This just really seems like a long run understatement, and I would like to see a general equilibrium analysis, at least summarized, with key intuitions. Some American companies with huge economies of scale, like software, will see costs per unit rise greatly if walls go up worldwide (not sure that's fully in this model). And, monopoly power will get much worse, which is not in this model. Also, there are economies of scale and specialization to R&D and learning which are not in this model, and can be big for long run growth.
Paul, it should be noted that the relatively small effect on GDP you show does not take into account some other big factors:
-- Decreased economies of scale
-- Decreased economies of specialization and relative advantage.
-- Decreased economies of scale in R&D and learning.
-- Decreased competition, increased monopoly power problems.
Your model does not iclude these, or fully include these, and over the long run they would result in a far lower GDP relative to free trade.
Yes, these are partly reflected in the domestic price being higher than the world price, but they will push up the world price, market and average of all countries, especially if high walls get erected worldwide; the world price won't stay the same, and especially smaller countries with far lower economies of scale and specialization will be severely hurt. There's a lot this model leaves out, and so greatly understates the costs long run.
I think "We'll see!"
What about inflation and interest rates? How much will these levels of disruption increase inflation beyond the Fed target? And what about their response?
I would guess that if China is subsidizing production costs of semiconductors and electronic products; they will be unwilling to just settle for lower volumes at current price levels. We should see a bigger "welfare loss" and greater price inflation as well.
Hope we don't have to relearn Econ 101 along with Trump - who knew trade economics is so complex? Maybe just a tad more complex than healthcare?
Dr. Krugman,
What about the effects for the national debt? The model you described seems to assume that all currencies are equal in the global market, but they are aren't. One of the main stimulus to trade for many countries is to get dollars to trade globally without spending their foreign reserves. But less trade also means less liquidity of dollars overseas. Cannot that accelerate the replacement of dollar as main global currency? Why making all that effort to acquire dollars after it becomes increasingly difficult to acquire them and there are some possible replacements? And if the dollar stops being the main currency to trade, wouldn't that mean that the U.S. may find itself later in some difficulties to find foreign buyers of its national debt, particularly after the last "tax cuts"?
1
OK, so if Trump will please keep listening to Peter Navarro, the Democrats will retake Congress.
1
Some global plutocrats love trade "wars". They can profit off it.
Dr. Krugman: You calculated the cost of tariffs at 2 or 3 percent of GDP based on lost consumer surplus. But isn't that only one component of the cost. What about the impact of the disruption in production for foreign markets and supply chains that could result in significant job losses, both in the US and abroad? While such disruptions may be short lived, as economies adjust, the impact on US GDP could be significant.
https://twitter.com/paulkrugman/status/1009123741870288901
Paul KrugmanVerified account @paulkrugman
Meanwhile, in trade war news: a little while back I argued that even if you make the most mercantilist-favorable assumptions you can, it's really stupid to levy tariffs on imported inputs instead of consumer goods 1/
https://www.nytimes.com/2018/05/31/opinion/oh-what-a-stupid-trade-war-ve...
10:20 AM - 19 Jun 2018
So @ChadBown and colleagues have analyzed the composition of good subject to the new anti-China tariffs
https://voxeu.org/content/trump-china-and-tariffs-soybeans-semiconductors … Um ... 2/
Maybe this is what it felt like to be on the Titanic. Putin seems to know developing world economies could decline with high crude prices but most OPEC members would really like to get at Trump, the other wants to pump/dump Aramco IPO. Also, my understanding is China would like to produce six (6) air craft carriers and US will not allow this with Chinese/US trade surplus subsidies and then there is Chinese debt not to mention Italian debt response to 2% - 3% GDP reduction. And the FED is telling all that will listen they are to hawkish for a trade war type environment and the $US may rise due too the the US trade war beatdown of Chinese economy and may be the rise of those like Marie LePen and/or Beppe Grillo winning the French or Italian elections on an anti-euro platform.
Trump and his base do not care about others. They are unencumbered by historical memory. They recognize no moral, political or strategic commitments. They feel free to pursue objectives without regard to the effect on allies or, for that matter, the world. They have no sense of responsibility to anything beyond themselves.
Donald Trump and his base are just about the most crass, selfish people that have ever lived.
It is amazing how low these people can go.
2
Tariffs and child separation are Trump's doing. These are his choices. There is no need for either. The world has benefited from free trade, especially the US. The products we buy are better because of it, and the products we produce are better. Yet Trump wants to protect coal of all things. And primary manufacturing like steel and aluminum. How 19th century! The world is finally snapping out of the Great Recession, and Trump wants to ruin it all. Putin couldn't have backed a better guy to disrupt and destroy the Western democracies politically and economically than Trump.
4
We have been running trade war scenarios with a global computable general equilibrium (CGE) model, as Krugman suggests. the difference between our scenarios and Krugman's trade war game scenario is that we assume that the trade war only involves the US and its trading partners. Everyone keeps to the rules-based trading system among themselves. In the long-run trade war scenarios we have considered, we do not find dramatic cuts in the volume of world trade. We find reductions in global trade of the order of 2-3%. We find that countries adjust their trade shares around the US. Lots of trade diversion, not much trade reduction. The reason is that the US is no longer a dominant country in global trade. The US share of global trade is not that big. EU is largest, E&SE Asia is second (1/2 EU share), and NAFTA is third (1/2 E&SE Asia share). And the US is in the process of dismantling NAFTA. The adjustments in national trade shares of current US trade partners by origin and destination to divert around the US are modest.
2
The US has lost control of many industries to China due to cost of production. Low wages, working conditions and goverment subsidies to industry has led to high tech investment in manufacturing. US corporations are off-shoring to China to take advantage of the savings as well.
The US is in a struggle to maintain or improve its past standard of living with this onslaught of problems created by free trade agreements. If the US cannot find alternative industries to reverse the trade imbalance the problem will continue. A renegotiation a free trade is a solution.
Nope, your wrong. Stop forgetting about the capital flows. The US has strong control of the worlds financial via reserve currency. Low wages mean little to trade as those wages have been coming down since the mid-70's. No worlds reserve currency and less trade= lower wage and permanent recession.
1
Forgive me if I'm mistaken, but does Krugman spend any time addressing the impact on Investment under a trade war scenario?
Channeling Econ 101 here, GDP = Gross Private Investment + Gross Government Investment and spending + exports minus imports (e.g., the trade deficit or surplus) + domestic private consumption.
It seems as if we're not accounting for the long term impact of tariffs on the investment environment in the US, which could produce further downward pressure on the GDP forecast Krugman has developed.
3
Once we pull back behind our wall, we'll probably miss the many benefits a global marketplace has given us. Amazon, Apple, Google wouldn't be the big American presences they are, if their markets and supply chains stopped at the border. The rapid rate of technological progress we have become accustomed to - electric cars, solar power, new batteries, more and more capable smart phones - wouldn't exist without an R&D enterprise spanning the world. Competition has given us better, and better-quality consumer goods, not the least cars and airplanes. Even food is better.
Instead of pulling back behind a border wall, we should look at the rest of the world, and adopt policies, habits, and institutions that we find attractive. Whether in healthcare, education, farming, the workplace, or the urban environment, there are things we can do better.
3
Circulation issues (of which trade is only one aspect) are intrinsically tied to production issues as these phases form a unity of the whole valorization process. So retardation of circulation reflects deeper retardation of production. This is not explained in this piece. Everyone knows that profits are not totally reinvested in production. TNCs prefer to put most of their profits in the financial market as opposed to investing it in production. Obviously profitability in production does not appear as good as that of rents on money capital. However, this creates a problem as the source of financial profits in the last instance resides in production, which in due time (the lagging effect may last years or months) will manifest itself as a crash.
So rather than refer to a secondary phenomena like “trade wars” as if they were causa sui, economists should explain the primary factor, (e.g. the slowing down of production). Italy and England among the largest economies have slowed down since 2008 as evidenced in their GDPs.
Again economists fail to discover the essence and get confused with the appearances like “trade wars.” I know that the people who represent these “wars” are not the nicest or brightest of the bunch, but after all they were elected by the multitud of confused people who prefer to attribute causes to others instead of looking at the intrinsic contradiction of the valorization process.
2
Well. We are not currently at war with North Korea, are we? That was a lot of threatening, followed by a big drama reconciliation that actually led to nothing. And there is good reason to think this whole business about a trade war is going to be the same thing. In a few weeks, Trump will meet with the Chinese, and then announce to a very gullible public that the threat from foreign trade has ended. Except maybe from Canada, who will be punished pointlessly for a while, at great expense to some farmers on both sides of the border and with no real reason behind it except that the Canadians made Trump look bad, or at least he is afraid they did.
2
But is it maybe just possible that there will be some "import replacement" in domestic markets, which will in turn lead to increased demand -a virtuous circle? And will other nations find it so easy to raise retaliatory tariffs, when in many cases they already have unilaterally higher tariffs in place in the really important industries?
Anecdotally what we're seeing is that we’re lifting duties on steel and cars, and they're "retaliating" against bourbon. As for soybeans, that's a tiny industry and we already have a price support program that can be adjusted to give extra help near term to farmers.
I do loath Trump, but on this one issue I think his globalist critics are kind of knee-jerk in their responses to his provocations. A tariff regime with a strategic angle might have benefits.
1
I think you've made this point elsewhere (perhaps hidden behind the "stranded capital" language), but it would have been worth repeating here: the disruption isn't just about dockworkers having fewer containers to unload, it's about everything everywhere that depends on a global supply chain.
Sure we can make our own steel and aluminum, but not this month. Not next month. We aren't going to set up smartphone manufacturing lines on the drop of a hat. We don't have the capital infrastructure or labor pool (sub 4% unemployment) to pull it off.
What was the presumed culprit of the Great Recession? Structural Unemployment? The idea that we had too many homebuilders and not enough nurses?
We talk about the China Shock to manufacturing, but that at least took years. If we suddenly spike prices for goods and materials from China, Europe and North America by 30-50 percent, we can't replace them with domestic goods until the rest of the economy catches up.
By then, the massive shock to supply may lead to a fall in demand that leads to Induced Rapid Onset Structural Unemployment.
3
I think you're right on... there are so many industries that have little to no production here in the US. Consumer electronics, metal hardware, clothing.... The disruption would be huge. When is the last time you bought a TV that was made in the USA? 20 years ago? 30? 40? There are two big problems with the presumption that all of this production will come home:
1. Employment is already near capacity.
2. What sane business owner/investor is going to invest tons of money into a factory that can only be competitive on the world stage if there are massive tariffs on the imported substitutes? My business assumption would be that this trade war would be short-term, likely to last as long as a Trump presidency, which is between 1-6 years. Not such a hot investment to make.
