The 2018 trade war

Has the trade war with China been good for American businesses and consumers? The first results are in, and David Weinstein tells Tim Phillips who the winners and losers are.

Trade: the effects of a border between East and West Germany

From the Peterson Institute for International Economics comes this interview in which Soumaya Keynes and Chad Bown talk with Stephen Redding (Princeton University) about his research on the border between East and West Germany erected in the mid-20th century. They discuss the loss of market access for cities near the border, and how being cut off from one's neighbours affected the local economy. Spoiler: It wasn't pretty ...

Paul Krugman talks trade

From the Peterson Institute for International Economics comes this interview in which Soumaya Keynes and Chad Bown talk with Paul Krugman about trade theory and policy.

Soumaya Keynes and Chad Bown sit down with Nobel Prize-winning economist Paul Krugman (CUNY and New York Times) in a wide-ranging interview about international trade. They discuss NAFTA, labour standards, and the USMCA (2:25); the current toxicity of trade politics (8:00); the wonky economics of comparative advantage versus increasing returns to scale trade (16:55); when and why the trade world changed (21:30); trade’s impact on US wage inequality (25:10); more wonky economics of strategic trade policy (29:30); China’s trade and industrial policy (34:45); what the Trump administration gets right about trade (39:40); and more.

Scott Lincicome: in defense of free trade

From Conversations with Bill Kristol comes this interview with Scott Lincicome on a defense of free trade.

Scott Lincicome is a leading international trade attorney, adjunct scholar at the Cato Institute, and senior visiting lecturer at Duke University. In this Conversation, Lincicome explains the system of free trade agreements and alliances that the U.S. has built over many decades and how the system contributes to peace and prosperity for America. Lincicome also shares his perspective on the renegotiation of NAFTA, the decision not to participate in the Trans-Pacific Partnership (TPP), and other trade agreements. Finally, Kristol and Lincicome consider where Republicans and Democrats stand on trade today—and where the parties are likely to go in the future.

Don Boudreaux on free trade, protectionism, and the China shock

From David Beckworth’s podcast series, Macro Musings comes this audio of an interview with Don Boudreaux on Free Trade, Protectionism, and the China Shock.

Don Boudreaux is a professor of economics at George Mason University as well as the co-director of the Program on the American Economy and Globalization at the Mercatus Center. He joins the show today to talk about the future of trade and globalization. David and Don also discuss the history of protectionism in the US, President Trump’s trade policies, and why the China Shock thesis may signal bad economics.

Pierre Lemieux on Peter Navarro's conversion

In the latest issue of Regulation, Pierre Lemieux writes on Peter Navarro's Conversion.

Navarro is an economist and director of the Office of Trade and Manufacturing Policy (OTMP), a White House agency created by President Trump. He is one of the rare economists to occupy a high-level advisory role in the White House. A Harvard University Ph.D., he is a stiff protectionist, which is rare among economists

Rare is something of an understatement!

Lemieux writes that

Navarro makes five distinct arguments against open trade with China and other countries. They can be summarized as follows:

• The impossible-competition argument: We cannot compete against a dirigiste and even totalitarian country like China. Trying to do so generates negative externalities.
• The fairness argument: “Unfair” trade is not free trade and is destroying the American economy.
• The trade deficit argument: The U.S. trade deficit is a serious problem that reduces gross domestic product and indicates unfair trade.
• The retaliation argument: Retaliatory protectionist measures are justified against protectionist countries; such retaliators are the real free-traders.
• The national security argument: Protectionism is required for reasons of national security.

Lemieux then examines each of these arguments and show what is wrong with them.

Lemieux concludes by saying,

Writing for Foreign Policy in March 2017, journalist Melissa Chan depicts Navarro as motivated by his love of media attention and his longing for political fame. He ran for public office several times, always unsuccessfully, and “morphed from registered Republican, to Independent, to Democrat, and back to Republican.” According to Chan, he is derided by well-regarded China analysts. Disregarding psychological and political speculations, one thing is sure: his arguments are not based on economic analysis.

To summarize my arguments, economics strongly suggests that the best trade policy is not to have one, to leave citizens alone to import or export as they wish. That’s true whether the country’s trading partners are free-traders or dirigistes like China. Free enterprise and economic freedom are not only efficient, they are what fairness is or should be about. There is no reason to be concerned with the trade deficit, except to the extent that it is caused by federal profligacy, in which case the solution is to solve the root cause of the problem. Retaliation only compounds other countries’ protectionism. National security is an easy protectionist excuse. Building a war economy in peace time is not acceptable in a free society.

