‘Every Who Down in Whoville Liked Christmas a lot…
But the Grinch, Who lived just north of Whoville, Did NOT!
The Grinch hated Christmas! The whole Christmas season!
Now, please don’t ask why. No one quite knows the reason.
It could be his head wasn’t screwed on just right.
It could be, perhaps, that his shoes were too tight.
But I think that the most likely reason of all,
May have been that his heart was two sizes too small….’
How the Grinch Stole Christmas – Dr Seuss
It does not take a vivid imagination to see the incumbent US president as a kind of flesh-and-blood version of one of children’s book author Dr Seuss’s most famous imaginary creations – the Grinch. The Grinch, of course, stole Christmas from those lovable Whos, until he finally has one of those last-minute Damascene conversions, and returns everything to the Whos – and then some. But we should not expect that inevitable good news. Of course, our story is not about those lovable Whos or the bitter, dyspeptic Grinch who afflicts them. Rather, our story is the Trump administration’s international economic policies – and their effects – even if they are about to take away Christmas.
The most recent announcement on trade from the Trump White House vis-a-vis China has been that they are imposing tariffs on some $200-billion worth of Chinese goods being imported into the US. This comes on top of the earlier imposition of some serious tariff action on $50-billion worth of imports, and then China’s reciprocal imposition of tariffs on American imports. Going forward, the Chinese have said they will be imposing new tariffs on yet more American goods.
But wait a minute? What is a tariff, anyway? And what are they supposed to do? We’ll get there in a minute, but first we need some background on other tax policy offerings from the current president.
Observant readers may remember the 2016 Trump presidential campaign in which he promised tax cuts for an overlooked, beleaguered middle class and that would bring back all those jobs shed by manufacturing in the past several decades. Well, he did succeed in gaining a tax cut from Congress, although it was largely beneficial – no real surprise – to the rich, the very rich, and big corporations.
Besides cuts in inheritance taxes, top-end marginal tax rates, and other benefits to well-off individuals, a key idea behind the Trump administration’s tax cut was that corporations would use the new gains in their financial positions to repatriate funds to invest in new plants and job growth – consequently, the Second Coming would be just around the corner. Instead, corporations used the resulting tax bonanza to increase share dividends, to increase compensation to corporate officials, and to carry out share buybacks to boost per-share prices. (That latter would inevitably generate bigger bonuses for corporate top dogs and their investment brokers – and yacht salesmen.)
Economists also point out, however, that American businesses were unlikely to be shifting massive amounts of their funds back to the US in order to invest in that new job creation effort – because most of that hoard was effectively already in the US in the form of Treasury bonds they were holding. But one result of the resulting tax cuts combined with new federal spending has been that the US federal deficit is on course to hit close to the trillion dollar level. Until this moment, that kind of thing has been one of the great no-nos of government budgeting, according to Republicans.
Now what about those people in the hard-pressed middle class and all those working stiffs who were the bedrock of the Trump victory? Not so much in it for them. Not really enough for most people even to notice in their regular pay cheques. But there has been a stealth tax coming in through the back door. And here is where the idea of a tariff becomes more important. And where we can begin thinking about the Grinch.
The unremitting drum beat of the Trump narrative from the time of the 2016 campaign onward has been that China (and some traditional friends and allies) cheats on trade and investment. China rigs its currency to benefit its exporters and the trade relationship between these two major economies and trading nations is devastatingly tilted in China’s favour. As such, the trade deficit in China’s favour is in itself sufficient proof of all this evil doing. Quod Erat Demonstrandum. QED.
China recalibrated its economic trajectory away from the Spartan lures of “The East is Red” into becoming the exemplar of expansive, authoritarian state capitalism from the Deng Xiaoping era onward. Thereafter, it joined the global economy with a vengeance. It turned itself into the world’s workshop and, with that, became the exporter of zillions of dollars’ (or renminbis) worth of toys, clothing, geegaws, gizmos, Christmas tree lights, consumer electronics, machine tools, cars, and pretty much everything in-between. (Of course this transformation has been helped along by the growing eagerness of foreign companies, finding in China a vast, low-paid labour force that was easily trainable to work in those export-driven industries, and aligned with a government willing to ensure its state banks would invest in new industries and industrial research, and with a growing pool of money to be spent on public infrastructure.)
To deal with the undoubted efforts of China to find ways of avoiding those troublesome WTO regulations, to pressure foreign investors to give Chinese shares in those new investments, and to encourage sub rosa efforts to go around intellectual property protection; the Trump administration determined any future negotiations would only occur along with the threat in mind of, and then the reality of, tariff increases on Chinese goods. That would bend the Chinese to Trump’s indomitable will as they increasingly saw their once-easy access to American markets and sales drop. That would provoke a crisis for Chinese industry, the government, and even the new middle class dependent on all those new, good jobs in those export-driven industries. And that would generate some real pressure to co-operate with Trump’s America.
Oh yes, tariffs. The critical thing is that a tariff is also a tax. And that particular tax is on the ultimate consumer – not the actual product’s producer or its exporting nation. And that means that all those eager Americans driving to the malls after Thanksgiving to the sound of Jingle Bells or White Christmas are going to be encountering – courtesy of the Trump administration’s China policies – higher prices on all those Chinese-made goods, or goods where the global supply chain has its sub-assemblies made in China, or where the products have been made in plants elsewhere but which rely upon Chinese machine tools.
