I don’t know anything about roosting chickens, but I do know a bit about trade theory. Over the past 200 years, debates about trade have occurred on two levels. Academics insist that unilateral free trade is the best options. However the “very serious people” (VSP) who conduct real world trade negotiations act as if open markets are a “concession”. They act as if we were doing other countries a favor by letting them export goods to our market. They view the academic perspective as hopelessly idealistic, even as the VSPs have worked hard to gradually move the world toward the same goal of freer trade, one agreement at a time.
Today it looks like the VSPs who believe in globalization made a big mistake, and that the idealistic approach of unilaterally moving toward freer trade was the better strategy. The VSP approach opened the door to protectionist populists, and Donald Trump walked through. Protectionists are using the “concessions” myth as an excuse to impose higher tariffs. Other countries then face a difficult choice. If they give in to pressure from Trump, it would just encourage him to make even more demands.
It’s normally the case that one is better off standing up to a bully. When one does so, bullies tend to back off. But it’s not easy to do this without making the problem even worse, without triggering an international trade war.
If countries had done like Singapore and Hong Kong, and adopted a unilateral policy of free trade, then they would not face this quandary. In that case, if the US wants to shoot itself in the foot with trade barriers, it’s free to do so. No point in compounding the problem by also shooting yourself in the foot. Unfortunately, the international trade negotiation establishment is deeply invested in the “concessions” view of trade, and this creates some difficult game theory problems. If they do the “right thing” (cut tariffs) they look weak and make the populists even more popular.
Sometimes the most idealistic approach is also the most pragmatic.
PS. As an analogy, I have argued that we should rely 100% on monetary policy to stabilize demand, and not at all on fiscal policy. This view is widely seen as impractical. But now the Trump administration and Congress have raised spending and cut taxes to the point where a viable countercyclical fiscal policy is almost impossible. And yet we never built the sort of robust monetary regime that could provide a stable path for expected NGDP. So what happens if there is another 2008?
READER COMMENTS
Philo
Jul 15 2018 at 4:24am
Your P.S. suffers from this disanalogy: The liberal view of international trade is textbook orthodoxy, but your conception of monetary policy as of primary importance for “stabilization” is the view of a small minority of academics.
Thomas
Jul 15 2018 at 8:53am
I’m not so sure your latter comment is true. There seems to be broad academic acceptance of Romer & Romer’s “What Ends Recessions?”
BC
Jul 15 2018 at 9:23pm
Right. I thought the accepted wisdom among economists was that, away from the zero-rate bound, monetary policy offsets fiscal policy. Was it Krugman that once said that AD was whatever Alan Greenspan (then Fed chair) wanted it to be?
EB
Jul 15 2018 at 9:31am
As long as economists don’t pay attention to our world’s political order, the discussion about free trade makes nonsense. Yes, small countries are better off by opening their economies regardless of what other countries do because they don’t have any power to influence others. More important, those same small countries would be much better off if they could negotiate with others to let their productions enter freely into their domestic markets. Anyone familiar with the story of Chile since 1975 knows that very well (I have lived in Chile for 24 years since 1973, and today I live in Santiago). The experiences of HK and Singapore are relevant, but given their origins, we should not be surprised since their governments never had an alternative (most of 1997, I lived in HK).
On the other extreme, two large countries are forced to negotiate their “economic integration” because of their governments are expected to take into account other “values”. How important these other “values” are in determining their “economic integration” depend largely on the history of the relations between the two governments. In addition, when talking about large countries, we should be aware that domestic “economic integration” is far from perfect. For example, anyone familiar with the relations between China and U.S. in the past 60 years knows well the large differences in the domestic economic integration of the two countries, even today, after 30 years of radical changes in China. Also, we know how different the two systems of government are and the large mutual suspicions about the other government’s intentions, so we should not be surprised that other “values” play an important role. Not surprisingly, “experts” on both countries differ sharply about those other “values”. Yes, there was a time in which the U.S. has a great interest in encouraging China to integrate into the world economy in general, and the U.S. in particular, and to a large extent it succeeded (again I know because 1994-96 in Beijing advising on how to reform state banks and enterprises). None should be surprised, however, that the two governments have often complained about how integration was moving forward (we should ask ourselves about the domestic groups in both countries that have been complaining and pressing their governments). Yes, the process of “economic integration” of China and the U.S. is far from over and will be conditioned by agreements the two governments can reach and enforce –agreements that will depend on both the benefits and costs of accelerating the pace of integration.
