The economists are correct (mostly) in their theories, but the people – the “rational consumers” – are correct also in their personal economic decisions – and they’ve clearly decided that they’re willing to pay extra to maintain these industries in America and have Americans harvesting their crops at higher wages than illegal aliens can get.

Update from reader Kevin: the chart below shows NZ will be better off by $US 400 per capita

The chart and reasoning explained here by Auckland University economist Robert MacCulloch on his Down To Earth Kiwi blog.

Every Presidency has a crap sandwich that is delivered sooner or later and Trump’s arrived yesterday.

  • A 10% tariff on Heard Island and McDonald Islands, which has been unpopulated since 1877
  • A 10% tariff on the British Indian Ocean Territory whose only population are US military staff who work at the Diego Garcia airbase there!

It’s a crap sandwich that even Trump supporters have doubts about, partly because many of them do understand economics, partly because many of them voted for Ronald Reagan who, although he did maintain some existing tariffs and even introduced one or two new ones for targeted political purposes, was very much opposed to them in favour of free trade.

Trump thinks they’ll do three things that directly support his overall agenda:

  1. They’ll force foreign companies to do business in the USA, especially in manufacturing.
  2. They’ll raise money in lieu of taxation, as in the 19th century, making the country wealthier.
  3. They’ll eliminate America’s trade deficits with other nations, resulting in some sort of equilibrium where everybody runs neither trade surpluses nor deficits.

He’s wrong on all three points, but let’s start with the last point and work backwards.

THREE: The announced tariffs were calculated on the basis of those deficits, not, as I’d hoped would happen, on a truly reciprocal basis that enables negotiation down to zero on both sides:

 [I]t settled on one of the worst possible methods to set tariff rates: It divided the country’s goods-trade deficit with the U.S. by its amount of exports to the U.S. and then divided that in half. For the more than 100 countries with which the U.S. has a trade surplus, it set the tax rate at 10 percent. It’s all based not on tariffs or unfair trade practices but simply on the existence of a trade deficit, and on the dogged belief that trade deficits are bad.

As a result poor old Cambodia has been hit with a 49% tariff. But the reason they run a trade surplus with America is not because they place tariffs on US goods (As far as I can see they have no such thing) but because they’re too poor to buy American products and services.

Indonesia gets a tariff of 64%, calculated by taking the US trade deficit with them, $17.9 billion and there exports to the USA of $28 billion, and dividing 17.9/28 = 64%, and then cut that in half to 32% to make it look the USA is being generous to Indonesia with its tariffs on them.

Yes, really! And you thought counting our GST as an import tax=tariff was bad? We only got whacked with 10%!

As this guy puts it:

The policy, unveiled yesterday afternoon, is called a ‘reciprocal tariff plan,’ which is a bit like calling a hammer a ‘reciprocal pillow.’

BTW, the real joke about placing tariffs on some uninhabited (except by penguins) islands and America’s own military at an island airbase, is that it’s an example of how tariffs leak. If you don’t cover every place that’s technically part of another nation, sneaky people will use such places to send you tariff-free imports. So you block them everywhere. Stupid, but logical.

The real leakage will be in the lobbying that will happen. How long will pro-Israel Trump be able to withstand the obvious problem with that specific nation:

It puts 17 percent tariffs on Israeli goods even though Israel has had a free-trade deal with the U.S. for 40 years and eliminated its few remaining tariffs earlier this week. There’s nothing “reciprocal” about it.

Such lobbying was what undid the American tariffs of the 19th century. By the 1900’s it had all became thoroughly corrupt and if you’ve ever wondered why the income tax was accepted in 1913 as a Constitutional Amendment (2/3 of Congress, 3/4 of the States), the answer is that people thought it would at least end that corruption of a device upon which the US Federal government then depended for most of its revenue. Admittedly from a century of hindsight and looking at an 80,000 page tax code that nobody understands, perhaps corrupted tariffs would have been better?

