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It’s been another wild two weeks in the world of tariffs and trade. It began with a tariff threat from the U.S. president that seemed to come out of the blue. He threatened a 5 percent tariff on imports from Mexico — which might be increased to 25 percent over time — as a way of dealing with a migrant crisis at the Southern border.
It ended with a series of tweets in which the president took credit for a new policy on the part of Mexico: the country would crack down on migration from its Southern border and also buy agricultural products from the U.S. as a way of dealing with the supposed problem of the U.S. trade deficit.
There will be no new tariffs against Mexico, for now. However, the hiatus might only be temporary. “The tariff threat is not gone,” one Trump administration official (who is probably Peter Navarro) told the New York Times. “It’s suspended.”
And that raises a serious problem for businesses on both sides of the border. Can or should they continue to make deals and investments, or should they look for other markets? This regime uncertainty can be as costly as tariffs themselves.
Even stranger, there was no relationship between the stated problem (a migrant crisis and a drug problem in Mexico) and the proposed solution (taxing Americans). Even more bizarre, taxing Americans for buying goods will harm economic health in both countries, which will likely intensify problems at the border.
In any case, at the height of the threat, it seemed impossible to find anyone not directly employed to speak for Trump who is willing to make a case for these tariffs. Republicans in Congress pushed back for obvious reasons: this can only harm businesses and consumers. And it wasn’t only the political class. Every important voice in financial markets and banking spoke out with unusual candor about how terrible this tax would be.
Even stranger, we’ve since learned that all the essentials of the U.S.-Mexico deal had already been hammered out between December 2018 and March 2019. Moreover, the U.S. had only recently put together a new version of Nafta. The sudden imposition of new taxes on Americans would violate every bit of the spirit of the deal and raise fundamental questions about whether the U.S. can be trusted in any of these trade negotiations.
What Deal?
There’s also the matter of this bizarre tweet: “MEXICO HAS AGREED TO IMMEDIATELY BEGIN BUYING LARGE QUANTITIES OF AGRICULTURAL PRODUCT FROM OUR GREAT PATRIOT FARMERS!”
Problem 1: the communique from the U.S. and Mexico makes no mention of such new promised purchases. No one on either side of the negotiators had ever heard of such a thing. Bloomberg reports that “increasing Mexico’s purchases from the U.S. wasn’t discussed during the three days of talks in Washington that led up to Friday’s agreement, said the three people with knowledge of the deliberations who weren’t authorized to speak publicly.”
In other words, so far as anyone can tell, the claim that more purchases is part of the deal seems to be made up out of whole cloth, though no one was willing to go on record in saying that. There appears to be no change to the patterns of U.S./Mexico trade, which is actually much larger today than ever.
Problem 2: U.S. agricultural exports to Mexico are already high. They have been growing for decades.
“In 2018, Mexico accounted for 13.6 percent of U.S. agricultural exports and 20.1 percent of U.S. agricultural imports,” reports the USDA. “Between 1993 (the year before NAFTA’s implementation) and 2018, U.S. agricultural exports to Mexico expanded at a compound annual rate of 6.9 percent, while agricultural imports from Mexico grew at a rate of 9.4 percent.”
The specific products exported track U.S. agricultural subsidies:
What’s happening here is pretty clear. For seven years, bulk agricultural exports to Mexico have been increasing. At the same time, the world market prices for all these have fallen ever further due to vast oversupply. Thus, the total value of U.S. agricultural exports to Mexico has remained flat.
The U.S. massively subsidizes production of corn, soybeans, and wheat along with their by-products, thus generating vast overproduction and driving down the price and squeezing the financials of American “patriot” farmers. The subsidies, then, are having a reverse effect. Intended to help farmers, they are making them ever more dependent on Washington’s largess and the use of government power in seeking to find purchasers for them. The trade wars have been particularly devastating because U.S. farmers have lost access to foreign markets due to retaliatory measures.
