Download Tarriffs and Free Trade

KEY INGREDIENTS OF
OPPOSITION TO FREE TRADE?
PREJUDICE AND NATIONALISM
By Shahrzad Sabat, The Washington Post, 8/22/2016
Economic globalization hasn’t won any popularity contests this summer. After 25
million primary voters supported the protectionist rhetoric of Bernie Sanders and
Donald Trump, both parties’ national conventions featured strident opposition to
international trade. When Democrats met in Philadelphia last month, attacks on the
Obama administration’s big trade deal with countries of the Pacific Rim, the TransPacific Partnership (or TPP), led some observers to pronounce it all but dead. At the
Republican convention in Cleveland, Trump declared that, “Americanism, not
globalism, will be our credo,” attacking NAFTA (the 1994 North American Free Trade
Agreement) and a string of trade agreements negotiated since.
Meanwhile, a majority of British voters chose to leave the European Union, rejecting
decades of economic integration. The morning after the Brexit vote, business
leaders, political pundits, and experts of all kinds were in shock. The economic costs
of leaving the E.U. were too significant; “sober” economic reasoning, many had
believed, would surely prevail.
But social science reveals that rational economic calculus has some competitors in
shaping citizens’ opinions on globalization.
If you listen to the rhetoric of recent globalization debates, you’ll hear another major
influence. Many observers have noted that Donald Trump’s anti-trade language is
decidedly “us versus them.” In Britain, the “leave” movement’s campaign against
economic openness was infused with anti- foreign sentiment.
A series of studies by both economists and political scientists confirms this link
between nationalistic sentiment and opposition to global markets. Negative attitudes
toward “out-groups” — ethnocentrism, generalized prejudice and chauvinistic
nationalism, for example — are some of the strongest predictors of protectionism in
individuals. Several of these studies suggest that attitudes toward outsiders affect
opinion about globalization more than economic self-interest does.
This research focuses mainly on public opinion toward trade — the flow of goods, not
of people. The connection between protectionist sentiment and negative out-group
attitudes has been made more obvious this year, as both Trump and many pro-Brexit
campaigners have also railed against migrants. But even with no discussion of
immigration, those who are hesitant about outsiders are far more likely to oppose
open markets than those with a more welcoming outlook.
That makes sense, considering what we know from psychology and behavioral
economics. In their Nobel Prize-winning work, psychologists Daniel Kahneman and
Amos Tversky argued that the human mind is lazy: It relies on shortcuts to bypass
the effort required by deliberate reasoning, unconsciously turning complex decisions
into quick, intuitive judgments.
When it comes to foreign trade, the “foreign” aspect of the issue presents the
most prevalent mental shortcut. International trade involves dealing with “others.”
Research on globalization opinion suggests that the average individual’s opinion on
trade comes not from rational (and mentally demanding) assessments of costs and
benefits, but gut-level decisions guided by attitudes toward out-groups and
foreignness.
This research is consistent with findings from a recent study of Republican voters.
The study, based on a Gallup survey of 87,000 Americans, finds no connection
between an individual’s risk of economic loss to trade competition and his or her
support for Trump’s economic nationalism. Rather, those who support Trump and
his protectionist stance tend to have little contact with immigrants and racial
minorities. That insularity is linked to negative attitudes toward outsiders.
But there are other sources of protectionist opinion as well. When President Obama
traveled to Hanover, Germany, in April to promote his trade deal with Europe, the
Transatlantic Trade and Investment Partnership (or TTIP), thousands of
demonstrators gathered to oppose the agreement. Across Europe, voters worry
about fairness and predatory corporations. They are questioning the secrecy of the
TTIP’s negotiation, and protesting what they believe will be the resulting erosion of
consumer protection and environmental standards.
On our side of the Atlantic, similar considerations — concerns over economic
inequality, in particular — have been a key part of Bernie Sanders’s protectionist
message. The villains in his story are not foreigners, but corporate interests
perpetuating inequality at home and abroad.
We have less research on these aspects of globalization opinion. In a preliminary
study, however, I find that among the most liberal Americans, trade opinion is
strongly tied to beliefs about the impact of globalization on the poorest segments of
society.
Disentangling human motivations is a complicated business, especially when
motives tied to identity or values appear to overlap with economic interests. It is
certainly no coincidence that anti-globalization messages have been resonating
deeply with voters who feel personally cheated by open markets. But pure economic
reasoning rarely tells the whole story.
