Coyote Blog

The defenders of the Trump tariffs are starting to coalesce on a few different arguments, but what all these arguments seem to have in common is a core assumption that the current world trade system is "unfair." From Victor Davis Hanson via Powerline:

Our trading partners have taken advantage of us for decades after tariffs were no longer needed to help them rebuild their economies after WWII.

Or this:

I could write a book on this, and many people have, but what follows is my reaction to these tariffs and in particular to the notion that our trading partners are being "unfair."

Yes, many other countries have trade practices that are unfair -- unfair to their own citizens! I went to business school in the late 1980's and at the time it was all the rage a) to bash Japan for "cheating" the US and running a trade surplus and b) to wish to emulate Japan and their MITI-style economic management. I disagreed. I was fairly sure that MITI's control of capital flows was causing unseen distortions that would hurt the Japanese economy in the long-term (I had read my Hayek). At the same time, the Japanese were screwing their own consumers who had to pay far more than Americans for food and most manufactured goods, with far less choice and availability. It was not long after that Japan entered 20 years of stagnation as its trade subsidies and economic distortions just served to nuke their own economy.

Later, about 10-15 years ago, our Chinese exchange student and her friends came to the US for the first time. These kids, as it so happened, live only a few miles from one of the Apple assembly plants. They all brought huge empty suitcases to buy things in the US, including what seemed like a score of iPhones for their friends. The iPhones were far cheaper here in the US than in China where they are made and where many of the other things they bought were not available in China at all. So who is China's trade policy being unfair to? Me, or their own citizens?

I love foreign-subsidized trade. Nothing confuses me more than when people complain about foreign subsidies of exports to the US. Why? If the taxpayers and consumers of Germany wish to subsidize cheaper products in the US market, we should absolutely let them. I mean, I would be pissed off if I were a German citizen, paying higher prices and taxes so a few wealthy manufacturers can meet their quarterly profit goals, but why a US consumer should be unhappy is beyond me. (**see Panda Blog column in the postscript). And remember, we are not just talking about cars and vacuum cleaners, but raw materials and intermediate products bought by US manufacturers and support our domestic manufacturing.

Just as I was about to hit publish on this article, I saw this from Commerce Secretary Howard Lutnick defending tariffs:

He further urged, “these people have all been living in our house. They have been driving our car. They come by and visit, open our fridge and eat our food whenever they want.”

“They have taken advantage of us,” he emphasised [sic].

I am sure he will have all the hard-core MAGA types nodding sagely but what the hell does this really mean? In part this is the kind of confusion that results from aggregating what are in fact discrete transactions. Everything Americans buy we pay the asking price for, and everything the Chinese buy they pay our asking price for. How is someone getting cheated? How is there any fraud? Lutnick if pressed would obviously argue that fraud comes from the prices we are paying to the Chinese being artificially low. If that is the case, who is eating out of whose fridge? If I pay $20 less for shoes and $200 less for a phone and that difference is being subsidized by the Chinese people/government, then it is I that is getting over on them. Thanks for the free lunch, China. (update: Even Dave Chappelle agrees)

Hate me if you wish, but compared to consumers, manufacturers are a special interest. 13 million people or so are employed in US manufacturing firms, out of a total workforce of about 160 million, or something like 8%. And by no means are these all in jobs vulnerable to foreign competition -- in fact I would bet at least as many work for companies that are dependent on foreign raw materials for success as there are those working for companies that live at knife-edge vulnerability to competition.

Let me give you an example of a domestic industry entirely vulnerable to foreign competition that tariffs entirely support: Sugar. The US sugar industry would likely disappear if not for tariff's and import restrictions that raise the US sugar price to more than double the world price. We simply do not have the climate or land costs or labor costs to support competitive growing and manufacture of sugar in this country. As a result of tariffs, 300+ million Americans pay more than double for sugar, and perhaps worse, because of the high cost of sugar, food manufacturers in this country have largely abandoned sugar in favor of alternatives like HFCS that are far less healthy. And in exchange for this cost? We are protecting about 12,000 direct jobs. For nearly every tariff in every industry, you will find -- at its heart -- this sort of special interest math.

The history of sacrificing the mass of consumers to the profitability of a few elite producers goes all the way back to the horrible British corn laws. Economists refer to the problem as "concentrated benefits, dispersed costs." Costs are dispersed such that no one person bearing them really has the financial incentive to take on the costs of fighting them, while benefits are concentrated in a few hands that have the incentive and the means to fight to the death to protect their special privilege.

By the way, who is going to work in all these new on-shored manufacturing plants? Due to falling birth rates, the US labor force has been growing only very slowly:

This actually understates the problem, because there is a huge shortage of labor with the right skills for manufacturing. With the US near full employment (though with a relatively low workforce participation), its not clear how we will staff these theoretical new factories. Manufacturers are already screaming they can't get the people they need in the US:

“BlueForge Alliance calls me and they say, we need to hire some tradespeople, and we were wondering if you and your foundation could help.” “I said, I’ll try, as you probably learned, it’s pretty skinny out there … how many do you need?” “They said 100,000.” “100,000 tradespeople for one industry that most people don’t even think about.” “They said, we’ve looked everywhere … do you know where they are?” “I said, yeah I do, they’re in the eighth grade.” “That’s 100,000 building submarines. There’s 80,000 in the automotive industry alone for technicians. Right now … 80,000 openings.” “You start to go down the list and you begin to realize our workforce is wildly out of balance.”

Historically we have had two answers for this problem: 1) more immigration and 2) taking advantage of foreign labor through imports. This administration is trying to cut off both. (Long term there is an education opportunity, that will be addressed below).

If this foreign interventionist trade strategy is superior, why is the US doing so much better? The economies of most major trading nations are all on their back -- except the US. The US is doing very well and still is richer than most any other large nation. Countries like Germany and France that are supposedly so smart to be "cheating" in trade are clearly not doing a very good job of it, because every nation in the EU would be poorer on a GDP per capital basis than the poorest US state (Mississippi). Great Britain through most of the 20th century ran their economy into the ground through protectionism, leaving their industry bloated and inefficient. The US did the exact same thing in its auto and steel industries until tariffs were lifted in the 1970s. We have a smaller auto industry than we did then, but it is healthier and makes FAR better products.

The US is wealthier across the whole of the income spectrum than, say, countries in the EU. Our rich are richer than their rich and our middle class is richer than their middle class and our poor are better of than their poor, even considering the net of taxes and transfers. I have not updated this analysis for over a decade but I am pretty sure it is still directionally accurate.

In fact, there is a fairly direct correlation between low tariffs and citizen well-being:

I don't know where the average South Korean's or Thai's head is at on all of this, but I can say with some confidence that the average Western European citizen would be shocked at the notion that a) their country is somehow beating up on the United States and b) that they personally are getting rich at the expense of American citizens.

It should be noted that even when all else is equal, the fact that US citizens are substantially wealthier than their peers in other nations, it is almost mathematically guaranteed that we will buy more (ie import) than we sell in return in exports.

The Shifting of Jobs Out of Manufacturing Is A Normal Part of Economic Growth. Certainly a smaller percentage of Americans work in factories today than they did 30 or 40 years ago (ignore the Trump stat about 90,000 factories disappearing, though, it is totally fake). You know what other industry has lost jobs through US history? Agriculture. Today about 2% of the population works in farming vs well over 80% in the year 1800. I am pretty sure few today are pining away for a return to the life in a small farm -- I guarantee farmers and ranchers work way harder than most folks want to work today.

As the economy gets wealthier and technology advances, the nature of work keeps shifting. We are upgrading lower-skill, lower-productivity jobs for higher productivity jobs, just as we have since the start of the industrial and agricultural revolutions. We still need the things made in those lower skill, lower productivity jobs, so they shift to other countries (which in turn helps them get wealthier too). No one is demanding we shift workers back from manufacturing to agriculture, and no one should be arguing that we shift folks working on AI back to manufacturing.

Of course this process can have costs for individuals and communities. But we almost never wish to turn back the clock on past such transitions while still greatly wishing to block the current one.

These tariffs are not strategic. I have seen the most enthusiastic of Trump supporters try to argue that this is really about returning certain manufacturing to the US for strategic reasons. But this can't possibly be correct, or if it is, then its a really odd approach since these tariffs apply to every single country and every single product.

This may yet be another Trump negotiating ploy, but its a really expensive and high risk one. Trump supporters who have more than half a brain like Victor Davis Hanson are arguing this is just Trump putting a negotiating token out there. Perhaps. That is certainly Trump's style, to make an irrational demand and soften it only when he gets something back. Secretary Lutnick explicitly says this is the plan, and I will believe him. This is obviously expensive and high-risk, and to some extent still doesn't make a lot of sense since Trump slapped high tariffs on countries like Switzerland that have close to zero tariffs themselves and are largely productive partners.

