Michael Hudson: Trump’s Travesty of Protectionism

By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is J is for Junk Economics. Jointly posted with Hudson’s website

Trump’s series of threats this week was a one-two punch. First, he threatened to impose national security tariffs on steel and aluminum, primarily against Canada and Mexico (along with Korea and Japan). Then, he suggested an alternative: He would exempt these countries IF they agree to certain U.S. demands.

But these demands make so little economic sense that they should be viewed as an exercise in what academia used to call power politics. Or in Trump’s world, Us versus Them, a zero-sum game in which he has to show that America wins, they lose.

It won’t work. Trump’s diplomatic ploy with Mexico is to say that he’ll be willing to exempt them from the steel and aluminum tariffs if they agree to (1) build the wall that he promised to make them build, and (2) give other special favors to the United States. He can then go to American voters and say, “See, we won; Mexico lost.”

This is unlikely to elicit a Mexican surrender. Its president already has said that building a wall makes no sense, and cancelled the planned diplomatic visit to Washington last week. Giving in to Trump’s election promise to American voters (or more to the point, indulging in his own ego trip about the wall) would be political suicide. Trump would crow that he made Mexico bow to his bidding.

Matters aren’t much better in Canada. While some Pennsylvania and Ohio steel companies probably will try to make Trump look good by hiring back a few hundred workers if and when the tariffs are announced, Canada and other suppliers employees would have to be laid off. Canadian resentment already has been building up for decades, ever since the auto agreement of the 1960s and ‘70s that favored U.S. suppliers.

But the real economic problem comes from within the United States itself. If new steel workers are hired, they may be laid off in a few months. Most important is the bigger economy-wide picture: The Chamber of Commerce and other groups have calculated that the loss of jobs in steel- and aluminum-using industries will far outnumber the new hiring of steel and aluminum workers.

NPR on Wednesday had a maker of beer kegs explain that if the cost of steel goes up, he can’t afford to match the prices of foreign keg manufacturers who buy their raw materials cheaper – and do NOT have tariffs raised on higher manufactures.

There are many good arguments for protectionism. These arguments are in fact much better than the free-trade patter talk used to indoctrinate college economics students. Of all the branches of today’s mainstream economics, free-trade theory is the most unrealistic. If it were realistic, Britain, the United States and Germany never would have risen to world industrial power. (I review the fallacies of free-trade theory in Trade, Development and Foreign Debt.)

Economic history provides a long and successful pedigree of good arguments for protective tariffs. Britain created its empire by protectionism, stifling manufactures in the United States as long as it pursued free trade. After the Civil War ended, America built up its industry and agriculture by protectionism, as did Germany and France. (I discuss the strategy in America’s Protectionist Takeoff: 1815-1914.)

But as each of these nations became world leaders, they sought to pull up the ladder and prevent other countries from protecting their own industry and agriculture. So they changed to “free trade imperialism.” The aim of industrial leaders is to convince other countries not to regulate or plan their own markets, but to let the United States engineer an asymmetrical trade policy whose aim is to make other countries dependent on its food exports and monopoly exports, while opening their markets to U.S. companies.

Since the 1920s the protectionist economies that came to support free trade have rewritten history to white out how they got rich. The strategy of protectionism has been forgotten. Trump’s so-called protective tariffs against steel and aluminum are the antithesis to every principle of protectionism. That is why they are so self-destructive.

A really nationalistic trade strategy is to buy raw materials cheaply, and sell finished manufactured goods at a high value-added price.

The idea of industrial protectionism, from British free trade in the 19th century to U.S. trade strategy in the 20th century, was to obtain raw materials in the cheapest places – by making other countries compete to supply them – and protect your high-technology manufactures where the major capital investment, profits and monopoly rents are.

Trump is doing the reverse: He’s increasing the cost of steel and aluminum raw materials inputs. This will squeeze the profits of industrial companies using steel and aluminum – without protecting their markets.

In fact, other countries are now able to legally raise their tariffs to protect their highest-technology sectors that might be most threatened by U.S. exports. Harley Davidson motorcycles have been singled out. They also can block U.S. monopoly exports, such as bourbon and Levi blue jeans, or pharmaceuticals. Or, China can block whatever U.S. technology it decides it wants to compete with.

Trump’s tariff threats caused short-term aluminum prices to jump by 40 percent, and steel prices by about 33 percent. This raises the price of these materials to U.S. manufacturers, squeezing their profits. Foreign manufacturers will not have their material prices increased, and so can out-compete with U.S. steel- or aluminum-using rivals. The global oversupply in fact may make the price of steel and aluminum decline in foreign markets. So foreign industry will gain a cost advantage.

On top of that, foreign countries can legally raise tariffs in their own markets – for whatever industries they deem will best gain from this advantage.

Trump’s tariffs will not induce new capital investment in steel or aluminum

America’s logic behind protective tariffs after the Civil War ended the Southern free-trade policies was that tariff protection would create a price umbrella enabling U.S. manufacturers to invest in plant and equipment. Britain already had made these sunk costs, so the United States had to include the cost of capital in its revenue.

That’s how America built up its steel industry, chemical industry and other manufacturing industries.

But no steel or aluminum company is likely to invest more or hire more U.S. labor as a result of higher tariff revenues. These companies may raise their prices, but neither investment nor trickle-down effects are likely.

For one thing, aluminum is made out of electricity, and America is a high-cost producer. Alcan – America’s largest supplier – has a rip-off deal with Iceland, getting electricity almost for nothing.

For steel, it takes a long time to build a modern steel mill. No company will do this without an assured market. Trump’s tariff increases do not guarantee that.

America’s policy of breaking international agreements (we’re the “indispensable nation”)

Few companies, labor groups or banks in New York City have been willing to trust Mr. Trump in recent years. He should have called his book “The Art of BREAKING THE deal.” That’s how he made his money. He would sign an agreement with suppliers to his hotels or other buildings, and then offer only 80 cents (or less) on the dollar. He’d tell them, in effect: “You want to sue? That will cost you $50,000 to get into court, and then wait three or four years, by which time we’ll have made enough money to pay you on the cheap.”