The maintenance of economic freedom at home—which includes the freedom to import what one wants if one finds the terms agreeable—is the only individualist, coherent, and realistic policy. The young Peter Navarro seemed to understand that. Sadly, today’s Navarro does not.

Trump's trade policies have done the almost impossible, they have united economists across the entire political spectrum Unfortunately for Trump, they are united against him and the policies that Navarro has been advocating.

Adam Smith's discovery of trade gravity

From the latest (Vol. 32 No. 2 Spring 2018) issue of the Journal of Economic Perspectives.

Retrospectives: Adam Smith's Discovery of Trade Gravity
Bruce Elmslie

The gravity equation is a current workhorse of empirical trade theory. It is generally acknowledged that this theory, which relates the extent of trade between countries to their respective sizes, distances, and relative trade barriers, was first developed by Jan Tinbergen in 1962. Acceptance of the gravity model as part of the discipline's core was limited by its scant theoretical foundation for the first 40 years of its existence. This paper finds that a theory of trade gravity was first developed by Adam Smith in The Wealth of Nations. Moreover, it is shown that Smith's statement of a proportional relation between economic size and distance came about as an application of his general theory of differential capital productivity in different economic sectors, and his elaboration of a theory of the gains from trade originated by David Hume. It is further shown that Smith had an explanation of the size of border affects in trade volumes, and a gravity theory of trade restrictions.

Something else for which Smith was ahead of his time.

Trade and minimum wages in general equilibrium

An new NBER working paper on the effects of minimum wages on trade.

Trade and Minimum Wages in General Equilibrium: Theory and Evidence
Xue Bai, Arpita Chatterjee, Kala Krishna, Hong Ma
NBER Working Paper No. 24456

Do minimum wages affect economic outcomes beyond low-skill employment? This paper develops a new model with heterogeneous firms under perfect competition in a Heckscher-Ohlin setting to show that a binding minimum wage raises product prices, encourages substitution away from labor, and creates unemployment. It reduces output and exports of the labor intensive good, despite higher prices and, less obviously, selection in the labor (capital) intensive sector becomes stricter (weaker). Exploiting rich regional variation in minimum wages across Chinese prefectures and using Chinese Customs data matched with firm level production data, we find robust evidence in support of causal effects of minimum wage consistent with our theoretical predictions.

Worst. Tariffs. Ever. The Smoot-Hawley tariff

From NPR's Plant Money comes this audio involving Doug Irwin on the Worst. Tariffs. Ever.

About a month ago, President Trump walked up to a podium, and followed through on a big campaign promise. He said the U.S. was going to impose a 25-percent tariff on foreign steel, and a 10-percent tariff on foreign aluminum.

#833: Worst. Tariffs. Ever.
His announcement was met with a lot of face-palming from economists. Why? Because we've been down this road before.

Today on the show, we learn how the Smoot-Hawley tariff act of 1930 helped tank the world economy. And why it means that today, 90 years later, President Trump has the power to start what many people say is a trade war.

Trade wars and the Smoot-Hawley tariff: what really happened?

From Trade Talks comes this interview with Douglas Irwin on the Smoot-Hawley tariff, its effects and its relevance for today:

Soumaya Keynes of The Economist and PIIE Senior Fellow Chad P. Bown speak with Douglas Irwin (PIIE and Dartmouth College) about popular misconceptions around the Smoot-Hawley Tariff Act of 1930, the Great Depression, and the global trade wars that ensued. They discuss how the gold standard, tariffs, quotas, exchange controls, imperial preferences, and bartering all fit into the dismantling of the international trading system in the 1930s. They then put President Trump's trade policy actions in perspective.

The senselessness of trade wars

The senselessness of trade wars is well expressed in an adage attributed to the British economist Joan Robinson:

Even if your trading partner dumps rocks into his harbour to obstruct arriving cargo ships, you do not make yourself better off by dumping rocks into your own harbour.

Alas in a trade war as soon as one country dumps rocks in its harbours everybody starts dumping rock in theirs, and everybody losses. So no matter what some twitting presidents seem to think, trade wars are not easy and nobody wins them. They really are a lose/lose proposition.

Economist's views on tariffs

The IGM Economic Experts Panel at the University of Chicago's Booth School of Business were asked their views on the statement

Imposing new US tariffs on steel and aluminum will improve Americans’ welfare.