In between the two extremes, there have been all sorts of stories, although today “economic integration” is much more advanced than at any other time.
Benjamin Cole
Jul 15 2018 at 9:51am
“If countries had done like Singapore and Hong Kong, and adopted a unilateral policy of free trade,”—Scott Sumner
I have be reviewing Singapore. Egads, Singapore and perhaps Pluto are close to the free trade-free market ideal.
I think Singapore, where per capita GDP PPP is 50% higher than the US, is a telling example that governments that all but mechanically manufacture comparative trade advantages—well, they can be successful.
Where to start?
How about a 7% goods and services tax on all imports, but collected at point of entry. Is that a tariff? Well, one could say not, after all domestic purveyors pay the same tax. But not exporters. Oh!
So, if you run an export factory in Singapore, you benefit from all the government services, infrastructure, extensive pro-business benefit programs—but you do not pay the freight. The importers do pay the freight, and do pay taxes to help run Singapore. Exporters? Well, no.
So is a 7% sales tax on all imports not a duty or tariff? Seems grey-zone to me.
Of course, all the land in Singapore is government-owned, and 80% of the housing of government-built.
A comment section is not the place to catalog the extensive, and the word “extensive” is mild, government involvement in Singapore enterprise, but suffice it so say Singapore both owns major companies and runs large government investment corporations. Shipyards and airlines, and oil refiners.
Singapore exports refined petroleum products. The world’s largest resin plant (Exxon’s) is on Jurong Island, an entire island built and owned by Singapore. Wonder what they charge in rent? Through JVs Singapore owns large shares of plants on the island, and has extensive programs to aid refiners, including recently forming a R&D facility to pioneer new products. BTW, Singapore does have a tariffs on imported petroleum products, on top of the 7% sales tax.
Singapore, of course, is a city-state. 5 mil pop. Probably a lot easier to run than a large nation, and many policies that work in Singapore might not work elsewhere.
But when I review Singapore, and perhaps China (China may be too large to understand) I see nations that use government to create comparative advantages for industry, and also deploy more protectionism than is seen at first blush. A VAT tax that exempts exporters is an idea that needs an honest assessment. (China also does not have private ownership of land, just long-term leases. This can be a great development tool, as rents on industry can be zero).
It is worth noting that a very successful US economic sector, and an exporting industry, is agriculture. US agriculture is deeply in bed with Uncle Sam, through the USDA, and the extensive federal subsidy of infrastructure in rural America, everything from roads, to power, to water systems, to telephones to airport and railroads. Analogies are never perfect, but perhaps the US farm sector resembles certain sectors in China and Singapore.
They say US farmers are the most productive in the world. I have little doubt Exxon’s plant in Singapore is now the best in the world. So does government collusion with private industry actually work?
And why did Singapore want the Exxon plant? I would guess the plant brings a lot of income into Singapore. Are the leaders in Singapore “bullies” or “protectionists?” Crony capitalists? Hard to say.
Western economists insist the (perhaps idealized) US free-market model is better than the public-private Singapore model, and unilateral free imports the ideal.
It does raise an interesting question: What empirical observations would have to be made before a Western “free-trader” began to doubt his premises?
If US living standards stagnate, while they rise in the Far East for another 20 years, what conclusions can we draw? (Well, probably none, as no one is ever wrong in macroeconomics. Economists today marshall facts and arguments like plaintiff and defendant lawyers).
Still, when it comes to “free trade” is the old joke informative?
“What you say may be true in fact, but more importantly, is it true in theory?”
