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
Jeffrey A. Tucker is Editorial Director for the American Institute for Economic Research. He is the author of many thousands of articles in the scholarly and popular press and eight books in 5 languages, most recently The Market Loves You. He is also the editor of The Best of Mises. He speaks widely on topics of economics, technology, social philosophy, and culture. He is available for speaking and interviews via his email. Tw | FB | LinkedIn
Related Articles – Free Trade, International
Why Women Workers Might Be Less Willing to Delegate
People love demographic generalization of the workplace because they simplify what is actually incomprehensibly complex. So the newest study of professional women was destined to go viral: “Women Are Less Likely to Delegate Than Men—and That Might Hurt Their Careers.”
The study, part of a slew of workplace gender studies conducted by Columbia Business School, says absolutely nothing about any particular case but it still remains good fuel for our culture’s endless fascination with gender differences.
The Wall Street Journal reports on this finding and explains: “Women are less likely to delegate than men, are more likely to feel guilty about doing so and tend to have less-courteous interactions with subordinates when they do pass on tasks.”
And the explanation offered herein: “Women are more likely than men to view delegation as aggressive and assertive. Past studies suggest that women are judged more harshly than men for assertive, stereotypically male behavior like negotiating salaries.”
That explanation has an intuitive plausibility. Passive but talented workers are more likely to accept their plight, allowing task after task to mount. More work is always better because then one is more valuable, they reason. But they also quite possibly fear that talking others into lightening their load means giving orders in a way that is not their place.
“Hey, can you do this for me?” is not always the easiest question to ask. It might come across like “I can’t do my job well” or “I’m in charge of you.” It would make sense that a relatively deferential employee might be less likely to pose the question to begin with. Better to just keep adding to the personal workload.
It also makes sense that this tendency can hurt a career. There is a paradox in delegating. You might at first think that doing more tasks – more and more paper, more and more computer entry, more responsibilities – is always more productive. Surely this is way to succeed!
What you discover over time is different. Once you master a task, the best use of your time might be to train an understudy so that you can move on and take on another task or innovate in another direction. Then you should leave 10-20% of your time for something completely unknown. This is how you grow to become ever more valuable.
This is something you learn after years in the workforce. And it’s a hard skill to learn: do less to do more. Instead of looking for more things to pile on your plate, you should try to do the opposite. Get things off your plate so that you can take on new challenges and innovate. To do this, you need to open up your strategies and skills to others, letting others get a sense of what you do and how you do it. You pick the person who finds it most interesting and then delegate what you do. This way you become a force for progress. If everyone does this, you build a team organically from the bottom up, so that everyone has learned from each other.
Delegation also prevents stagnation and bureaucratization in task management, that is, managing via the job description. The personnel working in a firm should operate less like a mechanical clock with fixed gears and more like a choir in which many members can substitute for each other and know each others roles well enough to blend.
This is a way of applying the division of labor within the workplace. You might be the best at everything but it’s in your interest to task out to others, even if they are less good at the thing than you are, precisely so you can specialize in the thing that no one else can do. Perhaps that is a new product line, finding efficiencies, looking for missed opportunities, or just the exercise of pure creativity. You will never be able to do this after all your time is filled with old routines.
What is the opposite error? I’ve called it work hoarding. You get a task. You build a wall around yourself, never letting anyone get a look. You try to create something of a magic show. Something lands on your desk. Time goes by. Weeks. Months. Then the big reveal comes. You show what you did. Everyone is amazed. You rinse and repeat. You figure that you have a lifetime job here, provided that nobody else can figure out what you do.
Then one day you are found out. Here is someone who can do this one thing even better in a fraction of the time and with much less fuss and drama. You feel exposed. Your work hoarding didn’t pay off after all. In fact, people then resent it. Work hoarders are actually a drag on productivity because they implicitly reject the division of labor. They don’t see the gigantic merit in cooperating with others. Indeed, the very existing of growing wealth, said Adam Smith, traces to this feature of human life.
Work hoarders also tend to be the least confident of the security of their jobs, and so choose hoarding instead of the risk of cooperating as a form of job protection. It’s a faulty strategy and it does indeed prevent workplace advance but there it is. I’m sure you have known one or two people like this in the course of your own work life.
In light of this, I would like to suggest a tweak on the explanation of the results of this study, though my explanation may or may not have anything to do with gender as such. More than anything else, the unwillingness to pass on tasks might be a reflection of the fear of being replaced. And given the perhaps less-certain perceived status of women in the workplace, this tendency might have a disproportionate impact on women’s lives.
In sum, the refusal to delegate may have less to do with a lack of willingness to be aggressive with colleagues and more to do with hoarding tasks to alleviate workplace anxieties over job security. It’s a bad strategy that doesn’t pay in the long run. A nation can’t prosper in isolation and neither can individuals in a firm.
