DEFICITS, TARIFFS, AND TRADE WARS. Andrew Greenland, PhD. Assistant Professor of Economics

Transcription

1 DEFICITS, TARIFFS, AND TRADE WARS Andrew Greenland, PhD. Assistant Professor of Economics

2 DEFICITS, TARIFFS, AND TRADE WARS Why countries trade. The drivers of global integration. Who wins and who loses (in theory). The case of workers, consumers, and factor owners. Who wins and who loses (in practice). The U.S. experience with NAFTA, and China. Deficits, Tariffs, and Trade Wars. A changing global outlook.

3 WHY COUNTRIES TRADE THE DRIVERS OF GLOBAL INTEGRATION

4 Countries don t. Firms do. WHY COUNTRIES TRADE International Trade is about firms finding cost advantages abroad. Trade Policy is about countries altering the prices of foreign competitors to favor domestic ones. Free Trade No distortions and the market controls outcomes Reality Divided world where countries control flow of goods via tariffs, quotas, and trade agreements.

5 WHY COUNTRIES TRADE TECH INNOVATION VS MANUFACTURING PRODUCTION U.S. could do both with isolationist trade policy. More demand for workers in domestic manufacturing Some computer scientists would find it profitable to switch careers Need lots of computer scientists to make small amount of manufacturing output Worse, we lose lots of new software, because our computers scientists are really good at what they do. Find a country that s got the opposite skills and trade Higher GDP

6 WHY COUNTRIES DON T TRADE Obvious Aggregate Gains (GDP) How to distribute gains and ameliorate losses? Depends on strong: Tax System Social Insurance Fluidity of Labor Markets Re-training Re-allocation

7 HOW TRADE IS DISTORTED Quota Restrictions on number of units (Sugar) Tariffs Tax on foreign varieties (Aluminum) Regional/Trade Agreements require common rules for all members GATT (Precursor to WTO) NAFTA European Union Who sets the policy?

8 EVOLUTION OF US TRADE BARRIERS High Historical Tariff Rates Declines Through WW1 Dramatic Reversal Smoot Hawley Act of 1930 Two sets of Tariffs Most Favored Nation Column II Rates Inflation Great Depression

9 TRADE AND THE FALLOUT FROM WWII 1947 Bretton Woods Economic integration for Stability Set up IMF, World Bank, and GATT Multiple GATT Rounds Replaced by WTO 1995

10 IMPORTANCE OF GLOBAL TRADE Trade largely occurs between partners in proportion to their GDP and inversely related to distance. Everything comes down to cost advantages. Resource Availability Technological Differences Market Size

11 IMPORTANCE OF TRADE TO THE US Growing Importance Changing Composition Think Silicon Valley: 1980 s Semiconductor Manufacturing 2018 Tech Hub

12 THE U.S. TRADING PARTNERS

13 2017 TRADE IN GOODS US Trade in Goods in Billions Country Exports Imports Balance Brazil $ 37 $ 27 $ 9 Canada $ 282 $ 305 $ (23) China $ 130 $ 506 $ (376) France $ 33 $ 49 $ (16) Germany $ 53 $ 117 $ (65) Hong Kong $ 40 $ 7 $ 32 India $ 25 $ 48 $ (23) Italy $ 18 $ 50 $ (32) Japan $ 68 $ 138 $ (70) Korea, South $ 49 $ 71 $ (23) Mexico $ 243 $ 319 $ (77) Saudi Arabia $ 16 $ 18 $ (3) Singapore $ 29 $ 19 $ 10 Taiwan $ 26 $ 42 $ (17) United Kingdom $ 56 $ 53 $ 2 Low-Skill Manufacturing is a comparative disadvantage sector for the U.S. The U.S. has relatively high labor costs resulting in a trade deficit in manufactured products. Current Administration is focused on Deficit with China, Mexico, and Canada

14 2017 TRADE IN SERVICES US Trade in Services in Billions Country Exports Imports Balance Brazil $ 26 $ 7 $ 19 Canada $ 58 $ 33 $ 25 China $ 57 $ 17 $ 40 France $ 19 $ 17 $ 1 Germany $ 32 $ 35 $ (3) Hong Kong $ 11 $ 9 $ 2 India $ 23 $ 28 $ (5) Italy $ 9 $ 12 $ (4) Japan $ 46 $ 33 $ 13 Korea, South $ 24 $ 10 $ 13 Mexico $ 32 $ 25 $ 7 Saudi Arabia $ 9 $ 1 $ 7 Singapore $ 18 $ 7 $ 10 Taiwan $ 9 $ 8 $ 1 United Kingdom $ 69 $ 56 $ 12 Services tend to be the U.S. comparative advantage Examples: Software and Computing Financial/Accounting/Insurance Entertainment Intellectual Property Transportation

15 GOODS VS SERVICES IN THE U.S. The U.S. has been shifting toward services trade It has been pushed out of labor intensive sectors On net, the trade deficit has been increasing over time. The U.S. total deficit was roughly 550 BN in the last year. Note, however, that this was out of over 2 TN in goods and services exported.

