“Kee” Points with Jim Kee, Ph.D.


  • Tariffs in the news
  • Comments on Trade

Tariffs in the news

Trade policy dominated the news last week as President Trump chose to exclude Canada and Mexico (contingent upon NAFTA renegotiations) from his signed proclamation authorizing 25% tariffs on steel imports and 10% tariffs on aluminum imports (the tariffs take effect in a few weeks). Few of Trump’s advisors are on-board with the tariffs, which counter alleged protectionist policies or “cheating” committed by our trading partners. These include intellectual property theft, failure to comply with WTO environmental and labor rules, subsidizing or propping up zombie companies, etc. Interestingly, I have yet to see an objective analysis of these cheating accusations in the press, despite all of the coverage of the tariffs over the past few weeks. Covert protectionism, like government procurement laws that require buying from domestic producers, are almost universally followed by America’s trade partners (Forbes). Most economists that acknowledge the need for trade restrictions (not all of them do) favor these sorts of policies over outright tariffs because they incite fewer retaliatory actions. Here are a few comments on trade policies from prior Kee Points:


Comments on Trade

October 23, 2012

Importance of trade: In Europe, Eurozone tensions have eased, leading to an increased demand for higher risk assets and a fairly dramatic decline in key European interest rates like bond rates in Spain, Italy, Portugal and Greece (Financial Times). As an aside, my biggest concern with low growth in Europe as well as the U.S. and other places abroad is that, historically, it tends to increase the incidence of both domestic and international strife. That’s particularly true of protectionism, a global “us versus them” mentality. From an economist’s perspective that’s a concern because wealth is created by production and exchange. Of these, exchange is most import, as value can be created merely through exchange by moving resources to their most highly valued uses. Not so with production. When global exchange is lessened, plants and firms (and workers) that made sense in a global economy become redundant in a local economy.

 


January 24, 2017

Trade theory: It doesn’t take a whole lot of training in trade theory to know that unskilled or expensive labor will suffer in a country that opens up trade to countries with a big surplus of unskilled labor or less expensive labor (like Mexico and China). Economists Wolfgang Stolper and Paul Samuelson formalized this in what is known as the “Stolper-Samuelson theorem” in 1941. Less skilled labor (really workers in general) in industries whose goods aren’t traded internationally, like a plumber’s assistant, are less threatened than those in industries whose goods are traded internationally, like autos and machinery. That’s pretty much what we’ve seen here in the US. There are three ways to mitigate this (2 positive and 1 negative), and I think we will see aspects of all three:


(1) Reduce costs: The National Association of Manufacturers regularly points to excessive regulatory costs and compliance (e.g. labor, environmental, tax) as a reason for lack of competitiveness in US industries that compete globally. Some of these represent hard-fought gains for both workers and the environment, but there are probably some excesses as well. It is an area that is certainly worthy of review and is indeed under review.


(2) Increase labor skills and mobility: A shortage of workers with the information technology (IT) related skill-sets that modern manufacturing requires, as well as the necessity of retraining workers for non-import competing jobs, are also cited as a prerequisite for mitigating the negative impacts of trade. That means spending more on education and job retraining programs. The track-record of federal “job corps” type educational programs isn’t exactly stellar, but IT advances in the field of education should lead to improvements here.


(3) Restrict trade from other countries. One way to protect workers from the negative impacts of foreign competition is to keep foreign goods out, which is why it is called protectionism. This lessoning of competition tends to result in higher priced goods in the protected countries, and it leads to less efficient production by reducing the gains to specialization. That’s why economists tend to oppose trade restrictions, though they are attractive to specific groups (e.g. labor unions; import-competing firms).


 

May 16, 2017

Global trade note: I’ve talked before about the economics of free trade and won’t reiterate that here. Less rigorous on the theoretical and empirical (i.e. “just the facts”) front is the notion of “regulatory arbitrage,” or the idea that companies will leave areas (states or countries) where the regulatory burden is increasing and relocate to areas where the regulatory environment is more attractive. This occurs more readily for business models with few immobile assets, e.g. buildings and people. Critics of global trade argue that regulatory arbitrage contributes towards a “race to the bottom.” That means companies will move to locations that have weaker environmental laws and labor laws. Fans of global trade argue the opposite, that there is a “race to the top” as countries with superior corporate governance (i.e. shareholder/owner protection) and financial institution/capital markets attract firms and force countries to compete by offering higher standards of living (i.e. water/air quality…access to education, etc.). A third possibility, often referred to as “the California effect,” is that firms cannot forgo lucrative local markets (for customers and workers) and so will be relatively insensitive to regulatory burdens. That is, they will put up with them in order to continue to do business. I have followed these lines of thinking on trade for decades, and recently Naomi Lamoreaux (Yale) and Bruce Carruthers (Northwestern) published what in my opinion is the best empirical research to date on the subject in the Journal of Economic Literature. Their findings? There is on balance evidence for all three!