4
(I should start by clarifying that by "presumed culprit", I was sarcastically referring to those who felt that the recession was a healthy cleansing process...)
I'm not only thinking about finished goods, but also components. Some might think that putting a tariff on cars will bring assembly jobs back to the US, but before it does it will put all of the engine and transmission makers out of work because the higher cost of bringing cars across the border and the delay in ramping up domestic alternatives raises prices and reduces demand for cars which reduces the demand for their components.
Even once the factories get built, the only workers available for the assembly line are the farmers with a lifetime of expertise in soybean production who have been made available by foreign tariffs on US agricultural products.
Of course that's all moot since there's no point in building a new factory because with all the engine makers and soybean farmers unemployed nobody can afford a new car anyway.
https://www.nytimes.com/2018/06/18/us/politics/trump-says-us-may-impose-...
June 18, 2018
Trump Threatens to Impose Tariffs on More Chinese Goods
By KATIE ROGERS
President Trump escalated a trade dispute with Beijing, saying the administration would identify another $200 billion worth of goods that could face tariffs.
[ What a self-defeating way in which to think and be advised. The need is to work with China, not to try to harm the Chinese. China should be an American ally as every president has understood since Richard Nixon. ]
3
O.K., there’s no certainty that any of this will happen. In fact, I still find it hard to believe that we’re really going to go down this path. But I also don’t have any plausible stories about what’s going to make Trump stop, or induce other big players to give in to his demands.
-- Paul Krugman
[ I am very, very worried because the Trump pattern is so self-defeatingly antagonistic for "our" sake. ]
2
Senator Toomey of PA made a good case for not imposing tariffs.
1. Steel is not coming back to PA
2. 40% of PA products export to Canada
3. More downstream manufacturers in PA do not need an increase in the price of steel or aluminum for their products - it will make them non-competitive or they will bleed profitabiity.
So crazy man Navarro and Trump may inherit a bunch of really angry voters in a few years once this impact is felt and I mean nationally, not just for Senator Toomey's constituency.
5
I don't know what will make him stop either but I'll engage in some speculation...
Big Oil and Big Military.
But really what I mean is the inability to build trucks and tanks because of the cost of steel.
Might be wrong.
3
Will Agribusiness really stand by as Trump reduces its exports by the billions???
4
This article is interesting as far as it goes, but what about:
a) The rest of the world is so irritated with America that there is a de factor boycott of American goods and services? Fairly severe and long-lasting non-tariff barrier there.
b) the rest of the world makes a serious effort to move away from the USD as the reserve currency? Another serious non-trade cost to America.
6
Great point(s), and ones that Trump and company would never have considered. 1) They don't (know how to) do risk assessment. 2) They are completely and totally solipsistic. It hasn't dawned on them that anyone else in the world could possibly have an opinion . . . especially an opposing opinion. Even farther from their minds is the understanding that the other countries of the world can do to the us something much like the EU is doing with England. "You don't want to be in the club anymore? Fine. We don't need you for us to succeed. The only thing we're going to change about the way we're doing business is that you are now and adversary and will be treated as such. It's really going to cost you . . ."
There's nothing keeping all of the countries of the world to decide to continue business as usual among themselves . . . And to decide to freeze the US out of world markets. Actually it would be a boon for many countries . . . they would be able to ramp up, say, growing soy beans and completely replace the US supply.
There are no adjectives to describe how shortsighted and clueless the current administration is . . . their actions could result in a devastating disruption of our economy and they don't have an inkling . . .
I have just renewed my passport. I will know within the next two years whether I am going to have to seek refugee status somewhere . . .
3
Towards the end of his essay, Prof. Krugman notes that impacts of the trade war are heavier in directly affected sectors. Those sectors know that their fate depends on Pres. Trump's whims.
Anybody can do the math on that one.
4
It seems the key factor is elasticity. The U.S., being a service economy, not a manufacturing one, imports more goods than a more self-sufficient country. Fortunately, economically speaking, we have food, cars and fossil fuels here for consumption. We do need clothes.
China depends on our coal, the petroleum-based plastic pellets we send them to turn into sacs, toys, pac kaging and our pork. They make our drugs and electronic devices.
Hard to imagine them placing tariffs on plastic pellets and pork. Hard to imagine us putting tariffs on drugs and electronic devices they produce. We both lack elasticity to lay tariffs on each other in these categories.
But the EU, with a much broader base of trading partners, can do without U.S. goods. Canada wants to refine its tar sand oil and sell it. I would suggest tanking the stuff to Mexico for refinement, and cut the U.S. out of NAFTA.
But Canada lacks elasticity and imports a lot. Good thing they're on good terms with the other democratic countries, with whom they can continue their trade agreements.
Trump's trade war would hurt Americans--every country he's insulted or placed tariffs on will retaliate.
But the U.S. has become isolated, and the rest of the world (save China) has enough elasticity and/or allies to continue normal trade functions.
5
There is no way there is going to be a significant trade war because the (mostly Republican) owners of everything will lose money. Like W, the Don might sink the economy and that would sink him too.
Although, if it's a tug-of-war between the Don's ego/id (superego? what's that?) and the well being of every single human on the planet, it is too close to call.
5
I am a beef producer and I have no idea how a trade war will affect us. Al I know is that the US exports 10% of its beef production and I am guessing that the four countries that could retaliate against the US as far as beef is concerned would be Canada/China/ Mexico and Japan.
In 2003 China cut all its beef imports from the US because of the mad cow decease, so there is a precedent that retaliation to US tariffs could be to ban beef imports from the US. For those four countries this would amount to about 500 thousand tons of beef cutting US exports by 50% .
In 2006 the Argentine President seeking reelection closed all beef exports saying that now the locals would have affordable meat on the table. It was of course just a temporary populist move, nevertheless in the following 9 years the loss to beef producers was US $7.958.798.620.
4
"In the long run, we are all dead."----John Maynard Keynes.
It is not the equilibrium end point that matters to social disruption, it is the peak effects on the way to equilibrium that cause foreclosures, suicides, and family dissolutions. Although Dr Krugman points out that at equilibrium the effects of tariffs are fairly modest, it would seem to me that the kinetics of this process could be very disruptive. It has taken us a decade to recover from the Great Recession, and during that process the costs were not born at large or on average, but by the complete decimation of some families with job loss, early deaths, suicides and foreclosures, and the complete indifference of those not affected. So it will be here too.
13
I understand that Trump proposed the elimination of all tariffs among the G7, and that was a non-starter.
From the little research I can find - the US averages ~3% tariffs, while the G7 average 4% - 5%, which doesn't sound like much, but 4% is 25% more tariff than 3%. If this is true, than the G7 has more protectionism than the US. If we can't play by the same rules, are we being played? Will the threat of a real trade war level the playing field?
When I look at NATO spending, the US is subsidizing Europe. Tariffs are incredibly complex, which means you can find any story you want, but I do think we have done more for the global economy than the US economy. Your conclusions talk about the cost to the global economy, but is that the right question?
2
We should remain mindful that NATO spending largely comes back to us as part of our greater defense budget, which keeps many Americans well paid and employed. The fact that the Europeans have the good sense not to spend their money the way we do, is why they can sell us high-priced automobiles and wine. It's also why their standard of living is substantially higher per capita.
3
Recent World Trade Organization data shows that America's average tariff for imported goods is 2.4%. Canada's average tariff for imported goods is 3.1%, and the EU's average tariff for imported goods is 3%.
1
"But there’s still a lot of the economy, maybe 9 or 10 percent, engaged in production for foreign markets. And if we have the kind of trade war I’ve been envisaging, something like 70 percent of that part of the economy – say, 9 or 10 million workers – will have to start doing something else. " True enough, though their employers could also try selling the same goods to Americans at somewhat lower prices. But if a similar or larger amount of the economy involves buying imports, and we don't buy them from overseas due to tariffs, won't there be at least a partially offsetting rise in sales by American companies to Americans? I think Dr. Krugman, like many trade advocates, likes talking about the "good news" of trade for workers -- exports -- without talking about the "bad news" for workers, at least those in specific industries -- imports that export their jobs..
1
With the new steel tariffs the domestic steel industry raised the price by 40%. Without competition the consumer has to pay whatever the industry demands. Like at the recent spikes for certain pharmaceuticals.
3
You can also add the long term costs of lost domestic efficiency. The auto tariffs we used in the past led foreign producers to improve their efficiency to the point where they could offer cars at prices, including tariffs, that were below domestic ones, excluding any tariff. This also happened in steel. The "protection" of producers is temporary. The losses to economic efficiency may be permanent, as we saw with the US automakers as we saw in the last recession.
2
Raise tariffs even more, spend money on your industries to make them competitive. That's what china and south korea do. Why can't we
3
The auto sector was governed by quotas on imports. The result was that Japan and other manufacturers improved the quality (and their profits) of their vehicles, which was at least one reason the US automakers fell behind.
4
The fact of the matter is humans are stupid collectively. I liken how we got here as best explained in the Cecil DeMille’s movie Moses. No matter how many people witnessed the Nile turning red, the locust, the plaque that killed the 1st born, the pillars of fire, the parting of the Red Sea the Jews eventually gave up on their leader and started worshipping a false god as soon as he went off hiking in the mountains. Like these miracles were a phantom I guess.
Nowadays...The difference here is sort of the opposite- how many clues were out there to maybe consider nominating someone else to the Republican ticket let alone electing this charlatan to the highest office in the free world. Let’s see- there’s the numerous bankruptcies, the lecherous behavior, the lawsuits, the fraudulent University and what research did they do there to receive University status-otherwise it’s considered a college, the lying, the tax returns, I only hire the best people, love Putin- hate my neighbors and yada, yada, yada. The Trump base made this bed and now they along with the rest of us get to experience what might some depressing years ahead because the masses are so easily swayed to get on the disruptive bandwagon for no apparent reason than they government so much that any change is welcome.
6
"What I thought would happen, instead, was a bit of kabuki: America’s major trading partners would make cosmetic concessions – perhaps with some lucrative payoffs to Trump businesses on the side – that would let Trump proclaim a “win”, and trade would go on much as before."
Krugman's column begins with this ugly (virtually mandatory for a NY TImes columnist) bit of speculative calumny before admitting that such speculation was mendaciously wrong ab initio. And now having gotten this bit of reflexive schmutz out of his system, he first proceeds to tell us how a full blow trade war might be vastly less damaging - in a worst case scenario - than even outright Trump haters like him would like to imagine. And buried in his essay is a slight, off hand mention of long standing unfair trade practices on the part of other nations, virtually giving them a free pass with no further commentary. When is this collective mendacity on the part of the TImes staff going to stop? When are you going to wake up to the reality that outside of the liberal echo chamber Americans are either not paying attention any more to what you have to say because of this disgusting attitude and/or are going to vote their disgust come November and 2020?
