Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
On Trade, Trump Is Acting in the Best Interests of the USA
Two members of Pres. Trump’s inner circle of economic advisers are Wilbur Ross, Trump’s Secretary of Commerce, and Peter Novarro, professor of economics at the University of California at Irvine. The latter has just been named assistant to the president that places him among the ranks of the President’s top-level policy advisors. Both have been urging the federal government to eliminate our international trade deficits which during the past half dozen decades have inflicted considerable harm on the U.S. economy particularly its manufacturing sector, causing the loss of millions of U.S. manufacturing jobs, reduced U.S. economic growth considerably, converted the U.S. from the world’s leading creditor nation to the world’s leading debtor nation.
The problem is that the nations who sell more to us than they buy from us are creating jobs for their own workers at the expense of American workers. They use a large proportion of dollars they earn from exporting to us to buy U.S. assets which do not create any jobs, buying existing American assets like shares of American corporations, hotels, office buildings, and the like. If they bought goods made in the U.S. resulting in balance trade, the economies of both countries would benefit and it would not have disastrous effects on the U.S. economy, U.S. jobs, and the incomes of American workers.
A policy of free trade makes sense only when there are no formal or informal barriers to trade, the rate of exchange between currencies is conducive to balanced trade, and national security is not endangered by trade in particular goods. Pres. Trump announced that he plans to impose tariffs of 25% on steel and 10% on aluminum because a great power needs those industries for its security and free trade is endangering its security.
Critics point out that the tariffs will raise the price of products fabricated utilizing foreign made steel and aluminum. But the existing low prices of iron and steel and aluminum are at the expense of American producers in those industries. American consumers should not be favored at the expense of American wage-earners
The reality is that most of the world’s output of steel and aluminum is made by a few countries which import less from us than they export to us. According to Wikipedia, total world crude steel production was 1,691.2 million tons[mt] in 2017. The biggest steel producing country was China, which accounted for 49.2% of world steel production and 47.1% of our global trade deficit of $796 billion in 2017. The U.S. produced 81.6 mt or 4.8 percent of the world’s steel output. The European Union produced 168.7 mt or nearly ten percent of the steel and accounted for $151.4 billion or 19% of our global trade deficit. Besides China and the European Union, Japan produced 104.7 mt of steel and accounted for 8.6% of our deficit, S. Korea 71.1 mt and accounted for 2.9% of our trade deficit. We have had huge annual trade deficits with China, Germany and Japan for decades. Imposing tariffs on imports from countries with which we have been experiencing huge trade deficits does not constitute an abandonment of the principle of free trade but is remedial, intended to balance trade. World trade rules permit trading partners to temporarily impose tariffs on goods from countries with which they are experiencing chronic deficits.
Balanced trade with the rest of the world is the goal of our international trade policy. Americans have been brainwashed by under-educated journalists to believe in free trade instead of balanced trade. The Constitution of the U.S. reqThe States of the U.S. can be cited as constitutionally required to allow free trade between the States and it has proven advantageous for the States but the conditions that make it advantageous in the U.S. are absent around the world. The U.S. Constitution requires the States to allow the free movement of labor, the free movement of capital, a common currency, and the absence of barriers to the sale of goods between the States. Economists have long recognized the advantages of free trade when those conditions exist. Unfortunately, they seldom acknowledge the absence of those conditions.
Protective tariffs are rarely the answer to chronic trade deficits. High tariffs on individual products only protect domestic industries in the short term. The causes of trade deficits are so numerous and so difficult to prove that no world organization can deal with them. The WTO is doomed from the start to failure to balance trade between its members. We recommended in our book, Balanced Trade (Lexington Books, 2014), that the appropriate way to deal with chronic deficits is the Scaled Tariff, a single-country-variable tariff that rises and falls with annual increases and decreases in chronic deficits.
President Donald Trump is in the process of imposing global tariffs on steel and aluminum imports on the grounds of national security. The imposition of these tariffs should be the first step in a much broader process of using the full range of tools of trade policy – including tariffs – to bring the US trade deficit down.
The United States has been running enormous trade deficits for decades. The many defenders “free trade” who are condemning Trump’s tariff proposal have signally failed to find an effective policy to address the trade deficit over the last several decades. The result – millions of lost jobs, and tens of thousands of shuttered, bulldozed, and destroyed factories.
What of fears of a trade war? As the final document is rolled out, the administration might want to target the tariffs specifically at those countries with which the US is running a chronic goods trade deficit overall. This has been made difficult but we believe not impossible by the “most-favored-nation” clause in the trade agreements. Countries with huge trade surpluses are in very weak position to ‘win’ a trade war with us because overall we buy much more goods from them than they sell to us.
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