It may well turn out that much of this ends up being performative. I need to remind everyone of Trump's much ballyhooed deal to get Foxconn to commit to a $10 billion plant in Wisconsin. I don't know if Foxconn ever intended to follow through, but in the end they never made most of this investment and the whole effort turned out to be performative. One interesting aspect of this article is that Foxconn backing out was not the only problem, there was a lot of local opposition as well for a variety of environmental, land use, and public policy reasons. It illustrates that the manufacturing labor shortage discussed above may not be the only reason manufacturing is shrinking in the US.

Trump supporters need to admit there is some vanity here. Trump likes to have people come to him hat in hand as a supplicant -- to kiss the ring, to thank him, to apologize, whatever. He blasted Zelenskyy for not doing just this on his White House visit (though I will confess I find Zelenskyy to be immature, irritating, and possibly corrupt). Trump supporters will say that what he really wants is for countries to show respect for America, and I suppose this is part of it, but I am convinced ego is a part of it as well.

There is more risk here than just price increases. Consumers are going to lose choices and many of those choices are going to be the low-cost options. Already Mercedes has hinted it may stop selling its entry level cars in the US. And yes, I know it is hard to cry for the Mercedes buyer, but the same math that causes the tariffs to hit hardest at their entry-level products (as they tend to have the lowest margins and the highest customer price sensitivity) is going to apply to about every other consumer product.

Ironically, one huge risk is to manufacturing investment. Trump's goal seems mainly to get more manufacturing investment in the US, but as long as the tariffs keep changing week to week -- and they will continue to if Trump is really using them as a bargaining chip -- no manufacturer in their right mind is going to make a major new investment. They are going to sit on their hands and wait. Many historians and economists of late have been coalescing around a theory that regime uncertainty in the 1930s -- ie the constant changing of regulatory rules and frameworks -- did much to cause the Great Depression to drag out longer.

And then there is the risk of cronyism. A system of high tariffs gives a huge new playing field for politicians to trade favors with favored companies, giving them special exemptions or hitting their competitors with extra costs. If you look at European politics around tariffs, it is a relatively ugly picture of favoritism to a few select elite. I guarantee you the special favors for Nike and Apple are already being discussed in the back rooms. Just look at the Foxconn deal discussed above, where Trump and WI governor Walker bought a trade-related election talking point for $4.5 billion in subsidies.

Update: And of course there is the threat to the rule of law. I left this out on the first draft because, frankly, I don't think the faithful of either party gives a sh*t about the rule of law if it is their agenda hat is being rammed through. Certainly Democrats didn't have any problem with Biden's lawless attempts to forgive a trillion dollars in student loans and I don't think Trump's supporters care about the legality of this tariff actions. The power to set tariff's is enshrined in the Constitution (that document Republicans used to care about) as a power of Congress. Weak-kneed and lazy Congresses have delegated some of this power to President's, but only very narrowly. The picture is complicated and illegal actions by the President can be hard to review in court. But looking at the 4-6 major delegations to the President of tariff authority, it is difficult to see that any of them apply simultaneously to every country on Earth and every single product manufactured anywhere. Certainly there is no precedent for them being enacted by the President on anything but a far far narrower basis (eg steel from China).

I also left out the issue of honorable dealings, which again I don't think political partisans of any flavor give a crap about. But Trump is violating any number of agreements, including not just lame President-only agreements like much of the climate stuff but real treaties that were legally passed by the Senate. He is also explicitly repudiating deals he personally made with Mexico, Canada, and the EU, among others. I suppose it is fine for him to behave this way in his personal negotiations for his personal businesses -- it is only his honor involved. But there is a real cost involved to the honor and reputation of the nation which makes it harder in the future for such agreements to be made.

So let me end by offering a few alternatives to tariffs to achieve some of Trump's stated goals.

Alternative 1: If you really want to reduce trade deficits, cut the government budget deficit. As I said above, the US is likely always going to run trade deficits as long as it is wealthier than the rest of the world. But probably the #1 thing that has caused these deficits to be higher than they would otherwise be is the huge Federal debt. Every year now we are issuing trillions of dollars of new US Federal debt. This pushes the interest rate for these bonds higher than the #1 risk-free world investment might otherwise be. This in turn attracts foreign capital, which buys dollars in order to buy of these bonds, which in turn increases the value of the dollar. This artificial inflation of the value of the dollar certainly helps consumers, by reducing the cost of imported goods, but hurts exporters by increasing the cost of their goods in local currencies of buying nations. The net effect is that government borrowing increases the trade deficit. Close the budget hole, and the trade deficit will come down over time.

Alternative 2: If you really want to increase US manufacturing, you need to increase the number of workers with trade skills. We talked above that US manufacturing is already limited by the lack of workers in skilled trades. In part this is due to government programs that pay people just enough that they play Call of Duty all day and still eat. But it is also due to the great fuck-up of our educational system. Public education has become complete crap. But even worse for manufacturing is the fact that we have for thirty years promoted a value system where it is high status to go to college and get a degree in the Lesbian poetry of Peru while it is low status to get a trade and go to work in manufacturing. The economic signals are pretty good -- the Lesbian poetry grad is probably unemployable while my friend with no college degree but welding skills makes 6 figures at SpaceX. But for some reason we have an entire hierarchy in education that says its wrong to encourage kids into trade schools -- they need to go to college. Starting to fix this is beyond the scope of this post but far more essential to US manufacturing than tariffs are.

**Postscript: I will conclude by recognizing that none of the above is recently adopted out of TDS, which I don't have. I would love certain parts of Trump's agenda to be succesful. But I have been making these same points for 20 years. Below is a post I wrote for my imaginary Chinese affiliate "Panda Blog" from an imagined Chinese citizen in 2006:

Our Chinese government continues to pursue a policy of export promotion, patting itself on the back for its trade surplus in manufactured goods with the United States.  The Chinese government does so through a number of avenues, including:

• Limiting yuan convertibility, and keeping the yuan's value artificially low
• Imposing strict capital controls that limit dollar reinvestment to low-yield securities like US government T-bills
• Selling exports below cost and well below domestic prices (what the Americans call "dumping") and subsidizing products for export

It is important to note that each and every one of these government interventions subsidizes US citizens and consumers at the expense of Chinese citizens and consumers.  A low yuan makes Chinese products cheap for Americans but makes imports relatively dear for Chinese.  So-called "dumping" represents an even clearer direct subsidy of American consumers over their Chinese counterparts.  And limiting foreign exchange re-investments to low-yield government bonds has acted as a direct subsidy of American taxpayers and the American government, saddling China with extraordinarily low yields on our nearly $1 trillion in foreign exchange.   Every single step China takes to promote exports is in effect a subsidy of American consumers by Chinese citizens.

This policy of raping the domestic market in pursuit of exports and trade surpluses was one that Japan followed in the seventies and eighties.  It sacrificed its own consumers, protecting local producers in the domestic market while subsidizing exports.  Japanese consumers had to live with some of the highest prices in the world, so that Americans could get some of the lowest prices on those same goods.  Japanese customers endured limited product choices and a horrendously outdated retail sector that were all protected by government regulation, all in the name of creating trade surpluses.  And surpluses they did create.  Japan achieved massive trade surpluses with the US, and built the largest accumulation of foreign exchange (mostly dollars) in the world.  And what did this get them?  Fifteen years of recession, from which the country is only now emerging, while the US economy happily continued to grow and create wealth in astonishing proportions, seemingly unaware that is was supposed to have been "defeated" by Japan.

We at Panda Blog believe it is insane for our Chinese government to continue to chase the chimera of ever-growing foreign exchange and trade surpluses.  These achieved nothing lasting for Japan and they will achieve nothing for China.  In fact, the only thing that amazes us more than China's subsidize-Americans strategy is that the Americans seem to complain about it so much.  They complain about their trade deficits, which are nothing more than a reflection of their incredible wealth.  They complain about the yuan exchange rate, which is set today to give discounts to Americans and price premiums to Chinese.  They complain about China buying their government bonds, which does nothing more than reduce the costs of their Congress's insane deficit spending.  They even complain about dumping, which is nothing more than a direct subsidy by China of lower prices for American consumers.

And, incredibly, the Americans complain that it is they that run a security risk with their current trade deficit with China!  This claim is so crazy, we at Panda Blog have come to the conclusion that it must be the result of a misdirection campaign by CIA-controlled American media.  After all, the fact that China exports more to the US than the US does to China means that by definition, more of China's economic production is dependent on the well-being of the American economy than vice-versa.  And, with nearly a trillion dollars in foreign exchange invested heavily in US government bonds, it is China that has the most riding on the continued stability of the American government, rather than the reverse.  American commentators invent scenarios where the Chinese could hurt the American economy, which we could, but only at the cost of hurting ourselves worse.  Mutual Assured Destruction is alive and well, but today it is not just a feature of nuclear strategy but a fact of the global economy.

