Tuesday, July 17, 2018
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Monday, July 16, 2018
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Saturday, July 14, 2018
Jul 12, 2018 BARRY EICHENGREEN asks why the effect of escalating protectionism on investment and financial markets has been so limited.10Add to Bookmarks
The steel and aluminum tariffs that the Trump administration imposed at the beginning of June were important mainly for their symbolic value, not for their real economic impact. While the tariffs signified that the United States was no longer playing by the rules of the world trading system, they targeted just $45 billion of imports, less than 0.25% of GDP in an $18.5 trillion US economy.
On July 6, however, an additional 25% tariff on $34 billion of Chinese exports went into effect, and China retaliated against an equivalent volume of US exports. An angry Trump has ordered the US trade representative to draw up a list of additional Chinese goods, worth more than $400 billion, that could be taxed, and China again vowed to retaliate. Trump has also threatened to impose tariffs on $350 billion worth of imported motor vehicles and parts. If he does, the European Union and others could retaliate against an equal amount of US exports.
The mystery is why the economic and financial fallout from this escalation has been so limited. The US economy is humming along. The Purchasing Managers' Index was up again in June. Wall Street has wobbled, but there has been nothing resembling its sharp negative reaction to the Smoot-Hawley Tariff of 1930. Emerging markets have suffered capital outflows and currency weakness, but this is more a consequence of Federal Reserve interest-rate hikes than of any announcements emanating from the White House.
There are three possible explanations. First, purchasing managers and stock market investors may be betting that sanity will yet prevail. They may be hoping that Trump's threats are just bluster, or that the objections of the US Chamber of Commerce and other business groups will ultimately register.1
Second, the markets may be betting that Trump is right when he says that trade wars are easy to win. Other countries that depend on exports to the US may conclude that it is in their interest to back down. In early July, the European Commission was reportedly contemplating a tariff-cutting deal to address Trump's complaint that the EU taxes American cars at four times the rate the US taxes European sedans.But this ignores the fact that Trump's tariff talk is wildly popular with his base. One recent poll found that 66% of Republican voters backed Trump's threatened tariffs against China. Trump ran in 2016 on a protectionist vow that he would no longer allow other countries to "take advantage" of the US. His voters expect him to deliver on that promise, and he knows it.
But China shows no willingness to buckle under US pressure. Canada, that politest of countries, is similarly unwilling to be bullied; it has retaliated with 25% tariffs on $12 billion of US goods. And the EU would contemplate concessions only if the US offers some in return – such as eliminating its prohibitive tariffs on imported light pickup trucks and vans – and only if other exporters like Japan and South Korea go along.
Third, it could be that the macroeconomic effects of even the full panoply of US tariffs, together with foreign retaliation, are relatively small. Leading models of the US economy, in particular, imply that a 10% increase in the cost of imported goods will lead to a one-time increase in inflation of at most 0.7%.
This is simply the law of iterated fractions at work. Imports are 15% of US GDP. Multiply 0.15 by 0.10 (the hypothesized tariff rate), and you get 1.5%. Allow for some substitution away from more expensive imported goods, and the number drops below 1%. And if growth slows because of the higher cost of imported intermediate inputs, the Fed can offset this by raising interest rates more slowly. Foreign central banks can do likewise.
Still, one worries, because the standard economic models are notoriously bad at capturing the macroeconomic effects of uncertainty, which trade wars create with a vengeance. Investment plans are made in advance, so it may take, say, a year for the impact of that uncertainty to materialize – as was the case in the United Kingdom following the 2016 Brexit referendum. Taxing intermediate inputs will hurt efficiency, while shifting resources away from dynamic high-tech sectors in favor of old-line manufacturing will depress productivity growth, with further negative implications for investment. And these are outcomes that the Fed cannot easily offset.