Benjamin Cole
Jul 15 2018 at 10:25pm
Add on: The Monetary Authority of Singapore (unique in the world) manages monetary authority by pegging the Singapore dollar to a basket of currencies. The basket is a secret and the target rate is a secret.
Aslo, the MAS has a
Monetary and Domestic Markets Management Department
The Monetary and Domestic Markets Management Department is responsible for implementing Singapore’s monetary policy by managing the exchange rate within its targeted policy band, conducting money market operations to manage liquidity in the banking system, and issuing Singapore Government Securities. The department is also responsible for maintaining the stability and functionality of the foreign exchange and money markets in Singapore, as well as fostering the development of Singapore dollar markets.
Reserve Management Department
The Reserve Management Department is responsible for the management of Singapore’s official foreign reserves….
—30—-
Okay, the MAS can peg the value of the Singapore dollar, and has control over enough capital to mimic capital controls.
Who knows what the market rate of the Singapore dollar would be?
As I say, fans in the stadium upper seats at a World Cup game in a very thick fog can pontificate on the finer details of a ref’s call. They are actually theorizing. Global economics is like that.
Tom West
Jul 15 2018 at 11:19am
I don’t think this is about VSPs. I think this about the fact that a lot of the progress made in the last several decades (both economically and socially) runs against the intuition of a majority of the population.
While leaders can lead the population to some extent (and usually have), if they pull too far beyond what the population can handle, the link between populace and leaders snaps, and the leaders morph into “the elites”.
And then you get Trump.
HK and Singapore avoid this by not being democracies.
Jon Murphy
Jul 15 2018 at 12:55pm
While that may be true, it doesn’t explain Trump. Remember that free trade is the result of people interacting with one another. Unlike protectionism (what I like to call “scarcityism”), it doesn’t require any diktats or force. It’s merely two (or more) people interacting with one another.
So, the results from free trade are exactly what people want; it’s exactly what the population can handle. We know this because it is the results that people choose.
Mike W
Jul 15 2018 at 11:21am
“In the short term, freer trade can be better for rich people in poor countries than for poor people in rich ones.” (Tony Abbott, WSJ 7/13/18)
Pierre Lemieux
Jul 15 2018 at 12:17pm
Mike: I also noticed this statement in the WSJ op-ed. I don’t know what the author bases it on. It’s the contrary of Stolper-Samuelson (which admittedly is not the end of the analytical world).
Pierre Lemieux
Jul 15 2018 at 12:22pm
Very interesting post, Scott. I defend a similar “idealistic” viewpoint (although not as well) in an article in the current issue of Regulation, “How’s Your Trade War Going?” at https://object.cato.org/sites/cato.org/files/serials/files/regulation/2018/6/regulation-v41n2-7_0.pdf#page=3.
Thaomas
Jul 15 2018 at 1:04pm
What happens if there is another 2008? Do then what the Fed should have done in 2008, buy enough of whatever it takes to keep the price level (or even better the ngdp) growing at the pre crisis rate.
Oh come on, the VSP did the best they could given that the public has never believed in free trade and that the comprehensive negotiation model does at least mobilize the exporting interest groups to offset the protectionist interests.
Warren Platts
Jul 15 2018 at 1:33pm
Don’t forget about the interest groups that were motivated by the prospect of lowered wages predicted by free trade….
Warren Platts
Jul 15 2018 at 1:31pm
Interesting article, sir, but it ignores the main 19th century argument that was deployed against unilateral free trade. And that is the dirty little secret of trade theory: tariffs improve a country’s net welfare. That is probably why countries are reluctant to remove them, especially if they are not matched by reciprocal reductions in trade barriers.
The problem, as Robert Torrens pointed out in the 19th century debates, in a situation where there are mutual tariffs and the home country unilaterally decides to lower its barriers, the foreign country will be able to raise the price of its exports/home imports. The result is that the home country will have to increase the amount of exports to obtain the same amount of imports. The terms of trade deteriorate. Net welfare losses ensue.