16 THE DEAL WITH DEFICITS Trade happens in local currency. Since the U.S. has a deficit with China, the U.S. needs more Yuan to buy Chinese goods than China needs USD to purchase U.S. exports. The only way this can work is if China finds a way to get Yuan into the U.S. This is precisely why China is one of the largest foreign holders of U.S. government bonds. So, while we are in a manufacturing goods deficit, this actually adds liquidity and money to the U.S. economy and facilitates short term economic growth. In the long run, deficits are not sustainable since government bonds eventually mature.

17 WHO WINS AND LOSES (IN THEORY). THE CASE OF CONSUMERS, FIRMS, AND FACTOR OWNERS

18 DEPENDS ON THE DRIVERS OF TRADE: Consumers Gains: Product Variety Product Pricing Firm Gains Input Costs Innovative Push Factor Owners Unskilled Labor Skilled Labor Capital

19 WHO WINS AND LOSES (IN PRACTICE). THE U.S. EXPERIENCE WITH NAFTA AND CHINA

20 NAFTA 1993 U.S. Trade Agreement with Mexico and Canada Reduced Tariff and Non-Tariff barriers to the U.S. Concerns regarding both environmental factors and lowskilled employment loss

21 MOST EXPOSED INDUSTRIES

22 MOST EXPOSED REGIONS

23 EXPOSURE TO NAFTA

24 OUTCOMES: Very little negative impact despite concerns But, where it s negative, it s very negative. Less than HS education 8% earnings gap Industry Effects 16% earnings gap

25 U.S.-CHINA PNTR AND THE WTO Smoot Hawley Tariff Act of 1930 Normal Trade Relations Substantial Uncertainty Permanent Normal Trade Relations WTO Entry in 2001

26 THE U.S. CHINA MANUFACTURING EXPERIENCE

27 EXPOSURE TO CHINA S WTO ENTRY

28 WHAT HAPPENS WHEN STEEL PRICES DROP? PART 1. More exposed locations saw relative worsening of: Employment and Wages Mortality Risk (Suicide and Opioids) Physical and Mental Health Property Crime Rates Funding for Public Service Concentrated Among Low Education Populations

29 AGGREGATE EXPOSURE AND EMPLOYMENT Sector Exposure Employment (11) Agriculture 5.4% 1.1% (21) Mining 3.4% 0.5% (22) Utilities 0.0% 0.5% (23) Construction 0.0% 6.1% (31-3) Manufacturing 29.8% 15.8% (42) Wholesale 0.0% 5.2% (44-5) Retail 0.0% 13.9% (48-9) Transportation 0.0% 3.8% (51) Information 5.9% 3.3% (52-3) FIRE 0.0% 6.9% (54) Professional 0.4% 6.2% (55) Management 0.0% 1.6% (56) Administrative 0.0% 7.3% (61) Educational 0.5% 1.6% (62) Health Care 0.0% 11.5% (71) Entertainment 0.0% 1.7% (72) Accomodation 0.0% 9.1% (81) Other 0.0% 3.8%

30 WHAT HAPPENS WHEN STEEL PRICES DROP? PART 2. Research Design is Loss Biased Input Costs Cost of Consumption Employment and Wages Innovation Expansion in Comparative advantage Sector High Education and Urban Gains

31 WHY THE DISCONNECT? Losses Highly Concentrated Low Levels of Education Rural Areas Historically Conservative Manufacturing Base Gains Tougher to Measure Consumption shifts Improved Quality Employment Expansions tough to attribute High Education/Urban Based

32 THE EVIDENCE ON JOB RETRAINING Trade Adjustment Assistance (TAA) Job Retraining Opportunities Very underwhelming take-up (Globally True) Substantial geographic component to trade shocks Questionable mobility

33 DEFICITS, TARIFFS, AND TRADE WARS. A CHANGING GLOBAL OUTLOOK

34 There are people who wish I wouldn t refer to China as our enemy. But that s exactly what they are. They have destroyed entire industries by utilizing low-wage workers, cost us tens of thousands of jobs, spied on our businesses, stolen our technology, and have manipulated and devalued their currency, which makes importing our goods more expensive and sometimes, impossible. TRUMP AND CHINA

35 TWITTER TRADE POLICY

36 Steel and Aluminum National Security Exception $50 BN on China China Reciprocation Domestic Employment Steel Harley Davidson Soybeans and Subsidies TRUMP S TARIFFS

37 USMCA (NEW NAFTA) New NAFTA policy outlines Dairy Access (Canada) Requires Renewal in 16 Years Increase in Local Auto production Maintains trade dispute mechanisms

38 LONGER RUN CONCERNS Inflation Losses in upstream/downstream industries Uncertainty effects Substantial subsidies to deal with countervailing tariffs