1
Dude, Trump's a crook and a fascist. That hurts us a lot more than whatever China does, bad as it may be. I notice you are in Israel. Netanyahu has done incalculable and probably irreversible damage to Israel's long-term interests in the United States by associating Israel with the Republican Party and with Trump. I say this with sadness and apprehension, as one mostly sympathetic to Israel over a lifetime. The people living in the echo chamber are the Israeli right wing. Embracing Trump is foolish and self-destructive, a poor calculation in regard to a sugar high over Jerusalem. N. could have opposed the Iran deal, if he felt that he needed to do that, without getting into heavy alienation of the Democratic Party. This will prove in the long run to have been a very costly mistake.
11
Queso Chaos: Until recently, I didn't think about the price of Mozarella in Mexico. The 25% Mexican tariff
on about 100,000 tonnes of American cheese triggered some research into alternative sources.
I buy American Mozarella for my restaurant from Costco Merida. If there's a 25% price increase I will switch to Mexican Mozarella.
I will buy more Mexican goat cheese....mmmmmm.
When the dollar peso rate spiked two years ago,
I switched to beef from Sonora, better quality and
price.
Costco's competitors are very helpful.
Thank you Mr Trump.
David Andrew Henry
ancient Canadian economist
(google queso chaos, the bullvine)
5
We should not ignore the irony associated with the impact of a trade war on Trump's corporate supporters, the Koch brothers et al. When these companies cynically backed this simpleton, in exchange for a huge tax cut, they surely did not anticipate that he would betray them with a little trade war. If the rest of us didn't face suffering far worse than any they will experience, this situation would be amusing.
In his analysis, moreover, Professor Krugman does not consider the potential political impact of a trade war. Although Hitler's rise in the 1930s stemmed mainly from forces far more powerful than the collapse of international trade, that downturn did help foster the economic crisis in Germany that stimulated support for the Nazis.
We already currently face a tendency of countries, including the US, to turn inward politically, scorning ties with their former allies. A trade war would surely exacerbate the distrust that contributes to isolationism on the international level. The inevitable political tensions which a strong international order can finesse might now fester and lead to military conflict.
Hardly inevitable, the breakdown of pax Americana would serve as a fitting legacy for a president whose nihilist tendencies have defined his administration.
4
Why Republicans are afraid of Trump's base is silly. What do they think they are going to tick them off and they will vote Democratic. Really?
2
they are afraid of primary challengers, like last Tuesday when trumpites knocked out the anti-trump faction in the primary elections . they gerrymander so good they're barely afraid of democrats anymore.
5
How does Vladimir benefit from the trade war?
PROSECUTE RUSSIAGATE!
2
Most western news articles about China are written by non-Han China apologetic free-trade fundamentalists and western based Han propagandists. Both groups are shamelessly acting as the blood-soaked Beijing dictators’ propaganda megaphones. I understand why western Hans are doing it – they are confused where their loyalty is – but why are western non-Hans siding with Beijing against the Trump administration and, as in the case with Americans, against their own country?
The “some-nazis-are-good-people” president has below average moral values, true, but he is also our last hope of renegotiating the horribly one-sided trade agreements with China. Almost all other politicians are protecting the short-term interests of multinational corporations and couldn’t care less about the citizens. I hope Trump succeeds and in doing so inspires our politicians in EU to rethink their views on free trade.
Death by China video:
https://www.youtube.com/watch?v=mMlmjXtnIXI11
Saddest part of this is that the idiot causing all the economic problems and US money and influence couldn't even make it through the first few paragraphs of your column.
6
In all fairness, neither could I. And I ain't no idiot, though I am apparently, alas, an economic and trade policy idiot, if I go by my (sorely lacking) comprehension of this article...
2
What is missing from any discussion of Trump's fixation on trade and tariffs is how any sensible reasonable intelligent American - whether politician, businessman, academic, or blue collar laborer - can conclude that Donald Trump knows what he is doing. Whether it's trade or NK or border security or health care or taxes, why is there not this overarching question being asked? How much longer will we the American people allow this man to continue to satisfy his narcissistic delusional megalomania? Trump is insane.
5
How long will it last?
He starts losing November 6, 2018.
2
20% * 0.7*15, or 2.1% ..... = 200%, not 2.1% ?
1
20%*70%*15%=2.1%
Paul is a brilliant economist. All I really want to know is “What time is it?”, not, how do I make a watch! All the ordinary consumer wants to really know is how is this going to affect me! Period!!!!
3
How do you chose who to trust/believe, if you're not interested in the evidence and reasoning?
3
Oh Lord! The title, for those who miss those things, says "Very Wonkish". Which signals a certain degree of "watchmaking" going on. And a big part of the problem is those who want to be told (hello Fox) rather than understand. This is the saddest comment of the day.
I think you missed my point Keith. Most people just want to know why something is wrong and how to fix it. Trade is a very difficult subject to understand and when your start to add in graphics and formulas, you’re going to lose most people. Even Paul, who is one of my favorite economists wasn’t sure if his theory was going to work. Better to tell the American people that what Trump is doing is extremely dangerous and is going to hurt most working class people, than throwing mathematical charts that few people will understand or ever take the time to dig into it. That’s what I meant when I said “What time is it?”
Wonk on, obviously this goes over the heads of 99.9% of the public. There once were adults in the room. Suddenly there is this alpha-pink-monkey-sociopathic-manchild-who-doesn’t-read barking orders.
5
Most western news articles about China are written by non-Han China apologetic free-trade fundamentalists and western based Han propagandists. Both groups are shamelessly acting as the blood-soaked Beijing dictators’ propaganda megaphones. I understand why western Hans are doing it – they are confused where their loyalty is – but why are western non-Hans siding with Beijing against the Trump administration and, as in the case with Americans, against their own country?
The “some-nazis-are-good-people” president has below average moral values, true, but he is also our last hope of renegotiating the horribly one-sided trade agreements with China. Almost all other politicians are protecting the short-term interests of multinational corporations and couldn’t care less about the citizens. I hope Trump succeeds and in doing so inspires our politicians in EU to rethink their views on free trade.
3
So, how to explain this to Trump?
5
Let this represent Exhibit A as to why "Economists" are utterly and unequivocally useless.
Where to begin?
We, and the rest of the developed world, have been in a trade war with China for the entire 21st century. Newsflash: China won. And now all of a sudden economists are wetting their pants about a trade war.
The “very angry world out there” was not created by Trump; he simply exploited it. It was created by morally and intellectually bankrupt economists in their Ivory Tower and the idiots who were stupid enough to translate their absurdly simplistic “econometric models” into economic policy. Nothing “slightly tricky” about it.
So no, “modeling” a trade war is not helpful, especially when the models vary by 100%. And especially ones that make a “pretty good case”…”could”…”maybe”…”maybe”. And that’s just one sentence.
You can’t make this stuff up.
But then it got even worse, with the “computable general equilibrium”, with all those pesky assumptions and imputations, and what not. And things that are “hard to estimate”.
You could save a lot of time and money by using two monkeys and a dartboard.
And after all that it turns out that there is not much certainty, anyway, so may as well just go with the back of the envelope approach. Combined with intuition. Because that has worked so well in the past for the American middle class.
Finally, let’s just “imagine” stuff. And suppose some things. Then we can prove that 9 million, give or take a million, jobs are at risk.
1
Until you change or somehow compete with his media echo chamber his supporters will continue to believe his lies.
The media is complicit. There is virtually no difference from the economy he inherited and the one we have but I keep hearing great economy.
Job creation is slightly less, GDP is still 2.2ish, wage growth is anemic. Where’s the greatness? So cons win in voters minds. Tax cuts have not helped the middle class.
He will eventually ruin our economy. Stupid is as stupid does and you can’t fix stupid. That Mr Navarro is the bedrock con economic principle.
5
Mr. Trump will end his "trade war" if and when it hurts HIS businesses. His economic policy can be written on a matchbook: "the country be damned, Trump uber alles."
When he can no longer get Chinese steel for his buildings or glassware from eastern Europe or foreign workers for Mar-e-Lago, then he will change.
Not one second earlier.
4
Trump may be simply acting on the advice of Steve Bannon and Stephen Miller to “destroy the Administrative state”. That sounds like a slogan until it becomes a policy. Only the pain of implementation will waken the population to the meaning.
The industrial leaders may be acting to make a quick buck when they are forewarned of the WH next act. They can buy market instruments that finesse the disruptions, short term. But, if Trump does not back off, the dollar and the Euro will suffer, financial markets will try to restore stability but destruction of the state also means destruction of the currency. The profound distrust in Trump, outside his inner circle, will extend to distrust in America.
So, we are left to the oligarchs to protect America’s standing in the world. Will they be benign? The last corporate state was Nazi Germany. Isn’t the absolutist language of Bannon, Miller and Trump adequate to alert the Democrats and others to the danger we are in? Are China and Russia cooperating with the handful of lunatics in the WH and the House?
Is there a clear voice that can speak to the American people to end the stupid rush to fast money, arrest the pirates, and restore the Administrative state?
2
Strictly anecdotal, but I hear from my sister who is a Canadian citizen that Canadians are mad as hell and a boycott of American goods is gathering steam. She says she will miss her grapefruit juice and her L.L.Bean flannel shirts, but the insults to Canada Trudeau will not be forgiven.
7
Given that you're looking at general equilibrium models, can you give us a sense of the magnitude of the adjustment ... changes in domestic employment and its multiplier effects in the US? While one could assume that this would be temporary as we move to the new equilibrium defined by the outcome of the trade war, the adjustment has real economics (and political) impacts. It would be nice to have an estimate of what that adjustment might look like. GE models can be used to do this.
2
One scenario that could very well play out is one in which major world economic powers only impose tariffs back on the US, rather than on each other. After what will for sure be some great pain, we should see stronger trade agreements take place between Everybody except the United States. This ultimately will do two things. Global trade will readjust to relegate the US market to a less dominant position, reaching a new balance as both economic and political actors within the traditional US trade partners and allies push for less dependence on the US volatile and unreliable market, as clearly demonstrated by the current WH regime. Second, the US may ultimately come back to a more rational approach with its partners, except now no one needs the US as much as before and there is no good will left, ultimately putting it at a sever disadvantage if it was aiming for better trade terms in the first place.
We’ll see
7
Trump is correct when he says “Trade wars are easy to win (exclamation point)”.
Indeed they are.
The rest of the world as a whole can compensate-to-win any trade war.