Trump’s tweet might have been wishful thinking, but it shows where all of this is headed: the U.S. will use gunboat diplomacy via protectionist threats as a way of forcing foreign purchases of its vastly overproduced grains. It’s one way in which domestic socialism feeds into a foreign policy of trade imperialism.
The Trade Deficit
Underlying this whole financial and political problem is deep intellectual confusion over trade deficits, a subject over which Trump and his top trade advisers are obsessed. Look at the balance-of-trade data as it pertains to Mexico.
U.S. goods and services trade with Mexico totaled an estimated $671.0 billion in 2018. Exports were $299.1 billion; imports were $371.9 billion. The U.S. goods and services trade deficit with Mexico was $72.7 billion in 2018.
A 5 percent tariff, all else equal, will take from Americans $18.1 billion, or $141 per American household. Increasing that tariff to 25 percent will take from Americans $92.5 billion, or $725 per household. The magic number for Trump is $72.7 billion. So long as this number is floating out there, Trump will seek new ways to punish Americans for buying goods marked with Mexico as the country of origin.
Economists have known for centuries that balance-of-trade numbers have no serious economic significance. You can calculate how much you buy from Burger King against how much Burger King buys from you, but it means nothing for how much enjoyment you get from eating a burger. There are gains from trade regardless.
However, if you are somehow deeply confused and come to believe that these trade data are somehow analogous to the balance sheet of a firm, you could easily render deficits as losses and surpluses as profits. If you are the head of state and imagine yourself to be the CEO of a country, your job then becomes to make sure that you run trade surpluses with the world.
Now, to be sure, most heads of state do not think this way. But there is a special type of businessman/politician who is tempted in this direction.
Frederic Bastiat wrote about this problem in the 19th century. The fundamental fallacy is to “compare the books of the counting-house with the books of the Customhouse.” In this view, so long as imports exceed exports, we are on the road to ruin. The ever-clever Bastiat suggested a remedy for France: “France has a very simple means of doubling her capital at any moment. It is enough to pass them through the Customhouse, and then pitch them into the sea. In this case the exports will represent the amount of her capital, the imports will be nil, and even impossible, and we shall gain all that the sea swallows up.”
We can even go further. If the Trump administration is truly dedicated to balancing trade with Mexico and even logging an accounting profit, however fictitious and irrelevant, we could fill the sea in two directions: the U.S. could pitch all Mexican imports into the sea, and Mexico could do the same with agricultural products exported from the U.S. The seas would fill up, and everyone could get rich!
You know what’s rather remarkable about this silly story? It’s actually coming true. In April 2019, the U.S. trade deficit with the world actually tumbled because both imports and exports took a dramatic fall. The narrowing of the deficit came about because imports fell to a greater extent, which is to say that American businesses and consumers benefited ever less from foreign productivity.
source: tradingeconomics.com
This is nothing to cheer! The last time the U.S. recorded a trade surplus with the world was 1975 — a year that no one remembers as the height of American prosperity.
The absurdities of this 18-month-old trade war are a case study in how one bad policy feeds another and eventually ends badly for everyone. So far, this war has produced disrupted supply chains, higher costs for business and consumers, new financial pressures that have resulted in closings and job losses, vast costs in farmer-bailout funds, a loss of U.S. negotiating credibility, a coalescing of new trading zones that are challenging U.S. dollar supremacy, pressure on the Fed to ease money as a way of mitigating slower growth, and, now, no shortage of fibs to cover up the failures.
The Trump administration pulled back from the brink of disaster in trade relations with Mexico — but there is reason to doubt that this unusual display of good sense indicates a change in intellectual orientation, much less a lasting shift in policy. The man-made trade mess of the last year and a half is likely to get more bizarre before it gets better.