1. Is this the most destructive Federal economic action in my 63-year lifetime? I am trying to think about the competition for this title. Certainly Nixon's wage and price controls would be up there in the top 5. The banking regulations that treated mortgages as preferred risk-free bank capital might be on the list. Perhaps we would include something like Biden's attempt to forgive a trillion dollars in student loans. There was some COVID craziness, including lockdowns and eviction moratoriums. But even looking at this collective Mt Rushmore of economic fail, I still think Trump's tariffs are at or near the top. This is as dumb as even the worst ideas of folks like AOC who the Republicans mock.
2. How is this possibly Constitutional? Article 1 Section 8 gives Congress sole "Power To lay and collect Taxes, Duties, Imposts and Excises" and "All Bills for raising Revenue shall originate in the House of Representatives." I understand the spineless Congresses have delegated all sorts of powers to the Executive Branch, but good God there has to be some sort of limit. Where is that nationwide injunction when you need it? This is as a good a case as any for the courts to test both Executive taxation power, limits to delegation of authority, and the general use of emergency powers.

The tariffs also bring to mind several ironies:

1. Trump called it "liberation day" but the actual day we celebrate liberation is the day the Declaration of Independence was signed. That document explains the King's injustices, including: "[the King] has combined with others to subject us to a jurisdiction foreign to our constitution, and unacknowledged by our laws; giving his Assent to their Acts of pretended Legislation:...For cutting off our Trade with all parts of the world [and] For imposing Taxes on us without our Consent" Can't find any exceptions for emergencies in this document or in the Constitution.**
2. Republicans have spent 5 years (rightly) complaining about the exercise of emergency powers when the person who gets the power also gets to declare an emergency. And now they have topped anything Biden ever did with COVID emergency powers
3. In economics, independence is the road to poverty. The most economically independent people in the world are the isolated primitive tribes in the Amazon. This stuff is not hard, we have understood it since David Ricardo was writing over 200 years ago. We literally understood how trade created value before we had invented the telegraph or the railroad or knew that germs caused diseases. We understood it before Iodine was discovered. My post on aluminum tariffs helped show the value of trade.
4. This almost goes without saying, but after campaigning on inflation, Trump is directly adding to inflation. Back of the envelope, given that imports are about 16% of GDP, then a 25% average tariff on imports adds something like 4% to prices. Immediately inflation rates for this year go from 3% to 7%, and I am fairly certain this simplistic approach underestimates the problem. A family member works in the finance department of a well-known low-margin retailer and said that they were absolutely going to have to pass through tariffs and spent today working on the numbers. Sure, Trump is going to identify a few high-profile companies to name and shame for raising prices to pretend that companies should not be passing through these costs, but this is -- ironically again -- exactly as ignorant as Elizabeth Warren blaming grocer greed for food price increases, something that Republicans mocked by the way.***

I only have the time, and frankly the stomach, to put down these few quick thoughts on this one. More later.

Update: From Pat Toomey vis Powerline, this is as good of an explanation as I have seen for the theory in Trump's head that is driving tariff actions. This explains pretty well the calculathttps://www.powerlineblog.com/archives/2025/04/toomey-on-trumps-tariffs.phpion of the tariffs, which appear to be more correlated with individual trade deficits than current reciprocal tariffs

This, I’m afraid, is going to take us down a bad path, Dominic. I think that we’re going to experience more aggressive tariffs than a lot of people think, because the president really believes that — what he really wants to go after is the trade deficits. What he really objects to, and from all of my arguments with him, I’m convinced that he believes — and if you listen to his language — he believes that if you have a trade deficit with another country, that is the measure of the amount that country steals from you. And that of course disregards that we get something when we purchase products from other countries, but this is the way he views it. He thinks that the Canadians are ripping us off, because we buy some more goods from them than they buy from us (by the way, the difference is fully explained by oil imports that are quite useful and important to us). But this is where we are. We’re going to have relearn this lesson. I do think the markets are going to respond very poorly, if I’m right and on April 2 we discover we’re having a more aggressive round of tariffs than we expect.

We are really in trouble. This is really next-level ignorance.

** Postscript: Tariffs rather than immigration is the topic of the day, but I was reminded in perusing the Declaration of Independence for this post that it also says this: "He has endeavoured to prevent the population of these States; for that purpose obstructing the Laws for Naturalization of Foreigners; refusing to pass others to encourage their migrations hither"

***Postscript #2: The reason this likely underestimates inflation is because it does not take into account domestic producers raising their prices to partially match the price increases of their foreign competitors

Trump has proposed -- and depending on the time of day -- is actively planning to put large tariffs on aluminum imports (25% in the last version I saw). The implication is that there is some unfairness that has other countries producing a product we should be making domestically. Typically the argument is that the other governments are somehow subsidizing the product unfairly. Personally, I have never understood this argument -- as a US consumer I am perfectly happy to have taxpayers of another country subsidize my purchases. It turns out aluminum is a great example to look at because it is very clear why it is produced where it is.

First, let's look at where aluminum is produced, via wikipedia (perhaps taking Chinese reported production statistics with a grain of salt).

Some of this makes sense, but UAE? Bahrain?? Wtf? Let's explain:

Aluminum is produced pretty much the same way today as it was when the mass production process was first invented in the late 19th century -- using a LOT of electricity. Essentially, aluminum oxide from the raw bauxite ore is separated into pure aluminum and oxygen through an electrolysis process. I am not an expert, but estimates I have seen place electricity costs at 30-40% of the entire cost of aluminum. It takes something like 17,000 kWh of electricity to make one ton of aluminum. At some level you can think of a block of aluminum as a block of solid electricity**.

If you look at the top aluminum producers above, there is only a partial correlation with the top bauxite ore producers. That is because aluminum is generally not produced next to the bauxite mine but wherever the cheapest possible electricity can be found. The US historically produced a lot of aluminum, much of it in two places -- the Pacific Northwest and around Tennessee. You know why? Because these are the two largest areas of hydropower production, generally the cheapest source of electricity (its also why these were the two areas favored for early uranium separation). As US electricity costs have risen (and as we have actually reduced our total hydro power production under environmental pressure), aluminum production has moved to other countries.

Every one of the top six producers, excepting Canada, have electricity prices less than half those in the US. That is why Bahrain and UAE are on the list -- the are effectively converting their excess natural gas that might be wasted or flared to aluminum via electricity. Canada's electricity prices are also well under the US's though not as low as half, but Canada has a lot of very cheap hydropower in their eastern provinces and that keeps their aluminum industry viable.

It would be great to import 5-cent per kWh electricity from Bahrain, but there is no viable technological way to do that. So we do it the next best way -- we import cheap aluminum. This is a great example of why tariffs are absolute madness. Why would we possibly NOT want to take advantage of such fundamentally lower production costs in other countries for such a critical raw material?

The only possible political argument for doing so is that the government might wish to rebuild the US aluminum industry. But there is absolutely no way that is going to happen, for at least two reasons:

• Given the amount of electricity in the production costs of aluminum, to bring production to the US where electricity costs are more than 2x those of other producing countries would be to accept at least a 50% cost disadvantage, which is not going to be undone by a 25% tariff.
• But the more important point is this: No one in their right mind is going to invest based on the promise of tariffs that Trump himself changes almost daily and that will likely be politically undone long before any new plant is paid for, or even built. A new aluminum plant costs in the billions of dollars and it would be crazy to invest based on fleeting political promises. [OK, I freely admit that there do seem to be investors willing to make huge investments on the basis of what were likely fleeting political promises of government support -- solar, wind, EV's all come to mind. But "enticing investors to destroy capital" is not a very compelling reason to support subsidies and tariffs.]

If President Trump wants to rebuild the American aluminum industry, the best way would be to take actions that would free up regulations and mandates so that we could reduce the cost of electricity.

** Postscript: This is why aluminum is one of the very few items that it makes economic sense to recycle with current technology. Aluminum made from recycled scrap takes something like 1/20th the electricity of aluminum from the raw ore.

This was originally posted on 2-1-25 but was lost in a  server update. 

Trump's first few weeks have been a mix of good and bad for this libertarian, all against a backdrop of horror at how Imperial the presidency has become.  But as of today, perhaps the most destructive and stupid initiative has begun:

Because we are all tired of those fentanyl-toting Canadians crossing the border illegally.   I mean, we all saw the Proposal and know how all those Canadians are trying to cheat US immigration law.

Seriously, this is beyond awful -- and not just because of the threat of retaliation, though that is real.  Even if all the affected countries roll over and accept these modified tariffs without response, this is still a terrible step for the US.  No matter how Trump and his very very small group of protectionist economist friends sell this, this is a tax on 300 million US consumers to benefit a small group of producers.   I don't have time right now to give an updated lesson on free trade -- that will have to wait for when I am not on vacation.  But I will offer a few ironies:

• After campaigning hard on inflation, Trump is slapping a 10-25% consumption tax on foreign goods.  That is a straight up consumer price increase for a variety of key products including much of the lumber we use to build homes, a lot of our oil and gas, a lot of our grain and beef, and many of our cars and appliances.
• Much of this inflation is going to disproportionately hurt Trump's base.  No one is going to care much if a Hollywood actor has the fair trade coffee they buy at Whole Foods go up in price, but Trump voters are going to see a direct effect of this on prices at Wal-Mart.
• Republicans have spent 4 years (rightly) condemning Federal and State governments for the economic disruptions of COVID lockdowns and restrictions.  While some of the inflation of the last 4 years was due to ridiculously high government deficits, another major cause was the COVID supply chain disruptions.  And now Trump is voluntarily recreating them.

