Tuesday, February 03, 2009

A Reckless Optimist Meets a Cautious Pessimist

Pete Murphy replies to my post criticising his idea for selective tariffs to address the US trade deficit: "A Reckless Optimist Writes", posted Saturday on Lost Legacy.

Pete Murphy posts on Five Short Blasts Forum HERE:
His recent post is on “Clumsy Trade Policy” and it expounds a new theory of ‘safe’ protectionism by weighting tariffs on manufactured goods by an index of the density of population of a country – the denser a country’s population the more the imposed tariff. [Opening sentence modified following clarification from Pete in the original comments.]

Gavin, I welcome the kind of constructive criticism and discussion provided by your post and those who have commented. I would just like to point out that I am not a protectionist basher of free trade in general. In most cases, free trade is the right policy.

However, I've discovered a factor that, in some cases, makes free trade tantamount to economic suicide and, I believe, is responsible for completely bankrupting America in the 34 years since our last trade surplus in 1975, during which time our cumulative trade deficit now exceeds $9.2 trillion. I wonder if any other country would be so patient with such trade results for so long? I don't see many volunteers in the global community raising their hands to take over for a while.

In these instances I speak of - trade in manufactured goods with badly overpopulated nations - the blind application of free trade policy is even more damaging (to the reasonably populated nation) than the blind application of protectionism in all of the other cases.

My fondest hope is that some economist of some influence will research the relationship between population density and per capita consumption, and then its effects on trade, as I've done. I think they would be astounded by what they found. It might be a great research project for economics students.

By the way, just a comment about my inclusion of Germany. When I analyzed America's trade deficit in manufactured products with each country, I translated it into per capita terms - that is, divided by the population of the nation in question. How else can one compare the effectiveness of our trade policy with a country like Ireland, let's say, as opposed to a country like China? Using 2006 trade results, I found that the deficit with China was rather unremarkable - nineteenth on the list. Germany, a nation seven times as densely populated as the U.S. and almost twice as densely populated as China, was 9th on the list, with a per capita trade surplus with the U.S. in manufactured goods of $541 per person - three times worse than China's surplus with the U.S. To not include Germany in my list of examples might come across as Asia-bashing.

Also, just as a matter of interest, in case you and your readers are wondering who was no. 1 on the list - it's Ireland. America's per capita trade deficit in manufactured goods with Ireland in 2006 was $4,306 - 25 times worse than the deficit with China. Of our top twenty per capita trade deficits in manufactured goods, eighteen were with nations much more densely populated than the U.S.

And here's an even more revealing statistic: in 2006, we had a $17 billion trade surplus with the half of nations below the world median population density. With the half above the median (same number of nations) we had a $480 billion deficit.

If tariffs in such instances aren't the answer, then there had better be another because a global economy that's predicated upon America enduring an enormous trade deficit in perpetuity is unsustainable, as the global economic collapse has demonstrated.

Thanks for the opportunity to present my case. Best wishes

My response:

Hi Pete
Apologies for the delayed reply but we've had more snow than usual this week and, as usual, the country has ground to a halt, though my domestic requirements haven't.

Thank you for your elaboration on your hypothesis, and your well mannered tone, both of which readers may find helpful.

However, it doesn't answer my objection to tariff targeting, which inevitably discriminates against some countries, who will notice the shift in their trade with the tariff imposing country and its effects on their revenues.

It is the noticeable affects of targeted protectionism that starts the 'beggar thy neighbour' spiral to less trade by futile attempts by retaliation to restore the new deficits.

This does not mean that general tariffs are less 'toxic'; in trade wars all parties involved lose, and usually for some considerable time, depending on the mutual retaliation exchanges. If the global system gets sucked into the trade war, then global depression threatens.

The problem is not really confined to international trade; there are domestic causes at work. The trade in manufactured goods in, say, the case of Germany, which you highlight as a possible target for your tariff proposal, is largely comprised of goods which both the US and Germany produce domestically – engineering products such as automobiles, electronics, etc. In these goods many US consumers buy the German imports in preference to US products. As the singer sings, she wants her man to buy her a 'Mercedes Benz' (or, many without singing, they buy 'Volkswagens').

US relative inefficiency in product, design, and marketing, causes the trade imbalance, therefore the solution to the deficit is for US manufacturing the change. Because the US auto-industry is not tackling these sorts of problems, it loses US customers. Blocking German imports reinforces the inefficiencies of US manufacturing and slows down, where it does not stop absolutely, the inevitable changes needed to remove the deficit as it stands. The same is true across all protected industries.

Tariff proposals are an administrative measure to patch up a glaring inefficiency in US manufacturing, where what is needed is the power of the ‘perennial gale of creative destruction’ to impose change on the way US corporations (and their workforces – and, in the US case, their pensioned and about to be pensioned former workforces; and their Unions, and their legislators and those who influence them) who go about their ‘business as usual’, ‘until Hell freezes over’, stubborn resistance to what their trade deficit is telling them.

I called you a ‘reckless optimist’ because you advocated a measure that has a poor history of effectiveness for a world where other countries are not part of the US solution. Germany, alone, is a powerful member of the European Union, with political clout (not on the scale of the USA), but in the not insignificant ‘pond’ of the EU, its potential for creating the necessary momentum for a response to imposed targeted tariffs should not be overlooked. For these reasons, whatever merits your tariff proposals have in theory (itself not yet properly tested), they may have far fewer merits in practise.




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