Indeed, when 19th century decided to conduct the unilateral free trade experiment, net welfare was reduced–as documented by Irwin and McCloskey of all people…
Any modern defense of unilateral free trade that ignores Torrens’s terms of trade argument is incomplete at best…
Don Boudreaux
Jul 15 2018 at 3:24pm
Warren Platts:
You do not adequate grasp the theory of optimal tariffs. Although John Stuart Mill developed the theory earlier but published it only later, Robert Torrens is indeed the first person who explained in print that under certain circumstances the use by country A of tariffs set just right on particular goods can improve country A’s terms of trade – meaning that country A ends up receiving more imports in exchange for a given amount of its exports. (Note, by the way, that this outcome is quite the opposite of that which typical protectionists think to be desirable.) And such an improvement in country A’s terms of trade only improves net welfare in country A if the size of the benefits from the improved terms of trade are greater than the losses that necessarily occur because of the fall in total trade volume and reduced international specialization that are caused by the imposition of the optimal tariff.
Mr. Platts, you are mistaken about the policy implications of the demonstration of the theoretical existence of an optimal tariff . That demonstration, contrary to your portrayal of it, emphatically did not establish a case for a policy of free trade. The assumptions – including especially the ones used by Torrens – for the optimal tariff to improve the net welfare of a country are many and extreme. These assumptions are far too extreme to apply in reality. Therefore, most economists have wisely understood this fact as one that relegates the optimal tariff to the ranks of mere theoretical curiosa (although, apparently, Torrens himself wasn’t among this wise number).
All of the above (and more) is nicely explained in this 1987 article by the excellent historian of economic thought Tom Humphrey. Here’s Tom’s conclusion – one which is widely accepted among economists:
Warren Platts
Jul 15 2018 at 4:39pm
Dr. Boudreaux, I am sorry, but that is simply not true. Even a monopolist will maximize his profits by lowering his or her prices in response to a new tariff, and I have the spreadsheets to prove it. But one need to look no further than the news to see the terms of trade effect in real time. For example, consider Harley-Davidson: in response to the new EU tariff on American motorcycle producers, I think they said it would increase the cost of a motorcycle by something like $2000. However, they also said they would not raise their price for their European consumers. That entails that they will accept $2000 of less profits for each motorcycle they sell in order to maintain their market share. (There is no large country effect here: H-D basically has a monopoly. If you want an American cycle with that distinctive, gnarly Harley-Davidson sound, you have to buy an H-D.) Thus, in effect, Harley-Davidson has decided it will pay tribute to the EU in the form of $2000 per motorcycle in taxes to Europe. That is a net gain to Europe, and a net loss for America. I say we reciprocate…
Don Boudreaux
Jul 15 2018 at 4:52pm
Mr. Platts: You miss the larger point. The minimum number of extreme and unrealistic assumptions that must apply in reality for an optimal tariff to increase the net welfare of a country is more than one. And your Harley-Davidson example does nothing to refute the standard economists’ arguments against using optimum-tariff theory as a guide to policy. Indeed, I can barely make out why you suppose that it does so.
Warren Platts
Jul 15 2018 at 4:58pm
Regarding monopoly terms of trade losses, consider a demand curve of P = 200 – Q. Assume a per unit cost of 50. Under free trade, the monopolist will maximize his profit at precisely at P = 125. The quantity supplied will be 75. Total profit will be 5625.
Now the importing country imposes a 25% tariff. What does the monopolist do? A: If he is a profit maximizer he will lower his price to precisely 105. The new quantity supplied will be precisely 68.75; tariff itself will be 26.25; the new price charged to the consumer, after adding the tariff tax will be precisely 131.25; total profit will be 3781.25.
Yes, the profits are reduced. But if he sets the price at either 104 or 106, his profit goes down. If he tries to pass off the entire cost of the tariff onto his customers, the new price would be 156.25, after adding the 31.25 tariff. The quantity supplied will only be 43.75, and his profit will only be 3281.25: he is better off lowering his prices, maintaining his market share, and paying most of the tariff tax cost out of his profits to the importing country.