The United States is the only world trade participant interested in precipitating a trade war, yet it accounts for a minority of world trade and cannot adapt as fast as the rest of the world:
1. Companies with easily relocatable assets (e.g. intellectual property) would be welcomed to move offices and people offshore.
2. More and more countries could agree to make all trade with the United States illegal.
3. Outside the US, substitutes for goods previously imported from the US would become more expensive while goods previously exported to the US become cheaper. After an adaptation phase, prices there would come back into line.
4. Downstream supply shocks to US production would quickly cripple the US economy when foreign goods upon which that production depends become unavailable. In contrast, the rest of the world, being significantly larger, can adapt much faster.
Being unable to blame the ensuing economic catastrophe on either Obama or Hillary Clinton, Republicans would be unable to win subsequent elections.
With luck, President Sanders would then reverse the damage.
4
Dear Mr. Krugman,
Either the economy serves the people or the Americans serve the capital and the global corporations.
None of those cases has anything to do with the Trump Administration.
Both instances have predated Trump as a politician, meaning those systems were created by somebody else.
The free trade doesn’t serve America but the capital.
Theoretically, the tariffs protect the fellow Americans from being forced to compete with the underpaid Chinese workers.
Such a kind of competition has been costing us about $800 billion per year, paid for by the US taxpayers, ending up in the pockets of the global corporations.
If your heart were in the right place, you would be able to understand it without any problem…
The Big Three car manufacturers operate in Canada with the institution of socialised healthcare this side of the border massively reducing costs, thus boosting profits. If the Trump administration slaps crippling tariffs on Canadian made vehicles, the effect will be immediate and catastrophic for Canadian auto workers. The car manufacturers will withdraw to the US, presumably to build these vehicles in the lower 48. The effect then will be equally catastrophic for the Big Three as benefit costs spiral, lowering profitability, increasing the price of cars. In a nation regionally impacted by other tariffs vs employment, who’s going to buy cars at a higher price? When this mechanism is applied to other industries, who’s going to buy anything?
This MAGA thing (Make America Groan Agonisingly) is predicated on the notion that the world has a physical need to trade with the US, but that is not the case. The US has provided a voracious and stable destination for foreign products, The world, however, is bigger than America. Rather than batter economic rivals, tariffs will create new markets while boosting existing ones. Canada will trade more heavily with Asia, Europe, and Africa. The transition will be agonising, but necessity is the mother of all compromise solutions. It is America that will ultimately suffer the most.
5
Sure what you say is true. But Trump is right in one respect. You and the other free marketeers ignore the fact that China has been fixing the terms of trade unilaterally to its own advantage for 3 decades. Granted its not a plan for the world but it worked for them when they alone did it! What do you plan to do about that?
Here is a small but real world test case. Recently I was at my local "big box" home improvement store. It happened to be raining that day so the store put out an umbrella display near the checkout. $5 umbrellas, made in china. When I got home I decided to see what a "Made in the USA" umbrella would cost, $50-75. Clearly a better umbrella but there is no tariff that would bring the prices in line so that someone might buy the USA product in any volume. There is no surge in US umbrella factories, just $10 Chinese umbrellas
2
It's a trade-off that shoppers have been employing in grocery stores and pharmacies for a while now. A box of cereal that used to cost $2.50 has risen gradually to $4.00. I find a house brand cereal that is similar for $2.00--perhaps not quite the same, but close enough and the difference is not worth an extra $2.00. The same is true for laundry detergent, paper products, garbage bags and foil. Pretty soon my cart is mostly house brands and I can stretch my budget farther.
Years ago when I began to shop for clothes, clothing in my budget was either a sad looking item in polyester double-knit and drab colors made here, or an item imported from another country or island group that was made of cotton or another natural fiber and came in cheerful optimistic colors. I learned to simply compare the same item and size to see which exact shirt or child's overalls was most expertly cut, whose seams were straighter, than others on the same rack. Yes, they were made outside these shores, but with four children, I could afford it. It wasn't a hard choice because the items happened to be more attractively styled, too.
Until this trade war loomed, it seemed that items made elsewhere were nearly as good as what was made here, and were entirely justifiable in a free-trade, capitalist system. They fit my budget. With tariffs, a $10 Chinese umbrella might be $15, but be the cheapest way to stay dry. Without Chinese umbrellas, in a trade war, many of us will get wet.
1
Losing sixty seats in the House, and the Senate by even one vote might go a long way. The industries that stand to get hammered need to stand up for themselves, and explain to their workers that if the the Rs stay in charge, most of them are going to be unemployed.
1
Trade War results:
We will have higher prices at retail.
We will have continued inflation.
We will have a recession.
We will have higher unemployment.
We have lost any creditability that we had with the world.
2
Unless and until it affects Donald Trump personally, he won't care. It's all about dominating everyone else for Trump.
This suggests that the most effective way to deal with Trump on this is to cancel all those deals he and his family have been making to cash in on the presidency. (Sorry Ivanka - China's going to pull your trademark protections, and you'd better think about making all your stuff in the US.)
Overseas investors in Trump properties outside the US can get his attention by stripping his name off the properties and other tactics. (There's that golf course in Scotland that might suddenly have trouble with the permits it needs to operate.)
If somebody can shut off the flow of money to the Trump business empire and money-laundering operation from Russian oligarchs and Saudi princes, that would also get Trump's attention.
The thing with electing a narcissist to the presidency is that he has no interest in the greater good - everything has to be about him.
So, if Trump wants a trade war, the most effective way to carry it out is to target him and his personal business empire. Lèse majesté just might be the way to go with the man who wants to be king.
2
There is not going to be any real trade war. This is a common Trump strategy, recently seen in the North Korea summit. First, you ratchet up tension yourself by making inflammatory statements. Then you come up with some sort of 'deal' that is worse than what was in place before. Then you take credit for diffusing the tension that you yourself had created, and tout the terrible deal as greatest ever.
With trade, you will see exactly the same thing. Before the tariffs have had a chanced to cause any serious consequences, Trump with come up with a terrible new deal that is worse for the US than before. Then he will take credit for being a tremendous negotiator and avoiding the trade war with his 'skills'.
1
Unintended consequences:
1) The dollar replaced as the world's trading currency.
This alone would have enormous negative repercussions:
on national debt, balance of payments, value of the
dollar and foreign investment (into and out of the US)
2) Other nations increasing trade with each other (TPP, etc)
to the exclusion of the U.S. - turning us into an irrelevant
country. Chinese dominance in S. America & elsewhere.
(Economic dominance means ultimate military
dominance).
3) Domestic instability - causing political turmoil and
even more military adventurism. Closer than the
mid-east (e.g. seize Canadian fishing grounds, Mexican
offshore oil wells, anything else a rapacious U.S. can seize)
4) Donald Rumsfeld's 'unknown unknowns.' None good.
1
trumpty's goal in any and everything he does is to enrich himself and his family while also making sure those to whom he is beholden get their share. As we know, he won't release his tax returns and he owes millions (billions) to Putin. Thus he and his cronies will be the main benefactors of any economic policy decisions. Now of course he'll bluster his way through with his lies about maga. If people have not yet figured him out, then as far as I'm concerned they are beyond hope and are (a huge) part of the problem. It is always about the money and in this case we're talking trillions.
1
Thank you for using hard numbers and historical facts to criticize Trump's policies rather than photographs of crying babies. Pretty soon, I think Sarah McLaughlin is going to be narrating a commercial about needing donations to reunite families separated at the US borders. I find numbers and world trade pocketbook issues a lot more persuasive than sad puppies and crying babies.
"Meanwhile, trade decisions are being made at Trump’s whim, without input from anyone who knows anything about trade economics (Peter Navarro thinks he understands the economics, which is even worse.)"
This is the problem: you cannot have a stable planet order when a single person sitting in the White House decides on a whim to blow up the world economy. This is a constitutional crises because at this point there are ZERO checks and balances.
So, Dr. Krugman, the problems concerning the ins and outs of trade wars pale in comparison to the real problem, which is that one crazed individual is being allowed to ruin the planet all by himself, literally.
1
The number of the leading economists predicting the last economic crisis in 2007: ZERO
If any existed, the crises would have never happened.
If the leading economists could have foreseen the problems, they would have prevented them.
The economists can’t predict the problems because they segmented and partitioned the economy.
They talk just about the trade, the wages, the federal budget, the national debt, the export of the jobs overseas, the stocks, the taxes…
All of them are internally and functionally connected like the Rubik Cube. If you change a single thing, you are messing up everything else.
If you are fixing one thing at the expense of the other areas, you are not solving the problem but just hiding it out of the plain sight under a carpet.
Allegedly, if you cannot see a problem, then it doesn’t exist?!
They exported the US manufacturing and the jobs overseas, imbalanced the trade, slashed the labor wages and reduced the taxes…
How do they pay for all those structural problems?
By running the colossal budget deficits and accruing the enormous national debt?!
Why are they doing it?
They have never seen what happens when the government in charge of the largest economy and the world largest debtor goes bankrupt.
You bet the economists are going to be shocked once it happens because they couldn’t have imagined it.
That’s why you use the mathematics – to accurately predict the future…
Actually, there were several economists that were predicting it. It was Alan Greenspan's grip on the profession that prevented anyone from believing the naysayers.
1
I think Paul's initial instincts are correct. Namely, Trump is spewing all of this trade bluster for the benefit of claiming "trade victory" in the next election. He doesn't want to have any significant industries shuttering their doors lest this be too widely publicized. I think he will ultimately target one or two areas for tariff and then declare victory before the whole mess causes him much political damage. He could miscalculate, of course, which would bring a political victory to his opponents and a loss to the economy and workers he is trying to woo. His victory, in his eyes, will be the misperception among blue collar workers that he actually did something meaningful for them, so I'm still betting on a limited war with little or no meaningful effect.
I'm hoping that Canada makes good on the threat to target Trump's own businesses. Trump says that we have sacrifice to make his trade policies work. Well, let the sacrifice be shared by Trump himself.
4
Supposedly, it's become customary in academia for academics to declare their interests. In practise, the custom is observed in token fashion because academics never state exactly how much they get paid by their various patrons, the size of their pension fund, the market value of all the perks and handouts they get. In any case, how does one put a price on the academic reputation of the HOD of a prestigious research university like Harvard or Yale?
Take for example Krugman. He is on a nice little number. He gets very well paid by the NYT for his opinion pieces, he's well regarded by his followers, he basks in their loyalty and admiration.
Much of America is a foreign country to Krugman and his readership. The lack of status, the lack of hope, the anxiety and the fear, creating hatred, bitterness and despair.
Things cannot go on the same way, with the rich getting richer while everyone else gets poorer.