And yes 100% of those who answered either disagreed or strongly disagreed with the statement (Three people did not answer, if you want to know why the numbers only add up to 93%.)

Yes 100%.

In short, economists do sometimes agree, and one thing they agree on is that tariffs are bad.

Politicians take note.

Steve Hanke on Trump's protectionist policies

From RNZ's Morning Report comes this discussion with Professor Steve Hanke of Trump's recent protectionist policies.

China has responded to Donald Trump's threat of a trade war with a warning that it won't sit idly by if its economy is hurt by new protectionist policies by the United States. The US President openly talked of starting a trade war late last week when he announced stiff new tariffs on imported steel and aluminium. He tweeted: "Trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don't trade anymore-we win big. It's easy!" Mr Trump also threatened to impose a tax on EU-made cars. His comments have drawn strong criticism from the International Monetary Fund, the World Trade Organisation and trading partners including Canada and China. Professor of Applied Economics at Baltimore's Johns Hopkins University and a former senior economic advisor to President Ronald Reagan, Steve Hanke, has described Mr Trump's proposed new tariffs as a "horror".

Milton Friedman on the protection of the US steel industry

Protection is, unfortunately, in the news again. The US may be starting a trade war by imposing steep tariffs on imported steel and aluminum. Milton Freedman explains why protection is a bad idea.

Doug Irwin on the history of US trade policy

From David Beckworth’s podcast series, Macro Musings comes this audio of an interview with Doug Irwin on the history of US trade policy.

Douglas Irwin is a professor of economics at Dartmouth College and a leading expert on trade economics. He joins David Beckworth to discuss his new book, Clashing over Commerce: A History of US Trade Policy, which examines the history of American trade policy from the late 1700s to the present. Doug explains how US attitudes toward trade evolved over time and how free trade became the postwar consensus. Specifically, Doug argues that the history of US trade policy has been guided by the “three R’s: revenue, restriction, and reciprocity.” Finally, David and Doug discuss some of Doug’s work on the gold standard and the Great Depression.

Tyler Cowen interviews Douglas Irwin

From Conversations with Tyler comes this interview between Tyler Cowen and Douglas Irwin about trade policy. Well worth the hour it takes to lesson to.

Tyler thinks Douglas Irwin has just released the best history of American trade policy ever written. So for this conversation Tyler went easy on Doug, asking softball questions like: Have tariffs ever driven growth? What trade exceptions should there be for national security, or cultural reasons? In an era of low tariffs, what margins matter most for trade liberalization? Do investor arbitration panels override national sovereignty? And, what’s the connection between free trade and world peace?

They also discuss the revolution as America’s Brexit, why NAFTA is an ‘effing great’ trade agreement, Jagdish Bhagwati’s key influence on Doug, the protectionist bent of the Boston Tea Party, the future of the WTO, Trump, China, the Chicago School, and what’s rotten in the state of New Hampshire.

The Latest bad idea in town: economic nationalism

From the IEA comes this podcast in which Kate Andrews and Steve Davies talk about the rise of economic nationalism.

From the left-ward shift of the Conservative Party in Britain, to the rise of Donald Trump in America, there seems to be a growing appetite for protectionism and central planning in contemporary politics. Steve and Kate examine some of the reasons behind this trend - and whether advocates of free trade are losing the "Battle of Ideas" in the 21st century.

They also look at what protectionist governments hope to achieve from adopting these policies - and how likely they will be to succeed in "bringing back jobs" for declining domestic industries.

Daniel Griswold on the basics of trade

From David Beckworth’s podcast series, Macro Musings comes this audio of an interview with Daniel Griswold on the Basics of Trade.

Daniel Griswold is a Mercatus Center Senior Research Fellow and Co-Director of the Program on the American Economy and Globalization at the Mercatus Center at George Mason University. He joins the show to discuss the theory of trade, dating back to Adam Smith, and his work on current US trade policy. Daniel and David discuss some of the misconceptions surrounding trade and why Americans should embrace free trade instead of protectionism.

Ricardo and comparative advantage (updated)

David Ricardo is probably most famous because of his introduction of the idea of comparative advantage into economics. Today comparative advantage is the standard reason given as to why countries gain from trade. And as noted in this twit by the great trade economist Doug Irwin, Ricardo's book "Principles of Political Economy" is 200 years old.