Jon Murphy
Jul 15 2018 at 5:15pm
Mr. Platts:
It is trivially easy to come up with a theoretical case for anything under different assumptions; give me enough assumptions and I can prove gravity causes things to fall upward. But you need to justify those assumptions if you want to translate things into the real world.
You need to justify the assumptions:
The demand and supply curves are (and indeed can be) known
The elasticity of these curves does not change over time
There are no transaction, transition, administrative, etc costs (or those costs are negligible)
There are no enforcement costs
Other countries will not retaliate (something we already know won’t happen)
There are no public choice issues
All you’ve done is handwave away all concerns. Make your case; do not make the Nirvana fallacy.
Mark Z
Jul 16 2018 at 8:13am
Harley-Davidson isn’t a monopoly. Once we introduce elasticity of demand, your argument breaks down.
Just because demand for a good isn’t perfectly inelastic doesn’t mean the producer is effectively a monopolist, and there are few industries in which there are monopolies other than those sponsored by states (in which case, one can improve the nation’s welfare even more than one would with tariffs simply by ending the state-sanctioned monopoly) or that are de facto monopolies just because they provide better goods and services than competitors (e.g. Google).
Warren Platts
Jul 16 2018 at 7:33pm
Mark, if you look at my simple numerical example, the elasticity of demand is 1. It is not inelastic, nor is it perfectly elastic. And yet the monopolist maximizes his profit by lowering his price to 105. Work it out for yourself. It will take you less than 5 minutes. Note this monopolist effect has nothing whatever to do with the large-country effect. A small country that imposes a tariff will also get that terms of trade gain. If Burkina Faso implemented a 25% tariff on Harleys, H-D would lower their price for them, just as they are doing for the EU.
And yes of course, Harley-Davidson is not the only motorcycle manufacturer in the world, but you are neglecting the importance of branding. Their brand is unique, just like Coca-Cola’s is–it gives them pricing power. Coca-Cola’s cost to produce a can of coke is probably not any higher than any generic producer, but because of their special brand, they can charge more. One thing that is obvious about the fact that H-D can eat $2000 in profits per motorcycle is that they must have some pretty good margins.
Don Boudreaux
Jul 15 2018 at 5:01pm
Mr. Platts: You begin your reply by saying that it is “simply untrue” the assumptions necessary to hold in reality in order for governments to use optimum-tariff theory to raise the welfare of the people of their country are too extreme. I note for the record that your claim contradicts the consensus of economists who study this matter. This fact, of course, is no proof of the incorrectness of your claim, but the fact that your claim contradicts a long-standing consensus among economists is nevertheless quire relevant.
Jon Murphy
Jul 15 2018 at 5:25pm
Not to mention reality. We’ve already seen two of the major assumptions violated: 1) That foreign governments will not retaliate and 2) that the tariffs are free from political pressure
Warren Platts
Jul 15 2018 at 8:10pm
Well…. I hate to be the one who says the emperor wears no clothes, but someone has to be the first. The terms of trade have significant effects under reasonable assumptions. We can put some numbers to it. Say we have $1.5 trillion in exports, and that the average ROW tariff (including all the VATs and everything else) is 33.3% . The latter is not unreasonable: I looked into the overall tariff for importing Vermont maple syrup to China–it was 48%. For Vermont cheddar cheese to the EU, it was 20%. Again, we are just looking for an order of magnitude, ballpark estimate of the US terms of trade loss due to our policy of unilateral free trade. Thus, 1/3 of $1.5 trillion is $500 billion. Of that tax, roughly half of that tax incidence will fall upon our exporters. They will reduce their prices because of the ROW’s tariffs. So we are looking at a figure–an annual terms of trade loss–that is on the order of 1% of our GDP.
Jon Murphy
Jul 16 2018 at 8:13am
@ Warren Platts
Ignoring for the moment the fact that current events already show the assumptions are unreasonable, I don’t even think you think they are reasonable:
You claim it is reasonable to assume the other country’s government won’t retaliate, but you also claim that Canada, EU, China, etc are “committed mercantilists.” It seems unreasonable to assume, then, that they will not retaliate.
