President Donald Trump is giving a ringing endorsement of free trade at G7. (Video starts at 7:10 mark)
I love this statement because he’s absolutely right. There shouldn’t be tariffs, barriers, or subsidies on goods going across one border or the other. Businesses should be able to exchange goods with businesses and customers without any sort of tax or ban. Governments shouldn’t subsidize various industries. Bastiat called the spirit of free trade, “a reform of the mind itself, that is to say, the source of all reform.”
Do I believe Trump is serious about the call? I believe it about as much as I believe no one in the upper echelons of the Justice Department had any idea Fast and Furious was going on. That is to say, I don’t believe it at all.
The big reason is the fact Trump and his Administration’s actions are completely different from his words today on free trade. Trump later threatened to stop doing all trade with G7 nations, and others who have tariffs. (Video starts at 18:29)
These are more believable for more than a few reasons. The first is an op-ed by National Trade Council President (and hardline protectionist) Peter Navarro in The New York Times. Navarro, who supports ‘free market’ (note sarcasm) positions like carbon taxes and banning incandescent bulbs) intimated auto tariffs were on the way.
Even when Germany’s automakers build facilities in the United States, these so-called factories are more like assembly plants. S.U.V.s in the BMW X series that are assembled in the United States actually contain only 25 percent to 35 percent American-built content — the high-value engines and transmissions are manufactured in Germany and Austria.
Even as Germany runs huge trade surpluses with the United States, it is not on track to meet its financial commitment to the NATO alliance, to spend at least 2 percent of its gross domestic product on defense by 2024. Despite being Europe’s wealthiest country, Germany spends a mere 1.24 percent of its G.D.P. on defense.
America’s trade deficit in goods with Japan is higher than with Germany: $70 billion in 2017. For every one car America exports to Japan, Japan sends us over 100. High non-tariff barriers, including a complex regulatory system, make it difficult to sell American cars in Japan. Meanwhile, Japan slaps tariffs on a wide range of American agricultural products — as much as 32 percent on oranges, 50 percent on beef, 40 percent on various cheeses and 58 percent on wine.
The other reasons are the steel and aluminum tariffs the administration is doing, plus the looming trade war with China.
It’s doubtful any of these tariffs will actually do anything to help the U.S. economy and even a White House internal study found the tariffs will hurt the economy. Cato’s Scott Lincicome wrote last year protectionist policies cause economic headaches in America. He specifically cited findings in Frank Taussig’s The Tariff History of the United States as proof.
Not only did Taussig find typical consumer pains associated with protectionism—railroads paying twice as much for steel rails as they paid in England due to the 1870 tariff, for example—but he documented the cronyism that inevitably accom- panied such policies. Vermont Congressman Rollin C. Mallary described the tariff bill of 1828 as giving “the manufacturer of iron all he asked, and more.” The Tariff Act of 1864, introduced and enacted in only five days, “contained flagrant abuses in the shape of duties whose chief effect was to bring money into the pockets of private individuals.” The Tariff Act of 1867 “was an intricate and detailed scheme of duties, prepared by the producers of the articles to be protected,openly and avowedly with the intention of giving themselves aid; and yet this scheme was accepted and enacted by the National Legislature without any appreciable change from the rates asked for.” Bad if not worse, the “whole cumbrous and intricate system—of ad valorem and specific duties, of duties varying according to the weight and the value and the square yard—was adopted largely because it concealed the degree of protection which in fact the act of 1867 gave.”
Trump’s current target is Canada’s tariffs on American dairy goods. It’s important to look at exactly why Canada has these tariffs – tariffs I disagree with – and how much of a mess they’ve made of the Canadian dairy industry. The Globe and Mail reports it’s a humongous government subsidy (emphasis mine).
Supply management is the uniquely Canadian regime that governs virtually every aspect of milk, chicken and egg production. The system depends on three “pillars” – a tariff wall to block imports, strict quotas that determine how much each farmer can produce and fixed prices paid to producers. The system was created in the 1970s to help stabilize farmers’ incomes. But as the food industry has gone global, supply management has faced mounting internal and external pressure, including persistent trade complaints from the United States, Europe, Australia and New Zealand. The World Trade Organization has ruled that the high prices paid to Canadian farmers are subsidies, making exports very difficult. For Canadian consumers, supply management also means consistently higher retail prices for dairy, chicken and eggs.
It’s also a policy which is failing as more and more farmers get out of the business (from almost 140K in the 1970s to just 12K now). Canada won’t get rid of it for whatever reason, probably because it encourages the tariffs to stay in place. Trump’s complaints make sense, but are highly hypocritical because the U.S. has its own subsidies for dairy farmers. From Milwaukee-Wisconsin Journal Sentinel from 2014.
The five-year bill, which preserves generous crop subsidies, heads to the Senate where approval seems certain. The White House said President Barack Obama would sign it.
The measure, which the House approved 251-166, had backing from the Republican leadership even though it cuts only about 1% from the $80 billion a year food stamp program.
The dairy fight largely centered on a provision that sought to limit milk production when the supply was too high. Some dairy farmers said they needed a way to balance supply and demand so they could get a reasonable price for milk and stay in business.
The current bill under consideration in Congress doesn’t really make any changes to the 2014 one. Trump is threatening to veto the legislation but not due to the subsidies. Instead, he’s angry over SNAP requirements he finds too loose. He’s right on the requirements, but his refusal to fight to lower farm subsidies shows he has nothing to complain about when it comes to Canada’s system. America needs to address its own subsidy problems before whining about others. Or, better yet, complain about Canada’s system while mentioning, “Hey…we’re fixing our subsidy issues.” Action is greater than words.
Trump’s actions aren’t matching his rhetoric regarding wanting a complete free trade zone. Trump’s apparent decision to do ridiculous tariffs on foreign goods aren’t going to result in anything but trouble for the American economy. The stock market may not crash immediately from the tariffs, but the reckoning is coming.