Why Mandating That Essential Drug Production Remain In The US Is A Bad Idea

Sources in the US government say that President Trump will issue an Executive Order that will require that certain essential drugs be produced in the US. The order, which is a response to shortages incurred in the Coronavirus pandemic, could come as soon as today reports CNBC. Unfortunately, the move is likely to be counterproductive.

The text of the Order has not yet been released but White House trade advisor Peter Navarro has pushed a plan that would streamline approvals for American-made products and impose similar FDA restrictions on US facilities as on those abroad. Navarro’s proposal would also encourage government agencies to buy only American-made products.

The Executive Order, which will probably be popular, is reminiscent of a famous quote by H. L. Mencken: “There is always a well-known solution to every human problem—neat, plausible, and wrong.”

In this case, the fallacy is that America’s medical supply problem can be fixed by mandating that American companies produce the items at home. The idea of “just make everything here” is appealing in its simplicity but, in reality, is fraught with problems.

Aside from the fact that moving production to the US would take at least a year, one of the most obvious problems is that the United States has a finite industrial capacity and labor pool. If we move essential pharmaceutical production to the US, that means that we can’t make something else.

Scott Lincicome, a trade lawyer at the Cato Institute, notes that such a policy would have many other hidden problems as well, comparing the idea to the Jones Act on a recent Jonah Goldberg podcast. The Jones Act is a shipping law that requires that all goods shipped between US ports be shipped on vessels that are flagged under the US as well as being built, owned, and crewed by Americans. In theory, it’s a sensible idea but in practice, it has led to higher costs, cronyism, inefficiency, and decreased national security, Lincicome wrote in 2015.

Lincicome recently penned a critique of the idea of “repatriating” supply lines that appeared in National Review. In it, he addressed the question of critical medical supplies, pointing out that the claim that the majority of America’s medical supplies come from China is “essentially baseless.”

Per Lincicome’s investigations, China’s stranglehold on American medical supplies is greatly exaggerated. For example, even though China produces 30 percent of imported medical equipment, it accounts for only nine percent of medical items used in the US because American companies already produce more than 70 percent of items consumed here.

Further, only 13 percent of factories that produce active pharmaceutical ingredients (APIs) are in China compared with 28 percent in the US. Most of the remainder are in the EU, Canada, or India. For essential medicine APIs, 21 percent are already produced in the US versus only 15 percent from China.

If the threat of China to our medical supplies and pharmaceuticals is overblown, the threat of protectionism is not. Protectionist policies have a history of backfiring and weakening the industries they were supposed to protect while stifling innovation at the same time. President Trump’s own steel and aluminum tariffs are one recent example of such a failure.

Rather than inspiring companies to become more innovative and competitive, protectionism does the opposite. Companies spend more time and energy lobbying to protect their fiefdom than in expanding their core business. Often higher costs are associated with protectionism as well.

There are better options than government edicts moving production to the US. For example, when the pandemic is over and prices of medical supplies drop, the government should replenish strategic stockpiles. Both the Obama and Trump Administrations failed to restock N95 mask supplies that were used in the 2009 flu outbreak. Proper planning would make a big difference in future pandemics. This year the Trump Administration wasted months and did not order necessary supplies until mid-March, weeks after the pandemic was well underway.

As I’ve pointed out before, another good solution is to provide companies with an alternative to China. Or better yet, with several. The Trans Pacific Partnership was supposed to be an counterweight to China but the president canceled the agreement as one of his first acts.

If we had free trade agreements with countries such as Australia, Japan, Vietnam, and Malaysia, it would diminish China’s influence in the region as well as providing an incentive for companies to move operations out of China. The pandemic should make the risks of doing business with an untrustworthy authoritarian regime obvious but businesses still need viable alternatives.

There are better solutions to the problems in medical supplies than to decree a top-down order for companies to realign their supply chains and unilaterally force them to move production to the US, regardless of the costs. The idea that government knows best and that businesses should just fall into line and do as they are told is the sort of thing that Republicans and conservatives used to oppose.

Originally published on The Resurgent

Debates Exposed Schisms In Democratic Party

The most important takeaway from the second round of Democratic debates, other than the fact that Joe Biden performs better after a practice round, is that there is a deep division within the Democratic Party. Contrary to claims by many of the pundit class, the Democrats are not all in lockstep solidarity with the democratic-socialist left. Over the past two nights, several Democratic candidates sounded almost (but not quite) conservative.

In particular, there seems to be an ongoing struggle between different factions of the party with respect to two issues: immigration and health insurance. Several sharp exchanges in the debates related to whether healthcare reform plans should eliminate private medical insurance in favor of Medicare-for-all and whether illegal immigration should be decriminalized.

Joe Biden led off the second night of debates with an attack on Kamala Harris’ plan to replace private health insurance, saying, “There is no talk about the fact that the plan in 10 years will cost $3 trillion. You will lose your employer-based insurance. And in fact, you know, this is the single most important issue facing the public. And to be very blunt and to be very straightforward, you can't beat President Trump with double-talk on this plan.”

Sounding almost like a conservative, Biden continued, “The plan, no matter how you cut it, costs $3 trillion when it is, in fact, employed, number one. Ten years from now, after two terms of the senator being president, after her time. Secondly, it will require middle-class taxes to go up, not down. Thirdly, it will eliminate employer-based insurance. And fourthly, what happens in the meantime?”

Biden is on firmer ground here than Harris. The former vice president was deeply involved with Obamacare, the 2010 health care reform bill that was intensely unpopular until Republicans came close to replacing it in 2017. At that point, Obamacare suddenly gained more fans and maintains a 10-point advantage in polling.

On the other hand, the approval of Medicare-for-all fluctuates wildly in polling and is heavily dependent on the details. AP polling from January found that voters like the idea of Medicare-for-all but not the higher taxes and longer wait times that it could bring. More recently, FiveThirtyEight pointed out that more voters are on board with the idea of allowing people to buy into Medicare voluntarily than in eliminating private insurance and forcing everyone into the program.