Trump has seized on this. Trump is not the answer to the problems America and the wider world face. Nevertheless, Krugman and the rest of the great and the good have created many of the problems and for this Krugman and the so called liberal establishment must bear much of the blame, along with the Koch Brothers and their ilk.
1
Whether is's negotiating with N. Korea or imposing tariffs to get better trade deals have you noticed that almost all trump's proposals or policies entail promises about the future. Vague promises about how what he is doing today is going to benefit us tomorrow. This schtick sounds a lot like the bill of goods he solf investors on the way to his six bankruptcies. Far far off in some distant future Trump's belligerent actions will pay uus big dividends. But this snake oil huckster has always sold promises and visions of the future almost none of which ever pay off. Tariffs are so backward thinking. The president is still living in the 1950's and tariffs are just one more example of that. He is the paradigm case of the "macho pig" feminism wrote about in the 70's and 80's. Culturally, your average American male is light years ahead of where Trump is. He is an anachronism, a relic from a superseded cultural past. Tariff's strike me as simply the economic equivalent of how life and our culture has passed Trump by. He's still a 1950's pre Beatles, pre counterculture knuckle dragger. Tariffs aren't the way to better trade deals but he comes from the sleepy decade of the 50's, it's the only lame idea he can come up with. He's no negotiator, his lawyers have always done all that for him. He's a P.R. guy at best. If not for Fox 90% of the American public would have already seen through him.
1
If prices will rise on imports and jobs will be lost in our export centers, it may be wise to start planting a "trade garden" (i.e victory garden) or a community plot garden for urban dwellers.
This will certainly bring us back to a time when the administration would believe that he has made America great again.
A huge number of American yards are polluted with lead. Make sure you test your dirt before gardening to avoid giving yourself or your family lead poisoning.
1
As a young man, in the 1970s sometimes I would see or encounter cult followers, and I became a little familiar with them. What does that have to do with a trade war in 2018? Well, I saw a TV report in August 2015 on a Trump rally in Alabama, and from the crowd's enthusiasm I recognized then that many Trump supporters unknowingly make up a cult.
It's the cult-like devotion to Trump that is terrifying Republicans who dare stand up to him. And given this cult, Trump's clout has increased to a dangerous level while his intelligence remains mediocre, and that helps explain the current menace of a trade war.
4
The missing response here is supposing that a Democratic congress for two years and then a Democratic President in 2020, how quickly can this nonsense be ended?
Tearing about an economic system that we are the center of and in control of to score tough guy points with his base and justified by simplistic lies about trade costs will, hopefully, not last.
I do hope those economic sectors that really wanted this walking disaster pay the most. My mother told me not to be vindictive. Sorry mom.
3
The trade war is the delusional phrase of the dysfunctional left-leaning economists that are not sure of their own priorities and system of values.
They would allegedly like to see the higher wages for the America workers but they truly love the lower cost of the products. The simple truth is they aren’t capable of comprehending that the higher wages lead to the more expensive goods.
They are still working “hard” on the concept how to increase the labor wages while simultaneously lowering the prices, lowering the corporate taxes (those they have miserably failed to increase over the last quarter of century), balancing the federal budgets and balancing the trade.
Here is the moment of truth for those incompetent Nobel-Prize-winning laurates.
The trade has always been the exchange of goods. The shopping is when one side buys the products and the other is selling them.
It means the current free trade system is just a Potemkin village. It does not exist.
It is a mix of the real trade, meaning the balanced trade, and the shopping where America buys from the other countries the products worth about $800 billion per year.
The tariffs only target this second part, the reckless shopping spree and not the trade at all…
It means we are witnessing the shopping war, not the trade one…
We've lived in a liberal democracy so long we have forgotten the hum of its machinery. The consideration of our leader is not by what small amount will we all be diminished, any more than the point for a car battery thief is to maximize the economic utility of a capitol asset. There will be winners and losers. And he gets to pick them. The point is increasing his power over our economy. Creating winners, who are beholden to his benevolence, and losers, who may, with proper genuflection have better luck next time.
1
When people can't meet their needs through legal means, they turn to illegal means. A trade war is a gift to individuals in positions of authority willing to be persuaded to ignore the law. The black market will supply what the legal market cannot: exactly the kind of world that Mr Trump is most comfortable with.
The damage is already done - our trade and political partners no longer trust us. Even if Trump and his policies were removed tomorrow they would still not trust us. We went where nobody thought that anybody could go - now they know that we may go there again. They will have to build policies and supply chains that are not subject to damage if America gets all crazy hysteric again. Unfortunately the same calculation will have to be done by American multinational companies - they will have to construct supply chains that are independent of crazy American politics and policies. Except for raw materials our exports are toast in the medium and long run.
2
Wherever the politically powerful are able to favor some favored industries at the expense of the rest of the population, there is the potential for protectionism. China has a large $375 billion trade surplus with the United States. That makes China useful as a villain for both branches of protectionism. The “progressivism of fools” branch would not mind a trade war in which both sides imposed ever-increasing tariffs, as long as those who they favor benefit. Senator Reed Smoot and Representative Willis C. Hawley probably did many things in their careers, but history only remembers them for the Smoot-Hawley tariff of 1930, which remains the prime example of the damage that protectionism can do.
Today, the elasticity of internationally traded goods is much lower than in the 1930s. Thus, even in a trade war with much higher tariffs by both countries, China would still buy almost as much soybeans and pork from America, and we would still buy almost as many electronics assembled in China as now. The tariffs would essentially be a very regressive tax imposed on the residents of both countries. This would raise prices and reduce standards of living in both countries. The net trade deficit with China would remain nearly the same, whether tariffs were increased or decreased by both sides or by only one side. The higher inflation from higher tariffs could force the Federal Reserve to raise rates more than otherwise. .."
https://seekingalpha.com/article/4164735
1
The lessons we learned from the great depression, the sacrifices made by 405,000 Americans in WWII, all mean nothing in the face of this nation changing juggernaut called Trump. What was the point in putting America on top of the world? It's time to mine our National Cemeteries for their phosphate. Trump needs another tax cut.
1
If I understand the upshot of this, we're headed for a recession that would cut 2.1% of GDP and put 9-10 million people out of work. I would think that Larry Kudlow and others around Trump would be able to express this in simple terms: Mr. President, you will trigger a recession all by yourself. You will NOT be reelected. Your base will be out of work and calling for head. You will be Making America Unemployed Again.
2
As we saw in comments yesterday the boycott of American produced goods is underway by global citizens. How might consumer behavior skew the data / modeling?
2
If Paul's arguments are meant for other economists, he has achieved his goal. An ordinary Joe, or even Donald Trump, is perhaps too dense, too tribal, too biased, too ideological, too foolish, or simply too unwilling to listen to Paul.
What to do?
Truth is that ,due to globalization, millions of Americans have lost good paying jobs. Trump thinks that if he imposes tariffs on imports, the lost jobs will return. If we accept that this can actually happen that will be very good. There will be costs, there will be a time lag. The current manufacturing capacity may be too low or entirely absent to meet the domestic demand at any price. So our dependence on imports will continue until we have built our own manufacturing capacity.
What happens after regaining our manufacturing capacity? Our products will be higher priced because of the higher labor costs. Consumer Price Index will go up and so will inflation, forcing raising wages of everyone. We will enter a vicious inflationary cycle.
I would like to hear from Paul and other economists how to solve this conundrum?
1
It is deeply unfair and unjust to demand from Mr. Krugman to explain our economic problems. That’s far above his pay grade.
One cannot build a skyscraper without the good foundations. One cannot create the good economy without a just social system.
How could an economist solve our democratic problems?
What is democracy? A system with the periodic elections in which we can get to choose our leaders?
Not really, not at all!
The democracy is the system with the good social values and correct priorities.
In true democracy the society is at the pedestal. The government with a solemn duty to serve the people should be in the second place. The economy must come the third.
The capitalism is there to protect the capital. The people and the government lag far behind. That’s why we have the colossal national debt, the corrupted politicians and the utterly ignored voters. However, the capital has never been more influential or in the better shape… It means the true capitalism and democracy are mutually exclusive. That’s what both Theodor and Franklin D. Roosevelt understood easily.
In the communism the government was the first, the people the second and the economy the third. That’s why their economy collapsed.
Why are the West European socialist countries in the great shape? The people are most important, thus economy serving the people is vital and innovative too.
The government is there just to properly synchronize them, as in any true democracy.
'What I thought would happen... America’s major trading partners would make cosmetic concessions ... that would let Trump proclaim a “win”'
Implicit in this statement is the jaw-dropping state of affairs (that we've somehow come to accept as the "new normal"): that a US president would willfully cause economic chaos and tempt disaster, due to sheer willfulness and egomaniacal desire for a personal 'win' to twitter about!
And another staggering comment on the state of affairs is that we all assume that "some lucrative payoffs to Trump businesses on the side" are involved in virtually all his otherwise nonsensical actions and rantings.
2
Interesting that there are so many commenters talking themselves into the idea that the effects of a trade war would be negligible. Sounds like a lot of Americans are actually hungry for a trade war. It seems to me if you are planning to start a war, you quietly prepare fo it first. Preparation being for losers according to Trump, I think every ancient folk tale tells you what to expect. But I'm sure everyone will just switch to an American-made router and cell phone without missing a beat, or just patiently wait the 10 or so years to completely rebuild entire industries from scratch.
1
I don't know if economics is still the dismal science it was once said to be. But I am confident that as my father use to tell we Canadians, Americans vote with their pocket book. So if as everyone agrees trade wars produce more losers than winners, a recession will spell the end for Republicans - say good night Donald.
3
Excellent timing. Hoover signed Hawley-Smoot into law on June 17.
2
3 thoughts here.
1) I *love* these occasional pieces labeled "wonkish," but I believe the Times has more than enough talent "on the bench" and on call to do what PK seems to shy away from doing - tone down the wonkishness and produce a widely readable piece. IT CRIES OUT TO BE DONE. *Some* of Ohio reads the Times and NEEDS to get a grip on the costs BEFORE stuff hits the fan.
2) I think there's a big bad blind spot in PK's reasoning - given how much he hates DJT, it's not surprising, but it is lamentable:
Big money has hundreds of ways (STILL!) to get messages through to the White House. (Wilbur & Jared are the first 2 that come to mind.) I'll go along with PK's summary pessimism, because I share his belief that the President's grip on reality is tenuous, but - most of the time, I believe that he sees cliffs and doesn't really come all that close to going over them.
3) It's a darn shame that this article makes no mention of the only part of our economy that has the stock market at record levels - "tech." ... I'm not wonk enough to take PK's words and apply them to Apple/Google/Microsoft/etc.
