Study: China tariff would add $156B to US GDP

Container shipIt turns out that economists are starting to get on board with the idea that protectionism can work:

The Coalition for a Prosperous America (CPA) has won the prestigious Edmund A. Mennis Award from the National Association for Business Economics (NABE) for a study showing that a permanent tariff on China would benefit the US economy. The award from the nation’s leading association of business economists confirms a growing acceptance of pro-US trade policies needed to address the nation’s economic challenges.

The study, Decoupling from China – An Economic Analysis of the Impact on the U.S. Economy of a Permanent Tariff on Chinese Imports, co-authored by CPA Chief Economist Jeff Ferry and Senior Economist Steven Byers, modeled the effects of a 25 percent tariff on imports from China. It found that after five years the tariff would add $156 billion to annual GDP and 948,000 jobs to the US economy. […]

Michael Stumo, CEO of the CPA, said, “I am very proud of the cutting edge work of our CPA economics team. Receiving this important national award among a crowded competitive field of economic papers is an honor. We have long been concerned that standard economic models produce incorrect results, leading to trade policy that destroys US jobs. Our team has broken new ground on how decoupling from China will produce economic gains, rather than pain, even as America’s national interest is served.”

“The effects of freer trade on the US economy are complex, and often negative for long-term economic growth and income equality,” said Ferry. “In this study, we attempted to show that activist trade intervention like tariffs, if implemented correctly, can produce positive results for the US economy. We are very grateful to the NABE for recognizing our work.”

Some good news for US manufacturing

US manufacturing

Advanced manufacturing is the key to lasting prosperity. The destruction of the US manufacturing base in recent decades – the US lost 55,000 factories and 5 to 6 million manufacturing jobs in the first decade of the 21st century – has dealt a severe blow to America’s economic competitiveness and its ability to generate wealth and provide decent, well-paying jobs to its population.

Reversing this dangerous state of affairs should be one of America’s top strategic priorities. In this regard, the latest US jobs report has some encouraging numbers:

Partly as a result of the last few months’ numbers, 2018 stands preliminarily as the best year for U.S. manufacturing job creation (284,000) since 1997 (304,000). The previous December-to-December manufacturing employment gain was 209,000.

Also, manufacturing jobs as a share of total non-farm jobs (the Labor Department’s definition of the total U.S. employment universe) rose to just under 8.55 percent – their highest level since July, 2016 (8.56 percent).

That’s the good news. The bad news:

Even so, manufacturing’s prior relative employment creation has been so weak that the sector still remains a laggard on this front for the recovery era as a whole.

Since bottoming out in February and March of 2010, manufacturing has regained 1.389 million (60.58 percent) of the 2.293 million jobs it had lost during the Great Recession and its aftermath. Overall private sector employment sank by 8.785 million during the downturn, but since then has regained 20.608 million jobs.

Manufacturing keeps trailing the overall private sector on the pay front, too. In December, pre-inflation manufacturing wages rose by 0.26 percent – considerably slower than the overall private sector’s 0.40 percent.

In summary, manufacturing employment is booming, but wage growth is still terrible. Part of the reason for this could be that some of the best and most lucrative manufacturing jobs are going unfilled. Given the general disdain for factory jobs in current-year America and the lack of emphasis on training people for highly skilled manufacturing roles, it’s unsurprising that the industry faces a sharp shortage of qualified workers:

This week’s new Job Openings and Labor Turnover Survey (JOLTS) revealed that job openings in the manufacturing sector jumped in October [2018] to a record-high 522,000, and it’s only going to get worse.

[…]

There are several causes behind this workforce crisis, notably that many workers lack critical training in the necessary skills to fill these jobs. The manufacturing industry also suffers from inaccurate perceptions among talented students who may avoid career opportunities in modern manufacturing.

In crisis there is opportunity, and the dearth of skilled manufacturing workers implies that a greater focus on closing the skills gap could lead to a boost in wages as the open jobs get filled. Jay Timmons, CEO of the National Association of Manufacturers, appears to think so. At the very least, this could be one piece of the puzzle to addressing the disaster of real wage stagnation in America. Rome wasn’t built in a day, and it will take many years to undo a generational catastrophe.

Also, the tariffs are working.

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More on the strong manufacturing employment numbers: another way to put it is that “the U.S. had as many people working in the manufacturing sector in December as it did 69 years ago.” And, although the percentage of the population working in manufacturing is far lower than it was in 1949, it is growing: “As a percent of the total workforce, manufacturing rose for the first time since 1984.”

And here’s a comment from Timmons:

This year was one for the record books, with manufacturers’ average optimism for 2018 hitting an all-time high. Empowered by tax reform and regulatory certainty, manufacturers are keeping our promise to expand our operations, hire new workers and raise wages and benefits. But as this survey also shows, we face challenges, most seriously the workforce crisis. We have more than half a million jobs to fill right now—and by 2028, as many as 2.4 million could go unfilled if we don’t equip more Americans to take on these high-tech, high-paying careers.

