tariffs

A safety net for the looming trade war

Posted on by j.giglio

Much has been written about the continuous maelstrom of trade and tariffs. Articles are legion and lengthy, and the onslaught of words is entirely shorn of humor. Is the difference between trade and “free trade” the same as the difference between love and “free love?” Many of these articles fail the memory test.

Unlike academic arguments, debates about trade and tariffs are waged at a pitch of high intensity because the stakes are so high. Often overlooked is Trade Adjustment Assistance, a program with avid supporters and fierce critics.

Trade Adjustment Assistance is the primary policy response to dislocations caused by trade and globalization. This federal program provides assistance to workers who have involuntarily lost their jobs to foreign competition, either because their jobs moved outside the United States or because of an increase in directly competitive imports. It also assists those whose hours and wages are reduced as a result of increased imports, whether or not that had anything to do with a trade deal. Congress created the program as part of the Trade Expansion Act of 1962, but it was little used until the Trade Act of 1974 eased eligibility requirements.

Trade Adjustment Assistance offers eligible recipients a variety of benefits and reemployment services. It provides expanded unemployment insurance benefits, two years of job training, job search and relocation allowances, tax credits for health insurance coverage, wage insurance for workers over 50 years of age and related subsidies.

The legislation was initiated by President John F. Kennedy as a way of building domestic support for multilateral trade negotiations. The program has undergone changes through the years. Since free trade policies are expected to bring overall economic gains, there is a rationale for providing assistance to workers whose jobs are sacrificed for the greater good. Put differently, benefits of free trade, which are diffused throughout the economy, exceed its costs, which are concentrated. The winners should compensate the losers and help train or retrain American workers to become more competitive.

The original legislation faced strong opposition, but, with labor’s backing, Trade Assistance Adjustment became law. Trade Adjustment Assistance has been the necessary political price for keeping free trade on track, the sop to displaced domestic workers.

Critics of the program are wont to complain that despite its generosity, the program has been ineffective. For example, one study of Trade Adjustment Assistance recipients shows that their incomes after returning to work were no better than those of returning workers not eligible for Trade Adjustment Assistance.

Fairness is also an issue. Why should someone get special assistance after losing a job because of trade, but not if they lose a job because of changes in technology and consumer preferences, domestic competition or simple business failure? After all, they still have bills to pay.

On the other hand, advocates argue that Trade Adjustment Assistance has provided badly needed assistance to more than 2.2 million workers who lost their jobs to globalization since the Trade Act of 1974 and is an essential complement to the broader trade agenda. They point to data showing that nearly 77 percent of program participants found employment within six months of completing their training. They are silent on the quality of the jobs and whether they have a positive effect on wages for program participants.

While the United States may gain from free trade policies at the macro level, the losses are concentrated and inflict real distress on affected workers. Free trade has cut consumer costs, reduced poverty around the world and helped multinational corporations prosper; the United States should take care of workers who have paid the price.

Regardless of the dimensions of the coming trade and tariff wars and chaos in the international trading system, some version of Trade Adjustment Assistance is essential to provide a safety net, not just a fig leaf, for those who inevitably bear the cost of trade and tariff policies.

Originally Published: July 28, 2018

 

 

No doubt about it, China doesn’t play fair on trade

Posted on by j.giglio

Trade issues are not everyone’s idea of a good time. With so many demands on their attention, ordinary Americans are wary of the truth quotient in commentary on the subject. They are cautious about separating the genuine from the meretricious comments from corporate America, which is concerned about maximizing shareholder wealth rather than doing the right thing for the majority of Americans.

General Motors has warned that President Trump’s threats to impose a 25 percent tariffs on imports of cars and car parts are projected to cost the auto industry billions of dollars, could raise some car prices by nearly $6,000 and result in fewer American jobs and a smaller GM. In contrast, a Ford Motor Company spokesperson said they believe they are somewhat insulated from the proposed tariffs because their most profitable vehicles are built here.

Currently, vehicles imported to the United States face a 2.5 percent tariff. Cars built in America face a 10 percent tariff when they are shipped to the European Union and a 25 percent tariff when they head to China.

During the financial crisis, the feds put $49.5 billion of taxpayer money into the GM bailout and the taxpayers ultimately lost an estimated at $10.5 billion. The firm has remained profitable since then. In retrospect, the bailout should have included provisions requiring that a portion of future profits go to fully repay taxpayers. Government Motors could also have been required to build automobiles and auto parts in the USA.

The automaker sold 4.04 million vehicles in China in 2017, a third more than the 3.02 million it sold in the United States. Last year represented the sixth consecutive year that China was General Motors’ largest market.

GM and other multinational companies headquartered in America view China’s emerging middle class as the world’s largest market for their products. The firm’s future growth relies as much on China as it does on how the automaker responds to emerging disruptive technologies such as electric and autonomous vehicles, and changing patterns of car ownership and use that will ultimately force the modification of its current business model.