Bank lenders had as much trouble getting paid as did Trump’s hapless suppliers. He made his fortune this way – so successfully that he seems to believe that he can use the same strategy in international diplomacy, just as he’s threatening to break the Iran agreement.

Will this work? Or are foreign economies coming to view the United States as “not agreement-capable”? In fact, will U.S. companies themselves believe that agreements signed today will still be honored tomorrow?

Trump’s national security ploy to bypass Congressional authority over trade policy

This is not the first time the United States has raised tariffs unilaterally. George W. Bush did it. And my 1979 book, Global Fracture, describes U.S. protectionism in the 1970s against other countries. America did it again and again.

But Trump has introduced some new twists. First of all, former U.S. protectionism had Congressional backing. But Trump has bypassed Congress, no doubt aware that steel-using and aluminum-using industries can mobilize Congressional support against Trump.

So Trump has used the one play available to the Executive Branch: the National Security umbrella. In a great mind-expansion exercise, he claims that it would be a loss of national security to depend on neighboring Canada, Mexico, or allies such as South Korea and Japan for steel and aluminum. If he can convince a kangaroo trade court, this loophole is indeed allowed under WTO rules (GATT Article XXI). The idea was to apply to times of war or other great crisis. But U.S. steel and aluminum production has been steady for over a decade, and there seems to be no military or economic crisis affecting national security.

Suppose Trump gets away with it. Other countries can play this “national security” game. Any economic activity can be deemed national security, because every economy is an overall system, with every given part affecting all the others. So Trump has opened the door for overall asymmetrical jockeying for position. The most likely arena may be high-technology and military-related sectors.

Back in the 1980s this was called “Uncle Sucker” patter talk – acting as if the United States was the exploited party, not the exploiting actor in international trade and investment. Ultimately at issue is how much policy asymmetry the rest of the world is willing to tolerate. Can the United States still push other countries around as it has done for so many years? How far can America push its one-sided agreements before other countries break away?

Each foreign country threatened with loss of steel or aluminum exports has a more high-tech industry that it would like to protect against U.S. competition. The response is likely to be asymmetrical.

And here at home, how long will higher manufacturing industries back Mr. Trump and his policy that makes a travesty of “smart” protectionism?

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54 comments

  1. CrazyOverlord

    Is Trump serious though? Or is this a version or “reality diplomacy drama”? There are many ways this can play out but if he controls the narrative, whatever outcome can be parleyed into political capital with whichever interest group/demographic fits the bill.

    Tangentially, it would very interesting if any of South Korean diplomats could shed some light on how much of Trump’s unpredictability and non-adherence to diplomatic norms has played a role in potentially freaking out N. Korea to the point of offering complete denuclearization.

    1. Katsue

      My understanding is that what the South Korean government announced has been North Korea’s policy since before Kim Jong-Un became Supreme Leader.

      1. PlutoniumKun

        Yes, exactly, North Korea have been asking for a face to face meeting with an American president for 40 years at least. It remains to be seen as to whether they are actually offering denuclearization. But for the North Korean leadership, nuclear weapons have never been an end in themselves, they are a means to an end – the end being the wind down of hostilities towards them and trade agreements on their terms.

        1. vlade

          One has to remember that there is still not peace treaty around NK/SK, technically it’s still just an armistice. NK wants a proper peace treaty, which US (for a variety reasons, most of the dumb IMO) wasn’t really willing to talk. So nukes for NK are, as you say, means to an end. Doesn’t mean it all ends well of course.

          1. Travis Bickle

            What we see here is Trump’s knee jerking wildly, as usual. In his limited, zero-sum mind, as noted above, Trump wants to see NK as caving-in, and he’s said as much. Obviously, that is not what NK has in mind.

            Over the next 3 months, Tillerson et al will have a chance to backpedal or mould Trump’s statements and expectations to the point where a constructive meeting, defined as giving each leader the photo-op they crave, might still be achieved. Everyone’s ego can then survive unscathed. In reality, this is the best scenario to be hoped for.

            There is, of course, a theoretical chance that a 1:1 meeting could break through this 60+ year old logjam, bypassing all those unimaginative low-level preparatory meetings we are told are essential to ‘success’. Hey, I’m all for thinking outside the box, which is what the US is in when you look at pretty much any issue, and revolutionary thinking may be all that can hope to succeed on those many fronts. But what are the odds those ideas will come from Trump, with his history of bankruptcy, deceit, and unreliability in deal-making, not to mention having to sell whatever deal he might cut when he returns?

  2. /lasse

    Trump are inept in macro-economics, but aside the illogic in his trade-war the overall “logic” is in line with mainstream economics and what he probably has learned about it in NYT, WSJ, FT and so on. Deficits are bad, and surplus is good. In line with that logic I suppose he believe that trade/CC surplus will enrich US, that is what mainstream economics say. But if, does he want US to accumulate Chinese Yuan, Euro, Turkish Lira and so on? All of them fiat-currencies that are created out of thein air. Or will he demand that US surplus is paid in gold?

    US have since the 80s been the global trades clearing house, the consumer of last resort with its permanent huge trade deficits. No US consumer of last resort, no global export tigers. Export led growth are also EUropes economic model, never ever do they do anything to alleviate international economic slumps by supporting demand, rather the opposite, they in general implement austerity to worsen the situation.

    All of them want to suck the US deficit teat. EU are protectionist at core, they now “demand” that US should continue its deficits. Trump are inept but so are EU:s protests, they are genuinely dishonest.