But is Ricardo the author of the famous pages in his "Principles of Political Economy"? Some have argued that James Mill is the true author.

In a footnote on page 132 of the fifth edition of his "Economic Theory in Retrospect" Mark Blaug writes

Ironically enough, it is now been shown that the famous pages on comparative advantage in the chapter on foreign trade were almost certainly written by James Mill. Moreover, Ricardo's own conception of foreign trade never effectively went beyond the idea of absolute advantage; in short, he does not deserve the credit he has been given for the theory of comparative advantage.

The basis for Blaug's claim is the paper, by William O. Thweatt, "James Mill and the Early Development of Comparative Advantage", History of Political Economy 8 (Summer 1976) 207-34.

A quick look at Douglas Irwin's book "Against the Trade: An Intellectual History of Free Trade" gives rise to another footnote, from page 91, which reads,

Thweatt's case is plausible because Mill worked closely with Ricardo on the Principles and commented extensively on drafts. Inconclusive evidence against his interpretation comes in a letter from Mill to Ricardo in which he states: "... that it may be good for a country to import commodities from a country where the production of those same commodities cost more, than it would cost at home: that a change in manufacturing sill in one country, produces a new distribution of the precious metals, are new propositions of the highest importance, and which you fully prove." See David Ricardo (1952, 7: 99). Further, in his article on colonies Mill also credits Ricardo with the theory.

It has also argued that Mill explained the idea of comparative advantage better in his "Elements of Political Economy", published after Ricardo's "Principles".

But whoever wrote about comparative advantage Ricardo's book is worth celebrating. So joint Irwin and many other economists in raising a glass of wine, from a country of your choice, to David Ricardo!

Updated: In the comments section to this posting Jorge Morales Meoqui writes,

The authorship debate about comparative advantage has mostly revolved about the relative merits of Ricardo's statement in the Principles and Robert Torrens’ statement in Essay on the External Corn Trade (1815). James Mill never claimed merit for it, and in the letter to his friend Ricardo he indicated unequivocally who should be credited for the insight.

For more on Morales Meoqui's work on the comparative advantage debate see here.

Employment effects of Chinese imports in the US

In 2013, Autor, Dorn, and Hanson published a paper in the American Economic Review showing that rising import competition from China has been an important contributor to the recent decline in the employment rate of working age population in the United States.

Exploiting variation in exposure to Chinese import across local labor markets (commuting zones) over 1990-2007, they find that Chinese import exposure caused a large reduction in manufacturing employment: a $1,000 per worker increase in import exposure over a decade reduces manufacturing employment per working-age population by 0.6 percentage points (their Table 3, column 6), explaining about 44 percent of the actual decline in manufacturing employment from 1990 through 2007. Furthermore, the negative employment shock by Chinese imports goes beyond manufacturing and exists for nonmanufacturing workers. To be more specific, import exposure to Chinese imports caused a substantial employment decline in both manufacturing and nonmanufacturing sectors for workers without college education; while for workers with college education, import exposure caused substantial job loss in manufacturing sectors but a statistically insignificant increase in employment in nonmanufacturing sectors (their Table 5, Panel B) (Feenstra, Ma and Xu 2017: 2).

Robert Feenstra, Hong Ma and Yuan Xu have written a comment, "The China Syndrome: Local Labor Market Effects of Import Competition in the United States: Comment" (pdf), on that paper. In their comment Feenstra, Ma and Xu report results that cut the total employment effect in half, and in some groups the employment effect becomes insignificant, by controlling for the US housing boom .

The comment's abstract reads,

We re-examine the findings by Autor, Dorn, and Hanson (ADH, American Economic Review 2013, 103(6)) on the impact of Chinese import penetration on U.S. local employment by taking into account the concurrent housing boom. The responses of total employment, unemployment, or not-in-the-labor force to import exposure fall by about one-half when controlling for changes in housing prices, and become statistically insignificant in a number of cases. Results across sectors are more subtle. Noncollege workers in the manufacturing sector continue to experience a reduction in employment after correcting for the ‘masking’ effect of the housing boom, but that reduction does not occur in the nonmanufacturing sector. For college workers, their employment in the nonmanufacturing sector even rises due to the China shock, which fully offsets their reduced employment in manufacturing during 2000-2007. Our results imply that the net reduction in total US employment due to Chinese import exposure was about 0.8 million workers, or less than one-half of that implied by the estimates in ADH (2013).