Trump's new trade policy

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US President-elect Donald Trump has announced he plans to quit the Trans-Pacific Partnership (TPP) trade deal on his first day in the White House. The TPP was signed by 12 countries which together cover 40% of the world's economy, but has not yet been ratified. Asia-Pacific leaders meeting at an economic summit in Peru over the weekend pledged to pursue free trade deals despite Mr Trump's opposition. 

Simon Rabinovitch, Asia economics editor at the Economist This is not surprising given all that Trump said during the campaign, but it is still disappointing. US withdrawal from the TPP kills a deal that was a decade in the works. The irony is that, though Trump has called it a horrible deal, it was actually very good for the US. It would have given the US a very strong say over the rules of trade between Asia and America, putting more of a focus on labour rights and intellectual-property rights. 

The collapse of the TPP will now create a void in Asia. There is lots of talk about China now moving in to fill it, becoming the region's leader in shaping trade agreements. But that will be hard for it to do because many other governments are wary of its export machine. Jim Rogers, Investor For better or worse, this gives Asia and the Pacific to China and its friends. There are several billion people with strong economies, little debt, and huge assets in the area. It will be a major turning point in history whichever way the world now turns out.

Reaction: US President-elect Donald Trump dumps TPP - BBC News

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Think of the TPP as an expanded version of the current trade pact Canada has with the US, the North American Free Trade Agreement (NAFTA). Canadians have had special access to the Mexican and American economies for quite some time now, arguably getting the best deals for products bought and sold across both borders. With the TPP, 12 countries would have been able to share in the perks of this free trade bonanza. 

That involves the reduction or elimination of tariffs (a tax or duty to be paid on goods), new rules for resolving trade disputes, and the renegotiation of subsidies for the manufacturing and agricultural sectors, among many, many other very complicated things. 

Indeed, the TPP has long been touted by critics as a grand American plan to plant their flag in East Asia and counter the perceived economic threat that is China, by getting first dibs in trade negotiations with key growth markets in Asia-Pacific like Australia, Brunei, Vietnam, and Malaysia.

Here's why Trump hates the Trans-Pacific Partnership so much - Business Insider

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This is a must read. Trump's trade picks are basically illiterate in economics.

“When net exports are negative,” Ross and Navarro write, “that is, when a country runs a trade deficit by importing more than it exports, this subtracts from growth.” They believe that, therefore, we can boost growth by curtailing imports

Donald Trump’s trade team has based their analysis on a remarkably silly mistake - Vox

They get this from an accounting identity: GDP = G + C + I + NX.

GDP = Gross Domestic Product
G = Government expenditures
C = Consumption
I = Investment
NX = Net Exports.

It's an accounting identity, not a causal relationship.

But has it occurred to them that using the same accounting identity, boosting G (government expenditures) would also boost growth? I don't think many of these right-wingers agree with that (to put it mildly). An example from the article:

Here’s a quick way to tell that something has gone wrong with the Ross/Navarro argument. Last year, the United States imported $180 billion worth of petroleum products — oil and such.

According to Ross and Navarro, if the United States made it illegal to import oil, thus wiping $180 billion off the trade deficit, our GDP would rise by $180 billion. With labor constituting 44 percent of GDP, that would mean about $80 billion worth of higher wages for American workers. So why doesn’t Congress take this simple, easy step to boost growth and create jobs?
Well, because it’s ridiculous.

What would actually happen is that gasoline would become much more expensive, consumers would need to cut back spending on non-gasoline items, businesses would face a higher cost structure, and the overall economy would slow down with inflation-adjusted incomes falling. 

Incredible stuff.

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On Thursday, CNN reported that President-elect Donald Trump's administration is considering imposing a 5% tariff on all imports into the United States. While the decision is not final, sources told CNN the tariff could be implemented through an executive order in the early days of the Trump presidency. The move is not surprising given that Trump made free trade one of the central topics of his campaign after criticizing China, Mexico, and Japan. 