How bad can it get it? Don’t take my word for it. Browse the Trump administration’s own May 2019 report that includes a complete hitlist of all countries with a trade surplus with the U.S. This whole document reads like a caricature of childish economic fallacies. The real world consequences could be devastating, once the trade wars with Ireland, Vietnam, Italy, and Malaysia commence. If anyone thinks Mexico is off the hook, he has failed to comprehend the fullness of the economic ignorance of this administration.
Behold the blueprint:
Jeffrey A. Tucker
Related Articles – Free Trade, International
Gas and Apparel Pull Everyday Prices Down in November
AIER’s Everyday Price Index fell 0.1 percent in November after posting a 0.4 percent increase in October. The Everyday Price index has fallen in four of the last six months. The Everyday Price Index measures price changes people see in everyday purchases such as groceries, restaurant meals, gasoline, and utilities. It excludes prices of infrequently purchased, big-ticket items (such as cars, appliances, and furniture) and prices contractually fixed for prolonged periods (such as housing).
The Everyday Price Index including apparel, a broader measure that includes clothing and shoes, decreased 0.3 percent in November after a 0.3 percent rise in October. The Everyday Price Index including Apparel has fallen in three of the past six months. Apparel prices fell 2.5 percent on a not-seasonally-adjusted basis in November and are down 1.6 percent over the past year. Apparel prices tend to be volatile, registering sporadic large gains or declines in between stretches of relatively steady prices.
The Consumer Price Index, which includes everyday purchases as well as infrequently purchased, big-ticket items and contractually fixed items, fell 0.1 percent in November, matching the decline in the Everyday Price Index. The Everyday Price Index is not seasonally adjusted, so we compare it with the unadjusted Consumer Price Index.
Over the past year, the Consumer Price Index is up 2.1 percent. Over the same period, the Everyday Price Index has risen 1.2 percent while the Everyday Price Index including apparel is up 0.9 percent. The modest increases in both indexes over the past year are largely due to weak energy and grocery store prices.
Motor-fuel prices fell 1.1 percent for the month on a not-seasonally-adjusted basis. Over the past year, motor-fuel prices are off 1.3 percent. Motor fuel prices are largely a function of crude oil prices. West Texas Intermediate crude oil prices fluctuated dramatically from mid-2017 through mid-2019, rising to a peak above $75 per barrel in October 2018 before plunging to less than $45 by December 2018. Crude prices have been relatively stable since May, bouncing around in a range of $50 to $60.
Grocery prices fell 0.3 percent in November and are up just 1.0 percent from a year ago. Over the last five years, grocery prices are essentially unchanged.
The components with the largest weights in the Everyday Price Index are food at home (weighted 20.8 percent and declining 0.3 percent in November), food away from home (17.6 percent and a 0.2 percent rise), household fuels and utilities (13.3 percent and a 0.3 percent drop), and motor fuel (11.8 percent with a 1.1 percent decrease). Together, these four categories account for 63.5 percent of the Everyday Price Index.
Overall, net changes in the Everyday Price Index remain modest. Energy prices are the most volatile component and have been, on balance, a negative contributor in recent months. Grocery prices (food at home) have also been rising at a slow pace and stand in sharp contrast to restaurant prices (food away from home) which have been rising more quickly and persistently. Apparel prices also remain volatile but in general have been a negative contributor. Other smaller components have had significant but largely offsetting trends. Notably, gardening and lawncare services prices are up 8.4 percent from a year ago, while tobacco products have risen 5.5 percent, postage and delivery services are up 5.4 percent, recreational reading materials are up 4.9 percent, and pet and pet products are up 3.3 percent. Partially offsetting these were audio discs and tapes, down 2.6 percent and video discs, down 2.5 percent. Several other smaller components have increases close to zero.
Robert Hughes
Related Articles – Everyday Price Index
Manual Labor Will Be Revived
In a previous column, I looked at the way automation and AI are likely to transform the world of work and employment. There is a lot of discussion about this, most of which focuses on the likely impact in terms of the kinds of paid work that will disappear. What there is much less of is discussion of the new kinds of paid work that will come into being.
