Trump is wrong about trade

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donald TRUMPReuters

What we’re about to talk about is much bigger than Donald Trump.
It’s bigger than ‘Make America Great Again’ and fake news. It’s
bigger than Brexit, and it’s bigger than France’s National Front.

What we’re about to talk about is trust, and how it demonstrates
its presence in markets. We’re going to talk about cooperators
and non-cooperators. We’re going to talk about world peace.

But let’s start small.

Over the last week, Donald Trump has turned his back on the
world’s best hope for wealth and happiness — global
trade. He has reignited an old, failed fight over Canadian
lumber, upsetting our allies to the north. He has played on the
fears of Americans by using national security as an excuse to
investigate steel and aluminum imports.

He has opened the door for American corporations willing to use
the power of the White House for their own ends.

And yet, there are many in the United States, the richest country
in the world, who cheer this bullying.

On both the extreme right and left, trade has become maligned as
a harbinger of economic catastrophe — a violent force with the
power to decimate the industries employing entire nations. And
that can be true.

But what is also true, is that trade is a powerful force for
good. We’ve known that for decades. More importantly, perhaps, we
know that trade is an approximation for trust.

“Unhampered trade dovetailed with peace; high tariffs, trade
barriers, and unfair competition with war,” said Cordell Hull,
the US Secretary of State from 1934 to 44.”It is a fact that war
did not break out between the US and any country with which we
had negotiated a trade agreement.”

If trade leads to trust and cooperation, turning away from trade
creates mistrust and animosity. While some think that
globalization — a leap of trust and cooperation if there ever was
one on this planet — started with the end of WWII, many
economists and historians believe it actually started in 1870,
only to collapse with the rumblings of WWI in 1913.

What these academics have found is that cooperation and trust,
like trade, do not move in a straight line. Instead, they move in
cycles — in ups and downs, in moments of darkness and light.

Guess where we’re headed.

Perhaps you’re familiar with Professor Nowak

This idea of the cycle is based on the work of mathematical
biologist, Martin Nowak of Harvard University. He posited that
trust and cooperation are cyclical simply because decisions have
consequences, and those decisions impact people’s worlds. That
world, in turn, impacts people’s decisions. It’s a conversation.

Here’s an example. Say you buy a tank of two dozen piranhas, and
within about 10 days of setting up the tank with all your
gorgeous fish, one piranha realizes that it can eat one of its
tankmates. And it likes the taste. This is a very high form of
non-cooperation to say the very least.

All of the sudden all of the piranhas realize that
non-cooperation is delicious and that its tankmates are dangerous
and not to be trusted. There is a feeding frenzy and by day 14,
there are only 5 piranhas left swimming. They decide at that
point, after all the decimation, that cooperation is better.
Trust is better. Without it, they’ll all die.

That’s how the cycle of trust and cooperation works. 



ages of globalization


Peterson
Institute of Economics; Klasing and Milionis (2013) for
historical data, WTO for 1960–2011, Johnson and Noguera (2012)
for value-added adjustment.


Economists Mariko J. Klasing and Petros Milionis, Professors at
the Netherlands’ University of Groningen then gave us the
data to overlay Nowak’s cycle onto the history of global trade.
In their paper, Reassessing
the Evolution of World Trade, 1870-1949
, they figured out
that trade was a much bigger deal before WWI than economists
initially thought. 

“Our estimates indicate that trade shares during the
1870-1949 period were on average 32% higher compared to
existing accounts and the world ís level of openness to
trade in 1913 had been comparable to that in 1974. This implies
that the rise and fall of world trade that took place over this
period were much more pronounced than previously documented,”
they wrote.

In other words, we’ve already had a period where
globalization came and went when deep cooperation turned into
non-cooperation in markets. Indeed, back in 1914 legendary
economist, John Maynard Keynes extolled the virtues of his
globalist era, one marked by the ease of transportation thanks to
deflated costs.

“What an extraordinary episode in the economic progress of
man that age was which came to an end in August, 1914.” he wrote.
“The inhabitant of London could order by telephone, sipping his
morning tea in bed, the various products of the whole earth, in
such quantity as he might see fit, and reasonably expect their
early delivery upon his doorstep; he could at the same moment and
by the same means adventure his wealth in the natural resources
and new enterprises of any quarter of the world, and share,
without exertion or even trouble, in their prospective fruits and
advantages; or he could decide to couple the security of his
fortunes with the good faith of the townspeople of any
substantial municipality in any continent that fancy or
information might recommend.”

In short: What a time to be alive.

But of course, as we know, this globalization did not benefit
everyone. While income convergence was taking place on a global
scale, some members of society were being left behind. Returning
to Nowak’s thesis, these people are the non-cooperators. They are
the ones who want to throw out the elites and rip it all
down. 

You see, every cycle has them.