This is underscored by the recent endorsement of Joe Biden by the International Association of Fire Fighters, who said in a statement that union members “do not support the concept of abandoning those plans for a government-run single-payer plan,” adding, “The elimination of employer-based insurance in favor of a Medicare-for-all or government-run single-payer proposal is a bad idea that punishes working families who have secured quality healthcare.”

In his opening statement on the first debate night, John Delaney, a former Maryland congressman, argued that the focus on Medicare-for-all could cost Democrats the election. “We can go down the road that Senator Sanders and Senator Warren want to take us with bad policies like Medicare for All, free everything and impossible promises that’ll turn off independent voters and get Trump reelected,” Delaney said. “That’s what happened with McGovern. That’s what happened with Mondale.”

Later that night, Delaney took on Sanders directly, saying, “His math is wrong” and warned that many hospitals across the country would close if they had to rely on Medicare reimbursement rates.

“Why can’t we just give everyone healthcare as a right and allow them to have choice?” Delaney asked. “I’m starting to think this is not about healthcare. This is an anti-private sector strategy.”

Amy Klobuchar voiced similar concerns about the Medicare-for-all plans of Bernie Sanders and Elizabeth Warren. “I just don’t buy… that it’s somehow not moral to not have that public option,” she said.

The other big policy disagreement between the Democrats was over immigration. When former Obama Housing Secretary Julian Castro advocated decriminalizing illegal immigration, it was Joe Biden once again who resisted the urge to pile on the popular liberal talking point.

“I have guts enough to say his plan doesn't make sense,” Biden responded to Castro. “Here's the deal. The fact of the matter is that, in fact, when people cross the border illegally, it is illegal to do it unless they're seeking asylum. People should have to get in line. That's the problem. And the only reason this particular part of the law is being abused is because of Donald Trump. We should defeat Donald Trump and end this practice.”

There was one other issue where one Democrat sounded more conservative than present-day Republicans. At one point, John Delaney mounted a spirited defense of free trade, something rarely heard these days in either party.

“So listen, this is what I don’t understand,” Delaney postulated. “President Trump wants to build physical walls and beats up on immigrants. Most of the folks running for president want to build economic walls to free trade and beat up on President Obama.”

“I’m the only one running for president who actually supports the Trans-Pacific Partnership,” Delaney continued. “President Obama was right about that. We should be getting back in that. Senator Warren just issued a trade plan that would prevent the United States from trading with its allies. We can’t go and we can’t isolate ourselves from the world. We have to engage with fair, rules-based trade.”

At the end of the two nights, it was obvious that there are two different overlapping factions within the Democratic Party. One is the Obama faction represented by candidates like Biden, Delaney, Klobuchar. The other is the far-left faction of Bernie Sanders, Kamala Harris, and Elizabeth Warren. After attempting to keep one foot on both sides of the party in recent months, Joe Biden seems to have firmly embraced his position in the moderate lane.

As I’ve argued in the past, Biden is the dominant moderate candidate in the Democratic primary while numerous strong candidates are vying for the limited number of progressive votes. Barring unforeseen circumstances such as a gaffe of Trumpian proportions or a sudden health problem, this makes Biden likely to become the eventual nominee.

It also makes Biden likely to eventually become president. As he stakes down middle-of-the-road policy positions, he makes himself palatable to the moderate and independent voters who will decide the election, voters who have been all but ignored by Donald Trump for the past three years. As Biden attacks Kamala Harris and Bernie Sanders, he is also inoculating himself from charges of socialism by Republicans and positioning himself for the general election.

Originally published on The Resurgent

Tucker Carlson: Elizabeth Warren ‘Sounds Like Trump At His Best’

No, that’s not a typo. Proving once again that Fox News is not a monolithic hotbed of conservatism, Tucker Carlson heaped praise upon none other than Democratic presidential candidate Elizabeth Warren on his show last night. A few months ago, I pointed out that the Fox host sounded a lot like Elizabeth Warren and Alexandria Ocasio-Cortez. Now, he is openly praising Warren’s economic policy.

Carlson began by quoting a long, anti-corporate diatribe by Warren in which the Massachusetts liberal said, “Giant American corporations… wave the flag — but they have no loyalty or allegiance to America.”

“These American companies show only one real loyalty,” Warren said, “to the short-term interests of their shareholders, a third of whom are foreign investors. If they can close up an American factory and ship jobs overseas to save a nickel, that’s exactly what they will do — abandoning loyal American workers and hollowing out American cities along the way. Politicians love to say they care about American jobs.”

“But for decades, those same politicians have cited ‘free market principles’ and refused to intervene in markets on behalf of American workers,” Warren continued. “And of course, they ignore those same supposed principles and intervene regularly to protect the interests of multinational corporations and international capital. The result? Millions of good jobs lost overseas and a generation of stagnant wages, growing inequality, and sluggish economic growth.”

“What part of that statement did you disagree with?” Carlson then asked. “Was there a single word that seemed wrong? Probably not.”

“Many of Warren’s policy prescriptions make obvious sense,” Carlson added before gushing, “She sounds like Donald Trump at his best.”

I’m not sure whether that is more of an indictment of Trump or Warren.

Despite his embrace of Warren's economic policies, Carlson did stop short of endorsing her completely. He decried her “race hustling, gun grabbing, abortion extremist” positions and then said, “That is exactly the problem, not just with Warren, but with American politics.” In Carlson’s world, both Democrats and Republicans are “resolutely libertarian” while Democrats “nod in total agreement” because they are “on the same page” with respect to the defense of free markets and liberal social issues, such as the legalization of marijuana.

Carlson embraces President Trump’s “innovative new way to protect American workers from the ever-cascading tidal wave of cheap third-world labor flooding this country,” his plan to tax American consumers and businesses in hopes that the economic pain will trickle across the border to Mexico where it would, ironically, probably spur more economic refugees to cross the border in search of new opportunities in the United States. He also fails to note reports that Donald Trump supports legislation that would allow the states to decriminalize marijuana.