    In today’s FT: “Tillerson tells Africa that China finance imperils their sovereignty
    The globalists (and corporate Am.) wanted to squeeze American workers, loaded China with a mountain of US-deficit $ (created out of thin air). $ that Is god as “gold” on the global market.
    And now China use them to leverage their global influence, big “surprise”?
    In the 80s it was the Japanese that was to “take over” the world with their “mountain” of USD fiat-money surplus. How will it end this time? US didn’t became the sole superpower by accident or stupidity?

    1. Brian L.

      I heard what Tillerson said reported on BBC World Service last night and laughed out loud. The U.S./IMF would never imperil a country’s sovereignty, ever. Riiiight. I’m not defending China, but I bet that they wouldn’t treat Africa any worse than the West has.

      1. /lasse

        Can it be so!!! I’m in shock, aren’t IMF/VB and so on the most benevolent “global” institutions with the sole intent to do good for poor countries and humanity? In opposition to greedy China and Russia.

  3. Lucky13

    Trump is bad, got it! However what if Bernie did it? So where from here? The exemptions have already been granted, the target is known (China), so I am at a lose as to why the kneejerk reaction “it could have been done better”. There is very little chance that an expert panel could be convened prior to this to look at trade in a new light. Free trade expert voices will swamp any dissent. As the article points out within the present economic paradigm the smart protectionist argument would be rounded on quickly at a very high political cost, it is unlikely that truth and good policy will out …something about rice bowls.
    The discussion is about a new trade regime. Now the search is on for those who can guide us through a protectionist cycle. The experts and sycophants will now have to be assembled to help. The article makes good points about the possible plays in a trade war. About smart protectionist development ideas. Points that should be heard. How do we get from “free trade” that favours only the few to fair trade that helps workers and the environment?
    Is this the type of conversation that two sides can listen to?

    1. John B

      This is another excellent article about trade in Naked Capitalism, giving the kind of nuanced and balanced discussion it’s almost impossible to find anywhere else. The author and Lucky13 are correct that much of the intellectual work once done on protectionism has been forgotten. It’s hard at this stage to know what a Sanders trade policy would or should look like, and Trump is almost certain to find a way to make a policy bad.

      There are a couple of points in Hudson’s article I’d disagree with, though. First, I’d be very suspicious of any estimate of the net job losses (or anything else) that comes out of the Chamber of Commerce. In the trade field as much as any, the results of economic studies depend critically on assumptions, and the desired outcome often influences the inputs. The Chamber of Commerce is reflexively pro-imports and pro-outsourcing.

      In fact, basic tariff theory still teaches that a large economy like the US can increase its domestic net surplus by imposing low to moderate tariffs. I’d guess a 10% tariff on aluminum meets the criteria, and perhaps even a 25% steel tariff. The basic intuition is that part of the cost of a tariff is paid by foreigners, and a large economy is a sufficiently desirable destination for exports that they’re willing to pay something for access to it. Basically, the US government wields the monopsony power the US economy as a whole can enjoy, even if individual buyers by themselves could not. As with any exercise of market power, it has negative effects on other players, and negative global effects, and much depends on what gets done with the rents. Trump wants to use them to build a wall and give tax breaks to billionaires, which is nasty stuff, but a tariff for reducing inequality or carbon emissions could have greater justification.

      Second, the WTO is a “kangaroo” court, but the kangarooness works the other way than Hudson describes. WTO dispute resolution panelists are committed to free trade. Legally, the national security exception was intended to allow sovereign state members the ultimate say on what they understood to be their own national security interests — otherwise they would not have signed on. Every country has its own idiosyncratic ideas of national security, and the WTO Appellate Body is not qualified to judge them. But, in the end, I expect the WTO will find a way to rule against Trump on this one.

      1. Left in Wisconsin

        According to USW President Leo Gerard on TV the other night, China produces 1.2 billion tons of steel per year and has domestic demand for 700 million tons. While there may be other similarly low cost producers around the world, virtually all of that excess/export Chinese production is likely to be lower cost than ANY steel produced in the US (or Canada or EU). The steelworkers call it dumping because some of the steel production is subsidized, but ending the subsidies would hardly change the competitive equation.

        Trump’s tariffs are pure political theater. There is no way to “level the playing field” when production costs vary so widely absent major coordinated global intervention, which is not going to happen. One simple example: Trump has said nothing about raising tariffs on imported products made overseas with Chinese steel. So how would the tariffs promote American manufacturing (except in defense spending where indeed uncompetitive purchasing practices can be imposed)?

        Ironically, the best policy for Trump (or Bernie) would be using U.S. influence to dramatically raise wages in countries with high export surpluses. How likely is that?

        Is it just me or does it seem like the MSM is eager to hear from MMT’ers on trade? Stephanie Kelton was on MSHRC the other day and she sounded just like a traditional economist – the same long list of other, better non-protectionist policies that mainstream economists always promote but have no chance of enactment. But I don’t recall them ever having her on to talk about deficits or the job guarantee.

  4. Expat

    Trump is a lot dumber than most people give him credit for. With W we knew he was plain old stupid and drunk. With Trump, he has cultivated a persona which portrays him as the smartest, most savvy businessman to ever walk the planet. In reality, his is an abject failure at anything but tv and branding. He is avowedly ignorant and quite obviously devoid of any opinions other than those about himself. He doesn’t understand trade or international relations because they have never affected Trump, the man.

    He loves tariffs because they are simple to understand for his base. They are punishment against evil commies abroad who are trying to destroy America. They are a source of revenue which proves that Trump is a great businessman. And since the Swamp and the Hegemonistic Evil World Establishment is against them, they are obviously just what we need to MAGA.

    I am not an engineer but I assume it would take more than a few years to build up our steel and aluminum industry to meet domestic demand. While that is happening, we will be paying 25% more for inputs which will have to still be imported. The trade deficits with Mexico and China will soar. Or we will see a massive shift of imports to exempt steel producers, perhaps India. So we will at best beggar Canada and Mexico while getting no benefit ourselves.

