Q&A on that crazy G7 meeting: Trump, Trade, Tariffs, and Trouble

June 10th, 2018 at 10:23 am

Trump at the G7 meeting? What could go wrong?

Apparently, his Orangeness gave the leaders of the free world a heavy dose of peak Trump this Saturday at the G7 meeting.

Basically, nothing newsworthy is supposed to happen at these meetings. The leaders spend a day or two together discussing mutual interests, and at the end of the summit, they release an anodyne statement renewing their vows to work together to promote cooperation and trade.

Not this time. The summit was quickly tagged the G6 plus 1 and you can guess the identity of the (very) odd guy out. Perhaps the NY Times headline can give you a flavor of how this played out: Trump Refuses to Sign G-7 Statement and Calls Trudeau ‘Weak;’ Tells Abe “Sushi Sucks!” [OK, I made up that last bit, but the rest is there in black and white.]

I can’t speak to the diplomatic screw-up herein, though this outcome was predictable given the escalation of trade disputes in recent months, like Trumping up national security risks as a reason to put tariffs on imports from Canada and the EU.

But a number of trade issues came up in the summit, so here’s a brief Q&A on the issues to which I pay attention.

Q: Is the global trading system as broken as team Trump says it is?

A: Not at all. Global trade flows have grown steadily over time, tariffs and non-tariff barriers have come down (though all the G7 countries, including our own, maintain many tariffs; see below). Exports and imports were 25 percent of GDP back in the 1960s; now they’re 60 percent. These flows have introduced robust supply chains that support international commerce in goods, services, and finance. They contribute to lower prices and faster growth than would otherwise occur. Views may certainly differ as to the upsides and downsides of this evolution, but you’d be hard pressed to find an economist outside of the Trump administration who’d argue the system is broken.

Q: So, is Trump just over-emphasizing trade’s downsides?

A: Perhaps he is, but for decades before he came on the scene, too few politicians acknowledged the reality that trade engendered benefits and costs. Before Trump, from the center-left to the center-right, politicians’ answer to people’s complaints about the damage from foreign competition to their livelihoods and communities was yet another trade deal with the false promise that this one would really help them. Trump recognized the political power of a populist attack on elites’ refusal to acknowledge the downsides and he continues to press that attack.

Q: Is that why, after the meeting, he said, “We’re like the piggy bank that everybody’s robbing!”?

A: That’s Trump making a fundamental mistake that he won’t stop making: arguing that winning at trade means getting rid of our trade deficit. He views our trade deficit as a scorecard, and no one’s going to convince him otherwise.

And yet, the vast majority of economists, who view our long imbalanced trade accounts as either wholly benign—“hey, if foreigners want to support our consuming more than we produce, let ‘em!”—or as evidence of hyper-acquisitive Americans under-saving, are also wrong about the trade deficit. As Ken Austin and Michael Pettis explain, such thinking “is an egregious error of both logic and mathematics.”

In other words, once again, Trump is onto something, but is distorting its importance and attacking the problem in a way sure to do more harm than good.

In strong economies, like today’s, our trade deficit—a hefty -3.2 percent of GDP ($640 billion)—clearly isn’t preventing us from closing in on full employment. Still, even in a strong job market, a deficit of that magnitude does mean fewer jobs in export sectors, as consumers’ demands for manufactured goods are met with imports instead of out of domestic production. And in weak economies, the trade deficit can be a further drag on growth.

It’s not that our trading partners are “robbing the U.S. piggy bank” as much as jamming it full of their excess savings. World trade must balance, so when those with whom we trade produce more than they consume, or save more than they invest, other countries must do the opposite: consume more than they produce and spend more than we save, i.e., run trade deficits. And because the U.S. dollar dominates other currencies in global commerce, “other countries” are us.

So, when they send us their excess savings (capital inflows), our trade deficit goes up. It makes no more sense to yell at Americans for dis-saving than it does to yell at the Chinese, Germans (and the Taiwanese, the Koreans, and others) for saving too much.

Sometimes those capital inflows get put to good use, sometimes they just inflate bubbles. But they always strengthen the dollar and thus put competitive pressures on our exporting sector.

Q: Wait up. So, now you’re saying Trump’s right, and he should be getting up in everybody’s grill like he just did at the G7? Couldn’t you please stop with the “on-the-one-hand-on-the-other-hand” for a minute and give it to us straight?

A: Sorry, and I hear you, but the topic is nuanced. Here it is as straight as I can put it.

Our persistent trade deficits remain a problem, both in terms of job quality and excess, bubble-inducing financial flows. But they won’t be and never have been solved by tariffs. Instead, we must a) not allow the dollar to be overpriced, b) invest in our export sector, and c) really help the people and places who’ve been hurt by trade. Details here and here.

Q: So, Trump’s wrong on tariffs? Are you saying his assertion that those seemingly mild-mannered Canadians place a 270 percent tax on milk imports is false?!