What Carlson admits that he wants is not a small government, conservative policy but big government economic policy paired with conservative social policies. In his own words, Carlson wants candidates who are “nationalist on economics, fairly traditional on the social issues.”

“Would you vote for someone like that?” Carlson asks. “My gosh. Of course. Who wouldn’t? That candidate would be elected in a landslide. Every single time.”

The Fox host asks rhetorically, “What if the Republican leadership here in Washington had bothered to learn the lessons of the 2016 election? What if they’d understood, and embraced, the economic nationalism that was at the heart of Donald Trump’s presidential campaign?”

Yet Carlson overlooks the fact that Donald Trump did not win in a landslide in 2016, losing the popular vote and winning the Electoral College by a margin of only 50,000 votes over a handful of states. He also seems to forget the drubbing that Trumponomics took in the 2018 midterms. Donald Trump’s economic policies have propelled him to a 42 percent average approval rating and, since the onset of the trade war, President Trump is even underwater in many typically red states. Polling shows that Americans are opposed President Trump’s tariff war by about a two-to-one margin.

Carlson is correct that “almost nobody speaks for the majority of voters,” but not in the way that he means. Where the parties come together is on spending more and on expanding government influence to control a larger share of American life. They just don’t agree on what to spend on or how they want to exercise that control. Voters need a candidate and party that will leave them alone to live their lives without government interference.

I’d vote for that.

Originally published on The Resurgent

Good Trump Keeps Border Open While Bad Trump Threatens New Tariffs

Both Good Trump and Bad Trump were on display yesterday as President Trump backed off from his threat to close the Mexican border and simultaneously threatened to add more tariffs to Mexican auto exports to the US. The threat to close the border had sparked fears of a disruption in trade with Mexico that could have led to shortages and price increases on numerous products including avocados.

Addressing reporters at the White House, President Trump said that Mexico was not doing enough to stop cross-border traffic of illegal immigrants and drugs, but that he would give the Mexican government a year to improve.

“We’re going to give them a one-year warning and if the drugs don’t stop, or largely stop, we’re going to put tariffs,” on cars, Trump said. “And if that doesn’t stop the drugs, we close the border.”

When asked if his comments meant that he would not close the border for a year, Mr. Trump answered, “I didn’t say that. We’ll start with the tariffs and see what happens.”

The president did not explain how what he has described as a national emergency at the border could withstand waiting a year to take action.

Trump’s reversal on the threat to close the border was a welcome sign for businesses and economists. After decades of free trade under NAFTA, Mexico ranked as the second-largest export market for American-made goods as well as the second-largest supplier of imported goods to the US per the US Trade Representative. Many corporate supply chains are integrated within both countries with Mexican factories building components for products finished in the United States. Many consumer goods are also imported from Mexico.

Since the president made his threat to close the border, the avocado has become symbolic of the trade with Mexico that would be lost if Mr. Trump follows through. The fruit used in guacamole has become a very popular food in the United States and most of the American supply is imported from Mexico. Some supporters of the president’s strategy argue that avocados are also grown in the US and so the market would not be disrupted if the border was closed.

Several US states do grow avocados. The US produced a total of 292 million pounds of avocados in 2017. Unfortunately for avocado aficionados, Americans consumed about 2.2 billion (with a “b”) pounds of avocados the same year. If avocado imports were cut off from Mexico, the world’s largest producer. The avocado deficit means that the US would certainly suffer a large avocado shortage if supplies from Mexico were cut off.

When a product with high demand is in short supply, the laws of supply and demand take over. Prices increase and demand simultaneously falls. This has already happened as avocado markets reacted to the threat of border closure by increasing avocado prices by 34 percent.

The problem is the same for many other products as for avocados. Cars are one example. Mexico exports more than 2.5 million autos to the US that are produced by almost all major automakers, including popular Ford, Chrysler, and GM models. The application of tariffs or the closure of the border could hit American automakers and consumers hard. It would take years to move production back to the US.

Increasing prices would make it more attractive for American farmers to grow avocados, but the loss of avocado supplies could not be immediately replaced.  As with moving a factory, it takes 3-4 years for newly planted avocado trees to produce fruit. Diverting American farmland to avocado production would also mean that other crops could not be planted, causing shortages of other commodities due to limited resources.

The resources of the Mexican government are also limited. Security forces in the third-world country face a much greater threat from drug cartels than from migrants seeking to make their way to the US border. If the Mexican government gives in to President Trump’s demand to allocate more resources to intercepting and detaining migrants, those resources won’t be battling the cartels and drug smugglers.

While the decision to keep the border open will be welcomed by many Republicans and members of the business community, the president’s threat to step up the tariff war is more problematic. The Trump Administration completed a NAFTA rewrite with Mexico and Canada last year, but the new treaty has yet to be ratified by each country. It is possible that Mexico will refuse to ratify the deal if President Trump continues to threaten new tariffs.

Killing the new version of NAFTA may suit President Trump just fine. Mr. Trump blamed NAFTA for US economic woes on the campaign trail in 2016.  As recently as December, the president threatened to withdraw from NAFTA entirely. Killing the free trade agreement would allow both countries to place tariffs on US goods and could cause an economic shock.

President Trump’s erratic trade policies put the growth of the US economy at risk and work at odds with his regulatory and tax reform. Economic growth surged in the first half of 2018 following the passage of tax reform but slowed to Obama-era levels after the onset of Mr. Trump’s trade war. Growth for the fourth quarter of 2018 was recently revised downward to 2.2 percent, which is below the post-WWII average.

President Trump deserves credit for reversing his decision to close the border, but the reversal merely corrects a self-induced problem that stems from the president’s rash and ill-considered comments of a week earlier. Closing the border would be unlikely to have a significant effect on slowing smuggling and illegal immigration, especially since most new illegals enter the US legally and overstay visas, but it would have a punishing effect on trade and the economy.

If President Trump stands by his threat to close the borde next year, the debate would shift to the runup to the 2020 elections. The issue of a disruption of trade with Mexico could prove to be enough that many business leaders would see the socialist Democrats as less of a threat to the economy than an isolationist Trump Administration.