Non-cooperators in the 2nd era of globalization

Our non-cooperators are Nigel Farage and Donald Trump, they are
scared because this second wave has left them behind in a world
they no longer recognize. In the US economy — and indeed in the
world — during second globalization era, service goods like
banking and healthcare have become more tradeable than
manufactured goods. People who made the latter, especially those
in the developed world, are no longer comfortable in this
economy. For many, instead of converging, their incomes are
disintegrating. That’s why a populist message is resonating.


global openness chart
“Notes:
This chart shows two global openness indices: a simple average
(holding the sample constant of export-to-GDP ratios), and a
population-weighted measure.” -PIIE


Peterson
Institute for International Economics; Maddison for historical
estimates, Penn World Tables 7.1 for
1951–2010.



But populism and protectionism needn’t go hand in hand. It was
President Theodore Roosevelt, America’s most successful populist,
who opened up trade with Canada and the Caribbean. He had his
reservations about free trade, but he also saw it as a challenge
that the U.S., as a strong nation, should face with energy. After
all, he loved a competition.

This is the opposite of the lethargy Trumpians recommend. Instead
of innovating our economy, they prefer to reignite old fights.
The 20% tariff the administration just put on softwood lumber is
a perfect example. 

Commerce Secretary Wilbur Ross announced the tariff arguing that,
because lumber harvested from Canada’s state-owned timber lands
is cheaper than lumber from U.S. private lands, the country has
an unfair advantage. The United States has argued this before the
World Trade Organization before, and we’ve lost.

Structural differences in domestic economies do not count as a
trade advantage in the eyes of international law.

But here we are.

“It is an old subject, unfortunately, it’s coming
back,” Carl
Grenier
, a former executive vice-president (1999-2006)
of the Free Trade Lumber Council and current professor at the
University of Leval in Canada told Business Insider. “There is a
pattern in the three deals that have been made in the past…
each deal has been more restrictive to the US market than the
previous one. T
hat’s why it [this fight] keeps coming back
even though we’ve beaten them every time, it never seems to die.”

Grenier accuses the US lumber industry of seeking a hand-out, and
hurting Canada’s industry in the process.

“The only thing they [American lumber companies] want is
more money,” Grenier told Business Insider. “When they bring
countervailing duties the price of lumber and land goes up in the
U.S… “The fit is perfect but the US lumber industry has
found a quick way, a cheap way, and an easy way to make
money.”

Of course, it’s at the expense of goodwill with one of our
country’s best allies. Grenier called this issue a “major
irritant” for Canada.

After it was announced, The National Association of
Homebuilders put out a statement saying that this lumber tariff
would be devastating for housing. The group agrees with Grenier
in that it believes the US lumber industry doesn’t have enough
supply to meet domestic demand alone anyway.

“If the 20 percent lumber duty remains in effect throughout
2017, NAHB estimates this will result in the loss of nearly $500
million in wages and salaries for U.S. workers, $350 million in
taxes and other revenue for the governments in the U.S. and more
than 8,200 full-time U.S. jobs,” according to Granger
MacDonald, chairman of the National Association of Home Builders.
“Lumber prices have already jumped 22 percent since the beginning
of the year, largely in anticipation of new tariffs, adding
nearly $3,600 to the price of a new single-family home.”

In other words, protectionism makes things more
expensive.

It also makes things more complicated. Consider Trump’s ‘Buy
American, Hire American’ mandate. It requires companies to do
more research into who and what they’re buying (kind of like a
regulation, wouldn’t you agree?). It will require that
products be made with more expensive American components. That
cost will be passed on to the consumer.


WalmartAP

The word ‘credit’ actually comes from the Latin word for ‘trust’

This trust and cooperation deficit is happening at a bad time for
the driver of our domestic economy — the almighty American
consumer. Right now, US consumer debt takes up 20% of gross
domestic product, and the consumer is starting to show
strain. 

This showed up in the country’s dismal first quarter GDP print,
0.7%, below the 1% expected by economists. This was in
large part due to a lag in personal spending.

“Real personal consumption grew by just 0.3% in the first
quarter, down from an increase of 3.5% in the fourth quarter of
2016,”
Business Insider’s Bob Bryan
noted following the reading.
“It’s the smallest increase since Q4 2009, just two quarters
removed from the recession.”

Now there are a bunch of reasons for all this. Despite the fact
the country dug itself out of a mortgage debt hole after the
great financial crisis, other things gave. Student loans for one,
auto loans for another. Some of this is much deeper than that
though. Some of it is that income divergence we were talking
about.

Higher income inequality seems to have been conducive to
unsustainable consumer borrowing in the run-up to the Global
Financial Crisis (GFC),” Morgan Stanley said in a note to
investors last year. “
After disadvantaged households
bumped up their consumption possibilities through borrowing, they
found themselves with impaired balance sheets, limited income
prospects, and heavy debt loads in the aftermath of the crisis.
Unsurprisingly, they are frustrated by their dim prospects.”

This, Morgan Stanley, is a global phenomenon. It hasn’t gone away
either. To solve this problem, the bank suggests investing in
“access to education, enhance social mobility and improve
financial stability.”

But that’s not what we’re doing. Here in the United States we
have an Education Secretary who barely believes in public
education. We have a Republican Congress callous enough to call
for kicking millions of Americans off of health insurance. We
have a President who is willing to abuse something that builds
trust, connects nations, fosters cooperation, and makes up 28% of
our country’s economic output. 

We’re in a tight spot. 



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