You claim it is reasonable to assume there will be no political pressures to get the tariff incorrect, but you also claim that there are many millions of dollars spent in lobbying on issues of trade. It seems unreasonable to assume, then, that there will be no political influences.
You claim it is reasonable to assume the tariff can be accurately and precisely calculated, but you also claim that your calculations deliberately simplify the process. It seems unreasonable that the guy who can see the emperor wears no clothes cannot do his own calculations then assumes others can (and are willing to do so).
And all this is ignoring the fact that the big argument for tariffs by Trump et al is that the current terms of trade are too favorable!
One final point:
Is that a typo? You claim that the US can get a terms-of-trade gain, and yet here you’re telling us we’d get a rather substantial terms-of-trade loss.
Warren Platts
Jul 17 2018 at 5:01pm
Regarding the 4 standard objections to optimal tariff theory listed in Humphrey’s history, quoted by Dr. Boudreaux, there is an interesting paper: R.F. Kahn, “Tariffs and the Terms of Trade,” Review of Economic Studies, vol. 15, no. 1 (1947), pp. 14-19. Khan presents an ingenious argument that arguably obviates the objections listed by Humphrey.
Kahn correctly points out that we do not live in a world of universal free trade. That is to say, most other countries already pursue optimal tariff strategies that they use to improve their net welfare. Thus, according to Kahn’s argument, if we were to restore the status quo ante (by returning to the American System of protection) by imposing reciprocal tariffs against the ROW, they cannot retaliate very much.
The reason is, even if there was an optimal tariff trade war, countries have no incentive to raise their tariffs above their optimal level. Through a process akin to competitive price discovery, the trade war would reach an equilibrium: optimal tariffs improve net welfare: tariffs far above the optimal tariff level would not last long.
In principle, an optimal tariff trade war is neither more nor less irrational than ordinary price competition. Firm A lowers its price in order to capture market share from firm B. Firm B then “retaliates” by lowering its price even more, and so it goes until the firms realize the price is too low, then a new equilibrium is found.
If only the firms were smart enough to cooperate, there would be more profits for all. But because they are greedy, they drive profits for everyone close to zero. If Firm C tries to “lead by example, and raises its price, unless A & B follow suit, then A & B will get net welfare gains at the expense of C’s net welfare losses.
An optimal tariff trade war can no more spiral out of control than a price war can spiral out of control. Moreover, a unilateral free trade country is like a firm that unilaterally raises its prices: it will give net welfare to the other countries, as an act of pure altruism. However, such altruism on the part of a firm to competitive firms would be considered a breach of fiduciary duty by the firm’s shareholders. Similarly, it would not be surprising if a country’s citizens objected to excessive altruism on the part of their own country, especially if the cost of the altruism is born by those least able to afford it.
Scott Sumner
Jul 15 2018 at 3:39pm
Philo, Textbooks tend to support both free trade and monetary policies aimed at stabilization.
Ben, Just give up—you are wrong about Singapore. That 7% tax is not a trade barrier.
Tom, Polls show that Americans oppose protectionism.
Thanks Pierre, Good observation about Stolper-Samuelson.
EB
Jul 15 2018 at 5:33pm
Tomorrow Trump will meet Putin and one may think that they should talk about “economic integration”. We know, however, that most likely they will not talk at all about economic issues, especially about “integration”. The domestic political situation in the U.S. may force Trump to spend most of the meeting on the alleged intervention of the Putin government in the last presidential election. That would be a waste of time, however, because Trump should not let his enemies set the agenda with phony issues.
Given the suspicions triggered by the failure of Obama’s policies toward Russia –yes, he didn’t think Russia was a problem and mocked Mitt Romney for his concerns– Trump and Putin can talk only about how to build trust for future cooperation on specific issues, including “economic integration”. Trust can be built quickly only by commitments to simple but costly actions by both parties –actions that can be executed soon and their execution verified readily. That is not easy because of the differences between the political systems of the two countries: Trump cannot guarantee that as soon as next year a new Congress will not take action to derail any commitment that Trump makes. Nothing new but economists that ignore these details will continue mocking those that understand how hard it is to improve “economic integration” in the world’s political order in which we live –and will continue assuming that Trump is an idiot.