Originally published on The Resurgent

Trump To Withdraw From World's Largest Free Trade Agreement

President Trump said Saturday that he intends to use his executive authority to withdraw from the North American Free Trade Agreement. Speaking to reporters on Air Force One, Trump said that he will soon notify Canada and Mexico of the United States intent to leave the trade pact.

“I’ll be terminating it within a relatively short period of time. We get rid of NAFTA. It’s been a disaster for the United States,” Trump said, adding, “And so Congress will have a choice of the USMCA or pre-NAFTA, which worked very well.”

The Trump Administration has negotiated a new agreement, which the US refers to as the United States-Mexico-Canada Agreement (USMCA), that is intended to replace NAFTA. NAFTA is the world's largest free trade agreement and has led to dramatic economic growth in all three nations.

Trump’s intention is obviously to give Congress the choice of either the new deal or no free trade agreement at all. NAFTA reduced tariffs among the three nations so destroying the pact would have the effect of raising tariffs even further and slowing trade. Already, American agriculture, small manufacturing, and shipping have been damaged by the trade war.

The new trade pact, which is also referred to as the “New NAFTA,” has received mixed reviews. On the plus side, the deal contains increased protections for intellectual property, agrees to prevent currency manipulation, and opens American access to Canadian dairy markets. On the downside, the treaty automatically expires in 16 years unless it is renewed and, in an apparent attempt to limit US investment in Mexico, the Trump Administration insisted on limiting protection from regulatory abuse. Further, the new deal increases the percentage of domestic content required to exempt new cars from tariffs.

Rather than free trade, the Wall Street Journal says of the USMCA, “This is politically managed trade, and its economic logic is the opposite of Mr. Trump’s domestic deregulation agenda.” The paper’s editorial board added that the “auto gambit is part of the Trump-Lighthizer strategy to blow up global supply chains.”

The main attraction of the Trump trade pact is that it is better than a reversion to pre-NAFTA rules with their return to increased tariffs and regulations. Economists say that the new deal won’t boost economic growth or increase manufacturing jobs. Its new limitations on free trade will end up costing American consumers more money while giving them less choice.

There is also debate on whether President Trump has the authority to unilaterally withdraw from NAFTA. The treaty includes a provision that allows for withdrawal after a six-month notice, but opponents say that since NAFTA was approved by the Senate, leaving the pact would also require Senate approval.

A 2016 report by the Congressional Research Service addressed the question of a unilateral withdrawal from NAFTA by the president. “As a practical matter, the President’s communication of a notice of termination of an FTA [free trade agreement] to trade partners in accordance with the FTA’s terms59 appears sufficient to release the United States from its international obligations,” the report says, but  notes, the “President could not repeal federal statutes implementing the FTA in the absence of congressional action because the Constitution gives Congress the authority to impose duties and to ‘regulate commerce with foreign nations.’” In other words, the president’s notice to terminate could be a withdrawal in name only if Congress does not change the US laws and regulations to differ from what the treaty requires.

The report also points out that “the Constitution apportions authority over international trade between the President and Congress.” The legality of Trump’s move is not specifically addressed in the Constitution and there is no precedent for a president unilaterally withdrawing from a trade treaty.

If President Trump goes through with his move to unilaterally claim the executive authority to withdraw the United States from a successful trade deal with its two largest trading partners, it will almost certainly provoke a constitutional crisis as well as an economic one. The Senate is controlled by Republicans but many oppose the president’s protectionist trade policies. Republican Senate leaders may be forced to sue to overturn the president’s abuse of executive authority or choose between either a badly flawed trade deal or no deal at all.

Originally published on The Resurgent

President Trump: 'Without Trade, We'd Save A Hell Of A Lot Of Money'

“Our trade deficit ballooned to $817 billion,” Donald Trump told steelworkers in Granite City, Illinois, this week. “Think of that. We lost $817 billion a year over the last number of years in trade. In other words, if we didn't trade, we'd save a hell of a lot of money.”

When I heard the clip from the president, the first response that came to mind was that of the high school principal played by James Downey in Billy Madison:

What you've just said is one of the most insanely idiotic things I have ever heard. At no point in your rambling, incoherent response were you even close to anything that could be considered a rational thought. Everyone in this room is now dumber for having listened to it. I award you no points, and may God have mercy on your soul.

Downey’s comment may be extreme, but President Trump’s soundbite is one of the most astonishingly ignorant things I have ever heard a sitting president utter.

Sure, sitting presidents have misspoken. Barack Obama had his “57 states” gaffe. The Bushes were no strangers to mush-mouthed soundbites either. One of my favorites was when Bush-41 tried to say, “Nitty Gritty Dirt Band” and it came out “nitty ditty nitty gritty great bird.” Even a polished actor and politician like Ronald Reagan was not immune to a slip of the tongue. The Gipper’s jokes are sometimes taken for gaffes, but when he said, “We are trying to get unemployment to go up, and I think we're going to succeed,” it probably was not intentional.

Those gaffes were good for a laugh, but no one really thought that they didn’t know the real number of states, the real name of the band or wanted unemployment to increase. In the case of President Trump, however, it seems likely that he really does believe what he says about international trade. After all, he's been saying the same things for years.

There is so much wrong with the president’s one remark, never mind the entire speech, that it is hard to address the entirety of his error within a short article. To begin, his figure on the size of the trade deficit is factually incorrect. The Bureau of Economic Analysis put the 2017 trade deficit at $568 billion. President Trump seems to have pulled the $817 billion figure from where the sun does not shine.

It is also astonishing that President Trump seems to consider money spent on trade to be “lost.” Is money lost when you spend it on groceries or when you buy a new car or house? International trade is no different. The idea that trade money is “lost” is nonsensical.

Trade is a voluntary exchange. No one has to enter into a trade deal that they don’t believe is to their benefit. If the price of milk is too high, don’t buy it. Go to a different store. It’s no different with international deals to buy Chinese steel, German cars, Mexican tequila or Saudi oil. If it’s a bad deal, go to a competitor.