But common sense says that NOWHERE is "global" more pivotal!! Take manufacturing - funny how 20-50 years ago "Made in Japan" was very readable on all sorts of products; now, I wonder how many people can visualize where their iPhones and the like "were born." Then think distribution or Google's variant. A wall around the U.S.??
Makes me think that PK UNDER-estimates the peril here.
1
Trump lacks the capacity to conceive of increased wealth as a win win--as in international trade.
He's stuck in mercantilism--zero-sum--winners take from losers.
His tariff idea is simply economic rent--charging a fee without adding any value--rather by merely allowing access or use. Charging a fee just to eliminate artificial restrictions--possible or actual. In other words extortion.
But its even worse.
If he could he would re-brand USA as Trump, Inc. His branding fees are another form or rent--income without added value. It's all about hype--bilking the gullible.
What he does as president is charge the US economic rent. He wants to extend that to the world--pay HIM a fee for doing business in the US.
3
I have a notion that just as murderous totalitarianism was a kind of "attractor" in the 20th century, which drew in countries as diverse as Germany, Russia, and China (and North Korea, still), and with somewhat lesser intensity Japan, Italy and Spain, the attractor in the 21st century will be a kind of "kinder, gentler" fascism, in which brutality and murder will be (is) much more selectively applied. The rule in the news fascism is that the government will leave you alone if you don't get in the their face, but if you get in their face, no one can help you. This would be Russia and China today. There was something about the zeitgeist of the 20th century which gave us that kind of fascism, and something about the zeitgeist of the 21st which is giving us this kind. On the last round the English-speaking world was not pulled in, but it could be different this time, as Orwell imagined, and as we are in grave danger of demonstrating. An earlier commenter referred to Trump wanting to realign the U.S. into being one of three poles in a tripolar fascist world. I don't know if Trump thinks that way, but he certainly likes dictators and would like to be one. In any case clearly Bannon does think that way, and there is every reason to believe that he is still intimately involved in the Trump Administration.
2
All trade policies will be made based on Trump’s mood at any given moment.
This is about ego gratification, nothing else.
Our best guess may lie in the behavior of mad autocrats of the past.
I’m afraid we are in uncharted (pun intended) territory.
2
As though we needed more proof that we’re living in The Upside Down: our best hope now may be the Koch Brothers’ campaign against protectionism.
3
And I'm thinking of it in terms of abnormal psychology, also wonkish.
A temperamental excitable president decides to have a trade war. It's as if he's never studied history.
He keeps taking us back to the 1930's. When a crazy protectionist law raised tariffs and worsened the Great Depression.
We just emerged from a Great Recession where banks went bust and unemployment skyrocketed.
And of course this is a president who craves upheaval, disruption, disturbance and turbulence.
And functions with his gut and sense of being personally wronged, while foolishly believing everything is easy.
1
The other question is this: all of this analysis focuses on the US. But what about other states? What kind of pain will be caused in Canada, Mexico, the EU and China? What about other countries that may be caught in the crossfire? The political costs to the US will also be immeasurable; after this, the US will have lost any claim to be the "leader" of the world. Its irresponsibility and the sheer stupidity(given they are based on nothing other than a moron's "gut feelings") of this trade war will underline how dangerous it is to leave the US with too much power in the world. It will need to be contained and its power and influence curtailed at the global level. A final consideration: how much more expensive will various goods become for American consumers and how will a US economy that is based upon stagnant wages for workers deal with this?
4
On the bright side President Trump has not said that China is a currency manipulator.
4
So when do you think all this is going to influence the stock prices? What signals would the market take as a threat reasonable enough to sell? When do you expect a crash?
1
it baffles me that I have seen virtually zip from the nyt and cnn about the tariffs the usa already had in place before trump started this latest craziness.
politicians and pundits report the awful things other countries are doing to the usa without vice versa.
the only numbers I recall are Canadian tobacco has a 300% hit and peanuts 132%.
1
Stop with the "wonkish"and "very wonkish"bit. Your math is simple and obvious.
1
Economists have predicted seven of the last two recessions/depressions; I know, snarky; however, we’re better at explaining what happened than predicting when it will happen ... we can’t predict the irrational... will the “Trump bump” continue to drive the stock market and the economy, or, will a panic cause a dip, slide, recession or depression? In spite of “big data” and dense mathematical formulae the edge is always looming as is the lemming principle...
The great danger is that Trump could not understand any of this
and (neither could the base). Hustlers and hunters are whispering in his ear.
2
I love the NYT columnists! They are always bias-and-prejudice free!
According to them, Mr. Trump cannot create is a single job because only the economy matters but can singlehandedly destroy the dozens millions of them with his personal incompetence.
The cause-and-consequence relationship goes both ways!
It is responsible for both good and bad outcomes…
Luckily, the columnists are not the policemen. Just imagine the number of the victims of police brutality in that case.
According to the editorial boards, the police officers are supposed to treat the people with the respect regardless of their nasty behavior and verbal abuse.
Why don’t they hold themselves up to the same standards?
Trump branded them as the fake news and they abandoned every crucial principle of the journalistic honesty and integrity in attempt to bring him down.
Would it be the case of the journalistic brutality?
What's the effect of the tax cut giveaways to American businesses that offsets some of the tariffs? Isn't this an elastic wash on American firms? Indeed, they can offset the tariff costs out of the tax cut profits the rest of us are paying for.
Other countries could boost trade amongst themselves without kowtowing to the US, and find a new equilibrium there. The globalized market can conceivably live without America pushing everyone around. Granted that gives China the most power. But that's what trump and his base want, no?
Perhaps trump's son-in-law has failed to get the lucrative side deals and kick-backs from governments and multi-nationals unwilling to be extorted (look what happened to Qatar), so he is ratcheting up the trade wars. It's always what's in it for him. He couldn't care less about trade much less know anything about it. The amounts Cohen cashed in for trump from AT&T, Novartis, Russians and others is tiny compared with what other lawyers and cronies must be collecting on his behalf - right now. Call it the Added-Trump-Tax (AT&T?) and loss of American welfare to trump wealth-fare.
Imagine how much trump debt Putin will cancel if he can get Russia back into the G7.
How to avoid costly tariffs? Pay up to the trump family - Bitcoin accepted.
3
Trump's base does not read Paul Krugman. In fact analysis or reflection of any kind causes them to coil and shake their rattles. None of Trump's trade policy -- not one bit of it -- is designed do anything, but keep his base quivering with rage and ready to strike.
1
Only short catch phrases and pictures for trump base
Wars of any kind--including the metaphorical "trad" ones are always destructive. To all sides. And generally, trade wars which involve escalting tarrifs are terrible. Beven if you "win" it is pyrrhic--at too great a cost to have made it worthwile. Donald and his sycophantic advisors don't seem to know this, or t care if they do know it. They are either ignorant or cynical. Or, more likely, some combination of each.
Mr. Krugman, I worry your analysis is based on an incorrect assumption: that Trumpian trade wars would be fought on a rational, but mistaken, basis. I don't think that is the case.
Trump isn't rational. Much of his base is equally irrational.
It's not economic thought that's behind these actions. It's xenophobia, isolationism and racism.
Trump's supporters despise Europe. Their attitudes towards Asia are straight-up Yellow Peril. And their attitudes toward Islam are fundamentally genocidal. They don't want to have anything to do with the outside world.
It's the same thing with immigration - they don't want any. They don't want any foreigners staying in this country for any length of time, much less a lifetime. I' m not sure they'd even allow tourist visas.
They don't believe that fair relationships, of any kind, are possible between nations or even groups of people. Only one can stand head-high in the sun; everyone else has to crawl and be grateful they're allowed to do even that much.
2
We'll see how serious Trump is with the anti-NAFTA rhetoric once Lopez-Obrador is elected in Mexico. The new Mexican president will accept nothing less than a substantial increase in wages for his people. Trump thinks that will lead to the exported jobs coming home. Watch Trump announce a renegotiated NAFTA as win-win. No wall needed. Mexicans staying home.
Lopez-Obrador will be the new Francisco Madero.
Lopez-Obrador is capable of accommodation, but with teeth! Unlike Madero he'll succeed, live on & become a two-termer.
What you write is accurate and the projected costs to humanity in economic growth and retarded standard of living as a consequence of a trade war is conservative, when one considers how catastrophically dysfunctional to the development and happiness of our species, a trade war would be.
Moreover, the consequences would endure much longer, perhaps decades -- a new dark age --and would put the World back in time to the sad events that led to WW I and the decline of the British Empire.
I believe fanning the political fires of the Nation State First is a serious mistake and a profoundly disastrous detour from the challenges that all nations face as we try to figure out how humankind and civilization will survive the food disruption, pandemics, and life and property destruction from extreme weather.
The World must harness its resources to bring innovative ideas to the market to continue our standard of living without fossil fuels.
Some political leaders wrongly try to deceive their fellow countrymen that they are better off to abandon globalism, free trade, and government regulation of capitalism's natural drift to monopoly, concentration of wealth and income, but history shows that global market based economies flourish & benefit all humankind.
Evidence shows that the agreements reached after WWII have vastly improved the standard of living for all humankind. If we can just get our heads focused on working toward making life better for humanity, we can continue.
4
While I would never disagree with Paul's economic analysis, which is right on, he fails to stress (something that he has done elsewhere) the essential political thrust of this seemingly economic story, which is: Trump - a psychopath - wants the pain; he likes the pain. And so does the Republican Party; now nothing more than a malicious cult of personality.
In fact, the pain is the point of the exercise. He wants the pain so as to clamp down on human rights; clamp down on civil rights. The end game here is a Reichstag moment: the imposition of an autocracy. People need to wake up.
So what about the big corporations? The Republicans are convinced that a China model, in which autocracy can go hand in hand with raw, seemingly unfettered (but ultimately crony) capitalism is the way to go. They promise you a better life (?); you do not ask questions.
The Republicans, with their "all war, all of the time", have been trying to put the country on a war footing for decades. Trump is placing this country on an economic war footing. The hot war is not far behind, as is a dictatorship.
1
If only we had friends to help us.
Whenever I think of the "trade war", I focus quite a bit on the "war" part. And then I think about how swimmingly the wars in Afghanistan and Iraq were promised to go. It was going to be like taking candy from a baby. And America, it was encouraged by George W. Bush, should head out to the mall. The disruption will only last but a short time. Well here we are and we are stuck in it still. And the collateral damage has been enormous and incredibly expensive. And then I return to the trade war. We will bring them to their knees and happy days will be here again. I am just waiting for the banner to be unfurled from Trump tower. MISSION ACCOMPLISHED. It's just that simple. And I think to a cartoon depicting people in the midwest who are setting the table for the great feast they are told is coming their way. And the little cloud over their head has "I think I am going to have seconds on dessert tonight" written inside of it. Just as soon as the "Trump Catering" truck they were promised pulls up in the driveway. I wonder how many times they will have to look at their watches before they get up from the table and go see what's left in the freezer. And they hear the Trump of the catering company will be in town. They go to see him and he says "leave the table set. The trucks will be here soon". And they cheer. And go back home and sit at the table in their Sunday best. The feast is in the mail.