Multinationals are concerned that the tariffs will cause the Chinese government to retaliate by imposing bureaucratic rules and regulations that could cause them to lose market share. China used this approach to roll back Japanese automakers’ market share during a dispute with Japan over contested islands in the East China Sea.

When China was violating the World Trade Organization rules on subsides for wind turbines, General Electric and other firms that were in the business were reluctant to bring a dispute to the WTO for fear of Chinese retaliation. It was the United Steel Workers who ultimately brought it to the WTO.

It is hard for multinational corporations to resist the temptation to placate the Chinese. China doesn’t have to send lobbyists to walk the halls of Congress, they just have the multinationals do what they want.

It is implausible to argue that China does not engaged in unfair trade practices. China is a one-party communist dictatorship. It is not bound by the political constraints of a democratic government with a constitution that imposes presidential term limits and secures the rights of free speech and association.

This political structure enables China to promote state subsidized industries such as steel, aluminum, and solar panels that have flooded global markets, depressed prices, and shut down hundreds of manufacturing plants, all in violation of World Trade Organization rules. Along with currency manipulation and stealing intellectual property, China’s actions amount to a thumb on the scale.

“Free” trade is a concept that works in classrooms insulated from the harsh realities of unfair practices and policies. They ignore predatory practices by foreign governments who view trade as a competition between nations and play dirty to grab a competitive advantage for their industries.

Like that of multinational corporations, China’s position on trade will be based on maximizing their own interest

Originally Published: July 14, 2018

Trade tariff battle will not lead to any long-term damage

Posted on by j.giglio

President Trump’s views on trade have never been a secret. Trump finally delivered on his campaign promises by announcing unilateral tariffs on steel and aluminum imports coupled with the imposition of about $60 billion in new tariffs on China. The moves generated frightening headlines, with experts predicting they will have dire consequences for the global trading system, but such claims are exaggerated.

Trade is a competitive game and every country plays hardball. The Trump policy is supposedly designed to counter a series of unfair Chinese trade practices, such as its longstanding restrictions on American companies, the forced transfer of American intellectual property, and many cases of patent and trademark infringement. The administration has demanded that China shave $100 billion off its record $375 billion trade surplus with the United States.

U.S. firms have been unable to sell advanced goods and services to China’s rapidly expanding middle class. It is widely acknowledged that in many market segments China requires foreign firms to share proprietary technology as a  condition of market access. The firms provide innovation and their Chinese counterparts imitate foreign design.

Many of the president’s media antagonists say these actions threaten to unleash a trade war; that the  moves appease the resident’s Rust Belt constituency but are unlikely to end America’s trade deficits or bring back manufacturing jobs. They also warn of rising consumer prices and are convinced that the U.S. would lose a trade war with the emerging market giant.

Yet it is unclear whether the president and the economic  nationalists in his administration will govern as tough as they talk. It is quite possible that actual tariffs will fall short of  the threats. For example, the tensions with American allies generated by the steel and aluminum tariffs are likely to be resolved through cometic concessions.

Following the president’s tariff announcement, China initially targeted tit-for-tat tariffs to put pressure on politically sensitive states that voted for Trump, hitting him where it hurts the most ahead of mid-term elections later this year. China’s Ministry of Commerce quickly said that it would impose a 15 percent tariff on $3 billion worth of American fruit, pork, wine, seamless steel pipes and more than 100 other products that represent about 2 percent of total American exports to China.

But soon after all this huffing and puffing, China’s Premier Li Keqiang, at a conference that included global chief executive officers at the Great Hall of the People in Beijing, pledged to open markets to avert a trade war with the United States and to ease access for American businesses. Also, China offered to buy more American made semiconductors and allow foreign financial firms to take majority stakes in Chinese securities firms.

Then on April 1, the Chinese Finance Ministry said the previously announced tariffs will take effect immediately.

China is reliant on foreign trade for growth and job creation and needs to retain access to the U.S. market. The country certainly doesn’t want to engage in a trade  war with its best customer. China’s exports to the U.S. are equal to about 4.5 percent of its GDP. In contrast, U.S. exports to China are equal to about two-thirds of 1 percent of GDP. Although less important to the economy than it was, trade accounts for almost 40 percent of Chinese GDP versus less than 30 percent in the U.S.

America’s decline relative to other countries is an old story. First the Russians were going to leave the U.S. in the dust, then the Japanese. But consider the strong and intrinsic advantages America enjoys. They include being functionally energy and agriculturally independent, having more favorable demographics and a consensual society. Drug dealers still prefer suitcases full of dollars, not yuan, and global investors still seek Treasury bonds as a safe haven in times of crisis.

President Trump’s trade moves may temporarily roil U.S. markets, but there is no need to panic or bet against the United States.

Originally Published: Apr 7, 2018