The only small hope I have is that Trump is steeped from his business career in a certain style of brinksmanship bargaining that consists of taking an entirely destructive and irrational position in hopes that they folks on the other side of the table will back down and give him more than he should.  My son won poker tournaments like this because he would do so much crazy stuff that no one at the table wanted to challenge him.  I have always said that I don't think Trump is a particularly good business person -- he has run business after business that has failed.  But he is a good negotiator, and has exited numerous bankruptcies with his creditors giving him far more than one would think was necessary.

So I am sure his supporters would say that this is no different from the Columbia situation, when the Columbian president backed down quickly on not accepting repatriation of Columbian nationals under a storm of Trump threats.  Perhaps.  But even if this stuff is reversed, it is incredibly destructive because it is almost impossible for businesses to plan and make long-term investments when something so fundamental as tariff rates is changing so quickly and arbitrarily.

But there is yet another harm.  I know some folks are exhausted with the idea of American exceptionalism, in part because it has been a 75-year excuse to send our military bumbling around the world intervening in every conflict large and small, frequently overthrowing states only to have the replacement be even worse.

But there is one part of American exceptionalism that is important -- our example and our persuasion is a key support beam in upholding two great benefits for humanity -- free speech and free trade.  Every government official anywhere is a potential tyrant (if you think that is extreme, I would argue that this exact fear was one of the fundamental founding ideas behind our Constitution).  And tyrants want to have their opponents shut up and they want to shift economic activity to reward their supporters.  They love censorship and protectionism.

As such, in every country of the world, there is a tremendous headwind against free speech and free trade.  There is some natural gravity affecting government behavior that if there is not a constant, visible pressure to maintain free speech and free trade, they begin to be undermined.  And at least since 1945, the US has been the primary source of that pressure (one might add the UK to this, at least once upon a time, but looking at them now that is pretty much over).

Over the last 10 years, it has been incredibly depressing to see the US start to lose its commitment to free speech, particularly on the Left which has here-to-fore been the natural home of its defenders.  Trump and his supporters say things that seem like a positive step in returning to free speech, but I am a cynical man and I fear that we may only see censorship shifted to different topics rather than actually eliminated.  Time will tell, and I will have more on that later.

But in the case of trade, it is the Right in the US that has been the natural defender of free trade.  To see the Right not only abandon the defense of free trade, but actually start ramming torpedoes into its sinking carcass, is perhaps the most depressing part of Trump's order.

From an interview the other day

Q I can read you the tweet, Mr. President. You said that, “Badly run and weak companies are smartly blaming these small tariffs instead of themselves…”

THE PRESIDENT: Yeah. A lot of badly run companies are trying to blame tariffs. In other words, if they’re running badly and they’re having a bad quarter, or if they’re just unlucky in some way, they’re likely to blame the tariffs. It’s not the tariffs. It’s called “bad management.”

The first answer to this is, LOL.  This is the man with a string of failed businesses (steaks, college) and multiple bankruptcies in his core business.  In fact, I would list one of Trump's most useful business skills is his ability to get other players in the capital structure to take the losses for his bad business decisions and management.

But as far as trade is concerned, if one is worried about bad management in US businesses, then the right thing is certainly not to protect those businesses from competition.  The US auto business in the 60's and 70's as well as almost the entirety of the British industrial base in the 20th century are good examples of the problem.  Protecting businesses from international competition, as is Trump's objective, only shelters those businesses from accountability and reduces the pressure to fix whatever bad management may exist.

As a special bonus, I would argue that many of the bad habits of large US companies today are directly attributable to the stimulative Federal Reserve policy which Trump wants to increase.  Returning profits to shareholders in the form of share buybacks rather than dividends is a perfectly valid strategy, particularly when the tax code favors capital gains over dividends.  But when companies borrow billions just to buy back more of their own stock, rather than reinvest it in new opportunities, something is broken.  A large part of the blame are twin Federal Reserve policies of low interest rates and a QE-created equity and asset price bubble.

The very first tariff President Trump imposed in 2008 was a 10% tariff on aluminum imports.  Because those desperate aluminum makers in the US needed protection from foreign competition.  Or someone did.

It turns out that earlier in the decade Goldman Sachs is accused of leading a price fixing ring that attempted to corner the market for domestic aluminum and aluminum warehousing

Purchasers accused banks and commodity trading, mining and metals warehousing companies of conspiring to hoard aluminum inventory earlier this decade, after prices had declined because industrial activity fell during the global financial crisis.

The purchasers said the alleged conspiracy led to delays in processing orders and higher storage costs, ultimately inflating the cost to produce cabinets, flashlights, soft drink cans, strollers and other goods containing aluminum.

One way to avoid this sort of thing is to allow robust import markets where consumers can seek alternatives when those of domestic suppliers are unreasonable, for whatever reason.  I would trust a free trade regime to far more than the FTC or the US courts to sort this sort of thing out in a timely manner.

Folks know I completely disagree with the whole premise of Trump's trade actions with China.  Tariffs on foreign goods hurt this country and its consumers even if the other country does not reciprocate with lower tariffs.

But let's put this all aside and think strategy.  A trade war is about creating enough pain for the other side's leadership that they agree to give in to your demands.  So the game is about American leadership outlasting Chinese leadership in dealing with unhappiness of its citizens due to the trade restrictions.  Put in this light, doesn't it seem like the strategy is doomed?  When would you ever expect the leadership of a democracy to be able to outlast an authoritarian government in terms of living with unhappiness from its citizens?

Conservatives rightly criticised the Obama Administration for rewriting rules so frequently and seemingly arbitrarily that businesses were reluctant to make long term investments.  As the WSJ editorialized in 2016:

Pfizer CEO Ian Read defends the company’s planned merger in an op-ed nearby, and his larger point about capricious political power helps explain the economic malaise of the last seven years. “If the rules can be changed arbitrarily and applied retroactively, how can any U.S. company engage in the long-term investment planning necessary to compete,” Mr. Read writes. “The new ‘rules’ show that there are no set rules. Political dogma is the only rule.”

He’s right, as every CEO we know will admit privately. This politicization has spread across most of the economy during the Obama years, as regulators rewrite longstanding interpretations of longstanding laws in order to achieve the policy goals they can’t or won’t negotiate with Congress. Telecoms, consumer finance, for-profit education, carbon energy, auto lending, auto-fuel economy, truck emissions, home mortgages, health care and so much more.

Capital investment in this recovery has been disappointingly low, and one major reason is political intrusion into every corner of business decision-making. To adapt Mr. Read, the only rule is that the rules are whatever the Obama Administration wants them to be. The results have been slow growth, small wage gains, and a growing sense that there is no legal restraint on the political class.

I am willing to believe this is true. On my own smaller scale, our company has disinvested in California because we simply cannot keep up with the changing rules there.

But all this forces me to ask, why doesn't this same Conservative criticism apply to Trump's trade policy?  The rules are changing literally by the day -- Consumers of goods from Mexico are going to be hit by new tariffs, Mexican goods are not going to be hit by new tariffs, China is hit by new tariffs, a China deal is near, a China deal is not near, Company A got a special tariff exemption, Company B did not get a special exemption, etc. How can any company with a global supply chain, which is most any US manufacturer nowadays, plan for new products or investments in this environment when they have no ability to make long-term plans for their supply chain?

As most libertarians feared, all those Republican concerns about Executive power under President Obama seem to have magically disappeared now that the President has an "R" after his name.  President Trump is set to put on his magic Thanos glove and snap his fingers and impose 5% Tariffs on Mexico.  The ostensible reason is to force Mexico to reduce immigration to the US, though I think it is becomming pretty clear that Trump actually thinks tariffs benefit Americans and he wants any excuse to impose them on our major trading partners (how about a 5% tariff on Canada if the Raptors win the NBA Finals?).  And all those Republicans in Congress who just 2 years ago nominally 1) were pro free trade; 2) were against raising taxes on Americans; and 3) were against expansions of executive power -- they are just going along meekly.

Scott R. Anderson and Kathleen Claussen attempt to explain what possible legal authority he might have to do so, and it turns out the decision rests on Trump's earlier declaration of a national emergency at the border.

By the way, I know a lot of readers really piled on me every time I tried to compare the border wall to the Berlin Wall.  Didn't I understand that it is totally different to keep people out than to keep them in.  I never thought that made much sense -- the wall blocks free movement of people and I am not sure its morality turns 100% on which side of the border built it.  Perhaps my point is now clearer.  What if Trump convinces Mexico to build the border wall, or at least use more aggresive policing to keep people in Mexico.  Isn't THAT now just the same as the Berlin Wall?

I have not really written on Brexit here, for a couple of reasons.  First, I am not at all informed about the issues, so it is hard to pontificate intelligently.  Second, I am torn because, were I British, I likely would have supported Brexit but for completely different reasons than many others.