The president’s statement that “if we didn't trade, we'd save a hell of a lot of money” is technically true, but also nonsensical. If we didn’t trade, we would have lots of dollars, but we can’t eat dollars or live in them or drive them to work. (Perhaps you could wear them if you stitched them together into clothes, but I digress.)

There would be pros and cons to hoarding cash and not engaging in trade. The downside to stockpiling a houseful of green paper is that you don’t have other things that you may want or need. It would be a case of “no phones, no lights, no motorcars, not a single luxury” as a famous ballad put it. On the plus side, you could use all that cold, hard cash to play Scrooge McDuck (hat tip to the Cato Institute’s Scott Lincicome) or reenact the sex scene from Indecent Proposal, but that would probably get old after a while - like when you got hungry - and I suspect that rolling around on piles of  currency really isn't as comfortable as television would have us believe.

President Trump may actually believe that not trading with foreign countries would Make America Great Again. After all, if there were no international trade, there would be no trade deficit and the trade deficit has been Mr. Trump’s bogeyman for years. With no trade, zero equals zero and we have trade equity.

Mr. Trump doesn’t address the problem of comparative advantage. Not all products are made in the United States just as any country doesn’t make every conceivable product. Some countries have a comparative advantage on low-skilled labor that makes them more efficient at building simple products. On the other hand, the US has highly skilled workers that are among the best and most efficient in the world when it comes to high tech products such as aircraft, industrial machines and pharmaceuticals. We also have an abundance of oil and farmland, resources that other countries lack, that allow us to export food and energy products.

With no trade, you’d probably pay more for many commonly imported items, from avocados which come from Mexico to mobile phones assembled in China and South Korea, if you could get them at all. For instance, the US grows avocados domestically, but not enough to meet the demand of 600 million pounds annually. If US farmers shift production to grow more avocados, they would have to stop growing other crops.

But that’s okay since US workers would have less money to spend anyway. Workers in jobs related to imports and exports would face massive layoffs. Those in other industries would also face job and wage cuts as the world slipped into a recession.

The core problem with Mr. Trump’s logic is that a trade deficit is not always bad, and a trade surplus is not necessarily good. Few conservatives would want to emulate Venezuela, but the socialist South American basket case of a country has been running trade surpluses since 1997.

What do trade surpluses and deficits really mean? The legendary economist Milton Friedman, whose humor and eloquence made economics understandable to the masses, once explained that most people, President Trump included, think about trade in a way that is exactly backwards:

When people talk about a favorable balance of trade; what does that term taken to mean? It's taken to mean that we export more than we import; but from the point of view of our well-being that's an unfavorable balance. That means we're sending out more goods and getting fewer in. Each of you and your private household would know better than that. You don't regard it as a favorable balance when you have to send out more goods to get less coming in. It's favorable when you can get more by sending out less.

In other words, the US trade deficit means that Americans are getting more “stuff” from other countries than they are sending abroad. In any other situation, getting more than you are giving in a deal would mean that you are “winning,” to use President Trump’s (and Charlie Sheen’s) phrase. But somehow, we have convinced ourselves that, when it comes to international trade, sending lots of stuff to other countries and getting very little back is a good thing.

I don’t blame the Granite City steelworkers for leaping to support Donald Trump’s protectionism of their industry. I was laid off twice and know how gut-wrenching it can be for the head of a household to suddenly lose his income, but, as Friedman explained, the big government protectionism of steel makes new victims in other industries. Most people just don’t see the jobs being lost because they are dispersed throughout the country rather than concentrated in steel mills.

The steel mill workers can’t be blamed for their self-interest in protecting their jobs, but President Trump can be blamed for a view on trade that is not grounded in reality. Any president, regardless of party, should be expected to have a basic understanding of economics. Republicans rightly criticize Bernie Sanders and Alexandria Ocasio-Cortez when they say outlandish and ignorant things. Republican leaders, especially the president’s advisors, have a duty to confront and educate the president about economics when he starts sounding more like Senator Sanders than President Reagan.

Originally published on The Resurgent

McCarthy Flips On Free Trade

It has long been said that it is a woman’s prerogative to change her mind. Apparently the same applies to prospective Speakers of the House.

Rep. Kevin McCarthy (R-Calif.), a presumptive favorite to succeed Paul Ryan as Speaker of the House, defended President Trump’s decision to implement tariffs on US allies such as Canada, Mexico and the European Union.  McCarthy’s statements represent an evolution on the trade issue.

“I believe there is a better way of solving a problem than getting into a trade war,” McCarthy told reporters last December.

On Sunday, the congressman denied that President Trump’s unilateral application of national security tariffs on American allies represented a trade war, even as US trading partners unveiled retaliatory tariffs on American products from steel to crops to motorcycles.  

“We are in the middle of a trade discussion. Nobody wants to be in a trade war. Nobody wins a trade war,” McCarthy said on CNN’s “State of the Union.” “But we are standing up for the process of where we're moving forward that we have fair trade.”

“A word that I would not use to describe it is ‘a trade discussion,’” responded Canadian Foreign Minister Chrystia Freeland.

McCarthy did not define what would constitute a trade war in his view.

Rep. McCarthy’s flip-flop on free trade was not sudden. In March, he told Fox Business that tariffs could be a good thing. Shortly after President Trump made his initial announcement of aluminum and steel tariffs, McCarthy said, “Standing up and putting a different perspective on this will turn out to be a very positive aspect.”

Farmers from McCarthy’s home state are less enthusiastic about Trump Trade than he seems to be. New Chinese tariffs on almonds, pistachios and wine hit the California counties that supported President Trump. Even though Trump cannot count on California’s electoral votes, if his supporters become disillusioned with his trade policies, it would be bad news for California’s already-shrinking Republican congressional delegation.

“Is the administration going to get us a better deal? How long will it take to get that better deal?” asked almond farmer David Phippen. “We have sustainability, but it’s limited.”

