Free Trade, Fair Trade & Tariffs

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1 Free Trade, Fair Trade & Tariffs Texas Public Funds Investment Conference November 8-9, 2018 William T. Chittenden, Ph.D. Associate Dean for Graduate Programs McCoy College of Business Administration Texas State University It s Not Politics, It s Economics 1

2 What is Free Trade? A policy by which a government does not discriminate against imports or interfere with exports by applying tariffs (to imports) or subsidies (to exports) Source: Free Trade Agreements Australia Bahrain Canada Chile Colombia Costa Rica Dominican Republic El Salvador Guatemala Honduras Israel Jordan Korea Mexico Morocco Nicaragua Oman Panama Peru Singapore 2

3 Absolute Vs Comparative Advantage Absolute Advantage 12 wines, 5 pizzas 4 wines, 4 pizzas Absolute Vs Comparative Advantage Comparative Advantage 3

4 Absolute Vs Comparative Advantage Comparative Advantage with Free Trade Trade 5 wines for 7 pizzas 13 wines, 7 pizzas 5 wines, 5 pizzas What is Fair Trade? No universal definition of fair Often focus on wages, working conditions, and child labor issues Other areas of focus are government subsidies and intellectual property 4

5 2017 International Trade Goods and Services $2.3 trillion in exports to the rest of the world $2.9 trillion in imports from the rest of the world $566 billion trade deficit 2.9% of U.S. GDP Source: Where Does the U.S. Export To? 5

Where Does the U.S. Import From? 2017 International Trade Goods and Services Canada: $2.8 billion surplus $341.3 billion in exports & $338.5 billion in imports Mexico: $68.7 billion deficit U.K.: $15.

6 Where Does the U.S. Import From? 2017 International Trade Goods and Services Canada: $2.8 billion surplus $341.3 billion in exports & $338.5 billion in imports Mexico: $68.7 billion deficit U.K.: $15.6 billion surplus E.U.: $101.2 billion deficit Hong Kong: $35.1 billion surplus China: $335.7 billion deficit $188.0 billion in exports and $523.7 billion in imports Source: 6

7 International Trade Goods and Services Source: Are Trade Deficits Bad? Factors Impacting Trade Imbalances Relative Growth Rates of Economies Faster growth attracts investment funds, which can be used to buy more imports Relative Value of Currencies value of the dollar makes U.S. exports more expensive, thus reducing demand for our exports Savings and Investment Rates If Savings < Investment, U.S. will attract foreign capital Source: 7

8 Are Trade Deficits Bad? Balance of Payments Current Account = Capital Account dollars that leave the U.S. to buy foreign goods, services, or assets find their way back to the U.S. economy to purchase U.S. goods, services, and assets Current account deficit is a mirror image of the capital account surplus What is a Tariff? Tax paid by American consumers in the form of higher prices 8

9 What is a Tariff? A tax on imports or exports Typically Ad Valorem Alternatives Import Quotas Export Subsidies Voluntary Export Restrictions Arguments for Tariffs Domestic Jobs Infant Industries National Security Retaliation 9

10 Examples of Tariffs on Imports Paper Clips % tariff on paper clips made in China Canned Tuna 35% tariff on canned tuna imported from Ecuador Shoes 48% tariff on foreign shoe imports Tobacco 350% tariff on imported tobacco Examples of Tariffs on Imports Clothing 16% - 19% tariff on 75% of imported clothing Costs the average family $300 more per year Chicken Tax 25% tariff on imported pickup trucks

Examples of Tariffs on Imports Sugar 88% tariff on imported raw sugar 2017 cents per pound World: 15.81 U.S. 27.

11 Examples of Tariffs on Imports Sugar 88% tariff on imported raw sugar 2017 cents per pound World: U.S % tariff on imported refined sugar 2017 cents per pound World: U.S

cheese 298% on butter 0% on ultra-filtered milk Peru Peru Trade Promotion Agreement (PTPA)

12 Which is subject to a tariff? Examples of Tariffs on Exports Canada North American Free-Trade Agreement (NAFTA)* 245% on cheese 298% on butter 0% on ultra-filtered milk Peru Peru Trade Promotion Agreement (PTPA) 80% of exports to Peru are duty-free Remaining tariffs being phased out by

13 Examples of Tariffs on Exports European Union 10.9% average on agricultural goods 3.9% average on non-agricultural goods 26% on fish and seafood 22% on trucks 10% on processed wood products 14% percent on bicycles Current Trump Tariffs January %/50% on imported washing machines $1.8 billion 30% on solar panel components $8.5 billion 13

14 Current Trump Tariffs March % on steel & 10% on aluminum imports $33 billion Canada, Mexico, and EU exempt April 2018 Current Trump Tariffs 25% on 1,333 Chinese products $46 billion Mostly intermediate inputs and capital goods 14

15 Current Trump Tariffs June 2018 Canada, Mexico, and EU steel and aluminum exemption revoked $15 billion Current Trump Tariffs August 2018 China 25% tariff on $16 billion of goods 15

16 Current Trump Tariffs September 24, % tariff on $200 billion of Chinese goods 25% by end of the year Exempt: Smart Watches Bluetooth Devices Car Seats High Chairs Mexico Retaliation Tariffs on steel products, lamps, berries, grapes, apples, cold cuts, pork and various cheeses June/July 2018: $3 billion Canada 25% tariff on steel imports from the U.S. and a 10% tariff on aluminum and a wide range of other U.S. goods, including some food and household products June 2018: $12.8 billion Source:

17 Retaliation European Union Tariffs on hundreds of items, including peanut butter, bourbon, motorcycles, cranberry juice, denim, corn, and T-shirts June 2018: $3.2 billion China Retaliation Tariffs on items including soybeans, automobiles, frozen orange juice, beef, and aircrafts April 2018: $2.8 billion June 2018: $34 billion August 2018: $16 billion September 24, 2018: $60 billion 5,207 U.S. products, including farm goods, machinery and chemicals ?mod=hp_lead_pos2 17

18 Business Reaction Shift Production Foreign Investment Automation/Increased Productivity Yes, but Do Tariffs Save Jobs? 18

19 Do Tariffs Save Jobs? Federal Reserve Study on Impact of Chinese Imports 800,000 manufacturing jobs in U.S. lost but offset by like number of jobs in other sectors Increased buying power of $260 a year on average for every American for life Do Tariffs Save Jobs? 35% tariff imposed on tires imported from China Saved 1,200 U.S. tire-manufacturing jobs through 2012 Cost Americans $1.1 billion or $917,000 per job paying an average of $40,000 per year Source: 19

20 Do Tariffs Save Jobs? 2018 Estimated Steel and Aluminum Tariffs will save 33,464 jobs in those industries But will cost 179,334 jobs throughout the rest of the economy Real Trade Issues with China Market Access Intellectual Property Currency Exchange Rates Government Subsidies 20

21 Summary Trade Deficits are not inherently bad Faster Economic Growth contributes to the Trade Deficit Government Budget Deficit can contribute to the Trade Deficit Strong Dollar contributes to the Trade Deficit Tariffs make all countries worse off 21

22 Questions? 22

THE TRADE WAR OF 2018 AN EXPLANATION OF RECENT TARIFFS

THE TRADE WAR OF 2018 AN EXPLANATION OF RECENT TARIFFS July 27, 2018 THE SCARBROUGH GROUP Freight Forwarding & U.S. Customs Brokerage NVOCC Operations & Consolidation Services Freight Forwarding & Mexico