My understanding is that many folks (in a parallel with Trump voters in the US) voted for Brexit out of fear of global free trade and immigration, both of which I support.  I, on the other hand, would have voted for Brexit to shed the absurd, overreaching EU regulatory state.  So I likely would have supported it, but don't want to be counted among modern anti-global nationalists.

But if you want to see the type of BS that would have driven me into the arms of the Brexit camp, this is it.

he European Parliament’s approval of the Copyright Directive today is the end of the internet as we know it. This new regulation creates substantial new controls on what we can share online which threaten freedom of expression, undermine creativity, and cement the dominance of technology giants.

The Copyright Directive will create two internets. The first, a heavily censored version for European users, including filters to prevent you from uploading content. The second, a free internet where creativity is encouraged, for everyone else.

The directive represents everything that’s wrong with the EU’s policymaking process. It was written at a substantial distance from Europeans, heavily influenced by lobbyists and national compromises. There is a serious lack of accountability.

By the way, I would have had completely the opposite instincts than President Obama during Brexit.  The day Brexit passed, as President I would have immediately announced to Britain that if they were leaving the EU's common market, they were welcome to join one with the US and would have sent a trade envoy over that day.  Instead, President Obama did nothing but threaten and scold Britain for trying to get out from under the EU's regulatory umbrella.

John Hinderaker of Powerline writes approvingly of Trump's apparent trade deal with Mexico.  First, he quotes the New York Times celebrating the higher taxes:

Under the changes agreed to by Mexico and the United States, car companies would be required to manufacture at least 75 percent of an automobile’s value in North America under the new rules, up from 62.5 percent, to qualify for Nafta’s zero tariffs. They will also be required to use more local steel, aluminum and auto parts, and have 40 to 45 percent of the car made by workers earning at least $16 an hour, a boon to both the United States and Canada and a win for labor unions, which have been among Nafta’s biggest critics.

I am not sure how narrowing the scope of products subject to lower taxes is a "boon" to this country, though I suppose labor unions might be happy and one is suspicious that this is sufficient reason for the NYT to support it.  My suspicion is that these numbers are incredibly carefully tailored by Ford and GM lobbyists to hit a couple of their competitors while missing themselves -- this has all the fingerprints of a classic crony deal that benefits very few powerful groups to the detriment of most consumers.

So the NYT can be expected to cheer for bad crony economics that helps a few unions, but what about Conservatives, who are supposed to understand markets and trade.  Hinderaker writes:

So, from 62.5% to 75% to qualify for zero tariffs. Not exactly radical, but positive.

So broadening a US government tax on US consumers is "positive."  Powerline in the past has rightfully chided Paul Krugman for abandoning his understanding of economics in favor of cheerleading the Democratic team.  Now Powerline is doing the same for Trump.

Trump supporters are saying "I told you so" as Trump and European officials reached an agreement to dial back tariffs and pursue some efforts at free-er trade.  Trump supporters have argued, and I was skeptical, that Trump really wanted free trade but was engaging in brinkmanship as part of the opening phases of negotiation.  First, let's see exactly what this agreement included:

– They will work towards “zero tariffs, zero non-tariff barriers, and zero subsidies” on non-auto industrial products. That’s not a huge category of goods, as it excludes agriculture and raw materials, among other things, and zero non-tariff barriers and subsidies seems really unlikely. But still, it would be great if we made progress here.

– The EU will buy more U.S. soybeans and liquid natural gas. This was probably going to happen anyway because of market shifts and other factors.

– They will have a dialogue about conflicting regulatory standards in the U.S. and EU. This is a long-time goal of U.S. and EU trade policy-makers. It sounds easier than it really is.

– They will work together on reform of the WTO, and to address problems to the trading system caused by China.

In addition, the agreement effectively included:

• Current Trump tariffs on steel and metals, and the European retaliation, will remain in place
• Trump will not currently put in place his threatened $200 billion in auto tariffs on European vehicles

So the basic agreement is 1) leave all new tariffs in place; 2) sell more soybeans and natural gas to Europe; and 3) talk about tariff and non-tariff barriers that typically consume years and years of discussion.

This is basically a big zero.  Even beyond the fact that the agreement avoids most of the major trade categories, the act of negotiating towards lower tariffs, lower non-tariff barriers, and reconciling conflicting regulator standards has been done before -- its called NAFTA and the TPP, both of which Trump has sh*t on.  Sure, they can have flaws (especially the TPP), but these compromises are the only way these trade deals get made, as country leaders each are in thrall to their own influential crony industry.  The US's own high tariffs on SUV imports is a great example.  This is all not to mention the time -- TPP negotiations took 8 years -- through which we consumers apparently will still suffer under Trump's tariffs.

So for most US consumers, the end result of all of this is that we still are paying higher prices for any product that contains metal, from soda cans to automobiles.  This is great for soybean farmers, I suppose, but sucks for the rest of us.   This is all about politicians balancing one crony against another and in this calculus, consumers always lose.

Trump says he is for free trade, but he still spouts all this fairness BS.  Things that he considers "unfair" are actually just "unfair" to a few people in a few industries, but are eminently "fair" for 300 million consumers in the US.  Here is the true test of a free trader:

Consider two trade regimes.  In Regime #1, the US charges 0% tariffs on German steel and Germany charges 0% tariffs on US steel.  In Regime #2, the US is able to charge 10% tariffs on German steel while Germany still charges 0% tariffs on US steel.   I would bet quite a bit of money that Trump would say that Regime #2 is a better deal for the US, while free traders like myself and most economists would say that Regime #1 is not only better for the world as a whole, it is better for the US.  Zero tariffs allows the division of labor and comparative advantage to all work their magic to make sure capital and productive effort in this country are employed for the highest return.

...Congress simply has to pare back the tariff authority it has delegated the President.  It is simply insane that Trump can just unilaterally impose 20% tariffs on foreign automobiles, a $200 billion new tax on US consumers.

It is appalling to see Trump following the usual blue model of economic regulation, imposing one intervention after another, each meant to fix the unintended consequences of the last intervention.  Steel tariffs increased costs to domestic auto makers, so Trump proposes tariffs on foreign autos.  When tariffs result (inevitably) in counter-tariffs on US agricultural exports, Trump proposes more agricultural subsidies.   People (not me) lament gridlock in government and want more fluid lawmaking -- well here it is.  And it sucks.  It is mindless and reactive and emotional and totally ignorant of economics.

These tariffs, when combined with earlier actions, will result in tax increases on consumers that swamp the tax cuts Trump and the Republicans were so proud of last year.

I tend to be a pessimist so I have probably accurately called 5 or the last 2 recessions, but i have started to shift my investments around to get ready for a slowing economy and a market correction.

Update (source)

While both careful not to specifically cite the politically unwise 'tariffs', Boeing, GM, and Fiat Chrysler stocks are plunging in the pre-market after trade war-related impacts caused missed earnings or lowered outlooks.

General Motors Co. cut its forecast for profit this year as surging prices for steel and aluminum combine with swings in South American currencies to burden the largest U.S. automaker. Specifically, Bloomberg reports that raw material costs probably will be a $1 billion headwind to GM’s profit this year - roughly double its previous expectation - while the Argentine peso and Brazilian real are likely to drag on results through the remainder of 2018.

This is definitely from the schadenfreude files, via the WSJ:

After the Trump administration announced new tariffs on imported washing machines in January, Marc Bitzer, the chief executive of Whirlpool Corp., celebrated his win over South Korean competitors LG Electronics Inc. and Samsung Electronics Co.

“This is, without any doubt, a positive catalyst for Whirlpool,” he said on an investor conference call.

Nearly six months later, the company’s share price is down 15%. One factor is a separate set of tariffs on steel and aluminum, imposed by the U.S. in March and later expanded, that helped drive up Whirlpool’s raw-materials costs. Net income, even with the added benefit of a lower tax bill, was down $64 million in the first quarter compared with a year earlier.

A few days back, we had a debate in the comments about whether Trump really wants free trade.   In my view, Trump looks at tariff rates and trade deficits like a simple scorecard of winning or losing without really understanding trade and its benefits.  Sure, Trump proposed a zero tariff rate agreement in passing with our European trading partners.  I think he did this because it made him look good and he knew they would never go for it.

But no matter the case, even if he is sincere, he still is judging this proposal by a very different standard than economists would.  Take European tariffs on passenger cars.  My understanding is that they are about 10% on US cars vs. our 2.5% on theirs  (this ignores the absolute hypocrisy in this whole thing that our light truck tariff on imports is like 25%, but put that aside).  Trump sees taking these two passenger car tariff rates to zero as a win NOT because it would be a benefit to consumers but because in his thinking the US gets a 10% concession out of Europe and only gives up a 2.5% concession in exchange.  Winning!