At the moment, the outlook for California farmers and the American export industry appears as if it will get worse before it gets better. Whether the current situation is a trade war or a trade discussion, the effect on American exports is the same. 

Originally published on The Resurgent

Trump trade war starts tomorrow

Commerce Secretary Wilbur Ross announced that the US will impose tariffs on steel and aluminum products from Canada, Mexico and the European Union starting on Friday. The close US allies had previously been given exemptions from the tariffs that the president imposed on other countries last March.  

All three trading partners vowed to impose retaliatory tariffs on the US in return. The Wall Street Journal reports that the European Union has prepared a list of $7.5 billion worth of US exports that could begin to be subject to increased tariffs on June 20. Mexico said that it will target US products “up to an amount comparable to the level of damage” that US tariffs inflict on Mexican exports. Canada did not make a specific statement, but had previously vowed to retaliate if the Trump Administration imposed new tariffs.

Canada and Mexico are parties to the North American Free Trade Agreement (NAFTA) with the US, which eliminated tariffs on much trade between the three countries. They were exempted from the earlier tariffs as negotiations to revise NAFTA proceeded. It is uncertain how the new tariffs will affect the trade pact.

“Those talks have been taking longer than we had hoped,” Secretary Ross told reporters.

The EU also had a temporary exemption as trade representatives tried to reach a permanent agreement. “We continue to be quite willing and indeed eager to have further discussions with all of those parties,” Ross said.

Additional tariffs on China are slated to go into effect next month. The Trump Administration called a truce to the Chinese trade war in May, but then announced it would proceed with the tariffs. The Chinese government has also vowed to retaliate.

The new tariffs on Canada, Mexico and Europe have the potential to be much more damaging to the US economy than the previous round of tariffs. Canada and Mexico rank first and third respectively in steel exports to the US. The two countries send more steel to the US than the rest of the top five countries combined.

Canada and Mexico also rank second and third, just behind China, as America’s top trading partners. Four European countries, Germany, the United Kingdom, France and Italy, are also among the top ten trading partners.

The trade war is already expanding beyond the steel and aluminum industries that Trump originally set out to protect. The Washington Post reports that European retaliatory tariffs include products as varied as Kentucky bourbon and Harley Davidson motorcycles. Mexican duties will be imposed US pork bellies, blueberries, apples, grapes, cheeses and steel.

If the tariffs go into effect, the result could be a slowing economy in the months prior to the midterm elections. This could give Democrats a desperately needed issue with which to attack Republicans. If trade becomes an issue in the election with Democrats embracing free trade and Republicans defending big government tariffs, politics will have officially turned upside-down.

Originally published on The Resurgent

Trump Is Now Open To Joining TPP

After railing against the Trans Pacific Partnership during the campaign and removing the United States from the treaty, President Trump signaled last night that he is open to rejoining the trade deal.

The president tweeted at about 11:00 p.m. Thursday night, “Would only join TPP if the deal were substantially better than the deal offered to Pres. Obama. We already have BILATERAL deals with six of the eleven nations in TPP, and are working to make a deal with the biggest of those nations, Japan, who has hit us hard on trade for years!”

One of Trump's first acts as president was to withdraw the US from the TPP, which was never ratified by Congress. Trump signed the order to leave the treaty on January 23, 2017, only three days after becoming president. At the time, he said, “Great thing for the American worker, what we just did.”

Also on Thursday, the president also told a group of elected officials from “farm states” that he had asked economic adviser Larry Kudlow and U.S. Trade Representative Robert Lighthizer to consider whether the US should join the trade pact per Politico. It isn't clear what changes Trump would seek or whether other countries would agree to reopen negotiations on the trade deal that has already been ratified.

The move toward acceptance of the free trade deal is a radical departure for President Trump, who has spent the last several weeks talking about implementing protectionist tariffs on a long list of imported products. Trump has also engaged in a rhetorical trade war with China, which is not a party to the TPP.

During the campaign, Trump was critical of trade deals such as NAFTA and the TPP. At a campaign stop in Ohio in June 2016, he said, “The Trans-Pacific Partnership is another disaster done and pushed by special interests who want to rape our country, just a continuing rape of our country.”

It is not clear what changed Trump's opinion of the TPP, but it is possible that he realized that the pact is needed to counterbalance Chinese influence in the Pacific region. The TPP includes Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. In recent years, Chinese trade and investment in Latin America has been growing in addition to the influence it already wields in Asia.

If Trump can successfully complete his 180-degree pivot on the TPP, it would not mark his first such reversal. The president has previously changed his mind on several issues from immigration to gun control to varying receptions from his base. Trump's anti-trade rhetoric won him support from blue-collar factory workers in the Rust Belt who believe that free trade pacts have been responsible for American job losses. If these voters are angered by Trump's reversal on the TPP, the president's pivot toward free trade might be short-lived.

Originally published on the Resurgent

China Announces Plan To Ease Tariffs And Investment Restrictions

In what some may interpret as a small victory for President Donald Trump's trade policy, President Xi Jinping announced that China will reduce its tariff on imported autos and pursue a number of other policies to ease restrictions on imports and foreign investment. Rather than a breakthrough, however, Xi's remarks reflect a continuation of policy that was planned before President Trump's tariffs were announced.

“China's door of opening up will not be closed and will only open wider,” Xi said.

Xi's remarks came during a speech a day after President Trump tweeted that the disparity in tariffs between the two countries represented “stupid trade” rather than free trade.

“China relied in the past on creating favorable policies for itself,” Xi told investors per NPR, but added that in the the future “to rely more on improving our investment environment, we will increase our alignment with international rules and our intellectual property protection."”

“Human society is facing a major choice to open or close, to go forward or backward,” Xi said. “In today's world, the trend of peace and cooperation is moving forward and the Cold War mentality and zero-sum-game thinking are outdated.” Xi did not refer directly to President Trump or the United States.

President Trump has long criticized China for both its tariffs on American imports and for the alleged theft of US intellectual property. An investigation into Chinese trade practices by the US Trade Representative last year found that theft of trade secrets costs the US “between $225 billion and $600 billion” annually.