The real concern here is not Trump’s love of tariffs, and the above stands which could see negotiations – as Senator Kennedy talks about in the video above regarding Canada – but something much deeper about his economic beliefs that may preclude such negotiations:

Okay, it’s Bob Woodward, who has a history of inventing stuff, but it fits with MAGA and America-First-Andrew-Jackson nationalism. America as a world unto itself, isolated economically, militarily and perhaps even culturally, from the rest of the planet. That has been the case in America’s history, but only in periods, and those periods have often ended with a bang when Americans realised they couldn’t isolate themselves.

I have some news for you on that, even though it isn’t really news. We’ll have a trade deficit for as long as the rest of the world wants dollars more than we want the rest of the world’s funny-looking money. Look at it this way. People around the world want dollars for all kinds of reasons. Oil-poor nations (that’s most of them, look it up) need dollars to buy oil because oil is (mostly, and at least for the time being) priced in dollars. Foreigners want dollars to invest in our dynamic equities markets and our innovative tech firms. They also want dollars as a hedge against their governments’ bad decisions.

Aside from a vacation to Italy or wherever, how often does an American need a fistful of euro? Lots of companies invest in China, but since their currency isn’t fully convertible, getting the profits out requires — you guessed it! — dollars. And since the EU has regulated innovation and growth nearly out of existence, the eurozone is no longer a great place to invest.

Foreigners make goods tailored to the U.S. market because they need dollars. 

Looks like that lesson will have to be learned all over again.

TWO: Yes, the tariffs will raise money, but not enough to compensate the nation for the overall costs that will be imposed through price increases.

The estimates I’ve seen are for some $700 billion per year in customs duties, once the decline in imports is taken into account (otherwise the maximum would be $835 billion per year and the White House estimates $600 billion). That’s 2.3% of GDP, which is nothing to sneeze at. It might even enable tax cuts to be made – that’s certainly what Trump is aiming for, again looking at 19th century America. But the costs will certainly exceed that amount:

  • Inflation will likely rise, an early estimate is an added 2.6% on top of a rate that is still too high in the wake of the massive Federal spend-up of 2020-2023. Multiply that across GDP and it alone probably exceeds the tariff revenue.
  • Of course the key thing that Trump and others are missing here is that China and the other nations won’t actually be paying that tariff money. They’re a tax collected by Washington and, in one way or another, they’re going to be passed on to Americans, either directly by consumers in the form of higher prices (see inflation) or via businesses that choose to wholly or partly eat those costs – but the result would be less money for them, hitting profits, investments, and ultimately their innovation.
    Effectively they’re a $700 billion annual tax hike that will, depending on businesses eating the cost increase, fall mostly on the bottom half of earners. The Tax Foundation estimates that the “10 percent universal tariff would increase taxes on U.S. households by $1,250 on average.” If that tax increase is offset by other tax cuts and by increased wages, great. But that will take time, the bottom half of taxpayers already pay very little in income tax – and the midterms are just 18 months away.
  • Investments will take a hit and already have, with the S&P down 10% in just two days. That’s going to hit a lot of Americans in the pocketbook sooner or later; right now if they’re already retired, soon if they’re near retirement. That cost alone already exceeds the projected tariff revenues.
    Sure, the markets were over-cooked by the spending of the last few years – and arguably still overcooked from a decade of near-zero interest rates as the Federal Reserve employed Quantitative Easing to get America out of the Great Financial Crisis of 2008-9. A decade of easy money was going to catch up with investors eventually, as well as the growing Federal deficits and debts.
    But there’s no question that tariffs are the trigger here.

ONE: This is where the rubber really hits the road, at least emotionally, right Billy?

Thats song and a million other pieces of emotional nostalgia from musicians (most notably Bruce Springsteen, who made albums and a stage act to Joel’s one song) to filmmakers to Democrats like Walter Mondale and Dick Gephardt, made no dent in Reagan’s landslide election win in 1984, and the even bigger win when new Democrats like Bill Clinton threw in the towel on a lot of traditional Democrat notions regarding policies protecting American industries, unions, wage and price controls, free trade, and basically the whole neo-liberal package that the likes of our own Susan St John still rage against.

And now they’re back in the 21st century by the hand of a Republican President. History is strange, as are bedfellows (Free Trade from 2:00):

But Joel’s “Iron and coke and chromium steel” is a good example of these overall arguments – in both directions.

The reality is that there are more manufacturing jobs in America that consume steel than produce it. Tariffs on steel raise the cost for more jobs than are protected, and that applies to all this stuff.