I tried to think of the best way to highlight the difference between Trump's thinking and good economic thinking on trade, and I came up with this hypothetical:

Consider two trade regimes.  In Regime #1, the US charges 0% tariffs on German steel and Germany charges 0% tariffs on US steel.  In Regime #2, the US is able to charge 10% tariffs on German steel while Germany still charges 0% tariffs on US steel.   I would bet quite a bit of money that Trump would say that Regime #2 is a better deal for the US, while free traders like myself and most economists would say that Regime #1 is not only better for the world as a whole, it is better for the US.  Zero tariffs allows the division of labor and comparative advantage to all work their magic to make sure capital and productive effort in this country are employed for the highest return.  I believe from reading the comment section of this blog that there are many many people who call themselves a free trader but who would say that Regime #2 is a better deal for the US.  If you believe that, you better have done a lot of work educating yourself on the issue because the great mass of economic theory and practice is against you.

I am not an economist and I am too busy today to give the whole explanation today, but here is one hint at part of the answer:

As of mid-2017, there were 29,288 steel-consuming firms, employing more than 900,000 workers who face higher prices versus just 916 steel-producing firms with 80,000 employees who benefit from those higher prices and reduced competition.

Republicans that used to lament the imperial presidency under Obama sure seem to be OK with Trump unilaterally levying tens of billions of dollars of new taxes on American consumers.  I presume since no one has seriously questioned his power to do so that he must have this power.  Yet another example in the shameful history of Congress delegating its powers to the Administration.

Trump:  I'm going to raise taxes on the consumers and businesses in the US that buy things from overseas.

China: Oh yeah?  I will show you, I will raise taxes on my citizens even more!

From the vaults:  Our sister publication in China complains about Chinese tariffs.  Note the date, way back in 2006.  If history doesn't repeat itself, it at least rhymes.

After hammering various members of the G7 with new tariffs and threats of even more tariffs, Trump proposed that everyone eliminate all their tariff's and subsidies:

Q Mr. President, you said that this was a positive meeting, but from the outside, it seemed quite contentious. Did you get any indication from your interlocutors that they were going to make any concessions to you? And I believe that you raised the idea of a tariff-free G7. Is that —

THE PRESIDENT: I did. Oh, I did. That’s the way it should be. No tariffs, no barriers. That’s the way it should be.

Q How did it go down?

THE PRESIDENT: And no subsidies. I even said no tariffs. In other words, let’s say Canada — where we have tremendous tariffs — the United States pays tremendous tariffs on dairy. As an example, 270 percent. Nobody knows that. We pay nothing. We don’t want to pay anything. Why should we pay?

We have to — ultimately, that’s what you want. You want a tariff-free, you want no barriers, and you want no subsidies, because you have some cases where countries are subsidizing industries, and that’s not fair. So you go tariff-free, you go barrier-free, you go subsidy-free.

Awesome, sign me up. But is this serious?  I want to get to that in a minute but first let me offer two practical observations

• Trump belabored the 270 percent Canadian dairy tariffs on US products, but at the same time the US tariff rate on Canadian dairy products is effectively infinite, because we simply don't let any in.  This is the kind of complexity he is glossing over.  Forget Canada, his proposal for no tariffs or subsidies would cause a major freakout among US dairy farmers, a business absolutely chock-full of crazy quilt of progressive state regulation on prices and subsidies and quotas.  (and by the way, congrats to Trump for getting progressives like Drum into the free trade, anti-price-control camp).
• Simple statements like "no subsidies" are easy to make, but is a lower corporate tax rate a subsidy?  How about lower minimum wages?  What about really long copyright lives?  What about when a governor or mayor gives out relocation incentives and tax abatements?  What about the whole Amazon HQ2 deal that is coming?   The list of complexities are endless.  That is why long and complicated negotiations are necessary to reduce tariffs and subsidies.  Fortunately we have actually done this, in deals like NAFTA and the TPP.  Unfortunately, Trump has given both of these the boot.  So is he really serious?

I have a love for history and like to make comparisons of modern events to history, and in this case I believe there is a very parallel case we can learn from.   Here is the problem:  It involves Hitler's Germany.  Hitler is obviously the third rail of Internet discourse, but the example is so parallel I am still going to go ahead, with the following proviso:  I am not saying Trump is Hitler, or making any such analogy or statement.  I am merely attempting to learn from a very similar international negotiation that occurred in the 1930's.

If  you can put aside all the emotional baggage of Hitler being either the worst mass murderer in history or at least in the top 3, he was (at least for a while until it all blew up on him) very successful in getting wins in diplomatic face-offs of the type Trump seems to want (by this I mean gains for his own country in zero-sum or even negative-sum games made by repudiating past international settlements).  Hitler's brashness essentially won out with the reoccupation of the Rhineland, Germany's remilitarization, the annexation of Austria, and even led to the western powers basically handing the Sudetenland over to him.

But the example I have in mind is with the disarmament conferences of the the early 1930's.  Major western powers were looking for some sort of agreement to head off an expensive and destabilizing arms race of the type that occurred in the run-up to WWI (and which by the way was way too expensive for countries bogged down in the Great Depression).  As the powers discussed incremental limits or reductions, one world leader jumped into the fray and proposed that all the powers agree to total disarmament  -- no more militaries at all.  Can you guess who made this radical proposal that would be the envy of any 1960's hippie?**

Hitler had [President Roosevelt's] message before him when he prepared the final draft of his speech to the Reichstag. Contrary to expectation, his speech, when delivered, made no threat of immediate rearmament. Germany was ready at any time, Hitler said, to renounce the aggressive weapons forbidden to her by the Treaty of Versailles “if the whole world also bans them.” Without further ado, Germany would dissolve her whole military establishment “if neighboring nations unreservedly did the same.” For President Roosevelt's proposal the German government was “indebted with warm thanks.” Germany was ready to join in “any solemn non-aggression pact because she thinks not of attack but of her security.”

In making this speech, Hitler said that he above everyone else wanted peace.  He was a soldier, he had been in the trenches, and no soldier wanted war.

Given his past actions, we suspect Hitler was not a total peacenik, so what was going on here?  The Treaty of Versailles had essentially disarmed Germany, reduced its army to 100,000 men and banned it from having an air force and submarines, among other things.  Germany chaffed at these limits, considering them grossly unfair, and wanted limits at parity with those on, say, France.

Hitler always liked to turn other nations' values against them in his international statements.  Later, when he justified potential annexations in Austria, Czechoslovakia, and Poland, he would say that he was just interested in "self-determination of peoples" and that other powers were inconsistent and unfair when they refused to allow this principle they themselves had established to be applied to ethnic Germans in these countries.  Hitler clearly didn't care one bit about free self-determination of peoples, but he was happy to throw US and British and French rhetoric back in their faces.

So in this case Hitler grabbed at the other major powers' pious pronouncements about their commitment to disarmament and again threw it back in their faces.  You want disarmament?  OK, let's do it -- total disarmament.  Hitler knew that they would never do it -- France in particular did not trust Germany at all.  Hitler waited until it was clear the other countries were not going to go for this proposal and said something like, "see, those other countries were never serious, they never wanted peace.  All they want to do is keep Germany down."  He proceeded to resign from the conference,  renounce the military limits of the Versailles treaty, and started building Germany's army and air force.   Which was what he had intended to do all along.

I know from the comments that there are folks reading my blog who honestly don't seem to understand trade and the trade deficit, and I am at my limit in explaining any more clearly.  I know there are also folks who honestly think Trump is following a brinksmanship path to get to a net better set of trade rules in the future.  I wrote the other day that I doubted this, but folks have emailed me the quotes about Trump proposing full free trade as proof of his intentions.  Sorry, while I would love to believe this is true, and will happily admit my error later if needed, I don't believe it for a minute.  It just looks too much like Germany's actions at the disarmament conference.  People who truly want and understand free trade do not say things like "there are too many German cars in the United States."***

** This link is squirrelly and sometimes is gated and sometimes not.  The full citation is Boeckel, R. M. (1933). The Disarmament Conference, 1933. Editorial research reports 1933 (Vol. II). Washington, DC: CQ Press. Retrieved from http://library.cqpress.com/cqresearcher/cqresrre1933100900

*** Anyone older than about 45 can tell you how badly US cars sucked before foreign competition, and how much better they are today only because we allowed this competition.  Even if you don't own a German car (and I do), your American car is better and less expensive than it would be without German and Japanese and Korean competition.

I can't resist publishing this email.  This is the full text, I have not edited it:

57 YEARS ASIA FAKE MONOPLY MONEY THEFT/TRADE THEFT/DEFENSE THEFT/WELFARE THEFT & BUILT US OVER THERE & CHARGING “””””””YEN,YUAN’’’’’’’’’’’’’’’’’’’MONEY MANIPULATION

SO POTUS TRUMP STOPS THEFT & YOU MF ARE MAD

SO WHY ARE YOU NOT LIVING IN ASIA US=================INSTEAD OF THE ONE YOU DESTROYED-US!!!!!!!!!!!!!!!!!!!!!!!!!

Frankly, I do not know how folks like Mark Perry and Don Boudreaux do it.  They are able to keep going, day after day, year after year, refuting the same stupid anti-trade arguments over and over again.  I don't have the patience or endurance.  Long-time readers will remember I used to spend a lot of time on climate.  But the debate never went anywhere.  It was like Groundhog Day.  At some point I just thought "I've said what I have to say, and now I am done"  (though I actually do have a climate update in the works).