3
I don't even try to read very far into the VW blogs. So how about you de-wonk it for us regular folks? But don't use that banana example someone used recently. That wasn't an argument anyone could use in a debate with someone.
Trump should remeber the 'elaticities' of the American voter. Not only does he have to win the 'trade war'. He has to be around to claim victory for it.
There will not be a trade war. No, not because the GOP will suddenly develop a spine, but because some coffers will suddenly see inflows. (Yes, starts with a T and rhymes with pump).
Welcome to Banana Republic status.
1
led know what this means but I don't. Why are all of Krugman's columns labeled 'Monkish or in this case very "monkish". This seems to be a word, like "meme" and "Kabuki Theater" that pop up on the left leaning shows and in writings that leave me a bit confused. If they leave me confused then I'm sure others are equally confused. Please get back to something that anyone who admires your writings can get. Hope this doesn't sound too stupid but I've never seen Kabuki Theater or a wonk or a meme (though I may have).
Trade wars = Deflection wars.
Trump's deflections are getting desperate and full of fear,
as the Russian conspiracy investigation gets close to the first report being published.
Trump is using the nations economic security to cover up
the Russian conspiracy.
America is in danger of becoming an economic fascist state.
4
What has to be added in here is the nature of trump. He is mentally ill. The idea behind traditional economic theory is that people are rational thinkers. trump is anything but rational. He suffers from the Dark Triad. His characteristics include no morality or empathy, no ability to take advice or to recognize that he has made an error, he seeks out risk needing the constant stimulation that it provides. He has no attention span and can't think deeply, or strategically. He simply reacts to whatever is in front of him at the moment. Separately, and not related to his mental illnesses, he is simply not smart. He is a Black Swan event to these calculations and i believe the outcomes are much more uncertain.
I remember Paul Krugman.
He used to be a good columnist.
In the early years of the third millennium he regularly preached that Bush tax cuts were dangerous to the US economy. Then he claimed under the Obama Administration that those taxes were essential to the health and recovery of the US economy.
The very moment Obama Barack left the White House the NYT columnist changed his opinion again and claimed that now the budget deficits were deadly for the US economy.
However, we could bet that during the next Democratic Administration Mr. Krugman will be vehemently against the tax rising because such a move would be extremely risky for the US economy.
Now you know why the Democratic-led governments never succeed in reversing and revoking the Republican-introduced tax cuts.
The Dems just sheepishly follow the lead of the Nobel-Prize-winning economists changing their principles cyclically and making the deadly neck breaking maneuvers in front of the stunned fellow Americans.
And when the voters elect a complete outsider called Donald Trump to power, then the Clinton clan describes them as the racists, xenophobes, red necks, bigots and haters…
A sure way to gain their support, trust and votes during the next elections…
The Dems were very critical when the GOP exported the American jobs overseas. They are even louder now when Trump is trying to bring them back. It allegedly hurts the trade relations the GOP developed…
Thank you for injecting some rationality in this emotionally and politically charged topic. Is it entirely implausible to envision a large group of countries in the world ganging up (the trendy word "colluding" comes to mind) to maintain free trade among themselves and fighting the trade war jointly against the US? Are there precedents, and could a credible analysis of that scenario be attempted? [This question could be viewed as a follow-up on Mark Tonino's and netwit's in this Comments section.]
2
Excellent question. Isn’t already happening? Look at what all countries that have announced retaliation measures have targeted... US agribusiness. This is where they think they can really hurt the Trumpkins. e-businesses (NetFlix, Amazon, Google, etc. ) should follow soon after once this trade war gets serious.
1
An interesting article but like all Macro models there is a very high degree of aggregation. These models lack the details to see how any effects will be distributed across different industries, regions, and consumer segments.
It looks like the first group of models implies that the national government has a strategy in place that will maximize the impact of its trade policies, with Trump implementing tariffs and trade policy on a whim not sure these are relevant models as to the effect.
Using a historical may give some guidance but there are so many interconnections between businesses in the global supply chain that these models leave much to be desired.
All in all, it will be bad. Just not sure how much.
1
One factor in this is the uncertainty of it. If trump starts a trade war, will the tariffs he brings in continue after he is out of office, or will America favor free trade again? Will American businesses commit capital on the assumption his policies will continue? I think not, which will mean that the full benefit of the tariffs will not be realized.
There is more than just direct dollars involved. Quebec provides about 26 Terawatts of electricity per year to the north east states. That is only worth about $4 billion but the disruption and cost to the US would be thousands of times that while Canada could redistribute that energy to green houses to produce the food that we import. That type of action is not what we want to come down to but what else do you think would happen in a complete trade war. Would it eventually come to the US invading Canada to guarantee its energy supply? How far can this go?
5
And the treaty that provides water to the entire US west coast must be negotiated. (Amusingly, it contains a sunset clause!) What are the odds that trump, the untrustworthy liar, can negotiate favourable terms for the provision of fresh water in a global warming world when trump denies climate change?
Here are the exact odds: H2O = Hardly to Zero
"But I also don’t have any plausible stories about what’s going to make Trump stop, or induce other big players to give in to his demands."
That's the problem with Trump in office. And the other problem is that the GOP values power more than it values honesty, integrity, or the welfare of the average American. In case you haven't noticed, prices are increasing already. I don't know how much of this is in response to what Trump has been saying and doing but the effects are beginning.
For all the cheers about an economic recovery from the Great Recession (which has been, for most of us a depression that has continued) our salaries have not increased much since the 1980s. The cost of living has. More people than ever are living on shoestring that is wearing out and will be shredded sooner rather than later. We have the people born after 1955 who are losing their jobs and cannot find new ones thanks to age discrimination. A trade war is not going to help them or anyone else.
I hope we don't have a trade war. I hope we don't have real war either. But there is a war going on in America and it's hurting all working Americans. It's a war for a decent life for ourselves and our children. It's a war on the part of the extremely rich to keep their money and impoverish us. And our politicians, the GOP ones in particular, are not on our side, the side of the average American.
8
Add to your excellent summary that the GOP wants to privatize Social,Security and Medicare. Also that ha Ingleside withdrawn from the Paris Climate Accords we are quite efficiently wrecking hopes of saving the planet for our grandchildren.
4
In the short term, years actually, the US consumer will be hurt. Prices for common goods will rise sharply. By exporting so much of the manufacture of low tech consumer goods (e.g. clothing), the US has lost the ability to manufacture those goods efficiently. We have neither the soft skills (experienced people) nor the infrastructure (factories). Essentially, when countries are unable to manufacture certain goods, consumers are forced to pay the tariff.
Obviously, entrepreneurs will scramble to meet the need but learning to efficiently manufacture low value added items will undoubtedly take some time. To compete with low wage countries, American companies must either automate or force workers to accept a much lower wage.
The supply and demand arguments presented by Dr. Krugman must be correct in the long term, but ignore short term hysteresis.
The US economy will be even more damaged in the long run as capital will be diverted from high tech businesses to low tech manufacturing. One day, the US will be competitive with Bangladesh while China will fly people to Mars and establish outer space colonies.
Trumpkin progress!
2
Thank you, Mr. Krugman this article was very informative. I believe this potential Trade War will be excerbated by Trump's hyberbole and verbal assaults on our top trading partners. It will cost the U.S. in our relationships with our Allies. It will cost regular American working class families and the poor, money they can't afford to lose to pay for these additionial taxes. Increaseing wage stagnation and making null and void any benefits received from the Tax Reform Act. Red State farmers will pay a huge cost. The Rich can whether this without a problem. The rest of us, will have to make serious cut backs, just to make ends meet.
7
Not at all certain that the “rich will weather this.” Key word: weather. Refusal to recognize the effects of climate change will affect rich and poor alike.
How does this compare to "normal"trade wars? There is no global race to raise import taxes, it is just the USA taking itself out. Why would trade not just start flowing around the USA?
8
A 2% annualized loss of GDP would make for a disruption larger than that experienced during the 1990-91 recession. Which, because it is structural, rather than simply transient or periodic, has a lasting negative impact. Recession tomorrow, recession today, recession forever as the new mantra?
5
Countries with deep trade relationships tend not to go to war with each other. There is too much financial disincentive.
If we see a 70% decrease in global trade, then the best investment will be a company that makes body bags for our soldiers.
This is not really an economic issue. Not in the long run.
11
The optimal tariff warfare scenario assumes that our trading partners wish only to maximize their national incomes. But surely they have another objective: to destroy Trump and Trumpism.
They've already signaled that their intentions are, in part, political, in that their retaliatory tariffs are targeting red states.
I wonder if our trading partners view themselves as a liberating army.
11
"Pershing, we are here!"
1
One effect would be a greater shift to intangible, non-physical goods. More time, and money spent online consuming digital media at the expense of non-durable goods.
Durable goods (washing machines, cars) will take a hit. Construction costs will restrain new housing and "surplus dollars" (from not buying durable goods) will get absorbed by increased housing costs.
GDP, as Krugman indicates, doesn't change that much, but where the money goes as a result of trade wars is to rentiers (e.g. landlords and cable companies) making economic inequality even more problematic.
3
I'd like to see the effect on Walmart/Sams. In my view they personify the idea of sourcing the world's cheapest goods, in volume, to drive their predatory pricing. They crush all retailers and manufacturers alike.
So the US tariffs (taxes) Chinese imports. What will Walmart do? Change suppliers to the next cheapest somewhere on the globe. They won't just revert to US manufacturing, unless Trump taxes every country who can make a $2.00 T shirt.
It's a game of Whack a Mole. Tariff the current producer, then, the next, the next etc etc until eventually the US is the lowest cost producer and the source becomes an American company and job.
Seems logical until you look at the scale of Walmart's sheer quantity of different goods. 80% comes from China and most of the rest from other Asian countries. There are millions of items to deal with.
So how long from the first tariff to an American job making T shirts? Five years? But during that time the cost of a T shirt to a Walmart shopper will go up almost immediately.
So middle America will endure increased shopping costs while waiting for a new factory to be built in their town making $12.00 t-shirts.
But shouldn't we be asking...where does the Tariff money flowing into the government go? Do we citizens have a voice (vote) on the way it's spent? And isn't a tariff a tax and were we citizens properly represented? Or is this taxation without representation?
10
Who will work in these T-shirts factories? At 3.5% unemployment good luck to find a warm body to work in these sweatshops. Ah and how much you will pay them? 2$ / h? No?
