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The strange endgame of protectionism

Summary:
When Steve Bannon was still advising President Trump, he advocated a traditional form of economic nationalism. The goal was to boost manufacturing in America and reduce the trade deficit. One traditional argument against US protectionism is that it would damage American farmers, an important export sector. In the past two years, the Trump administration has moved increasingly far from that vision, promoting policies tailor made to increase the trade deficit and further squeeze manufacturing, such as a massive increase in the budget deficit. Now Bloomberg has an article claiming that Trump officials have almost entirely given up on the mercantilist agenda, and indeed are actively encouraging China to put tariffs on US manufactured goods, with the goal of helping

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When Steve Bannon was still advising President Trump, he advocated a traditional form of economic nationalism. The goal was to boost manufacturing in America and reduce the trade deficit. One traditional argument against US protectionism is that it would damage American farmers, an important export sector.

In the past two years, the Trump administration has moved increasingly far from that vision, promoting policies tailor made to increase the trade deficit and further squeeze manufacturing, such as a massive increase in the budget deficit.

Now Bloomberg has an article claiming that Trump officials have almost entirely given up on the mercantilist agenda, and indeed are actively encouraging China to put tariffs on US manufactured goods, with the goal of helping farmers:

China is considering a U.S. request to shift some tariffs on key agricultural goods to other products so the Trump administration can sell any eventual trade deal as a win for farmers ahead of the 2020 election, people familiar with the situation said.

The step would involve China moving retaliatory duties it imposed starting last July on $50 billion worth of U.S. goods to non-agricultural imports, said the people, who asked not to be identified because the discussions were private.

But that’s not all.  Another proposal would hurt our Rust Belt even more:

Another person said China would consider shifting the tariffs to make it easier to meet a proposal to buy an additional $30 billion a year more of U.S. agricultural goods on top of pre-trade war levels as part of a final deal. . . . Under the proposed agreement, China would commit by 2025 to buy more U.S. commodities, including soybeans and energy products, and allow 100 percent foreign ownership for U.S. companies operating in China as a binding pledge that can trigger retaliation from the U.S. if left unfulfilled, people familiar with the situation said earlier this month.

This is breathtaking.  It’s not enough to switch tariffs from farm products to manufactured goods; the Trump administration also wants to encourage the Chinese to buy more US farm products than ever before, which will cause China to send even more manufactured goods to America. Any policy that encourages the export of farm products also encourages the import of manufactured goods.  (There’s a reason they call it “trade”.)

And then to pour even more salt on the wound, the administration is trying to make it easier for US firms to invest in China.  Recall that two years ago the new nationalists were up in arms about all the factories that were closing down in the Rust Belt and moving to China.  Why does the Trump Administration propose making it easier for US firms to outsource jobs?

Of course I’m being a bit sarcastic here.  More seriously, I’d tend to discount the Chinese promises to buy more commodities.  If that occurs, it will merely shift our exports around, not increase total commodity exports.  Commodities are “fungible”, and if one country buys more of our soybeans, then our soybean exports to other markets will be displaced by exports from Brazil and Argentina. But if the Trump administration is placated by meaningless symbolic gestures, then that’s a good thing.  And a Chinese agreement to allow 100% foreign-owned investments would also be a good thing, as it will make China a stronger and more powerful country.  That’s what the American nationalists want, right?

I wonder if they even realize what is happening.

The strange endgame of protectionism

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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