Anyway, Trump has put tariffs on Mexican and Canadian steel and aluminum and is poised to do so for European products soon, a tax that will ultimately be paid by every American consumer.  Sigh.  This is just so economically ignorant it is hard to take it seriously, yet here it is.  In the name of 150,000 or so US steelworkers and a bare handful of obviously politically well-connected corporations, we are going to raise prices on essential raw materials that are consumed in one way or another by a huge number of American businesses and hundreds of millions of US consumers.   Two or three years ago when US manufacturers are moving oversees for lower raw material costs, you will know why.

Republicans are really supposed to know better on this sort of thing, which to me is just proof #12,465 that our political parties represent tribal rather than consistent ideological differences.  Republicans have twisted themselves in so many knots trying to support Trump while knowing better on tariffs that some have actually brought back a version of madman theory.

I am not entirely sure of the intellectual and historical origins of madman theory, but I have always ascribed it to Nixon and Kissinger.

President Richard Nixon and his national security adviser Henry Kissinger believed they could compel "the other side" to back down during crises in the Middle East and Vietnam by "push[ing] so many chips into the pot" that Nixon would seem 'crazy' enough to "go much further," according to newly declassified documents published today by the National Security Archive.

The documents include a 1972 Kissinger memorandum of conversation published today for the first time in which Kissinger explains to Defense Department official Gardner Tucker that Nixon's strategy was to make "the other side ... think we might be 'crazy' and might really go much further" — Nixon's Madman Theory notion of intimidating adversaries such as North Vietnam and the Soviet Union to bend them to Washington's will in diplomatic negotiations

Speaking of Kissinger, the new Conservative explanation of Trump trade (and foreign) policy also includes an element of old-time brinksmanship.  I remember reading something in college from Kissinger, which I can't find now so maybe I have it wrong, but I would paraphrase it as, "it is very dangerous to go to the brink over an issue, but one can never make progress without going to the brink."

Some Conservatives are now arguing that Trump's protectionism is "good" protectionism because it is an opening move in a bargaining game where the US can make headway and perhaps get better rules all around.  As such, Trump's seeming irrationality and willingness to ignore basic economics is a feature, not a bug, supporting the madman model of negotiation.

Ugh.  This might perhaps all be reasonable strategy in a zero-sum game such as, say, negotiating shares of the assets in a bankruptcy settlement (something Trump is actually super experienced at).  Trade, though, is not a zero-sum game.  By definition, trades that are executed voluntarily have to help both parties, or else they would not be agreed to.  As such, anything that reduces the amount of trade between people in two countries is guaranteed to be a net loss for BOTH groups of people.  There are no winners.

Don Boudreaux and and Mark Perry have been doing a great job making the case against Trump's trade sanctions.  But it is always a danger only to learn about opposing views from those who disagree with you, so in the spirit of Bryan Caplan's "Ideological Touring Test" I wanted to address directly some of the arguments in support of Trump's sanctions.

I followed several links to this article by Spencer Morrison.  After reading the whole thing, I fear I have made the intellectual error of choosing a poor representative of the opposing side's argument, but I am committed now, so here goes.

Consider that China steals more than half a trillion dollars in American intellectual property every single year. This is one of the reasons America’s trade deficit with China is so massive. For example, in 2010 Chinese companies stole high-speed rail designs from American firms, thereby depriving them of hundreds of billions in potential revenues. Such theft occurs in nearly every industry, whether it’s software programs or branded consumer goods. And the worst part? We let it happen.

I find the author's figure absurd, and likely untrustworthy given his example.  Following his high-speed rail design "theft" link one quickly finds that 1) Americans were not involved at all, which is not surprising since we really don't have high-speed rail manufacturing industry or expertise in this country; 2) the technology seems to have been acquired or copied legally; and 3) the real competitive issue for non-Chinese companies seems to be that the Chinese have extended and improved the technology.

This one paragraph essentially summarized the theme of the article, that technology is the key to increased well-being and that the US is poorer when they cannot monopolize the best technology.  The first is true, the second is dead wrong and flies in the face of 200 years of history.

I won't spend time on the mass of the article where describes the economy in very production-based terms which I don't totally agree with, but his basic point is one I can partially accept -- that real economic growth over time comes from  productivity growth.  I agree that technology is part of the productivity equation, but unlike the author I also see other drivers such as trade (which he calls "noise").  Trade is a critical factor in productivity improvement as specialization and comparative advantage greatly increase productivity.

But where I think he really goes off the rails is to say that because technology is wealth-creating, we need to monopolize that technology in the US.

The core issue remains: we continue to  offshore our advanced industries at an alarming pace, which will only increase the likelihood that the “next big thing” will be invented abroad. If we do not reverse this trend, we will soon be on the outside looking in.

It would be entertaining to discuss the origins of the American textile industry in the late 18th and early 19th century with the author, which were largely based on spinning jenny and powerloom designs that were literally stolen from manufacturers in the UK (countries don't own technologies, only individuals and their companies do).  The UK at the time had strict technology export restrictions of which I am sure the author would have been approving.

So did the UK suddenly become poorer as America built a lively cloth industry?  No, in fact the UK boomed along with the US.  It turns out that spreading new technology and productivity techniques around more widely made everyone richer.  This only makes sense.  Would the West really be wealthier if they had kept all technology from spreading, and thus were surrounded by countries dominated by subsistence farming and medieval crafts?  A skeptic might argue that the UK did eventually become poorer relative to the US and upstart Germany, but Andrew Carnegie could have told you why at the beginning of the 20th century.  He went back and toured manufacturers in his old home and was horrified at how little they reinvested in new technology.

Which brings me back to Chinese high speed rail, the example he started with.  Clearly the Chinese have a growing high-speed rail manufacturing industry, and they DIDN'T invent the technologies originally in China.  This is what trade is all about.  Rather than keep technologies locked up in a secret underground bunker in the Rockies, as the author seems to prefer, it spreads technologies around the world.  Production then shifts around the world based on a variety of factors such as comparative advantage in ways that are hard to predict, but seldom has a strong relationship to the country in which the technology was first invented.  One place production does NOT shift, though, is towards countries whose government has artificially raised critical raw material prices through border taxes on its consumers called tariffs.

Which reminds me, if the problem is China "stealing" things like high-speed rail technology, then why in the hell are we imposing steel and aluminum tariffs?  What the heck does this have to do with technology transfer?  In fact, if the US really had a high-speed rail industry we were worried about, or if one were exclusively concerned with the auto industry, the author is essentially telling them "we are sorry you had your technology stolen so to help you out we going to substantially raise the prices of your two largest purchases (steel and aluminum) so that you can be even less competitive internationally."  Ahh, I can feel the economic growth from that already.

If the author wants better intellectual property protections for US companies and individuals, I am generally supportive of efforts to achieve this (as long as we don't over-specify intellectual property and end up again with endless patent troll suits).  For all its flaws, though, joining the TPP seems to be a better path to this end (it actually addresses, you know, intellectual property protections rather than just raise steel prices for consumers).

To conclude, I love this quote from his article because, despite being anti-trade, he in fact is echoing the pro-trade observation by Steven Landsburg.

Yet our trade policy does exactly the opposite. After the North American Free Trade Agreement took effect in 1994, U.S. corn exports surged, as did our imports of automobiles. The problem is that automobile manufacturing is much more likely to benefit from disruptive technology than is growing corn—under NAFTA, the preponderance of long-run benefits went to Mexico, not the United States. The same is true with America’s trade relationship with China: America’s advanced goods trade deficit with China now tops $120 billion. Meanwhile, our biggest export is soybeans.

Free trade is, quite literally, turning America into China’s mercantile resource colony: we buy their value-added, manufactured products, and we sell them raw materials.

This is freaking awesome!  We grow and sell soybeans and get back advanced technology products.  Brilliant!  No wonder we are the richest nation on Earth.

Postscript:  So to save the time clicking through to Steven Landsburg, here is a part of what he said (via Carpe Diem):

There are two technologies for producing automobiles in America. One is to manufacture them in Detroit, and the other is to grow them in Iowa. Everybody knows about the first technology; let me tell you about the second. First you plant seeds, which are the raw material from which automobiles are constructed. You wait a few months until wheat appears. Then you harvest the wheat, load it onto ships, and sail the ships eastward into the Pacific Ocean. After a few months, the ships reappear with Toyotas on them.

International trade is nothing but a form of technology. The fact that there is a place called Japan, with people and factories, is quite irrelevant to Americans’ well-being. To analyze trade policies, we might as well assume that Japan is a giant machine with mysterious inner workings that convert wheat into cars. Any policy designed to favor the first American technology over the second is a policy designed to favor American auto producers in Detroit over American auto producers in Iowa. A tax or a ban on “imported” automobiles is a tax or a ban on Iowa-grown automobiles. If you protect Detroit carmakers from competition, then you must damage Iowa farmers, because Iowa farmers are the competition.