So here is where the Grinch will have stolen stealthily into Who-ville, er, America. The gifts and accessories are going to cost more this Christmas – for the next new iPhone and iMac, an XBox, that luxurious cashmere sweater, the shiny mountain bike, those Fisher-Price educational toys, and the like. (Fortunately, a majority of television and computer flat screens are made in South Korea, so they may be safe for now.)
Peterson Institute for International Economics senior fellow Chad Bown, describing the issues, wrote the other day:
“The scale of Trump’s potential new protection is enormous, even if the president limits further tariffs to only the auto imports and trade with China that he has under threat. By the midterm elections, 40% of total US imports could be hit by new tariffs Trump imposed in 2018 alone.
“To trade economists, the point of these tariffs is puzzling. Countries followed through with immediate retaliation when Trump failed to heed advance warnings and imposed his tariffs anyway. Trump’s message seems to be that America should trade less with the world, not more. Some of his tariffs, such as those on China, appear punitive. Others are an attempt to coerce countries to negotiate trade deals. But even Trump’s self-professed ‘deals’ may reduce as much American trade as they create.”
If that happens, there may be a boom market. But it will be in research on the way the Smoot-Hawley Tariff, passed in 1931 by the US Congess and signed by President Herbert Hoover, helped dramatically lower global trade levels and, in turn, helped increase the impact and longevity of the Great Depression.
Up until this week, Bown has identified five major elements of the Trump trade and tariffs saga. First were those “new tariffs on metal imports from Canada, Mexico, and the European Union. This extended earlier steel and aluminum restrictions on imports from China, Russia, and other countries after the Trump administration declared these were a threat to ‘national security’”.
Given that those tariffs preferentially fell on production from the EU and Canada, as Bown says:
“US trade partners made good on threats to retaliate swiftly. Canada, Mexico, the European Union, China, and Turkey responded with new duties on more than $23 billion of US exports. Some tariffs targeted American steel and aluminum, the primary industrial beneficiaries of Trump’s actions. Other tariffs hit Harley-Davidson motorcycles, Kentucky bourbon, and US agricultural products – strategic choices aimed at engaging key US legislators or electoral interests that might push back against Trump’s trade policy.”
Then the US placed tariffs on $50 billion worth of Chinese imports with the threat (now presumably realised) of tariffs on an additional $200 billion worth of imports. Trump has even stated he might even cover the entire $500 billion worth of US imports from China. As Bown has written:
“China retaliated immediately with tariffs on $50-billion of US goods, including American cars.”
The results of those Chinese retaliatory measures have meant the Trump administration has been forced to offer some $12-billion worth of subsidies to the agricultural and fisheries sectors, after Chinese retaliation hit $27-billion worth of US farm and seafood exports, including sorghum, soybeans from the Midwest, fruits and nuts from California, and lobster from Maine. Not surprisingly, those subsidies were at least partially designed to head off a political backlash that could adversely affect Republican chances in the now-imminent midterm election.
As if Trump had not picked sufficient fights with the China trade imbroglio, he has also threatened tariffs on cars coming in from Canada and Mexico. Together with the European Union, Japan, and South Korea, these countries account for a majority of America’s $350-billion worth of imported cars, trucks, and parts. Bown notes that “Trump is expected to be granted legal authority to impose such tariffs after another soon-to-be-completed investigation, under the same US law used to impose his tariffs on steel and aluminun”.
Finally, the ongoing snarl over NAFTA threatens all those complex, interelated, tri-nation supply chains established since the US-Canada-Mexico trade accord came into effect. As Bown explains:
“Canada remains locked in its NAFTA renegotiation. When announcing the Mexico deal, Trump threatened, ‘I think with Canada, frankly, the easiest thing we can do is to tariff their cars coming in.’ Because cross-border supply chains – and the costs of new tariffs to US businesses and workers – did not stop Trump’s tariffs on Canadian aluminum, Ottawa may fear similar arguments are unlikely to block new tariffs on Canadian cars unless they, too, agree to a new deal.”
This Grinch is not travelling solo, it seems. Instead, he is apparently traveling in a flock, a herd, a coven, or whatever one calls it when Grinches travel in a large, unruly collective. As Bown concludes:
“While the overall US economy remains on solid ground, Trump’s tariffs and the resulting retaliation have caused suffering for thousands of US farmers, companies, workers, and consumers. None of the tariffs that President Trump has imposed thus far in 2018 have been lifted. And his trade policy has also gone unchecked by US courts, as well as Congress.
“Such new tariffs may fulfil some of the Trump political promises to punish unfair traders. But the collateral damage hitting other Americans seems likely to ramp up, raising new questions about the longer-term purpose behind Trump’s tariffs.”
In plain language, while there are real trade questions to be addressed, it is really hard to see the deeper, inner logic of the Trump administration’s current trajectory on trade policy, beyond disruption.
And so, unlike the happy fate of Dr Seuss’s Grinch, we should not expect a change of heart (in size or feelings) on the part of Donald Trump. Perhaps not even in policy clarity. And no one knows where it is all going to go. Or end.
Somebody needs to buy the Trump administration some of the classic economic history texts so they can learn something about prior tariff and trade wars, perhaps with a graphic novel version commissioned specially for the commander-in-chief, added as an explanatory aid. DM
A finger with nerve damage doesn't wrinkle underwater.