    The tariffs will end one day and probably as soon as Trump is impeached, so the US will then be saddled with a non-competitive steel and aluminum industry. At least no workers will be affected since this will all be automated and robotic. Leave the workers down in the coal mines where they belong!

    1. Kilgore Trout

      No coal mines either. It’s open-pit mining in the West, and mountain-top removal mining in the East.

    2. RabidGandhi

      He loves tariffs because they are simple to understand for his base. They are punishment against evil commies abroad who are trying to destroy America.

      This is a misunderstanding of who Trump’s base actually is. The median Trump voter’s income is 72K (vs a national median of 56K) , and he was vastly favoured by petite bourgeoisie small business owners: exactly the demographic that will be hurt by steel tariffs.

      The pro-tariff crowd is more likely to be the deindustrialised precariat victimised by “free trade” policy, but this demographic essentially sat out the 2016 election– for good reason. If Trump thinks this is his base, he is confused about how he ended up in the White House (a distinct possibility).

      1. Michael Fiorillo

        Trump’s base may be the petit bourgeois small business owner, but he needed more than that to put him over the top in the Electoral College, and there’s a strong argument to be made that it was disenchanted working class voters in Pennsylvania, Michigan and Wisconsin (many of them previous Obama voters), who did that for him.

        1. RabidGandhi

          Right: that is the difference between the base and the swing. Trump’s base is the 70K earning suburbanite. Some precariat swing voters helped give him the edge but– contra the MSM stereotypes of dumb uncredentialed deplorables voting against their interest– they are not his base.

          1. Travis Bickle

            Got a point there. People who are genuinely informed are the eggheads whose understandings are studiously and reflexively ignored.

            They stand in contrast to the base you describe, who are America’s NCO’, who with their strong and confident personalities are in a excellent position to influence the totally ignorant. These people sway many other minds they are in direct daily contact with. These are the type of people who buy into a Tall & Loud guys like Trump on the basis of those traits and the sort of simplistic solutions he provides that they find plausible.

            These small business owners are the sort of people who have mastered something to build a business and think of themselves in those terms, meaning they have enormous confidence in their ability to understand issues such as this one clearly. The problem is their unrecognized ignorance, and hence the hubris they are unleashed on themselves.

      2. ewmayer

        The pro-tariff crowd is more likely to be the deindustrialised precariat victimised by “free trade” policy, but this demographic essentially sat out the 2016 election

        Given that it was key voter swings in the Rust Belt which cinched the election for Trump, I find that claim highly dubious. Sure, enthusiasm for Trump and Hillary may have been low, but my impressions from the post-election analyses by Lambert et al around here were

        [1] A significant fraction of swing voters who believed Obama’s economic BS in 2008 and (perhaps to a lesser degree) in 2012 were in no way buying Hillary’s transparent lies on these issues and swung to Trump;

        [2] A lot of traditional Dem voters also were sufficiently unenthused at Hillarys transparent corruption and Wall Street water-carrying that they stayed home.

        Note that given [2], you could still have most of the demographic in [1] stay home and the ones who held their noses and voted Trump to swing the results in those states, so perhaps we do agree but I misunderstood your point. Clarification, please?

        1. RabidGandhi

          Yes, I agree with your last point– that most of demographic [1] stayed home while a small nose-holding minority swung the election– and I think this is overwhelmingly borne out in the data.

          For example, in the repeatedly pored over Michigan election, there was an 11,000 vote difference between Trump and HRC. Even if we were to say that those 11,000 voters were all swing group [2], there were well over 2,000,000 voters who stayed home (or who could not vote because they couldnt get childcare, were too busy working 4 zero-hour jobs to vote, were in prison…). This means any 0.5% of group [2] could have swung the election to either candidate, but they chose not to. Secondly, it is crucial to remember that turnout is highly skewed by net wealth: lower net wealth voters are far less likely to vote.

          Therefore, when assessing the opinions of these populations (and determining who is who’s “base” as it were), this refusal/inability to vote is a major demographic expression and it should be given much more weight than the small grouplet of swing voters who happened to cast the deciding votes.

          Lastly, my main beef is that US political coverage generally begins with the beltway pundit assumption that people are either Dems or Repubs, conservatives or liberals. Based on this, most election analyses assume that Trump is supported by 46% of the population which voted for him. This is of course, utterly false. Around 24% of citizens above-18 voted for Trump, and about 25% voted for HRC. Most people voted for neither.

          This interpretational error then extrapolates further into inane assumptions about who the “base” is, thus leading many– perhaps even including Trump and the Dems themselves– that these tariffs are playing to Trump’s base. The data show this is false.

    3. False Solace

      All right, so Trump is a moron and increased input prices will hurt our manufacturers. Undisputable. But we still need a steel industry and an aluminum industry in this country for network security reasons. Also undisputable. So the actual question for me is, how close to life support were those industries? I would like to see some analysis of that instead of comforting stories about Trump voters hitting themselves in the face.

      1. GF

        Here’s a solution. Keep the tariffs going until the steel and aluminum industries are up to a production capacity that matches the demand of the MIC (security) in all its varied aspects – complete vertical integration. Then remove the tariffs and only sell the domestic steel and aluminum to the MIC, thus lowering the cost of goods that the masses want/require. We as taxpayers already overpay by thousands of percent the actual cost of most MIC products so a few more percentage points increase in those costs will virtually go unnoticed.

  5. /lasse

    In EU the common logic is that trade deficits should be accommodated with austerity, Greek style. Tariffs are no-no. Austerity is the name of the game. Or like in Germany make larger and larger parts of the population poorer and poorer so they cant buy to much import and “afford” to maintain infrastructure. The entire programs of Hartz reforms was to quell domestic consumption to keep wages and import down and boast export. On EU level it’s called structural reforms. But that doesn’t count by the free trade cadre.
    Like in Sweden, that have had abnormal trade surpluses since the beginning of the 90s. Sometimes you can hear politicians boast about this and then in the next sentence point at US deficits and as very bad and say they should do as we do.
    In the Swedish and German logic everybody should have trade surplus. Against who one could wonder, the Moon or Mars?