If the result of automation is to create jobs more than to destroy them, then what kinds of work are likely to expand in the future? This is related to but distinct from the first question. In one way, this is a very hard question to answer. Many of the new kinds of employment that will appear are literally unimaginable — if we could imagine them, they would already exist.
Back in the 1980s, nobody could have told people worrying about the decline of jobs in the steel industry that there would be work designing apps for mobile phones, for example. So we can be confident that new kinds of work will appear but have no idea about what it will be — it’s for entrepreneurs to invent and discover that.
However, we can do some thinking about it because while the details may not be clear, there are cases where we can have a strong notion as to what will appear. In the 1900s, for example, there were a large number of jobs associated with horses, at that time still the main power for transport. Almost all of them were gone by 1930, but people could guess that a lot of new work would be created servicing and supporting (as well as producing) the motor vehicles that were replacing horses. Thinking like this about the present situation should lead us to a number of conclusions and to one in particular that many will find both surprising and heartening.
At-Risk Jobs
If you read the various studies that have been done over the last five years, there is widespread agreement about the kinds of jobs that are “at risk.” A recent study by the Brookings Institution estimated that 25 percent of current US jobs are at greater than 50 percent risk of automation. Some are not surprising. Any job that is both boring and repetitive is likely to be at risk. You might suppose that this would mean low-paid manual occupations would be at high risk, and indeed many are — shelf stacking, waitressing, and data entry are all at high risk.
On the other hand, many better-paying jobs are at considerable risk of disappearing. A range of jobs in the transport industry, from truck and taxi drivers to train and bus drivers, are likely to go in the medium term because of the rise of autonomous vehicles (most new metros around the world already have driverless trains). A wide range of clerical and administrative tasks are also likely to be handed over to algorithms, from financial services to company administration and financial advice.
The last example brings up another point. A recent study by the OECD argued that jobs involving face-to-face contact were more likely to survive — which suggests a rosier future for financial advisors. However, experience suggests this is actually not true. When the ATM was introduced, some argued that it would not catch on because customers preferred the human interaction with a teller. Experience suggests that actually the opposite was the case. The same is likely to be true in a range of occupations and not just financial advice and wealth management.
The common factor is that these are activities that can be readily reduced to a tick list of standard questions and hence an algorithm. Routine medical care and diagnosis is one; another is most standard legal work. This suggests that the risk of automation is actually high for many professional occupations such as medical general practice and routine attorney work. In the future, we will probably consult an algorithm rather than a human doctor or lawyer or accountant. However, surgery and nursing are still almost certain to be done by flesh and blood humans.
That particular example can lead us to the surprising and heartening conclusion mentioned earlier. Much of the commentary argues that we are moving into a world where the labor market will be dominated by two kinds of employment. There will be creative jobs that are open to highly educated people and which pay very well, and there will be unskilled and low-productivity jobs (hence low paying), but there will not be a range of middle-skill jobs that pay a decent or even high wage. The view is captured in the title of Tyler Cowen’s work Average Is Over. This has a number of alarming implications, most notably that access to high-paying work is going to become even more dependent than it already is on higher-education qualifications. We should be more sanguine, however.
A Heartening Conclusion
Economic theory, confirmed by empirical research, tells us that people will in general only adopt a new technology when the expected gain from doing so is greater than the cost (technically, when the marginal gain exceeds the marginal cost). This means there are many things that are technologically feasible that do not happen because they do not pass the test of their benefit being greater than their cost.
One example is supersonic passenger flight. This is certainly technically feasible — we know this because two such aircraft were in commercial service for some time. However, there are none now and no prospects for any. The reason, as Boeing discovered while trying to develop a supersonic transport, is that the benefit (getting from London to New York in three hours rather than seven, for example) is not valuable enough to consumers to exceed the costs of such an aircraft, which are due to the technology available and the unavoidable challenges of traveling at such a speed in the Earth’s atmosphere in a way that will meet standards of comfort and safety for passengers. (Military personnel have a different set of criteria, which is why supersonic combat aircraft are commonplace; plus, the buyers of such aircraft, namely governments, are not as price sensitive as airlines.)