At first glance, Xi's policy proposals may seem like concessions, but Xinhua reported last November that China planned to loosen trade restrictions in the near future. The plans included easing access to banking, securities and insurance as well as “gradually and properly” reducing automobile tariffs. The article also noted that restrictions on foreign ownership would be lifted in utility and “new energy” vehicle markets on a trial basis in free trade zones by June 2018.

On the same day that Xi delivered his speech, China filed a complaint with the World Trade Organization over the new US tariffs. China's complaint alleges that the US tariffs on steel and aluminum violate the General Agreement on Tariffs and Trade and the Agreement on Safeguards. The US filed a WTO complaint against China in March over intellectual property theft.

Financial markets reacted positively to Xi's speech, but it is not clear that the emerging trade war has been averted. China has previously pledged to respond in kind to President Trump's new tariffs. It is possible that China's relaxed trade restrictions could be limited to other trading partners if the US and China cannot reach a deal to avoid the new US tariffs.

CNN noted that the Chinese Communist Party newspaper denied a link between Xi's policy proposals and the the spat with Donald Trump. “These measures are based on our consistent policy and stance, our own development and our own pace,” the People's Daily said in an online commentary. It called “linking China's strategic choice to the current China-US trade frictions” a "baseless interpretation.”

Originally published on The Resurgent

Oh, Canada! Trudeau Says He Won't Accept Bad Deal On NAFTA

Canadian Prime Minister Justin Trudeau pushed back at Trump Administration attempts to rewrite the North American Free Trade Agreement on Wednesday. Speaking at the University of Chicago’s Institute of Politics, Trudeau said that “no deal” might be more preferable to Canada than a deal that is revised along the lines that the Trump Administration proposes.

“We will not be pushed into accepting any old deal, and no deal might very well be better for Canada than a bad deal,” Trudeau said.

Trudeau’s comments came in the course of a podcast, “The Axe Files,” produced by the University of Chicago and CNN. Trudeau said that Canada valued trade with the United States, but would not accept a one-sided deal.

“When Canadians see me engaging constructively, collaboratively -- but firmly -- at the negotiating table on NAFTA, saying, 'Look we know there are ways to modernize and improve NAFTA in ways that will create a win-win-win when we include Mexico,' there is a path absolutely for that. But we are not going to take a win-loss just for the sake of getting a deal,” Trudeau said.

He added, “We know we can work towards a good deal. But we also know that we will not be pushed into accepting any old deal, and no deal might very well be better for Canada than a bad deal. And being firm on that is, I think, what Canadians expect of me.”

During the campaign, President Trump called NAFTA “the worst trade deal in the history of this country” even though many economists say the trade pact with Mexico and Canada has benefitted all three countries.

Canada and Mexico are able to drive a hard bargain at the NAFTA negotiations because they have other options. Both countries recently signed onto the new Trans Pacific Trade pact that will not include the United States. If the three nations cannot agree to continue NAFTA, Mexico and Canada will have free trade access to numerous new markets around the Pacific rim. Mexico already has 10 free trade agreements with 45 countries.

Still, Trudeau emphasized that continuing the deal would be beneficial to both countries. “Frankly, there is no country in the world that has a greater vested interest in the United States being successful than Canada," he said. "You know, when you sneeze, we catch a cold. I mean, we're so interlinked that absolutely we want to make sure it's a good deal for the United States, because that's part of making a good deal for Canada.”

Trudeau also addressed his recent controversial correction of an audience member who used the word “mankind.” In a clip that has been widely mocked, Trudeau said that “peoplekind” was the appropriate gender-neutral phraseology. Fox News reports that the prime minister called the comment “a dumb joke.”

Originally published on The Resurgent

Why the Feds Denied Puerto Rico a Shipping Waiver – And Why Congress Should Act

After Hurricanes Harvey and Irma, the federal government loosened restrictions on a century-old shipping law to allow foreign ships to carry relief supplies and fuel from US ports to affected areas in Florida, Louisiana and Texas. This week the Trump Administration denied a request for a similar waiver to allow foreign ships to ferry supplies from the mainland United States to the island of Puerto Rico.

The Jones Act, formally known as the Merchant Marine Act of 1920, regulates maritime trade between US ports and in US territorial waters. Part of the law restricts cabotage, trade between two ports within the United States, to American vessels. Foreign vessels can transport cargo from other countries into the US, but not from one US port to another. Since Puerto Rico is American territory, trade between the mainland of the United States and the island is limited to American ships. The Jones Act was passed after World War I to help revitalize the American merchant marine losses incurred during the war.

After hurricanes hit Texas and Florida, the Trump Administration waived the Jones Act to allow more ships to move cargo from American ports to the affected areas. The extra shipping capacity helped to alleviate a looming fuel shortage after the storms.

Reuters reports that a delegation of congressmen led by Rep. Nydia Velázquez (D-N.Y.) petitioned the Department of Homeland Security to issue a similar waiver to aid Puerto Rico. This time the request was denied.

Gregory Moore, a spokesman for Customs and Border Protection, explained that an assessment of US shipping had determined that there was “sufficient capacity” on American ships to bring in supplies to Puerto Rico. “The limitation is going to be port capacity to offload and transit, not vessel availability,” Moore explained. With Puerto Rico’s ports and airports heavily damaged by the storm, the limiting factor on aid to Puerto Rico is not ships to transport the cargo, but ports in which to offload it.

 “We do have the capability,” Joint Chiefs Chairman Gen. Joseph Dunford told Senators on Military.com, but relief ships and airplanes “can't come in until we get the ports and airfields open.”

The Jones Act has been controversial for years and its effect on hurricane relief means that it will remain a sore spot for the island. The New York Times explains that there are two options for bringing foreign goods to Puerto Rico. If the ships come directly to the island, they must pay heavy taxes, tariffs and fees. The other option is to ship the goods to the mainland United States and then put them on American ships for the journey to Puerto Rico. In either case, the increased costs are passed along to consumers.