    1. flora

      an aside:
      Tariffs are no-no.

      And yet the EU put tariffs on Chinese steel last summer.
      https://www.wsj.com/articles/eu-imposes-fresh-anti-dumping-tariffs-on-chinese-steel-1469802897

      and in 2015
      https://www.reuters.com/article/us-eu-china-steel/eu-imposes-anti-dumping-duties-on-stainless-steel-from-china-and-taiwan-idUSKBN0ML0LQ20150325

      My opinion: the rise of China’s manufacturing sector (thank you, Western off-shorers) set off a low level trade war some time ago. It’s now expanding and having more pronounced effects in places one wouldn’t normally expect.

      1. /lasse

        At least internally, it would be no-no for poor EU-countries to remedy their current account deficits with tariffs against Germany, entire populations shall be punished with austerity for its “profligacy”. But first after Germany have sold their BMW, tanks and so on to them and they are deep in debt.

        And on solar cells from China and plan punitive duties on e-bikes, to protect production in EU (Germany).
        On poverty stricken African countries they have punitive duties on processed agricultural products like coffee and cacao, but not on the raw beans that EU does not produce them self. To protect EU:s coffee and chocolate producers.
        EU is mercantilist at its core.

  6. Tinfoil Cover

    Is it tinfoil hatty to think that this tariff charade is just a cover for an inevitably coming economic depression? moving away the blame from FIRE sector and the lack of demand through low real wages and deep debt to these insignificant tariffs?

  7. Lincoln was a Protectionist

    Don’t forget: the US also doesn’t have a value added tax (VAT) which most countries rebate on their manufactured exports to the US. VATs are often in the 20-30% range and so a real factor in why the US has its $800 billion a year merchandise goods deficit.

    A bit of history: the terms of trade turned against manufactured goods for Britain on its way to world dominance. The strategy is NOT to charge high prices on manufactures, but to charge low prices like the British in the 1700s and 1800s or the Japanese/Koreans/Chinese/Singaporeans since the 1950s.

    Trump’s tariffs are not strong enough, really very small compared to Lincoln and McKinley’s tariffs and they need to be extended into the 50-100% range on all manufactured products. Hudson’s history here is misleading: a better source would be Ha Joon Chang’s work (in which he notes today’s absence of transportation cost protections) or the work of Paul Bairoch. Given that other countries use VATs to subsidize their exports to the US and given the low cost of our shipping today, a reasonable tariff on the 19th century model would be in the 100-200% range.

    Or we could follow South Korean President Park Chung-hee (1961-1979) in his policy approach: forbid foreign travel to conserve hard currency, use the school system to police the consumption of illegal imports, arrest smugglers and burn all manufactured imports. South Korean school teachers encouraged their students to report on if their parents were consuming foreign cigarettes.

    Americans need to learn more about how their own country as well as others got rich and how they use VATs and currency intervention to stay rich.

    1. reason

      VAT IS an export subsidy, but it is not protectionist, because it applies to all imports and exports equally. The result being that in principle the effect can be exactly offset by exchange rate movements. The REAL issue is what actually determines exchange rates. Here, I think the position of the USD as the primary international reserve currency is the key. The US suffers in a sense from a version of the Dutch disease. Tariffs on individual products are as a consequence only cosmetic, and as noted create more domestic losers than domestic winners. Even a general tariff would probably end up only resulting in a rise in the USD to offset it (because foreigners would keep wanting more US dollars).

  8. Abraham Lincoln was a Protectionist

    The title on Hudson’s post is bit concerning. Observers shouldn’t let an obsession with opposing the President obscure that there may be a sincere attempt to move the needle on policy in a direction that might keep (or at least delay) the US from becoming a non-developed free trade paradise on the Haiti or Somalia model.

  9. Mickey Hickey

    The EU is not the USA in that you have 27 national governments who are quite distinct from a policy perspective in the EU. Thus, the north south divide Germany mesmerised by by Weimar hyperinflation who leans heavily toward balanced budgets along with their cousins the Dutch, Finns and Austrians. Many countries sitting on the fence and then what Germany sees as the disruptives, easy money, inflationary, Greece, Portugal, Italy, Spain, Ireland, Luxembourg. The latter two for their fluid corporate tax policies. I see no consistent EU logic now and given their history we should all be relieved that the EU has kept them from each others throats since its beginnings with 6 countries in the 1950s. Brexit was inevitable since Britain has been unable to shake its post empire delusions of superiority and entered reluctantly in the first place. But Britain is not the only country lacking commitment to the EU. Draghi has performed miracles given the opposition he faced from the Germans, Dutch, Finns.

  10. paul

    This article is why everyone should love michael hudson’s writing and reasons.

    the art of breaking a deal

    policy asymmetry the rest of the world is willing to tolerate.

    I think his books are optimistic, but what else should a text be?

  11. a different chris

    The thrust of Hudson’s article is quite good, but as an economist he needs to be very careful about specifics that he does not understand. Steel, especially 21st century steel, is *very* hi-tech, Harley Davidson motorcycles are most decidedly not. Try to start a shop, and I mean quite a big shop even, making one or the other and see what I mean. Ore is a “raw material”, the SS used for beer kegs most definitely is not.

    And we need to stop exporting our pollution. If we need steel, we better face the consequences of making it.

    BTW, the Harley export market was not anything to write home about, and dying anyhow.

    1. paul

      He might not be discussing the granular level, just the dreadful agregates.

      Its hard to convince eveyone,all at once.