So, for those who observe that the economic and financial fallout from Trump's trade war has been surprisingly small, the best response is: just wait
Friday, July 13, 2018
In Latest ACA Sabotage, Administration Nearly Eliminates Marketplace Enrollment Assistance Funds [feedly]
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Anyway, as Britain's self-inflicted Brexit crisis (self-inflicted with some help from Putin, it seems) comes to a head, it seems to me worth trying to explain some aspects of the economics involved that should be obvious – surely are obvious to many British economists – but aren't, apparently, as obvious either to Brexiteers or to the general public.
These aspects explain why Theresa May is trying to do a soft Brexit or even, as some say, BINO – Brexit In Name Only; and why the favored alternative of Brexiteers, trade agreements with the United States and perhaps others to replace the EU, won't fly.
Now, many of the arguments for Brexit were lies pure and simple. But their claims about trade, both before and after the vote, may arguably be seen as misunderstandings rather than sheer dishonesty.
In the world according to Brexiteers, Britain needn't lose much by leaving the EU, because it can still negotiate a free trade agreement with the rest of Europe, or, at worst, face the low tariffs the EU imposes on other non-EU economies. Meanwhile, Britain can negotiate better trade deals elsewhere, especially the US, that will make up for any losses on the EU side.
What's wrong with this story? The first thing to understand is that the EU is not a free trade agreement like NAFTA; it's a customs union, which is substantially stronger and more favorable to trade.
What's the difference? In NAFTA, most Mexican products can enter the U.S. tariff-free. But Mexico and the U.S. don't charge the same tariffs on imports from third parties. This means that Mexican goods entering the U.S. still have to face a customs inspection, to make sure that they're actually Mexican, not, say, Chinese goods unloaded in Mexico and trucked across the border to bypass U.S. tariffs.
And actually it's worse than that, because what is a Mexican good, anyway? NAFTA has elaborate rules about how much Mexican content is required to qualify for zero tariffs, and this adds a lot of paperwork and frictions to intra-NAFTA trade.
By contrast, the EU sets common external tariffs, which means that once you're in, you're in: once goods are unloaded at Rotterdam they can be shipped on to France or Germany without further customs checks. So there's much less friction.
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And frictions, not tariffs, are what businesses are complaining about as Brexit draws near. For example, the British auto industry relies on "just-in-time" production, maintaining low inventories of parts, because it has been able to count on prompt arrival of parts from Europe. If Britain leaves the customs union, the risk of customs delays would make this infeasible, substantially raising costs.
These frictions are also why estimates of the cost of Brexit are comparable to estimates of the cost of a global tariff war, even though the predicted reduction in trade volumes is much smaller.
Still, even if leaving the customs union would be costly, couldn't Britain make up for that by getting a really good deal with Donald Trump's America? No.
Certainly the U.S. couldn't offer hugely valuable tariff reductions, for the simple reason that our tariffs on EU products – like EU tariffs on our products – are already quite low. You can find examples of high tariffs, like our 25 percent tariff on light trucks, but overall there just isn't much to give.
What about a Britain-U.S. customs union? That would be hugely problematic, among other things because given the asymmetry in size Britain would effectively be giving Washington complete control over its policy. Beyond that, no deal with the U.S. could be worth as much as Britain's customs union with its neighbors, because of gravity.
What? One of the best-established relationships in economics is the so-called gravity equation for trade between any two countries, which says that the amount of trade depends positively on the size of the two countries' economies but negatively on the distance between them. You can see this very clearly in British exports. Here's British exports to selected countries as a percentage of the importing country's GDP, plotted against the distance to that country:
The point is that while America offers a market comparable in size to that of the EU, it's much further away, so that even if the UK could make an incredible deal with us, it wouldn't be worth nearly as much as the customs union they have.
All of this explains why May is trying to negotiate a deal that keeps the customs union intact. But that, of course, ain't much of an exit: Brussels will still set UK trade policy, except that Britain will no longer have a vote. So what was the point of Brexit in the first place?
Good question. Too bad more people didn't ask it before the referendum.
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