase transparency?
EB
Jul 27 2018 at 7:14pm
Read what I wrote. Higher from Obama’s zero level –a very low bar! Anyway, what is your definition of reporters? Does CNN employ “reporters”? Were Walter Duranty, Walter Cronkite and Dan Rather “reporters”? And what about George Will and the late Charles Krauthammer? Please tell me about the differences between the opinions of the first three “reporters” and those of the last two columnists.
Mark Bahner
Jul 29 2018 at 11:51am
I think a reasonable way of looking at it is that Dan Rather was a reporter when he was in Vietnam, but was not a reporter when he was on “60 Minutes”.
I don’t follow George Will carefully, and also didn’t follow Charles Krauthammer carefully, but I don’t think most people would classify either one as a “reporter”. Neither gets/got news that no one else had reported. Both instead provide/provided insight on news that has already been widely reported.
EB
Jul 28 2018 at 5:13am
Read
https://oversight.house.gov/hearing/shielding-sources-safeguarding-the-publics-right-to-know/
https://pjmedia.com/video/sharyl-attkisson-i-dont-think-i-was-the-only-reporter-the-government-surveilled/
Scott Sumner
Jul 29 2018 at 11:57am
EB, You asked:
“Were Walter Duranty, Walter Cronkite and Dan Rather “reporters”?”
Yes.
EB
Aug 1 2018 at 8:25am
If they were reporters, then all columnists and bloggers can claim to be reporters. They report their opinions sometimes relying on facts and most of the time on fake news.
Read
https://pjmedia.com/richardfernandez/who-killed-the-news/
I like the line that says “Fake news itself is not a problem; it only becomes a problem for elites when it veers out of control.“
EB
Aug 1 2018 at 9:03am
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EB
Aug 1 2018 at 9:35am
Scott, I have another question for you on reporters. Why should they have special access to the White House? They claim the privilege of accessing freely to WH personnel. As you may know, the press got that privilege at a time when it had little competition and great power to extort politicians and government officials. In the Constitution and the laws, there is no special recognition to a fourth power.
Mr. Econotarian
Jul 30 2018 at 2:35am
Does Juncker actually have the ability to change EU trade policy single-handedly? How much would he have to sell this “deal” to the European Commission & European Parliament?
BTW on LNG, the real reason the US doesn’t export much LNG is the slow permitting for export facilities. There are only two US LNG export facilities up and running in the at present, with several others still waiting for licensing.
FERC handles the environmental/safety issues of the license. DOE handles the “public interest” part, and in general DOE does not start license work until FERC signs off. While we probably don’t want badly built LNG terminals blowing up, it is unclear why Trump isn’t pushing Congress to change the Natural Gas Act of 1938 to get DOE out of the loop.
Thaomas
Jul 30 2018 at 8:14am
If buying more US soybeans means further cracking of EU’s anti-GMO prejudice, this will be a really big win for them,
Scott Sumner
Jul 30 2018 at 11:34am
Mr, Econotarian, Thanks for that info. I’m guessing he got pre-approval. He went in knowing exactly what he wanted.
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