  12. Andrew Watts

    The steel and aluminum tariff that Trump is imposing is nothing more than a political payoff for his supporters. Any systematic regulation of trade would need a government plan of some kind to subsidize industry and facilitate it’s expansion. That idea comes straight out of Alexander Hamilton’s Report on Manufactures. The Chinese probably aren’t worried about any American tariffs on commodities either. The Chinese government will simply increase subsidies if deemed necessary and continue to undercut their international competition,

    The mythical belief that free markets and trade will lead to an optimal outcome will only end in failure. Particularly while other countries implement mercantile policies. The concentration of capital, unequal distribution of resources, and the varying power and influence of countries guarantees that international trade is and will remain a zero sum game. The policy of free trade only worked for Western powers when they could force markets open and dump their surplus through imperialism and gunboat diplomacy. The current regime will last as long as the United States is able and willing to be the consumer of last resort.

    The tendency of capitalism towards overproduction is part of the picture but a whole ‘nother topic.

    This is not the first time the United States has raised tariffs unilaterally. George W. Bush did it. And my 1979 book, Global Fracture, describes U.S. protectionism in the 1970s against other countries. America did it again and again.

    When tariffs were imposed under Bush the Younger and the Obama presidency it occured in lieu of labeling China as a currency manipulator. The ineffectual outcome of these actions and being allowed in the WTO was an optimal outcome for the Chinese. If you’re wondering where China acquired the capital to militarize and fortify the South China Sea and for it’s Silk Road initiative look no further. The massive trade imbalance between the US/China during these years facilitated it. I can only conclude that the Bush II administration was filled with Chinese and Iranian spies given the overall outcome of their policies. /sarc

    1. Andrew Watts

      I should probably mention that I don’t blame China for a variety of reasons. The Chinese are merely winning at Washington’s game through a clarity of purpose and vision that I admire. If any of the fools in DC decided to factor in the yuan’s undervaluation with the rise in Chinese military spending it would’ve alarmed them a decade ago. Nor was China responsible for the free trade agreement between the US and Canada which helped devastate rural Oregon’s timber industry in the ’80s.

  13. TG

    Indeed, well said. It’s rare to see an intelligent defense of protectionism, that realizes that simply slapping tariffs on a few imports won’t do it. Successful protectionism requires a long-term plan.

    But on the other hand: it would have been far better for the United States if we had never signed NAFTA and MFN for China etc. But we did. And now our industrial base is largely gone. As a famous sportscaster once said, “That bus has sailed.” We don’t have the factories, or the supply chains, or – increasingly – the design expertise. It would take generations of concerted effort to get these back, and that’s not going to happen.

    1. Andrew Watts

      That general attitude is the embodiment of TINA, but I can easily concede that isn’t the most likely result with our current ruling class or America’s present trajectory. But it isn’t like “globalization” hasn’t failed once already when Western imperialism had hit it’s peak and the subsequent build up to the first World War commenced.

      A massive change in global attitudes towards protectionism isn’t hard to imagine. It’s probably more likely to start in the tech sector when the US intelligence apparatus is warning people not to use Huawei phones. While the rest of the world, outside of the US/Israel, wonder if using Intel chipsets is that good of a idea in the aftermath of Spectre alongside the Snowden revelations. The fragility of international supply chains is another argument in favor for protectionism in an age of heightened Great Power tension.

      Which isn’t to say that protectionism is the cause of conflict. The Wisconsin School of Economics theorized that the Western desire to economically dominate Eastern Europe was a major contributing factor in the onset of the Cold War. Witnessing the EU/US policy in Ukraine and how it turned out lends credibility to this relatively obscure theory.

  14. The Rev Kev

    Another great article by Michael Hudson. There is something that would be of great concern if I was an American and that is the reputation that it is getting for breaking agreements. The Russians have already given up on the US since the days of Obama as it being a nation that is not agreement-capable, as Hudson mentions, but that was with political agreements.
    With the US pulling out of the Paris agreement, threatening to trash NAFTA if it is not written in America’s favour, threatening the Iran treaty unless that country basically gives up its defenses and now threatening a trade war there must be a lot of countries wondering if the US is such a great place to do business with anymore. It has already been bypassed once with the TPP and I have a feeling that this is only the beginning.
    You are seeing this too in the military sphere where the US was willing to let Iraq be over-run by ISIS if they did not buckle to US demands, They recently stopped fulfilling their contract to service Iraq’s American-made tanks so that half are now in the workshop. They are threatening other countries if they buy Russian weapons and do not but more expensive, less effective US made weapons. You get the gist.
    Maybe not all at once but there might be a gradual pull-back of doing business deals with the US as it may be considered an unreliable partner and you would never know if some political decision would end the deal no matter how much money had been committed to it already. That is definitely something not to look forward to.

  15. steven

    Hudson could have woven in another of the many threads his economic analyses have covered over the years: super (monetary) imperialism. The bottom line here is that US bankers and their wholly owned politicians discovered it was far easier to create money (or as Hudson describes it “debts that can’t be repaid (and) won’t be”) than real wealth, products and services the world wants and can afford. And so begins the spate of off-shoring and the de-industrialization of the US economy.

    All of this ties in nicely with the needs of the US (financial?) military-industrial complex. As long as the US can continue to hang its paper (debt), US politicians can still pass out Pentagon pork to their constituents, Wall Street can continue to create its “product” and everybody (that matters) is happy.

  16. Louis Fyne

    Plenty of things to shake your fist into the air about Trump.

    These tariffs? Aren’t measures like this exactly what left-of-DNC Democrats were wanting for years?

    At least Trump is doing more than giving campaign lip service to the non-technocratic class.

    just sayin. Trump Derangement Syndrome is incapable of even giving a grudging ‘let’s wait and see’.