He suggested putting a 45% tariff on Chinese imports, said he would declare China a currency manipulator on his first day in office, proposed taxing imports from Mexico, argued in favor of "ripping up" trade deals, and called the Trans-Pacific Partnership, or TPP, "a rape of our country." After the election, Trump has said in victory rallies that for trade "you have to look at it almost as a war," asking "who the hell cares if there’s a trade war?” 

"If tariffs are more punitive and lead to a public trade spat with China, markets will get nervous, especially if a sharp, retaliatory, [Chinese yuan] depreciation looks like a realistic response," Ajay Rajadhyaksha, head of macro research at Barclays, said.

The impact of Trump's 5% tariff could be a 'global recession' - Business Insider

Another analysis, from Ball State University, attributed roughly 13 percent of manufacturing job losses to trade and the rest to enhanced productivity because of automation..

The Long-Term Jobs Killer Is Not China. It’s Automation. - The New York Times

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Hmm, a lot of objections, and this is by no means everything..

On the call, Trump reportedly threatened Peña Nieto with a 10% tax on Mexican exports and a 35% tax on exports that hurt Mexico the most. Problem is, that would just really hurt us. The Wilson Center, a nonpartisan think tank, estimates that 4.9 million American jobs depend on our trade with Mexico, and if people don't have jobs, they can't have any nice things, American or Mexican. The Peterson Institute — another think tank — says a trade war with Mexico and China would push us into recession. So that's one thing. Another thing is that Mexico is the US's third-largest trading partner. In 2015, the US imported $295 billion worth of goods from the country. 

Peter Navarro, the head of Trump's National Trade Council, laid this callous view of economic policy out in an interview on CNBC last week. When host Melissa Lee pointed to a Citigroup estimate that taxing imports from other countries — a provision called "border adjustment," which acts like a tariff — would be a massive hit to retail companies' earnings and put thousands of American jobs at risk, Navarro called Citigroup "fake news."

Trump starts trade wars - Business Insider

Since March, 2010, when manufacturing employment in the U.S. hit a trough of 11.45 million jobs, nearly a million new factory positions have been created, most of them in the Southern states, particularly North Carolina, South Carolina, and Tennessee. Better still, the jobs are typically good ones: across that same five-year period, average hourly manufacturing wages have increased over ten per cent, to more than twenty dollars. On the whole, U.S. manufacturing, as measured by the Purchasing Managers’ Index, has steadily expanded. Meanwhile, according to Quanton Data, which tracks global job postings by industry, open manufacturing positions in China have been dropping consistently since 2012, down nearly six per cent in that time. 

According to data provided to me by the Reshoring Initiative, a nonprofit trade organization, in the past five years, about a hundred thousand manufacturing jobs have returned to the U.S. from overseas, sixty per cent of them from China. If you fold in new U.S. plant openings by companies headquartered elsewhere (that is, foreign direct investment in manufacturing), the number jumps to two hundred and fifty thousand. An additional fifty thousand jobs were saved when companies that had planned to go offshore changed their minds. 

What’s more, thirty-one per cent of respondents to the Boston Consulting Group’s 2015 survey of U.S. manufacturing executives said that, in the next five years, their companies are likely to add factory capacity in the U.S. for goods sold domestically, while only twenty per cent were planning to do so in China. The share of executives saying that their companies were actively reshoring production had increased by nine per cent since the 2014 survey, and by about two hundred and fifty per cent since 2012.

Why Donald Trump Is Wrong About Manufacturing Jobs and China - The New Yorker

The United States could find itself with few friends in the Middle East if Republicans pass a border tax without carving out loopholes for oil imports, Helima Croft, RBC Capital Markets global head of commodity strategy, said Thursday. The so-called border adjustment tax would put a tariff on imports, but not exports. That system would favor U.S. drillers and refineries set up to process American crude into gasoline and other fuels. In addition to angering refiners that rely on foreign crude, it would rile key U.S. allies on the Arab Peninsula, including top oil exporter Saudi Arabia, Croft told CNBC's "Power Lunch."

