Free Trade


An open letter to Trump economic advisor Peter Navarro here.

Clip:

This claim is untrue.  Nothing at all in economic theory says that it’s abnormal for a country to run trade deficits for over a decade, or even for over a century.  Nothing in economic theory implies that years, decades, or even centuries of unbroken annual trade deficits are evidence of ‘unfair’ trade practices by foreigners or of self-destructive economic policies at home.

If investment opportunities available in the United States this year are especially attractive relative to opportunities elsewhere, the U.S. will run a trade deficit this year as global investors use some of their dollars, not to buy American exports but, instead, to invest in America.  If next year the U.S. economy again offers especially attractive investment opportunities, America will run a trade deficit again next year.  Ditto for two years from now if the relative attractiveness of American investment opportunities continues for that year.  For an innovation-filled economy, such as that of the U.S., in a world in which the size of the capital stock can grow, there is no natural limit to the number of attractive investment opportunities that arise each year.  Nor is there a natural limit to the number of consecutive years that a country can, or will, continue to remain a disproportionately attractive destination for investment funds.

 

In this post, Alan Reynolds takes issue with Billionaire investor Wilbur Ross, a supporter of Donald Trump, for making the following comment:

“It’s Econ 101 that GDP equals the sum of domestic economic activity plus “net exports,” i.e., exports minus imports.  Therefore, when we run massive and chronic trade deficits, it weakens our economy.”

In reality, the last sentence –beginning with “Therefore”– does not follow from the first.

By that logic, we should expect to see the economy weaken when trade deficits get larger and strengthen when trade deficits shrink or become surpluses. The data show the exact opposite (see chart and text here).

The main reason trade deficits are inversely related economic growth, contrary to elementary accounting, is that U.S. industry needs more imported parts and raw materials when the economy expands, and consumers can afford more imported luxuries when their incomes and investments are rising. A secondary reason is that whenever the United States is growing faster than the economies of major trading partners (such as Japan, EU, Canada), their demand for U.S. exports is likely to lag our demand for their exports.

Thanks for clearing that up.

Here’s an example of how politicians screw up the economy.

The steel producing industry is part of the primary metal manufacturing which includes nonferrous metals, such as copper, aluminum, magnesium, lead, tin, silver, and gold. Value added for that entire industry totaled $59.7 billion and employed 400,000 people in 2014. The steel industry employs somewhere in the range of 100,000 – 150,000 people.

By contrast, downstream industries that use steel as an input generate value added of $990 billion and employed 6.5 million people in 2014. Think cars, home appliances, things you as a consumer buy.

By “protecting” the steel-producing industry the government is harming the much larger steel-consuming industries and its customers. A bad deal.

Here.

 

 

Last week’s convention was a wake for the GOP as we know it.

This week will be an explanation of why Hillary Clinton is

unacceptable not simply to libertarians but to that plurality of Americans who define themselves as independent, centrist, moderate, or anything other than a dyed-in-the-wool partisan.

On Federal Spending, Foreign Policy and State Surveillance, Free Speech, Social Issues, Immigration, Gun Rights, and Regulations, Trade, and the Sharing Economy, Hillary is just as much an authoritarian as The Donald.

Nick Gillespie.

Mary Anastasia O’Grady in the WSJ on Trump’s bashing of trade with Mexico:

Exhibit A is his promise to shred the North American Free Trade Agreement (Nafta) on the grounds that Mexico, his favorite bête noire, is stealing American jobs. It is technology, not free trade, that is behind the shrinking number of U.S. manufacturing jobs.

Beating Nafta like a piñata worked in the Republican primary. But it is likely to hurt Mr. Trump and GOP candidates further down the ticket in the general election. Mexico is, after all, the U.S.’s third-largest trading partner and second-largest export market.

. . .

Indiana, the home of GOP vice-presidential candidate Gov. Mike Pence, exported some $4.8 billion of goods to Mexico in 2015, making it the state’s second-largest export market.

. . .

Exports to Mexico were over $1 billion in 31 states in 2015. It’s the largest export market for California, Arizona, New Mexico and Texas. It ranks second for 25 other states.

. . .

Trade wars will also damage U.S. competitiveness. As former Mexican deputy trade minister Luis de la Calle explained in a conference call to investors in New York earlier this month, Carrier Corp.’s production move to Mexico from Indiana—much-assailed by Mr. Trump—means that the company can survive Asian competition and can retain U.S. jobs in research, development, marketing and high-end components.

. . .

Mr. Irwin cites a study by the Center for Business and Economic Research at Ball State University, which “found that productivity growth accounted for more than 85 percent of the job loss in manufacturing between 2000 and 2010, a period when employment in that sector fell by 5.6 million.” This 85% compares, according to the study, with 13% of job losses attributed to trade during the same period.

. . .

It is “high-education” and “low-education” jobs—requiring “interpersonal interaction, flexibility, adaptability and problem solving”—that are most difficult to automate Mr. Autor notes. Traditional middle-education jobs have been the easiest to replace with technology.

Whoops, the unintended consequences. This same problem goes for Hillary Clinton and any other critic of trade.

I wondered what “competitiveness” meant. The above quote contains an example.

Not a neat situation that lends itself to a government program.

Behind firewall here.

The Christian Science Monitor:

The canal will reduce the voyage time from the US Gulf Coast to 20 days, down from 34 days around Africa or 31 days through the Suez canal. The new route will also reduce travel time to Chile from 20 days to eight or nine days and to Colombia and Ecuador from 25 to five days, according to the Energy Information Administration. Transportation costs will also decrease through the canal with a new system that encourages LNG traffic.

There’s more to it. Also, given the ingenuity of free enterprise, there’ll be other uses that are unknown at this time.

Here.

This post explains how we have all grown richer from trade. It corrects some fallacies that are prevalent among people who do not understand that trade — with your grocer down the street or a car maker in Korea — is a positive-sum result. Both sides benefit; you gave someone money and in return you received groceries or a car.

Analyst Chelsea explains it better. Here.

My view is the main problem is the political class — politicians, bureaucrats — have distorted the give-and-take of the economy that it does not work correctly. In other words, they broke it.

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