“Kee” Points with Jim Kee, Ph.D.

  • Why the sell-off?
  • Trade wars and antitrust actions a bad elixir
  • Some reasons for trade restrictions

Why the sell-off?

US stock futures markets over the weekend were pointing to a sharply higher opening on Monday. The sharp decline in stocks that actually ensued can largely be attributed to White House attacks on Amazon, and to retaliatory tariffs coming out of China. President Trump’s tweets against Amazon, claiming that it should pay more taxes and is “putting many thousands of retailers out of business” (Wall Street Journal), have certainly sparked a sell-off in the technology sector (helped along by Facebook’s data breach problems). And China’s impositions of tariffs on US agricultural goods have certainly stoked fears of a global trade war, sparking a sell-off of global stocks.

Trade wars and antitrust actions a bad elixir

The tech sell-off following Trump’s attack on Amazon shouldn’t be a surprise, as it is consistent with similar actions in the past. I’ve mentioned before the work of University of Kansas economist George Bittlingmayer, who researched the impact of the government’s antitrust actions against Microsoft twenty years ago on the technology stocks in general. Interestingly, Bittlingmeyer (and Irving Fisher) argued that antitrust restraint was important to the stock market boom of the 1920s, whereas other work (e.g. Jude Wanniski mentioned in prior Kee Points) indicates that trade restrictions were important to the stock market collapse of the 1920s. So trade wars and antitrust wars are not good stock market elixirs!

Some reasons for trade restrictions

Most presidents have dabbled with tariffs from time to time, but usually as temporary and/or one-off actions. Most studies on the economic impacts of trade restrictions look at the higher prices consumers have to pay for items because cheaper imports are restricted; they then compare this cost with the value of the jobs saved by the restrictions. On the blackboard, free trade always has winners and losers, and the winners gain more than the losers lose. And that’s what the studies tend to show. For example, I recall from the Reagan administration days when economists, looking at steel quotas, concluded that it would be cheaper (to the country) just to allow the imports and pay domestic steel workers not to work. An equally powerful statement came from President Bill Clinton’s last treasury secretary, Larry Summers, who described the post-NAFTA Uruguay Round of free trade as “the largest tax cut in the history of the world” (Foreign Press interview, 2009).

But because free trade has losers as well as winners, and because the losers are easy to identify (steel workers) while the winners are diffuse (“US consumers”), there is always political pressure to help the losers without fear of retribution from the winners. That’s why talk of trade restrictions never really goes away. Plus China does cheat on trade, at least by our standards. China heavily subsidizes many industries, and often requires technology transfer (sharing) as a pre-condition for doing business there (Asian Times). The most recent legitimate scholarship on trade and trade restrictions that I have seen is Dartmouth economist Douglas A. Irwin’s 2017 book, Clashing over Commerce. Irwin is a little more optimistic that Trump’s actions won’t spark a 1930s-style global trade war, because there are many global institutions – World Trade Organization, IMF, global corporations – that recognize the importance of today’s global interdependence and connectedness.