The task of producing a given fleet of cars can be allocated between Detroit and Iowa in a variety of ways. A competitive price system selects that allocation that minimizes the total production cost. It would be unnecessarily expensive to manufacture all cars in Detroit, unnecessarily expensive to grow all cars in Iowa, and unnecessarily expensive to use the two production processes in anything other than the natural ratio that emerges as a result of competition.

That means that protection for Detroit does more than just transfer income from farmers to autoworkers. It also raises the total cost of providing Americans with a given number of automobiles. The efficiency loss comes with no offsetting gain; it impoverishes the nation as a whole.

I have been watching the second season of Victoria on PBS (quite good, I think) and much of it has covered the famines of the 1840's and the debate over the Corn Laws.  At the time, it seems that average people understood that the British tariffs on imported food were in place solely to protect the agricultural profits of aristocratic (and by definition well-connected) landowners while hurting the country as a whole by raising food prices for every consumer and contributing to the famines that were sweeping Ireland and parts of England.

Trump's proposed tariffs are simply a disaster.  A lot of the media seems to believe the biggest reason they are bad is that they will incite retaliatory tariffs from other countries, which they almost certainly will.  But even if no one retaliated, even if the tariffs were purely unilateral, they would still be bad.  In case after case, they are justified as increasing the welfare of a certain number of workers in targeted industries, but they hurt the welfare of perhaps 100x more people who consume or work for companies that consume the targeted products.  Prices will rise for everyone and choices will be narrowed. This is Bastiat's classic seen and unseen -- the beneficiaries (say in the steel industry) are easy to identify, but the individual consumers who change their purchasing plans or industries that change their investment plans are frequently invisible.  It is the height of childish public policy to pretend those hurt by this don't exist merely because they can't easily be interviewed on TV.

Well, not completely invisible:

 A proposed expansion of an Exxon Mobil Corp oil refinery could be impacted by the Trump administration’s plan to place a 25 percent tariff on imported steel, a source familiar with the matter said on Thursday.

Exxon has been considering increasing its North American crude refining capacity since at least 2014, the company has said, but has not disclosed a final decision. An Exxon spokeswoman was not available for immediate comment.

 The nation’s largest oil producer has been weighing adding new processing capacity to its 362,000 barrel-per-day Beaumont, Texas, plant that could make it the nation’s largest. (Reporting by Erwin Seba Editing by James Dalgleish)

The government does it in health care, education, and housing.  Usually in the name of increasing access to or usage of something, they will subsidize demand.  But then at the same time they will restrict supply, giving lie to this stated justification of increasing access, making the whole exercise a crony enrichment of a small number of incumbent producers or asset owners.  The government creates low income housing programs and subsidized mortgages but limits the ability to construct new homes, thus having the primary effect not of increasing housing access but of driving up home prices for current incumbent home owners.  In health care the government subsidizes access to care in any number of ways but then restricts supply through certificates of need, onerous licencing programs, and drug manufacturing restrictions.

Now, consider solar panels.  The government has many programs to subsidize the purchase of solar panels.  Often, one can get local, state, and federal rebates and tax breaks for buying solar panels.  But at the same time:

President Donald Trump’s pledge to offer American companies more aggressive protection from foreign competition got fresh ammunition Friday, when a government board cleared the way for him to deploy a long-dormant legal weapon to restrict solar panel imports....

In the solar panel case, filed by Georgia-based Suniva Inc. and joined by Oregon-based SolarWorld Americas Inc., the ITC commissioners will now consider specific policy recommendations and submit those to the White House by Nov. 13. Mr. Trump then has two months to decide whether to impose solar trade barriers....

“We brought this action because the U.S. solar manufacturing industry finds itself at the precipice of extinction at the hands of foreign market overcapacity,” Suniva said. The firm filed for bankruptcy protection earlier this year.

This really is utter madness, even from a domestic employment standpoint.  I would be willing to be that the solar panel installation industry, which will be hurt by rising costs of solar panels, employs way more people than the US panel manufacturing industry.  The solar industry's trade association seems to agree:

“Analysts say Suniva’s remedy proposal will double the price of solar, destroy two-thirds of demand, erode billions of dollars in investment and unnecessarily force 88,000 Americans to lose their jobs in 2018,” said the Solar Energy Industries Association, which promotes solar use.

For Progressives who are suspicious of public choice theory, this is they sort of prediction public choice theory makes and should be an area where Progressives and libertarians could make common cause.  But traditionally Progressives have always been trade restrictionists, which seems crazy to me.

I just cannot understand how politicians can be called "populist" for favoring a few hundred thousand domestic steel workers and steel company equity holders over 300 million domestic consumers who depend on low-cost steel for their jobs or buy steel products.  But there seems to be something about the steel industry that causes folks who normally would scream about corporate welfare to just roll over.

At noon, Donald Trump will sign an executive order calling for a probe whether imports of foreign-made steel are hurting U.S. national security. The order will revive a decades-old, rarely used law to explore imposing new barriers on steel imports, in this case aimed loosely at China.

Trump will sign the memorandum related to section 232 of the Trade Expansion Act of 1962 at an event in the White House that will include leadersd of several U.S. steel companies; the law will allow the president to impose restrictions on imports for reasons of national security. Trump’s directive will ask Ross to conduct the probe “with all deliberate speed and deliver the results to the president with his recommendations."

An official cited by Reuters sad that there are national security implications from imports of steel alloys that are used in products such as the armor plating of ships and require a lot of expertise to create and produce.

Why do I suspect the national defense argument is a total sham?

Update:  “For every steelworker, there are 60 workers in steel-using industries,” said Lewis Leibowitz, a Washington attorney who has worked on trade cases involving steel in the past. “You need competitive steel prices for those industries to be competitive and to export.”  source:  WSJ

Ten years ago, we published an editorial from our Chinese sister publication Panda Blog.  Though some of the details of their government's financial actions have changed since then, the gist of it is still correct -- the Chinese government still engages in actions that they call "export promotion" and President Trump calls "currency manipulation".  So I think this editorial from the perspective of the Chinese consumer is still relevant:

Our Chinese government continues to pursue a policy of export promotion, patting itself on the back for its trade surplus in manufactured goods with the United States.  The Chinese government does so through a number of avenues, including:

• Limiting yuan convertibility, and keeping the yuan's value artificially low
• Imposing strict capital controls that limit dollar reinvestment to low-yield securities like US government T-bills
• Selling exports below cost and well below domestic prices (what the Americans call "dumping") and subsidizing products for export

It is important to note that each and every one of these government interventions subsidizes US citizens and consumers at the expense of Chinese citizens and consumers.  A low yuan makes Chinese products cheap for Americans but makes imports relatively dear for Chinese.  So-called "dumping" represents an even clearer direct subsidy of American consumers over their Chinese counterparts.  And limiting foreign exchange re-investments to low-yield government bonds has acted as a direct subsidy of American taxpayers and the American government, saddling China with extraordinarily low yields on our nearly $1 trillion in foreign exchange.   Every single step China takes to promote exports is in effect a subsidy of American consumers by Chinese citizens.

This policy of raping the domestic market in pursuit of exports and trade surpluses was one that Japan followed in the seventies and eighties.  It sacrificed its own consumers, protecting local producers in the domestic market while subsidizing exports.  Japanese consumers had to live with some of the highest prices in the world, so that Americans could get some of the lowest prices on those same goods.  Japanese customers endured limited product choices and a horrendously outdated retail sector that were all protected by government regulation, all in the name of creating trade surpluses.  And surpluses they did create.  Japan achieved massive trade surpluses with the US, and built the largest accumulation of foreign exchange (mostly dollars) in the world.  And what did this get them?  Fifteen years of recession, from which the country is only now emerging, while the US economy happily continued to grow and create wealth in astonishing proportions, seemingly unaware that is was supposed to have been "defeated" by Japan.

We at Panda Blog believe it is insane for our Chinese government to continue to chase the chimera of ever-growing foreign exchange and trade surpluses.  These achieved nothing lasting for Japan and they will achieve nothing for China.  In fact, the only thing that amazes us more than China's subsidize-Americans strategy is that the Americans seem to complain about it so much.  They complain about their trade deficits, which are nothing more than a reflection of their incredible wealth.  They complain about the yuan exchange rate, which is set today to give discounts to Americans and price premiums to Chinese.  They complain about China buying their government bonds, which does nothing more than reduce the costs of their Congress's insane deficit spending.  They even complain about dumping, which is nothing more than a direct subsidy by China of lower prices for American consumers.

And, incredibly, the Americans complain that it is they that run a security risk with their current trade deficit with China!  This claim is so crazy, we at Panda Blog have come to the conclusion that it must be the result of a misdirection campaign by CIA-controlled American media.  After all, the fact that China exports more to the US than the US does to China means that by definition, more of China's economic production is dependent on the well-being of the American economy than vice-versa.  And, with nearly a trillion dollars in foreign exchange invested heavily in US government bonds, it is China that has the most riding on the continued stability of the American government, rather than the reverse.  American commentators invent scenarios where the Chinese could hurt the American economy, which we could, but only at the cost of hurting ourselves worse.  Mutual Assured Destruction is alive and well, but today it is not just a feature of nuclear strategy but a fact of the global economy.