One classic example of this is the artificial reproduction of manual dexterity or, to put it another way, of the combination of the human hand with the human brain and the complex feedback and control system (touch and sight) that connects the two. Despite much effort and research, this has proven incredibly difficult to reproduce artificially. Consequently, for most tasks involving manual dexterity and manipulation, it is still cheaper to use a human rather than a robot, and this seems likely to be the case for a long time. This explains why nursing and surgery are both at very low risk of being automated by everyone’s estimation, despite the fact that most surgical procedures and nursing tasks are standard and routine in many ways.
Manual Trades and Personal Services
So, there is a wide range of tasks and work that will not be automated because of this. However, the response might be that the kinds of jobs this applies to are precisely the low-productivity and low-skill jobs mentioned earlier, such as cleaning. Certainly, this is true, but it is not the whole truth. There is also a wide range of work involving manual dexterity that is skilled and highly paid, and the likely impact of AI will actually be to make that kind of work more productive and hence higher paid. Meanwhile, other foreseeable changes will increase the demand for these kinds of work and hence the number of employment opportunities, even allowing for the increase in productivity of individual workers.
This kind of work is that of skilled manual trades such as plumbing, painting and decorating, electricians, and construction work of all kinds. Another is personal-service work such as personal trainers or coaches. Teaching and researching are other examples (at the moment, these are thought of as jobs that require a degree, but that is more about rationing access than reality). Manual trades, for example, are very difficult because of the need for close-up manipulation — a robot that could do an electrician’s or plumber’s job would be seriously expensive.
At this point, another feature of innovation comes into play. What much innovation does is not so much replace human labor as enhance it and make it more productive. AI and associated control systems are a classic example of this. You will still need the manual dexterity of the surgeon or plumber, but the AI and associated technology will increase the range of things that they can do and make them much more effective. In other words, it will increase the value of the service they provide as well as the quantity per unit of time worked — which is the real definition of increased productivity. This translates into higher incomes for people delivering this kind of service.
Moreover, the demand for this kind of labor and service (as well as the others mentioned) is almost certain to increase. For one thing, the people earning very high incomes doing creative knowledge work will want to employ those providing these services in very large numbers (not least because the principle of comparative advantage means it makes sense for them to do this so they can concentrate on their own work). Another feature of AI is that it will make it much cheaper to personalize skilled work and services and so make it more valuable to the end consumer.
What we are likely to see, in fact, as well as the disappearance of a range of familiar jobs, is a revival in the value (and maybe the status?) of manual trades and personal services of all kinds. These will also become higher paying than many are at present (some, of course, already pay well). To give just one example, nursing and personal care are going to have their productivity significantly increased, while the demand for such services is going to rise organically because of the rise in the average age.
This will also mean an increase in the kind of work that requires a trade education and a relative decline in the need and demand for academic higher education. That sector will have to find another market to replace or supplement people looking for certification to have a shot at knowledge or creative work — the business of providing education and tutoring as a leisure and consumption good is one possibility.
In fact, one outcome of AI and automation may well be a revival of manual labor and of the traditional working class — maybe becoming more like an artisan class again. It is actually the credentialed and salaried white collar middle class that is more at risk in the years to come.
The overall effect will be massively positive, as economics leads us to expect. Thus a recent study by Price Waterhouse predicts that automation and AI will contribute an additional $15.7 trillion to the global economy by 2030, with a boost to local GDP of up to 26 percent by the same date. We should be sanguine about the impact of this latest wave of innovation, not just in terms of its overall impact on the wealth of the world but also in terms of its likely sociological impact.
Stephen Davies