Tiankai’s tariff terror

Chinese ambassador Cui Tiankai

Cui Tiankai

The Chinese ambassador to the US offers a stern but misguided warning about the alleged dangers of tariffs:

Speaking to Reuters before heading to join Chinese President Xi Jinping’s delegation at the Group of 20 summit in Buenos Aires, Cui Tiankai said China and the United States had a shared responsibility to cooperate in the interests of the global economy.

Asked whether he thought hardliners in the White House were seeking to separate the closely linked U.S. and Chinese economies, Cui said he did not think it was possible or helpful to do so, adding: “I don’t know if people really realize the possible consequences – the impact, the negative impact – if there is such a decoupling.”

He drew parallels to the tariff wars of the 1930s among industrial countries, which contributed to a collapse of global trade and heightened tensions in the years before World War Two.

“The lessons of history are still there. In the last century, we had two world wars, and in between them, the Great Depression. I don’t think anybody should really try to have a repetition of history. These things should never happen again, so people have to act in a responsible way.”

The problem is that protectionism did not cause the Great Depression. Like the idea that the Great Wall is visible from space (which was told to me by a certified tour guide in Beijing), this is a myth that just won’t die.

Allow economist Ian Fletcher to explain:

Let’s start by reminding ourselves of a basic fact: the Depression’s cause was monetary. The Federal Reserve had allowed the money supply to balloon excessively during the late 1920s, piling up in the stock market as a bubble. The Fed then panicked, miscalculated, and let the money supply collapse by a third by 1933, depriving the economy of the liquidity it needed to breathe. Trade had nothing to do with it.

The Smoot-Hawley tariff was simply too small a policy change to have so large an effect as triggering a Depression. For a start, it only applied to about one-third of America’s trade: about 1.3 percent of our GDP. One point three percent! America’s average tariff on goods subject to tariff went from 44.6 to 53.2 percent—not a very big jump at all. America’s tariffs were higher in almost every year from 1821 to 1914. Our tariffs went up in 1861, 1864, 1890, and 1922 without producing global depressions, and the great recessions of 1873 and 1893 spread worldwide without needing the help of any tariff increases. […]

World trade did indeed decline, but this was due to the Depression itself, not higher American tariffs. This is no surprise, as declines in the values of the currencies of America’s major trading partners wiped away much of the effect of the tariff anyway.

Fletcher quotes economic historian William Bernstein as follows:

Between 1929 and 1932, real GDP fell 17 percent worldwide, and by 26 percent in the United States, but most economic historians now believe that only a miniscule part of that huge loss of both world GDP and the United States’ GDP can be ascribed to the tariff wars. .. At the time of Smoot-Hawley’s passage, trade volume accounted for only about 9 percent of world economic output. Had all international trade been eliminated, and had no domestic use for the previously exported goods been found, world GDP would have fallen by the same amount — 9 percent. Between 1930 and 1933, worldwide trade volume fell off by one-third to one-half. Depending on how the falloff is measured, this computes to 3 to 5 percent of world GDP, and these losses were partially made up by more expensive domestic goods. Thus, the damage done could not possibly have exceeded 1 or 2 percent of world GDP — nowhere near the 17 percent falloff seen during the Great Depression…

Buckle up

US Trade Representative Robert Lighthizer

The tariffs cometh:

U.S. Trade Representative Robert Lighthizer said Wednesday the administration would likely be unveiling tariffs against China soon, but cautioned that the precise details are still subject to change.

“The president is going to make a decision in the very near future,” Lighthizer told the House Ways and Means Committee. “Our view is that we have a very serious problem of losing our intellectual property, which is really the single biggest advantage of the American economy. … We are losing that to China in ways that is not reflective of the underlying economics.” […]

He said that the existing world trade system, including the World Trade Organization, was “wholly inadequate” to deal with China because it is “state-dominated economy that rejects market principles.”

Better dig a bomb shelter and stock up on canned beans and shotguns shells, as we are reliably informed that tariffs will lead to a “trade war.”

Tariff talking points

Some thoughts from trade expert Alan Tonelson on the impending metals tariffs:

>Many countries have declared their intention to retaliate against the American tariffs with higher barriers to U.S. exports. Curiously, they are overlooking the Chinese government-subsidized overcapacity at the root of the long-time distortions in world steel and aluminum markets.

>Many of these countries want the problem tackled multilaterally. But the World Trade Organization (WTO) has failed to stem this overcapacity (or deal effectively with many other forms of Chinese trade and broader economic predation), and a G20 forum specifically addressing the steel issue has produced nothing since its founding in December, 2016.

>Although major steel-producing powers like the European Union have imposed their own steep tariffs on shipments from China, the global glut has continued. One reason may be that, since the global economic recovery took hold in 2010, according to World Steel Association data. the United States has been the major steel producer that has suffered by far the greatest loss of global production share by volume. (See this post of mine for the 2010 figures and the Steel Association’s latest report for the most recent – January, 2018 – figures.) And as of the most current World Steel Association data (2016), the United States is also the steel producer with the highest steel trade deficit by volume (21.7 million tons).

As a result, charges that American steel tariffs in particular will jeopardize the rules-based global trade system seem to be arguing that this system requires the United States to remain as the world’s dumping ground for government-subsidized steel.

Also don’t miss the follow-up post.