Shahrzad Sabet is a postdoctoral fellow at Harvard University’s Weatherhead
Center for International Affairs.
FOR AMERICANS, TRUMP’S TARIFFS
ON IMPORTS COULD BE COSTLY
Associated Press,12/1/2016
WASHINGTON – American consumers and businesses would pay — literally — if
President-elect Donald Trump followed through on his campaign pledge to slap big taxes
on imports from China and Mexico.
Trump said during the campaign that he'd impose tariffs of 35 percent on Mexican imports
and 45 percent on Chinese imports to protect American jobs from unfair foreign
competition. Companies that import those goods would pay the tax at the border.
Many of those firms would likely try to heap as much of the cost as possible on their
customers. The result is that American consumers could end up paying more for foreignmade clothing, tablet computers and other electronics.
A 45 percent tariff on Chinese-made goods could drive up U.S. retail prices on those goods
by an average of about 10 percent, Capital Economics has calculated. Consumers would
find it hard to escape the price squeeze.
"There are few alternative sources for the main products the U.S. buys from China," says
Mark Williams, Capital Economics' chief Asia economist. He notes, for example, that China
supplies about 70 percent of the world's network equipment, cellphones, laptops and tablet
computers.
Since Trump's election, his team has de-emphasized the use of tariffs, describing them as a
potential tool to be used to pry concessions from America's trading partners.
"Everybody talks about tariffs as the first thing," Wilbur Ross, an investment banker who
is Trump's choice for Commerce secretary, told CNBC Wednesday. "Tariffs are part of the
negotiation."
They would also be risky. Tariffs could ignite a trade war if, as expected, China and Mexico
retaliated by imposing tariffs or other sanctions of their own on the United States.
Analysts say Trump might rethink his tough trade talk once he fully weighs the costs — not
all of which would be economic. A trade war would likely have diplomatic consequences,
making it harder, for example, to enlist China's help in trying to defuse the threat from
North Korea's nuclear ambitions.
"It will only result in collateral damages to both sides," says economist Song Lifang of
Renmin University in Beijing.
Even without a broader conflict, tariffs can damage corporate America. Back in 2002,
President George W. Bush imposed tariffs of up to 30 percent on imported steel. American
steel producers took advantage of the tariffs to raise their own prices, thereby squeezing
U.S. industrial companies that buy steel. The Consuming Industries Trade Action Coalition,
representing steel buyers, has said the tariffs cost thousands of U.S. jobs.
"That was an awful thing for us," says Bill Smith, president of Termax Corp. of Lake Zurich,
Illinois, which makes fasteners for the auto industry. "We are pretty nervous here at
Termax" that Trump will target Chinese steel with tariffs again.
Smith says Termax wouldn't be able to pass along the higher cost to its automaker
customers — "They can just choose to use a different (foreign) manufacturer" — and would
have to absorb the costs itself.
Ford Motor CEO Mark Fields warned on CNBC last month that a 35 percent tariff on imports
from Mexico, where Ford is building its Focus compact car, "would affect the entire auto
sector."
Trump's proposed tariffs reflect frustration over the trade deficits in goods the United
States runs with China ($367 billion last year) and Mexico ($61 billion). The deficit is the gap
between the value of the goods the United States exports and the larger value of the goods
it imports.
China's Global Times newspaper, published by the ruling Communist Party's People's Daily,
speculated that if Trump's proposed tariffs are enacted, "China will take a tit-for-tat
approach."
"A batch of (U.S.) Boeing orders will be replaced by (Europe's) Airbus," it said. "U.S. auto
and iPhone sales in China will suffer a setback, and U.S. soybean and maize imports will be
halted."
Farmers in Mississippi, Missouri, Tennessee and Arkansas would suffer if China targeted
American soybeans in retaliation for any Trump tariffs, according to the Peterson Institute
for International Economics. It said rural Sharkey County, Mississippi, could lose up to 40
percent of its jobs.
Beijing could also restrict access to finance and other service industries, says Zhou Nianli,
a professor at the China Institute for World Trade Organization Studies at the University of
International Business and Economics in Beijing.
"If he really put what he claimed during the campaign into practice," Zhou says of Trump,
"China may create trade barriers for U.S. service industries that are thirsty to get into
China's markets."