GOP border tax may leave US with no Middle East friends, analyst says

A proposed U.S. corporate tax reform would almost certainly contravene international trade rules if implemented, lawyers told Reuters, risking the biggest dispute in the history of the World Trade Organization. With signs growing that the United States may become more protectionist under President Donald Trump, European business groups said the tax plan — which could impose de facto import tariffs of up to 20 percent — raised the danger of a trade war. Republican (GOP) members of Congress are pushing to replace the existing tax on corporate income with one linked to turnover. This would allow firms to deduct their costs for purchasing goods and services produced in the United States, but would give no such deduction for purchases of imports.

US tax plan would break WTO rules, lawyers say

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The U.S. withdrawal from the Trans-Pacific Partnership (TPP) trade deal won't just leave the U.S. on the outside looking in, it will devastate American agriculture, a former U.S. Trade Representative told CNBC. "We're now going to be competing against other countries who are going to reduce over 18,000 tariffs. Those tariffs will now stay in place for the U.S.," Ron Kirk, who was the U.S. Trade Representative (USTR) from 2009-2013, told CNBC's "Squawk Box" on Tuesday. "This is going to be devastating for American farmers and ranchers and businesses."

Former U.S. Trade Representative: Ditching TPP ‘devastating’ for farmers

The threat of sweeping US tariffs against China, Mexico, and any other country that falls foul of President Donald Trump, may be mere noise at this point.  What is not noise is the Republican plan for a "border-adjusted tax" that is just as explosive in its effects, and is emerging as the biggest single risk to the global financial system. Let us call it the 'Iraq War' of Republican economic policy: strategic folly pursued with dogged certainty by ideologues with limited feel for how the world economy works. "A terrible idea," says Adam Posen, head of the Peterson Institute. Trade experts mostly agree that this abstruse measure would lead more or less automatically to a spike in the dollar by 15pc to 20pc. If allowed to happen, this would drain liquidity from a global financial system anchored on dollar-based lending.  It risks causing capital flight from China to spin out of control

Trump 'border tax' threatens global dollar chaos

As a result, U.S. imports from Mexico soared from $65 billion when the North American trade deal was passed to around $295 billion in 2016. The U.S. has been helped, too, especially in border states such as Texas. Exports to Mexico have climbed from $68 billion in 1994 to an estimated $235 billion in 2016.

Trump calls U.S.-Mexico trade one-sided — and here’s the reality - MarketWatch

On the campaign trail, Trump made a lot of different kinds of promises to different kinds of people, from billionaire businessmen like Wynn to struggling families in the American heartland. It had the effect, partly, of helping all of his supporters see in him what they liked in him and ignoring the rest. This is how Trump was able to please the businessmen and the populists. Two diametrically opposing groups decided to ignore what they didn't like and heard what they did. They voted for the Trump they wanted to see. But the truth is Trump is going to have to choose between one of the groups. The business community needs open markets and stability. Trump's base wants a closed market and the destruction of the status quo. Eventually, that conflict will be fully understood as it plays out in the real economy.

Trump trade war with Mexico and China - Business Insider

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So what is a border tax and how exactly would it work? My former colleagues at the non-partisan Peterson Institute for International Economics just held a conference on the subject that sheds light on the details of a potential border tax plan — and the reviews are not especially positive. Putting aside the irony of a Republican president’s first major economic initiative being a tax increase, the so-called border adjustment tax would serve as a way to punish firms for doing business abroad, even though many US companies depend on such operations for their profitability.

A border adjustment tax works by "denying business deductions for imported goods and services and excluding exports of goods and services from the tax base," says trade economist and Peterson Institute senior fellow Gary Hufbauer. The problem, says Adam Posen, a former policymaker at the Bank of England and president of the Peterson Institute, is that the costs would vastly outweigh the narrow benefits to exporters, who are now lobbying favor of Trump’s proposed tax.