Alan Goldhammer
Jul 15 2018 at 10:08pm
EB – What does Russia make that the US needs? Nothing I can think of. Given this economic integration is worthless. It’s different for Euro countries that need Russian energy.
EB
Jul 16 2018 at 5:33am
In Russia, there are a lot of residents that may demand U.S. goods and services because they are cheaper than those from other countries. In the U.S., there a lot of residents that may demand Russian goods and services because they are cheaper than those from other countries. You are denying the benefit of free trade.
Hazel Meade
Jul 17 2018 at 3:45pm
You’re an evil genius. All along this was an elaborate plot, foisted by Vladimir Putin, to open Russia’s economy to Western imports, over the objections of his own domestic protectionist industries! Brilliant!
EB
Jul 17 2018 at 4:55pm
I don’t know what you mean by “this was” but certainly has nothing to do with my comment.
Mark Z
Jul 16 2018 at 8:16am
Russia makes people/laborers. Per the principle of comparative advantage, we would benefit from freer trade with Russia.
Daniel R. Grayson
Jul 15 2018 at 7:17pm
Great column, Scott!
I’m not an economist, but I do remember the one occasion that Milton Friedman visited our Sociology class at the University of Chicago when I was a freshman in Spring, 1969, and his main point (as you have emphasized) was that we should rely on monetary policy and not on fiscal policy.
BC
Jul 15 2018 at 10:17pm
“If they do the ‘right thing’ (cut tariffs) they look weak and make the populists even more popular.”
I’m not so sure. In any event, given how much smarter Merkel, Macron, Trudeau, etc. are than Trump, why aren’t they able to outwit him in the same way that Kim was? If an inexperienced Kim, who didn’t even earn his office, was able to get Trump to concede the joint military exercises with South Korea without Kim actually giving up any nukes, then why aren’t Merkel et al able to maneuver Trump into opening trade (and even immigration)? Reportedly, at the G-7 Trump offered to eliminate *all* tariffs and trade barriers if the others also did so [http://www.businessinsider.com/trump-suggests-dropping-all-tariffs-trade-barriers-at-g7-summit-2018-6]. Why didn’t they just call his bluff? Were they just trying to avoid giving Trump a “victory”, where the so-called “victory” would have been what they actually wanted or, at least should have wanted, all along? If so, that doesn’t seem like very smart negotiating. At best, they were able to get Trump to support NATO without actually accelerating their commitment to achieve 2% defense spending targets (conflicting reports about what was agreed on).
What does it say about these allegedly enlightened Western leaders if either (a) they are unable to outnegotiate the buffoon Trump as well as Kim did (and soon Putin might?) or (b) they use their wits not to open trade but to avoid spending adequately for their own defense? Western center-right leaders (e.g., Ryan and McConnell) were able to get Trump to appoint judges and pass tax reform that they liked. They, along with Netanyahu, were also able to get Trump to move the embassy to Jerusalem. What is wrong with the leaders favored by the Western center-left? (Yes, I know Merkel is center-right by German and European standards, but she is a darling of the American center-left.)
I bring all this up because of the comment about “looking weak”. I don’t think that’s quite right. It’s about looking good to what some people call the “Davos crowd”, which requires not just getting policy victories but also “not normalizing” Trump, lecturing about how bad he is, etc. That’s an additional constraint that seems to be getting in the way. If Trump really did offer to zero-out all tariffs, even if it was just a bluff, then that was a lost opportunity.
Scott Sumner
Jul 15 2018 at 10:46pm
BC, You are missing the point. Trump wanted a deal with Kim, at any cost. He wants to pick a fight with the EU, at any cost.
BC
Jul 16 2018 at 1:11am
Trump started out picking a fight with Kim. He was going to bring Fire and Fury to Little Rocket Man.