  17. C Basilovecchio

    HUDSON, “So Trump has used the one play available to the Executive Branch: the National Security umbrella. In a great mind-expansion exercise, he claims that it would be a loss of national security to depend on neighboring Canada, Mexico, or allies such as South Korea and Japan for steel and aluminum. If he can convince a kangaroo trade court, this loophole is indeed allowed under WTO rules (GATT Article XXI).”
    THIS IS A TRUE STATEMENT !
    Canada, Mexico,South Korea and Japan CAN NOT guarantee shipment, if there were a national security issue.Period.

  18. justaluckyfool

    HUDSON, “So Trump has used the one play available to the Executive Branch: the National Security umbrella. In a great mind-expansion exercise, he claims that it would be a loss of national security to depend on neighboring Canada, Mexico, or allies such as South Korea and Japan for steel and aluminum. If he can convince a kangaroo trade court, this loophole is indeed allowed under WTO rules (GATT Article XXI).”
    THIS IS A TRUE STATEMENT !
    Canada, Mexico,South Korea and Japan CAN NOT guarantee shipment, if there were a national security issue.Period.
    PLUS:
    No one reports: A way to reduce the National Debt @FixtheDebt without punishing WeThePeople. US can become a future net exporter of steel and alum. just as we have done in oil. US can change a minus $800 billion into a plus $800 billion each year. Not only reclaim $5 trillion owed to China and Japan but also save the interest being paid.

  19. paul

    At least Trump is doing more than giving campaign lip service to the non-technocratic class.

    Please illuminate about these.

    At least in the house terms of concrete,material benefits.

  20. JustAnObserver

    On a side note.

    Interesting, and saddening, to see another sighting of “not agreement capable” which I first saw @ Vinyard of the Saker. A pernicious side effect of government by executive order.

    Perhaps the US never actually was “agreement capable” but this was covered up by the Cold War and then, later, by its post Cold War sole remaining superpower (TM) status. This latter has now been demolished by the rise of China.

  21. djrichard

    I’m still struggling to understand what our trading partners do with the surplus that they’re accumulating. When it was central banks accumulating that surplus, it was easier to understand. Because central banks can have unlimited appetite in swapping newly printed currency for something else (in this case US dollars imported from abroad). And in the process they stimulate their exporters by keeping the currency peg and there’s an interesting side-benefit to boot, they stimulate their economy with all the new currency that’s pumped into it.

    The US could rightly call this currency manipulation and presumably there’s some way to seek redress (or not) for that.

    But now the IMF says the central bank of China isn’t manipulating their currency anymore. [China had to get this stamp of approval from the IMF for the yuan to be accepted in the SDR basket.] Which means other parties in China are picking up the slack – buying enough US dollars imported by their exporters of goods and services to keep the peg at where the PBoC wants it (more or less). And presumably those parties are parking their dollars in assets in the US, just like the PBoC did.

    But when the PBoC did this, it wasn’t like the PBoC was looking to the US bonds as a way to “make money”. It was just a side effect of their biz model.

    But whoever has inherited this baton from the PBoC (buying US dollars to buy assets in the US) is interested in what those assets in the US can do for them. Which is what precisely? They have to have a long term game plan for those assets. Otherwise, why buy them? If we don’t understand what’s creating this equilibrium, then I don’t see how we’re going to fundamentally change that equilibrium to something else.

    Is the answer that they don’t really have a long term game plan, and they are simply acting as proxies to the PBoC? I.e propping up the currency peg in a way that avoids the IMF calling them out as currency manipulators? In that case, the US should call it for what it is and seek redress that way. But I’m guessing that that’s not what is going on. There’s a biz model we’re missing.

    1. Left in Wisconsin

      I believe there is a sense that a significant fraction of accumulated dollars are being recycled into west coast (and Toronto) real estate. Doesn’t seem like that could go on forever, though.

    2. djrichard

      Hi LiW,

      I do agree that some of that is going on. But the US trade deficit with China is currently at 36B/month. The bulk of that has to be going into other assets: bonds and stocks.

    3. djrichard

      Just to drive the issue further, imagine that the parties that are picking up the slack (from the PBoC) are buying simply one asset: real-estate in the US. This tells us these parties have a biz-model for acquiring real-estate in the US. Perhaps it’s to fully occupy that real-estate when the time becomes necessary – for when all the little mafia chiefs and their brethren need to get out of dodge. Who knows.

      But it also tells us that they’re effectively balancing the trade with the US by buying that real-estate. Because through this demand, the currency exchange rate is relatively stable.

      So if we want to balance trade more towards goods and services, we need to disrupt this trade towards acquisition of real-estate in the US.

      Tariffs of any sort on goods and services aren’t guaranteed to unwind this demand for real-estate. Because all tariffs do as far as parties in China are concerned is reduce the amount of US dollars flowing to China. In turn, that necessitates less dollars getting repatriated back to the US by China. And they have choices to make as part of this:
      a) either reduce their demand for goods and services from the US
      b) or reduce their demand for real-estate (continuing the assumption from above) in the US.
      And right now, with “free trade”, that’s outside of the US’s control. Indeed, at any point, China could choose to reduce (a) down to zero for any reason including the reason that it simply wants only (b), such that the trade with the US is balanced entirely by buying real-estate in the US and nothing else, no goods and services. What would our free-trade proponents say about that?

  22. Altandmain

    This won’t work because the US is literally decades behind other nations in steel making in some areas. In some cases, the American plants are years behind in equipment.

    Steel mills, as Hudson alludes, are very capital intensive investments and the margins of them are razor thin, usually negative.

    Plus there is many decades of accumulated experience and technical knowledge that the US does not have. It also needs a highly skilled workforce with years of experience. That is anathema to the MBAs and their short-term profit cult, which is all about maximum executive compensation.

    I have done some work with the American steel industry, as in the automotive industry, we do of course buy our steel coils from them and several other suppliers.

    From what I can tell, it seems like any steel company that would be viable would require:

    1. State ownership
    2. Private company (not publicly traded) but with very heavy state subsidization

    Anything else is not viable. It will run a loss for 2 to 3 decades. It may never make a profit. I think that it is a worthy investment, because steel is an extremely important industry.