Moreover, increasing the numbers of those manufacturing jobs in places like Pennsylvania and other parts of the Rust Belt will take more than a few years, beyond the end of Trump’s presidency, and the number of such will still be dwarfed by jobs in the rest of the economy.

But here’s why it may still happen and it’s a rule that applies across politics, from gun ownership to shipping: a large number of casually interested people will almost always be defeated by a small number of fanatics.

In other words, those increased costs, even if they add up to huge sums on the American economy, are going to be spread across vast numbers of people. If the cost-per-person of protecting America’s steel industry is small then it will be hard to reverse when the smaller number face the cost of losing their jobs. One side will fight down to the last broken bone while the other will just shrug their shoulders. See also the claim that Trump booting illegal immigrants will boost the price of avocados by a few cents, to which a MAGA voter will simply, “Yeah,… And…?”.

It could never work in New Zealand simply because of our small population. I vividly recall a farmer returning from some overseas trip in the mid-70’s, talking of Irish dairy farmers with 50 cows and a Mercedes in the garage. But the real kicker was a monkey wrench he’d picked up in Australia for 5 Aussie bucks or such. All the farmers marveled at this because here they cost $NZ 10 here (and the currencies were pretty close together back then). Who was protected? An importer with their licence? Some little manufacturer churning out a few thousand per year – not for export of course? The farmers were not so protected; they had to flog their stuff on international markets. The cost fell on too few people who were not and could not be protected, which is why the system here slowly died before being totally destroyed by Rogernomics.

But that’s not the case in a nation of 350 million people.

The economists are correct (mostly) in their theories, but the people – those “rational consumers” – are “correct” also in their personal economic decisions – and they’ve clearly decided that they’re willing to pay extra to maintain these industries in America and have Americans harvesting their crops at higher wages than illegal aliens can get.

There’s also another aspect to all this that is not being considered as much as it should be, and that’s Trump’s attitude toward national security and China, with an argument that Trump has three goals that are not purely economic:

  1. To strengthen the US’ supply chain sovereignty so as to eliminate the leverage that other countries have over it, especially China.
  2. To build on that by prompting every country to renegotiate their bilateral ties with China.
  3. To shape the emerging world order – which Trump has done by speeding up the end of the present one by shaking the global economy to its core. Obtaining supply chain sovereignty and replacing China as the top trade partner for as many countries as possible would give the US’ leverage over a sizeable portion of the world.

Risky stuff. The real threat here, to Trump and all his schemes, and the GOP, but also all of us, is not all the little and large costs spread across nations and the globe but if this doesn’t stabilise into negotiated zero or near-zero tariffs, if it doesn’t morph into a global EU-type environment, but explodes into nations raising their tariffs in turn against the US and everyone else. We’ve seen that before, from 1929 to 1933.

Even Milton Friedman did not argue that the Smoot Hawley Tariff Act (that raised tariffs on imports by an average of twenty percent) caused the Great Depression, merely that some scholars regarded it as partly responsible for the severity of it, and he also had this to say about tariffs, even as he made his typically powerful, calm, arguments, couched in everyday examples with emotional appeal, that Free Trade was good:

Ever since Adam Smith there has been virtual unanimity among economists, whatever their ideological position on other issues, that international free trade is in the best interests of trading countries and of the world. Yet tariffs have been the rule. The only major exceptions are nearly a century of free trade in Great Britain after the repeal of the Corn Laws in 1846, thirty years of free trade in Japan after the Meiji Restoration, and free trade in Hong Kong under British rule. The United States had tariffs throughout the nineteenth century, and they were raised still higher in the twentieth century.

Something to remember as the usual TDS brigade runs around with their hair on fire preaching the end of the world.

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Three excellent, short articles (5m read) on Free Trade and aspects of it.

The Case for Free Trade, (Milton and Rose Friedman)
The Truths vs the Myths of Free Trade (Donald J. Boudreaux & Nita Ghei, Mercatus Center, George Mason University)
What Would a Pro-Free-Market ‘Industrial Policy’ Look Like? and The Manufactured ‘Decline’ of Manufacturing (Robert Trancinski)