“From a macro perspective, from a broad tax perspective, the amount of revenue you're going to get is very low, the amount of distortions you're going to create is very high, the amount of trouble you're going to create for the US and the world economy is very large, and the distributional effects are not trivial,” said Posen. “They're actually very harmful.”

The problem with Trump's border tax plan - Business Insider

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As an example, Branstetter said, China could decide to stop buying planes made by Boeing if Trump imposed one of the tariffs he has suggested. "They don't have to buy Boeing airplanes — they could buy Airbus airplanes," he said. Airbus is a French company. "That alone could cost thousands of jobs. So I don't see how we could avoid seeing manufacturing job loss accelerate in the United States as Trump either declares his trade war, or because he's sort of backed himself into this belligerent corner, we see an escalating round of trade skirmishes that may not add up into a trade war, but they can cost us a lot."

The death of the Trans-Pacific Partnership - Business Insider

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But an assessment of the impact of trade on wages is very different than an assessment of trade agreements. It is inconceivable that multilateral trade agreements, such as the North American Free Trade Agreement, have had a meaningful impact on US wages and jobs for the simple reason that the US market was almost completely open 40 years ago before entering into any of the controversial agreements. American tariffs on Mexican goods, for example, averaged about 4 per cent before Nafta came into force.

China had what was then called “most favoured nation” trading status with the US before its accession to the World Trade Organization and received the same access as other countries. Before the Korea Free Trade Agreement, US tariffs on Korea averaged a paltry 2.8 per cent. The irrelevance of trade agreements to import competition becomes obvious when one listens to the main arguments against trade agreements. They rarely, if ever, take the form of saying we are inappropriately taking down US trade barriers.

Revoking trade deals will not help American middle classes

Fitch Ratings, one of the world's major credit rating agencies, is sounding the alarm on the potential negative impact of President Donald Trump's economic policies. In a report on Friday, Fitch said that the uncertainty of Trump's economic policies, as well as his penchant for protectionist trade policies, pose a risk not only to the sovereign bonds but overall economic conditions as well.

Fitch Ratings on threat of Trump economic policy - Business Insider

Known as border adjustability, the approach is intended to help U.S. manufacturers by favoring exports over imports. As laid out in Ryan's "Better Way" agenda, companies would pay no tax on revenues from exports and would be unable to deduct the cost of imports from their taxable income. Advocates said if that approach became law, it would attract investment to the United States, provide incentives to manufacturers to maintain or expand their U.S. facilities, and dissuade companies from leaving the country. But some tax experts are skeptical it will be approved by Congress.

What does Trump's 'big border tax' threat really mean? | Reuters

Before going any further, have a read of Gavyn Davies on the idea of a border tax — suggested by Paul Ryan last year — being imposed by your president-elect Trump. The basic idea of said tax, in Davies’ words, is it would “operate like a tariff on imports into the US, combined with a subsidy on many exports from the US, a combination that would have profound international economic consequences.” In short, it would understandably be seen as protectionism and could lead to retaliation.

Pricing in a Trump border tax | FT Alphaville

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Nice long article about Peter Navarro, Trump's unconventional trade tsar who expouses even more unconventional ideas about trade. Here is just the part showing how mainstream economist are out of sink with the public on trade (or vice-versa):

In 2012, 95 percent of leading economists surveyed by the University of Chicago Booth School of Business agreed with the following statement: “Freer trade improves productive efficiency and offers consumers better choices, and in the long run these gains are much larger than any effects on employment.”

Voters never fully bought into that message, though, and they’re getting less deferential to authority figures. In 2013, according to a paper by economists at Booth and Northwestern University, 76 percent of the general public said “buy American” requirements have a positive effect on U.S. manufacturing employment. Only 11 percent of economists agreed.

Trump’s Trade Warrior Is the Most Unpopular Economist in the Class - Bloomberg