    Keep in mind that one big reason for the rise of East Asia is due to state subsidies and public ownership. China in particular has been unloading steel at very low prices. The reason why is because they built up a massive amount of overcapacity. They had built up back when their economy was growing rapidly. China has since ended up slowing down in economic growth, but they still have the overcapacity in steel.

    The Chinese also want to build up their technical know-how on making the best quality steel and to do that, they are willing to sell at a loss. Why? Every coil you sell deprives the competition of business, while you learn how to make steel better. In that regard, subsidizing steel is a small price to pay for greater future gains. Eventually China would catch up, while the foreign nations lost their steel industry and with it, the technical knowledge. Contrary to say, the Clinton Liberals, steel making is very much a high knowledge type of work.

    Another reason of course is that free trade with mercantilism practicing nations will inevitably end up in loss of key industries. It needs an industrial policy to counter the effects. The US would inevitably lose to more long term oriented nations.

    1. Left in Wisconsin

      I wouldn’t call it over-capacity. If you are the world’s low-cost producer, then any over-capacity that exists is not yours. The world may have excess capacity but since there is no requirement to have domestic demand balance domestic production, I don’t know why it would be Chinese excess capacity.

      1. Altandmain

        Fair enough.

        From their point of view, selling at low prices, even at a loss at times, might be well worth the costs. They can gain marketshare and technical knowledge. Right now though, the rest of the world is responding with tariffs.

        The issue is that American style capitalism is uniquely vulnerable to this business model. They can prey on the greed of corporate executives eager for a short term profit at any cost, including passing on technical knowledge to a potential future competitior. I have heard of many Western companies who have passed their knowledge in the hopes of lowering costs only to have their technical knowledge reverse engineered and a much cheaper competing product introduced. The same could be said about steel.

        Then there is the more advanced technology. Eamonn Fingleton touches on it:

        http://www.theamericanconservative.com/articles/there-is-no-such-thing-as-free-trade/

        I bet that in a few decades, it will be clear that the US was as ideologically inflexible towards capitalism and neoliberalism as the USSR was towards peddling communism. A case could be made that the USSR was never really a socialist society, but then the US was arguably was a crony capitalism society. It is just that the crony capitalism has worsened and is gobbling up productive industry.

        When there is excessive production, it means that there are huge losses. An executive from Toyota once noted that 60 percent of the costs of a car are in the plant, 20 percent in parts, and he doesn’t say the rest. Presumably labour and other external costs.

        http://archive.fortune.com/2011/02/18/news/international/toyota-factory-japan-asia.fortune/index.htm

        What that means is that having low wages isn’t as big an issue as subsidies. But having overcapacity is a huge, huge problem.

        I would imagine that the same is true in steel. Fixed costs must be very high. That is why overcapacity is incredibly damaging to a capitalist society where there are limited subsidies to weather the storm.

  23. Mikerw

    It seems to me that that are two major themes mixed in in the article and comments. General thoughts and prescription for the role of trade policy by the US and the economics of the steel and aluminum industry.

    I have early in my career worked in corporate planning for a major steel company then at a major consultancy working with the metals industry. Let’s take aluminum first. As Mr. Hudson points out Al is basically electricity (14,000 kWh per tonne). It also in most places now means hydro electric. Hence, why places like Quebec produce primary Al. But, more importantly, primary Al is a global commodity and generally priced off the LME so US tariffs will just make things more complex. Also, the real story in Al is that all the return is made upstream in bauxite mining / alumina, not in the production of Al or finished products. So the notion that the US will grow in Al is a fiction.

    Steel is more complex as steel isn’t always steel. What I mean is that there is a broad range of products with very different cost structures. That said, labor is only one component in the costs of manufacture in what are now large economy of scale, highly technical, process computer controlled factories. Of equal importance is access to a lot of water if you have blast furnaces (why so many US steel mills are on the southern shore of Lake Michigan) and access to raw materials. One of the key raw materials for integrated steel is iron ore. For the Asian mills, which tend to sit in self contained ports, this largely comes from Australia. US ore is poor quality taconite from the Mesabi Range in MN. It is not really competitive with Australian or Brazilian ores. You also need met coal, which we have also largely depleted domestically. So besides labor we are at a competitive disadvantage.

    What we do have is a good sized market. But for may complex reasons we import a significant percent of our steel. This is not going to change.

    Lastly, it is interesting that many of the famous names from the industry’s past are no longer (Bethlehem, Inland, LTV, etc.). They are either out of business or owned by foreign companies that run complex global systems. There is no signs they will invest here.

    So a knee-jerk may results in tariffs for some unknown period of time. It will not produce investment or employment, nor should it.

    1. ewmayer

      I was curious about the potential for increased Al recycling to help offset the need for energy-suckng new-ore processing, so did a bit of number crunching. This piece is from 2003, but let’s assume the recycling percentages have not changed majorly since then. Inside the article we find:

      More than 100.8 billion cans were produced in 2002, with 53.8 billion aluminum cans recycled—some 1.59 billion pounds. For 21 out of 22 years the rate has exceeded 50 percent.

      While over half of America’s aluminum beverage cans are being recycled, more than one million tons of aluminum containers and packaging – including billions of beverage containers, TV dinner trays, aluminum foil – are thrown away each year. That’s an alarming figure, because aluminum lying in our landfills will be there for 200 years or more.

      Further from an Aluminum dot org factsheet:

      About 34 percent of the aluminum used in North America came from domestically produced primary aluminum while 37 percent was derived from recycled materials. Imports represented 27 percent of supply in 2016.

      Said total annual supply is 26 million lbs = 13,000 (short) tons. It’s unclear what fraction of the imports are primary (mined/refined) versus recycled, but clearly, if the U.S. recycled 1 million tons more Al per year than currently it would make a large dent (pardon the pun) in the need for primary production.

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