At Termax, which employs 435 U.S. workers, Smith also worries that a trade dispute with
China would jeopardize his company's access to rare earth magnets it buys exclusively
from China.
The Trump transition team declined to respond on the record. But his team has argued that
fears of a destructive trade war are overblown. Trump advisers Ross and Peter Navarro, an
economist at the University of California, Irvine, wrote in September that the "fearmongering fails to understand the negotiating power of the U.S."
The threat of tariffs, they wrote, is a tool to compel others to abandon unfair trade
practices: "All of the countries now running major trade surpluses have far more to lose by
disrupting trade."
Navarro and Ross disputed the Peterson report that predicted big potential losses for U.S.
soybean farmers.
"We are world's largest producer, and they are the world's largest consumer ," they wrote
of China. "If China cuts off American farmers, Chinese people will go hungry."
Tariffs are meant to give American-made products a price advantage by making their
foreign competition more expensive. They have had a disreputable image since the United
States' Smoot-Hawley Tariff Act of 1930 disrupted trade during the Great Depression.
Economist Barry Eichengreen of the University of California, Berkeley, has argued
that tariffs aren't necessarily flawed policy. At times when inflation is too low — as it's been
in the United States and Europe since the Great Recession began in 2007 — tariffs can raise
prices and encourage consumers to spend to avoid paying more later. Such spending helps
drive economic growth. Higher inflation can also make it easier for consumers and
businesses to repay loans.
Still, even Eichengreen cautions that there are more effective ways than tariffs to lift prices
— notably old-fashioned stimulus through tax cuts and stepped-up government spending,
both of which Trump is also proposing.
Many analysts say the United States should also develop more efficient ways to help
American workers who lose jobs to foreign competition — in part through expanded
training programs — rather than punishing foreign competitors.
Tariff disputes can take unexpected turns.
In 2009, the Obama administration imposed tariffs on tires from China, charging that a
surge in Chinese imports was hurting American tire makers. Beijing fired back by imposing
a tax of up to 105 percent on U.S. chicken feet — a throwaway item in the United States
that's considered a delicacy in China.
Gary Hufbauer and Sean Lowry of the Peterson Institute found that the tire tariffs probably
saved 1,200 jobs in the tire industry. But consumers paid more than $900,000 in higher
prices for every job saved.
Overall, Peterson estimates that Trump's policy could trigger a trade war that would throw
the United States into recession and wipe out 4 million jobs.
"A lot of us are hoping that his overriding need to grow the economy and create jobs will
soften and mitigate some of the more harmful actions he could take on the trade front,"
says Joshua Meltzer, senior fellow at the Brookings Institution.
THEMAJORPOTENTIALIMPACTOFA
CORPORATETAXOVERHAUL
ByNeilIrwin,NYTimes,1/7/2017
The United States system for taxing businesses is a mess. If there’s one thing nearly
everyone can agree upon, it is that.
The current corporate income tax manages the weird trick of both taxing companies
at a higher statutory rate than other advanced countries while collecting less money,
as a percentage of the overall economy, than most of them. It is infinitely
complicated and it gives companies incentives to borrow too much money and move
operations to countries with lower tax rates.
Now, the moment for trying to fix all of that appears to have arrived. With the House,
Senate and presidency all soon to be in Republican hands and with all agreeing that a
major tax bill is a top priority, some kind of change appears likely to happen. And it
may turn out to be a very big deal, particularly if a tax plan that House Republicans
proposed last summer becomes the core of new legislation.
Among Washington’s lobbying shops and policy analysis crowd, it’s known as a
“destination-based cash flow tax with border adjustment.” It’s easier to think of it as
the most substantial reworking of how businesses are taxed since the corporate
income tax was introduced a century ago. And it could, if enacted, have big effects not
just in the tax departments of major corporations but in global financial markets and
the aisles of your local Walmart.
This possible revamping of the corporate tax code is less politically polarizing than
the debates sure to unfold in the months ahead over health care, or even over
individual income taxes. But the consequences for business — and for the long- term
trajectory of the economy — are huge.
The basic idea behind a D.B.C.F.T. (to use the abbreviation that has taken hold in a
particularly nerdy corner of Twitter) is this: Right now companies are taxed based on
their income generated in the United States. But there are countless tricks that
corporate accountants can play to reduce the income companies report and to reduce
their tax burden, and those tricks distort the economy.