EB
Jul 16 2018 at 6:05am
No. Trump wants to negotiate better agreements for the U.S. That’s what all past presidents attempted to do with foreign governments. You can question if he will be able to get them but you are wrong to deny him the opportunity to try it. As long as you deny that the world’s political order implies that the degree of economic integration among countries depends on bilateral and multilateral agreements among governments, you regret changes because they remind you how much power governments have. Yes, as happens any time that the status quo is questioned, challenges may fail miserably and impose costs much larger than benefits, but so far everything that Trump has attempted still has the promise of a net benefit for Americans.
You may not like that political order in which governments of nation-states have the power to determine the degree of economic integration among countries. It has been with us for too many centuries and therefore the relevant question is why it has been so.
Hazel Meade
Jul 17 2018 at 11:24am
He doesn’t want a better deal “for the US”. He wants a better deal for certain influential US industries. There’s a difference. Maybe you can’t tell, and he can’t tell, but there is a difference.
EB
Jul 17 2018 at 4:59pm
Exactly as all past presidents. You can never expect a president of any country to benefit all residents.
Hazel Meade
Jul 18 2018 at 11:31am
No, not exactly. While past presidents may in some narrow instances have carved out exceptions from trade deals for certain favored industries, they generally all understood the basic economics – they basically agreed that freer trade would broadly benefit the economy. Trump is not merely carving out exceptions, he is wrong on the economics, he doesn’t understand how trade benefits the broader economy.
Scott Sumner
Jul 16 2018 at 8:36am
BC, That was all just empty rhetoric. Trump likes the dramatic. It doesn’t much matter to Trump whether that means dramatically hawkish or dramatically dovish.
EB, The problem is that Trump has zero skills in negotiation. His negotiations with Kim were almost unbelievably incompetent.
Having said that, I have no problem with Trump seeking better relations with N. Korea.
EB
Jul 16 2018 at 9:57am
Zero skills in negotiation? Please tell about your skills to judge other people’s negotiations and how you apply them to conclude that “his negotiations … were almost unbelievably incompetent”.
Hazel Meade
Jul 17 2018 at 11:22am
It is depressing to me how much everything I said would happen, intellectually, as a result of Trump’s election is coming to pass. Everywhere you look these days are people striving to find arguments for why free trade is bad and protectionism is good. They see the power that protectionist ideas have to win elections, and they crave that power. And it’s so much easier to convince voters you stand for something when you convince yourself of it first. There are only two ways out of this. Either Trump and his ilk starts losing elections, badly. Or these ideas be allowed to run their course until everyone who voted for them learns a hard lesson in economics.
EB
Jul 17 2018 at 5:04pm
Conveniently you ignore what Democrats have been proposing. What is the alternative to Trump? Serious economists know they should compare alternatives.
Hazel Meade
Jul 18 2018 at 11:20am
The Democrats were proposing the Trans-Pacific Partnership, which is certainly better than a trade war with China.
Aidan O'Gara
Jul 20 2018 at 1:22am
Hi Scott,
I just learned about the “optimal rate of tariffs,” an economic theory holding that tariffs can be a positive thing for a country’s economy, and I’m wondering why it doesn’t come up more in discussions like these. If this theory is true, then the VSPs might be doing things right!
The full explanation is here (http://internationalecon.com/Trade/Tch90/T90-9.php). In simplest terms, the idea is that a country’s companies could collectively hold monopoly power over another country’s consumers, but can’t exert that power (raise prices) because they’re competing against one another for those foreign customers. Therefore, the federal government can step in and collectively raise prices with tariffs, solving the coordination problem and benefitting that country at the expense of others.
Take the example of American movies. Hollywood has global monopoly power, and it could collectively charge other countries much more without losing many customers–in economic terms, the demand for movies is significantly inelastic.
Yet all of Hollywood’s firms are competing against one another. They wish they could coordinate to charge higher prices and extract producer surplus from foreign consumers. But they don’t, because they all can individually benefit from defecting and undercutting each other’s prices.
The only way to abuse their monopoly power and extract prices higher than the breakeven point is with coordination. Here is when the government steps in with tariffs.
…Aidan to come…
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