The Times notes that the added cost makes prices “at least double” that of neighboring islands, including the US Virgin Islands which are not covered by the Jones Act. The cost to the Puerto Rico economy is estimated to be billions of dollars annually.

A temporary waiver of the Jones Act, would likely lift morale on the shattered island, if nothing else. “Our dependence on fossil fuel imports by sea is hampering the restoration of services,” Juan Declet-Barreto, an energy expert at the Union of Concerned Scientists, told Reuters. The decision not to allow a waiver “is raising fears on the island that they are going to be left behind in this disaster.”

As ports are repaired, goods imported to the island by foreign ships will be more able to aid the long-term recovery and rebuilding of the island. Prices for food and consumer goods would drop which would increase the standard of living as well as making manufacturing and tourism more attractive.

Shipping companies oppose changing the law, which they say is necessary to keep the American merchant shipping industry strong and protect jobs, but the policy is already applied unevenly. The Jones Act applies to Alaska and Hawaii as well as Puerto Rico, but at least three US territories, including the US Virgin Islands, are exempt from the law.

While a Jones Act waiver may not help the island in the short term, repeal of the cabotage section of the Jones Act may help the island’s recovery in the long term. The Heritage Foundation and the Cato Institute are among the organizations that have advocated repeal. In recent years, Sen. John McCain (R-Ariz.) and Rep. Gary Palmer (R-Ala.) have proposed repeal of the law. As the island struggles to rebuild after Hurricane Maria, the time to end the Jones Act may have finally come.  

Originally published on The Resurgent

Trump declares war on trade pacts

It’s only the beginning of his first week as president and Donald Trump is already moving to keep his campaign promises to trash free trade agreements. Before the coffee was cold Monday morning, President Trump had already announced his intention to withdraw from the Trans-Pacific Partnership and to sign an Executive Order to renegotiate the North American Free Trade Agreement.

“We will be starting negotiations having to do with NAFTA,” Trump said Sunday at a swearing-in ceremony for his top White House advisers covered by NBC News. “We are going to start renegotiating on NAFTA, on immigration and on security at the border.” The Executive Order withdrawing from the TPP was expected to be one of Mr. Trump’s first acts on Monday according to CNN. As I write this, the TPP page has already been removed from the US Trade Representative website.

During the campaign, Trump was critical of trade agreements that he called a “bad deal” for the United States. Trump blamed NAFTA for the migration of many US companies and factories to Mexico and other countries.

In spite of Trump’s claims, the website of the outgoing US Trade Representative shows that NAFTA has benefitted the US as well as Mexico and Canada. US exports to Mexico have increased by 468 percent since 1993 when NAFTA was implemented. Contrary to the popular belief that free trade is a one-way street, Mexico is the second largest export market for the US, accounting for almost 16 percent of all US exports. Only Canada imports more US goods.

While President Trump and the anti-traders among both parties blame cheap Mexican labor for enticing American companies to relocate, the real story is not that simple. When Trump negotiated a deal to keep an Indiana Carrier plant in the US, the company ended up eliminating many jobs due to automation anyway. The high cost of labor in the Indiana plant was not cost-effective for the low-tech products made there. Reneging on free trade agreements will not make American labor more cost-effective than machines.

The Carrier deal also hinged on tax credits for the company. The United States has the highest corporate tax rate in the free world. Only the United Arab Emirates and Puerto Rico, a bankrupt US territory, are higher. At 30 percent, Mexico’s corporate tax rate is above the international average, but still far lower than the US rate of 38.9 percent.

Ironically for Trump’s anti-trade agenda, another part of Mexico’s economic success is the country’s commitment to free trade. Mexico has numerous free trade agreements with countries in Central America, South America and Europe as well as with Israel and Japan. The ability to make products in Mexico and ship them abroad without taxes that would be incurred on US exports has attracted some US manufacturers.  When Ford announced that it was moving small car production to Mexico, a key reason was that most of those vehicles would be sold in countries where Mexico had free trade agreements.

If Trump can wring a few concessions out of other countries to improve trade deals, then the US may benefit. If he ultimately plans to scuttle NAFTA as well as the TPP, then it will be bad for US companies, workers and consumers.

According to Yahoo News, Trump claims to favor trade treaties with individual countries rather than multinational trade pacts. Trump’s plan would, for a similar amount of effort, craft a trade deal with one country rather than a dozen. It would also leave US businesses to navigate a patchwork of trade regulations that vary from country to country rather than a consistent set of rules for North America and the Pacific countries.

The Center for Automotive Research estimates that withdrawal from NAFTA or implementing punitive tariffs could cost 31,000 US automotive jobs. Prices for cars sold in the US would almost certainly rise due to both tariffs and the higher cost of manufacturing in the US. As a result, fewer cars would be sold.

An additional factor is that if the US withdraws as a free-trade partner, it is likely to be replaced by China. In addition to loss of market share for US companies, that would entail a loss of leadership in setting regulatory standards since, without NAFTA, the US small car market is smaller than that of China and the European Union. American standards and engineering would have less influence on auto design and construction as the American market for small cars shrinks.

By rejecting the TPP, the Trump Administration may well be pushing other nations of the Pacific Rim toward a free trade agreement with China. CNN Money reports that the Chinese are already inviting many countries that would have been in the TPP to form a Regional Comprehensive Economic Partnership (RCEP). The RCEP may ultimately include staunch US allies like Australia and Japan as well as allowing China to make further inroads to Latin America.

Overall, there is a large potential downside to tinkering with a free trade agreement that has been an enormous success and scuttling another that will open a door to Chinese expansion. Edward Alden, a senior fellow at the Council on Foreign Relations, told CNN Money that he was “baffled” by Trump’s protectionist hostility to the trade treaties.

Alden questions Trump’s penchant for deal-making. “Trump has single-handedly given away an enormous source of leverage over China,” Alden said. “The first rule of negotiating is don't give away something for nothing, and he's done that right off the bat.”

Originally published on The Resurgent