Two prime examples are transferring intellectual property to overseas holding
companies and engaging in corporate inversions that move a company’s legal
headquarters to a country with lower taxes. Moreover, because interest payments on
debt are tax-deductible, the current system makes it appealing to take on as much
debt as possible, even though that can increase the risk of bankruptcy when a
downturn comes along.
The House Republicans’ approach, instead of taxing the easy-to-manipulate
corporate income, goes after a firm’s domestic cash flow: money that comes in from
sales within the United States borders minus money that goes out to pay employees
and buy supplies and so forth. There’s no incentive to play games with overseas
companies that exist only to exploit tax differences or to relocate production to
countries with lower taxes because you’ll be taxed on things you sell in the United
States, regardless.
“With an income tax, one of the key issues is ‘how do you measure income,’ ” said
Alan Auerbach, an economist at the University of California, Berkeley, who is
a leading advocate of the idea. “But with cash flow you just follow the money.”
And the tax, Mr. Auerbach argues, could spur business investment while not
encouraging companies to rely on debt. It allows companies to enjoy the tax savings
of capital investments immediately rather than depreciating them over time. And it
doesn’t give favorable treatment to debt, as opposed to equity.
That alone would amount to a major shift in the tax system. Congressional staff
members, the incoming administration and armies of lobbyists will spend countless
hours hammering out the details of any such proposal: how it might be phased in,
and how to treat financial services, and much more.
Some of the most complex, and politically problematic, elements of the plan revolve
around its treatment of international trade, which creates winners and losers. And
some of those potential losers are powerful.
Consider what border adjustment means: When an American company exports
goods under this new tax system, it would not pay any taxes on its international sales,
while its imports would be taxed. So a company that spent $80 making something
that it sold overseas for $100 would pay no tax on its earnings. A company that
imported goods worth $80 from abroad and them sold them domestically for $100
would pay tax on the full $100.
At first glance this looks as if it would boost exports and reduce the trade deficit.
Indeed, it might prove politically promising for advocates of the strategy to pitch the
plan as one that would do this.
Many economists think it won’t work that way, however. That’s because as soon as a
cash-flow-based tax with border adjustment looks likely to become law, the value of
the dollar should rise in currency markets. And that stronger dollar could eliminate
the apparent pro-export, anti-import effects of the tax. The dollar could rise by, say,
20 to 25 percent, and the trade balance could remain about where it started.
Essentially, moving to this system means betting on a “textbook economic
theory,” as analysts at Evercore ISI put it, becoming a reality even though the effect
hasn’t been tested in practice.
If the dollar doesn’t strengthen as expected, for example, import-dependent
industries, especially those with lean profit margins, could face disaster. That helps
explain why some of the stiffest opposition to this tax overhaul is coming from the
retail industry. Essentially, economists are telling them “trust us, our models say the
currency will adjust and it will all come out in the wash,” but if the models are wrong,
for companies like Walmart, Target and many others that sell large volumes of
imported goods, their viability could be threatened.
If the models turn out to be right, there is a different set of risks. The United States
dollar is the linchpin of the global financial system, and a large move in its value
triggered by changes in domestic tax policy could have unforeseen effects.
Many companies worldwide, especially banks and especially in emerging markets,
have debt denominated in dollars, which would become more of a burden after a new
dollar appreciation. A big dollar rise would also effectively shift trillions in wealth
from American investments overseas toward global investors with assets in the
United States.
As Jared Bernstein of the Center on Budget and Policy Priorities has noted, we don’t
really know what the distributional consequences of this tax overhaul would be. It
could increase the costs of imported goods that the poor spend a disproportionate
portion of their income on, like clothing and gasoline. That would be bad news for
poorer Americans even as it makes the overall economy more efficient.
There’s still a lot of work to be done to understand the far-reaching consequences of
the D.B.C.F.T. (also, work to be done to find a catchier name). But there’s a broader
point about the nature of any major policy reform. The benefits of a reworked
corporate tax code would emerge slowly; these disruptions and costs could arrive
almost instantly.
No matter the outcome, 2017 will be a fascinating year in which core components of
the tax system – with long-lasting economic consequences – will be up for grabs.