Jeffrey A. Tucker
Jeffrey A. Tucker is Editorial Director for the American Institute for Economic Research. He is the author of many thousands of articles in the scholarly and popular press and eight books in 5 languages, most recently The Market Loves You. He is also the editor of The Best of Mises. He speaks widely on topics of economics, technology, social philosophy, and culture. He is available for speaking and interviews via his email. Tw | FB | LinkedIn
Related Articles – Economic Education, Everyday Price Index, Free Enterprise
Trump Wins the Trade War. Everyone Else Loses
The 70-year global progress toward freer trade is permanently reversed so long as the Republicans hold the White House. That’s the message of the non-deal trade deal just announced between the U.S. and China. It’s a deal that reduces no existing tariffs and offers only symbolic changes in other terms that were already on the table two years ago. Never mind that every credible source says that this situation loses billions or trillions in productivity in seen costs and unthinkable costs in what is not seen.
The only good news coming from this deal is that the U.S. has temporarily pulled back on the imposition of even more tariffs later this month. While robbery is better than assault, and a promise to steal less in the future can’t be brushed off as irrelevant, this trade deal does nothing to improve relations between the countries relative to the status quo of two years ago. However, in times when symbols matter more than reality, the US president can control the spin and therefore wins the day.
The only concrete change here – leaving aside some vague financial-access concessions – comes from China in the form of asking Chinese companies to buy $10 billion more soybeans and pork than is currently on the table, purchases extended over an uncertain period of time.
This would help address a major political problem of the Trump administration that the American agricultural sector has been suffering from a vast loss of its export markets due to the trade retaliation that the Trump administration said would never be imposed in this “easy to win” trade war. It does not, however, compensate for billions more in losses, nor pay back American taxpayers for the latest $16 billion pushed out as agricultural subsidies designed to soften the blow of the war.
Among the other contentious issues that are not mentioned in this deal:
- Coordinating intellectual property rules in a way that would curb the ability of Chinese companies to reverse engineer technologies of American origin, an absurd hope that flies in the face of the very meaning of economic cooperation;
- A rolling back of existing tariffs of the U.S. against China and China against the U.S.;
- Chinese subsidies to technology companies or US subsidies to agriculture;
- US restrictions on visas for Chinese visas;
- The rise of US export controls against China;
- The fate of Huawei;
- Alleged cyberhacking of Chinese origin;
- Enforceable rules on foreign-exchange valuation which are governed by market forces.
Why would the Trump administration proclaim this a victory when it actually seems merely to codify tariffs as policy? It comes down to two factors. First, the economics of this trade war is obviously and overwhelmingly negative. There are no credible outliers on this claim. This also spells some political trouble with heartland voters who have felt the pain most intensely. The mere hope of a solution was enough to lift financial markets.
Second, selling more product abroad is one way that mercantilists (Trump is an adherent of that deprecated school of thought) believe that they will reduce the “trade deficit,” an accounting fiction that is not only miscalculated but is irrelevant even if it were accurate.
The reality of what will not change except perhaps some of the planned tariffs is revealed in this chart from Goldman Sachs.
Another factor goes beyond any proposed deal or any future negotiations. It is the problem of trade uncertainty. Businesses and investors need a predictable regime to plan years in advance. That stability has been shattered as a result of executive-branch impositions that bounce around week to week, always the goal of making it clear who is in control.
So long as the U.S. runs a trade deficit with China (at least on paper), the Trump administration is likely to push for more tariffs under the mistaken belief that China is paying them, that these will make it disappear, and that this matters one whit for the fate of world prosperity.
Following the disastrous Smoot-Hawley tariffs of 1930, Congress turned over its constitutionally-codified power to regulate international commerce to the office of the president. The belief that this would remove the problem of special-interest protectionism held true for the remainder of the 20th century and until 2018, when the centralization of power came back to bite the great cause.
Today Congress is statutorily impeded from stopping a continued march toward autarky, lest there appears some bipartisan legislation structured to take it back. The problem is that the Republican president has received almost no pushback from the Democrats against his trade policies; indeed, the leading contender for the Democratic presidential nomination, Elizabeth Warren, holds to a doctrine of “economic patriotism” that is not different in substance from Trump’s own.
You have to look hard to find good news in this poor excuse for a U.S./China trade deal, but there is this: there is no longer much dispute about the harm the trade war has caused everyone – everyone but the man who will claim to have won it.
Jeffrey A. Tucker
Jeffrey A. Tucker is Editorial Director for the American Institute for Economic Research. He is the author of many thousands of articles in the scholarly and popular press and eight books in 5 languages, most recently The Market Loves You. He is also the editor of The Best of Mises. He speaks widely on topics of economics, technology, social philosophy, and culture. He is available for speaking and interviews via his email. Tw | FB | LinkedIn