A: He’s right about that! But again, he’s missing the bigger picture and his tariff war will backfire.

This is another way in which team Trump on the policy community are talking past each other. Economists will tell you all day, correctly, that average tariffs in G7 economies have come down a great deal and are all in the low single-digit percentages. I myself recently made that argument to a senator from a big exporting state. He immediately countered with a long list of examples like the milk one above.

The fact is that all countries, including our own, protect certain sectors. We do less of it than others, but we have tariffs of “350 percent on smoking tobacco, 130 percent on peanuts and 99 percent on prepared groundnuts” and 25 percent on imported light trucks.

So, when Trump rails, as he did at the meeting, between proposing a “tariff-free G7” versus “we’re going to stop trading with them,” he’s way out of his depth. Every tariff has a lobby behind it, if not a culture (the French countryside is dotted with lovely family farms that could not survive without protective tariffs and subsidies). They are an ingrained part of the trading system, they’re not a problem on average, and the realistic play here is to accept that reality and try to negotiate them down in trade deals.

As for postponing trade with G7 or any other large trading partner, it’s a meaningless claim. This is his standard “Art of the Deal, You’re Fired” crap that is great fun on TV (if that’s your thing), but meaningless in this context.

Moreover, his steel and aluminum tariffs, along with similar threats and actions will only hurt the many more Americans in industries that use these metals as inputs than those that produce them, while at the same time inviting retaliation in the form of higher tariffs on U.S. imports.

Q: So, where does this go next?

A: Nowhere good, I’m afraid. To circle back to the top, the system isn’t broken, so misguided attempts to fix it will likely backfire. That could mean higher trade deficits and higher prices, but I’d guess these are marginal impacts, given that none of this bluster will majorly disrupt ongoing trade flows, and given our relatively low exposure to trade (we do a lot less of it than the other G7 countries; imports are just 15 percent of our GDP and only about 10 percent of consumer spending, less than half that of other G7 economies).

The worst thing about all this, aside from the diplomatic disruptions, is that Trump identified a real problem and was elected, at least in part, to do something about it. But neither he nor his team knows what to do.

And now they’re headed for North Korea…

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2 comments in reply to "Q&A on that crazy G7 meeting: Trump, Trade, Tariffs, and Trouble"

  1. Ephemeral Human says:

    I would agree with this statement completely:

    “The worst thing about all this, aside from the diplomatic disruptions, is that Trump identified a real problem and was elected, at least in part, to do something about it. But neither he nor his team knows what to do.”

    It is easy for very informed people to get really, really depressed about the state of things here. My best advice, and it isn’t easy to digest, is to say that most Americans that will read this have had lives of a much higher quality that over 99% of humanity. Reality has always been really harsh, and most highly educated Americans never had to deal with most of reality.

    I would advice people to find a spiritual guidance and refuge in these times. None of us has the answer. Some of us praise those who we believed had better answers, and in almost all cases, those people died horrible deaths. We’re all the children of whatever we believe in. If one chooses to truely take the lead, they’re subject to the possibility of a horrible death. Perhaps the greatest lesson of all is that no matter how many people on earth have tried to take that leadership position, they have all failed, some through horrible death, and others through renewed goals.

    Maybe the best we can do is to allow as many people as possible to realize that no matter how correct or proper some people think the world order is, they are almost always in the minority. World order involves a lot of very unplatable intermediate events, and sometimes they involve ourselves. God forbid, we wish, but not.

    • Ephemeral Human says:

      I just wanted to clarify a bit, because when I read my own comments, I realize I was being too vague to be honest.

      I grew up Christian, and I have a renewed Christian belief system taking hold. It is taking hold because I think I have some idea of what Jesus felt in his persecution. He tried to provide a better way to counter the corrupt powers of his time, and he died a horrible death because of it. I fear that it might be the way of the world, that if a person tries to point towards a better way forward, if they step too far out on the ledge of goodness and humanity, that they will be killed one way or another.

      I’ve found personally that none of us including Jesus were good enough to be that one, the one to stand up to all adversity and fix the human condition. None of us alone can do that. But if more of us admitted that we feel beat down sometimes, that we are conflicted with the value of work vs. conscience, that we are conflicted with intelligence vs. meaning, safety vs. commitment, and personal misery vs. aggregate happiness… that many US companies have too little work to do because of monopolies, too many people trying to protect their jobs by dishonest means, and there’s too much focus on results rather than harmony. What happened to the days when one good person, perhaps incredibly talented, said you keep all of us or you get none of us? Maybe one is better than the others, but maybe they don’t want to do their job unless the others are allowed to keep theirs also…

      I met a ‘vagrant’ and I knew he was telling more truths than most professionals. I’ve been more harangued for spending a few bucks helping a vagrant than for paying Barclay’s or American Express.

      I’ve never been less proud of my country than I am now, but unfortunately, my perceptions are decades behind reality. I’ll be ok, but all in all, we’re not doing ok.

      “Strange days indeed; most peculiar mama!”