Copy of AFF Sentinel V21 #44-More on Trade and Tariffs

What Rules Remain the Same & What Has Changed

Steve Dittmer | AFF Sentinel

Colorado Springs, CO

Originally sent to subscribers 10/31/24

We’ve said often before: the global economy is a complex system, with many moving parts responding to other moving parts, on their own time frame but often faster these days.

For example, the assumption by some that cutting tax rates will cut government revenue presupposes that companies and individuals will not change behavior in response to changing government tax rules. Tax cuts have often been accompanied by allowing capital expensing faster or immediately and cutting the regulations that hamper growth. Companies and individuals work harder and longer, invest more and accomplish more (productivity), growing the economy and, after the first year or two, government revenues do go up. The most recent illustration was the first Trump Administration with the 2017 tax bill.

Certain left leaning economists and media commentators have said Trump’s tariff threats and plans would automatically raise prices to consumers and American manufacturers. But that presumes that foreign exporters will just pay the tariffs or quit exporting to the U.S.

Trump has offhandedly suggested across-the-board tariffs but we think he would be much more likely to use targeted or threatened tariffs on specific countries and specific industries like he did in the past. It wouldn’t make sense to just willy-nilly jump tariffs on countries with no access or tariffs to bargain with. If a country has no tariffs or restrictions in place to bargain with, then a tariff on that country makes no sense,  achieves no improved access and would likely increase prices for American consumers or manufacturers. That is contrary to Trump’s philosophy of helping, protecting and cutting costs for Americans.

Trump and USTR Robert Lighthizer invested a lot of time and effort in forging or improving free trade agreements with several major trading partners, as well as the USMCA. We consider predictions that he would dump those agreements for another 10 percent tariff just ridiculous.

That means many trading partners are off the table right off the bat. But countries like the EU trading bloc, India, and some Asian countries, with serious tariff discrepancies, would likely be targeted right off the bat. The EU has been exercising some assumed right to special treatment for years. The beef industry has been abused with technical arguments, non-tariff trade barriers, quotas, animal welfare issues and production practices, faux implant and feed additives “concerns” for over 30 years to keep out or severely limit U.S. beef. Are we the only industry the EU treats that way?

Breitbart economist John Carney has looked at the figures and concluded that most of Trump’s tariffs did not raise prices to consumers, because exporters could not do without the U.S. market, any more than importers could give up supplies of goods. So both trimmed their margins so as to not raise prices and lose market share in American markets.

Steel and aluminum are likely exceptions but their difficulties are long standing and not quickly fixed. China has overproduced and dumped steel on global markets for many years. U.S. steel makers adapted to new production practices and plant sizes too slowly, exacerbated by labor union resistance. Their products are further complicated by national security and military concerns.

Editorials in the media complain about initial retaliatory responses to Trump tariffs but fail to say how long any retaliations lasted or what long term examples are. There will necessarily be initial noise. But, for example, washing machines they cite as examples were much more likely affected by major strictures from the EPA that have raised costs, reduced effectiveness and forced digital solutions not really ready to achieve unrealistic targets. What tariff created that?

Interestingly, a Wall Street Journal editorial brought up the “chicken tax” on pickups in their tariff discussion, noting that it has been in place since LBJ’s time. We suggested long ago that should have been fixed years ago. The Journal is right in saying that government edicts can be stubborn to remove. But tariffs handled properly, with negotiated figures and target dates, can take care of that.

Would that EPA and IRS rules had expirations, figures, goals and dates spelled out, instead of being mandated rules to achieve unmeasurable goals, whimsical rules and no expirations upon failure.

We think some economists and politicians fail to understand Trump and his advisers’ thinking because they do not understand business and the private sector. Trump is a businessman and as such wants favorable, measurable results that yield product and profit. Economists who don’t believe in supply side economics and politicians who are more interested in building agencies, creating more regulations and making more businesses and constituents beholden to them, think differently.

Tariffs have traditionally been ponderous edicts, in relatively static economic relationships that could well raise prices. But in today’s economy, our communications and response time and global marketing appears to have changed global economic dynamics.

Competition is one of the subjects of debate regarding tariffs. The argument is that tariffs reduce competition for domestic companies, putting upward pressure on prices and reducing innovation. That may be true if tariffs are long-term or permanent in an isolated sense.

But as Trump proposes -- to create an environment of lower taxes and lower regulation for domestic companies and for foreign companies if they produce the goods in America -- then competition is increased, not decreased.

In some ways, this is analogous to the auto industry. We don’t recall the exact tariff incentives, but it was the product superiority alone -- regarding reliability, fuel efficiency, longevity and performance -- that changed the American automotive industry in the ‘70s and ‘80s.

We talked about trade deficits a couple columns back. Laffer and Moore said history showed America’s best economic years in the 19^th century happened during trade deficits, when America was importing more than exporting.

Former USTR Robert Lighthizer, in a recent letter to the editor in the Wall Street Journal, contended just the opposite, that America then thrived on trade surpluses, accompanied by fiscal surpluses. Lighthizer noted that Phil Gramm and Donald Boudreaux contend America’s success in the 19^th century occurred when tariffs were falling. Lighthizer pointed out that “falling” then mostly meant falling from 50 percent to 40 percent. And it’s been a quarter century since fiscal surpluses.

We happen to respect all five of these fellows as good economists and thinkers. But they can’t all be right, in this case. Part of the answers likely lie in the fact that modern trade is different from either the 19^th century or 20^th century. One can see text ads for products from Asia or the UK in the morning on your phone, order them from thousands of miles away and have them delivered in a week. Some of them already warehoused in the U.S., can show up in two days.

Yet some crazies in the Middle East can shut down the Suez Canal traffic in just days and throttle billions of dollars of shipping for months.

It isn’t just trade rules or tariffs that affect trade. But firm leadership in America is certainly needed.

Our address: Agribusiness Freedom Foundation, P.O. Box 88179, Colorado Springs, CO. 80908.

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