Robots then? Good idea, this will really help the average American...
1
What if the other big trading counties / blocks were to unite against the US. Would that change the analysis? Probably not, I gather.
What if services were taxed? This might be a point where the US is much more vulnerable than in manufactured goods.
8
Good questions for another Dr. K. article.
If the labor wages are frozen and the prices of goods are increasing rapidly because we keep printing the money, then the standard of living of the American middle class and the poor is doomed to deteriorate.
That has nothing to do with the Trump tariffs. Those two processes are completely detached.
Trump tariffs aren’t targeting the trade because the trade is an exchange of the goods but the shopping overseas.
The less we buy from China and the more we need to manufacture here in America, the more we need the domestic workers and the more we have to pay them.
The more you pay the workers, the less the corporations can be profitable.
It means the Trump tariffs are good for the workers and bad for the global corporations.
The question is why both the Democratic and Republican Parties are more protective of the capital and the global corporations than the American middle class and the workers.
Do they believe that they have managed to fractured the Americans so badly on the left and the right, the heterosexual and homosexual, the males and females, the conservatives and liberals, the young and the old, the coastal and heartland, the employed the retired, the blue and white color, the manufacturing and service employees, the educated and less educated, the legals and illegals, the citizens and the immigrants, along the racial lines that the voters are completely irrelevant, thus the politicians have to serve solely their campaign donors from the global corporations?
3
"It means the Trump tariffs are good for the workers and bad for the global corporations."
Good for the workers who now have to take their higher wages and go pay five bucks a pair for Fruit of the Looms?
Do you not think that Republican propaganda is the center of division in the country? When DT blames the Democrats for the failure of the DACA bill (DACA was put in place by Obama because the Republicans refused to act on any immigration bill), do you not see that as Republican divisiveness?
Because they are the minority party, the GOP began years ago to attack the Democrats as a way of getting votes. They have been very successful with the help of big money.
You might read “Democracy in Chains,” Nancy McClean, professor of history at Duke University. Her book, well researched and very readable, lays out the history of Republican politics in America from 1954 to the present.
1
This trade war initiated by a vacant minded president is going to hurt the very people who can not afford rising prices.
The price of gas has risen 50 cents a gallon in this state since Trump dropped out of the Iran plan and moved the Embassy to Jerusalem.That equates to an increase of $7.25 everytime the tank is filled. I suspect it will continue to rise.
This is an issue that effects the majority of people and should be used by every Democratic candidate. Trump's actions always have negative consequence for those who can least afford it as in his warped, misleading tax plan that every elected Republican praised as a win for the working men and women.
9
Paul:
You almost had me on this piece, which I thought was very well done - until I got to the section on disruption. Our entire manufacturing sector is 12.6 million jobs (1.5 million of which are food-related, by the way). Our mining and logging sector is 733K jobs. Even with a healthy number of ancillary service jobs factored in, there is no way that the modest reduction in the export of goods to other countries that you project will cost the U.S. 9 to 10 million jobs. And that doesn’t even begin to factor in the pickup in jobs by reducing imports.
Please reconsider your calculus. The back of your envelope may have been a bit splotched.
Your scaling of the rest of the issue was quite reasonable.
Best,
Dan
1
We also export services and our service economy is huge.
7
In a simple way - the volume of exchange is not reflected in trade deficits or surpluses. If you do only a single transaction, one side will have a surplus on the other a deficit. A tariff will make that transaction less likely. If you do thousands or millions of transactions the deficits or surpluses overall provide no insight into the real value of the trade going on. Tariffs reduce the important term, volume, in order to upset the balance. A casino comes out ahead or behind at the end of the day if they can get a cut from each transaction. Casino owners should not run national economies with that irrelevant business model.
2
There's an immediate example that proves, I think, Krugman's points, particularly about the disruption impact: 25% tariffs on automotive imports. Indisputably respectable economists have estimated that if Trump imposes these tariffs, there will be a loss of nearly 200,000 jobs, and "only" a modest impact on the national economy of 1.9%. (Petersen Institute). But, imposing these tariffs would have an even greater localized effect on certain communities, those that host automotive production, than the already gone jobs under NAFTA and other liberalized trade measures that Trump and his base are supposedly correcting.
4
I'm not sure how Krugman considers a prolonged 2 percent hit to GDP relatively benign. If you take our roughly 2 percent GDP growth and knock off 2 percent, Trump has just thrown the economy into irons for an indeterminate amount of time. If he hits the higher estimates, a trade war will likely cause a recession. As noted, the disruptions will be intense but localized. However, the multipliers will not. If you send 10 million American workers to the unemployment line, the shock wave is going to hit the general economy. Meanwhile, producers will pass along costs wherever possible.
A trade war is both recessionary and inflationary. This sounds like a pretty catastrophic combination if you ask me. We just spent ten years clawing our way back from the last bad economic policy. I'd rather not relive the experience.
7
It seems likely that a Trump trade war would cause a recession. However, I think Krugman's point is that it probably won't be a long or deep one. Of course, in part that depends on the Trump Administration's response to the recession.
Trade economics is clearly exceptionally complex with a big array of variables to be considered. This excellent column shows analysis that can be understood by many of us. But only experienced economists could recreate such a discussion base not only on models but experience with how those models affect real, tangible economies and historical data.
Trump? Oh, let's have a trade war to shake things up and appeal to his red meat base. He goes with his gut, and got doesn't have a real economist on his staff. And 30% of the population cheers. Even a resulting recession could be successfully blamed on Democrats.
6
Everything will always be blamed on Democrats and the occasional "rogue" RINO. (The only apparent RINOs to speak out against any Trump policies are leaving Congress, by the way. No "Profiles in Courage" there.) I wonder how a soybean farmer feels about the potential addition of a few thousand steel worker jobs in the scrap metal reprocessing industry. I doubt that he gets a warm glow from it.
1
Several commenters raise the possibility of boycotts of US goods as part of a trade war. I have a different question - whether a trade war might expand into an all-out economic war. There is a statistic that shows some 40% (60%?) of US debt is held by foreign countries. What if China, for example, stopped buying US treasury bills? The interest rates on those bills would go higher, making our deficits increase, and we might have to start printing money, driving the value of the dollar down and increasing inflation. Given that Trump has declared he might default on US treasuries, what effect would a refusal to buy treasuries have? It seems this might be a much more serious "war."
4
Default would be much more catastrophic than a trade war. As you say, that would drive up interest rates dramatically, and throw the global economy into turmoil. The impact could be greater than even the 2008 recession.
2
A wonkish quibble. Saying that trade reduction depends on the elasticity of trade demand is a bit like saying how fast a thing falls depends on the gravitational constant. That constant, like elasticity, does not determine but only describes the behavior of the real world.
1
Genuinely free trade is unlikely to ever exist, because capital is inherently more mobile than labor. Capital can move with a few clicks on a keyboard. However, immigration laws, language barriers and high transaction costs of international relocation all restrict the free movement of labor. Fully open borders worldwide would at least theoretically eventually lead to reduced disparities of wages and living standards between countries. This is not news; in fact, protecting the US's advantage in wages and living standards is cited as a reason to restrict immigration, legal and illegal.
This suggests that protectionism carefully designed to eliminate the benefits of moving capital to cheap-labor countries could theoretically benefit labor in the US. But, it would require some level of compulsion (or incentives) to force the owners of capital to shift some of their returns to labor rather than retrench to protect their returns despite higher labor costs. We know that won't happen in this political climate -- see the example of the tax cuts, where we did nothing to block companies from plowing their tax savings into share buybacks.
I think this is another version of the thought I have long had that it would be possible to design, on a blank sheet of paper, a US economy that is almost entirely self-contained and provides full employment -- but it's nearly impossible to get there from here.
3
US GDP shrank by 2.8% in 2009, so a reduction of 2% due to a trade war would be enough to set off a recession. That could be catastrophic as there is currently very little monetary and fiscal "ammunition" to fight its effects. And wouldn't there be multiplier effects?
7
Dr. K’s analysis makes lots of sense. I fully expect U. S. Influence on the world markets to continue it’s decline. It is time to refer to the increase in price of good and services as the “trump tax”, and the resulting loss of employment as the “trump dividend “. Say it loudly and often enough and even his (misguided) supporters will begin to understand.
9
The only way to signal to Trump that this trade war madness must stop is to win the House (and plausibly the Senate) in November.
With that in mind:
Check that you are in fact registered.
Help those who are not registered to register.
Ignore all polls.
VOTE.
In passing, comparing to past tariff regimes might be far too simplistic. The degree of international integration in manufacturing and services trade has risen tremendously over the last 30 years.
Tariffs will disrupt and distort these intricate integrations and drive up costs to US manufacturers, service consumers (big business), consumers, exporters ... everyone.
When your internal costs spike, you begin to cut purchases where possible (including the purchase of labour).
I think Mr. Krugman has underestimated the effect on the US economy by an important amount.
11
Excellent analysis, thank you.
I am sure you understand all the "bigger picture" concerns expressed in the comments, but the necessity of analysis precludes including every variable possible.
I think you have focused on enough in terms of modeling and historical context to identify the key _economic_ effects of tariff provocation, in particular.
The less quantifiable factors, of course, also come into play. Business purchase supply lines, logistics, transportation and port commitments, and on and on, rely upon habitual and long-term commitments just as much as consumer purchase habits form around consistently and reliably available goods and services.
The factor of disruption produces an incalculable "wave phenomenon" of follow-on effects, leading purchase habits to change, globally, and trade and manufacture and shipping commitments to change along with them.
New routes, suppliers, desired goods and services, manufacturing relationships, all blossom in the face of the increased friction tariffs (and for that matter, changes in tax policy, up or down, doesn't matter) produce.
As a consequence, those industries targeted with tariffs lose not only current but perhaps, permanently, future opportunities.
The initial GDP losses are small; the shift in global macroeconomic focus resulting, however, can be profound.
7
Just a really quick note. What about a "large-rogue-nation" scenario, where one nation switches into trade-war mode with all other nations, but the other nations remain in an optimum trade equilibrium with each other. This would be computationally harder to model because by hypothesis the rogue nation would have to be too large to allow perturbation analysis.
8
Krugman provides some useful information in estimating the economic losses resulting from a trade war. But Trumpians will argue that losses in a war are to be expected and endured, and that the important thing is that the US will win the trade war and punish countries with unfair trade practices. Thus, the magnitude of losses won't discourage them. I've even heard soybean farmers interviewed who said it was their patriotic duty to suffer losses to serve the country. What needs to be demonstrated is that a trade war is not a war we will win.
8
While it might be true that many of Trump's supporters will stand by him even if they are hurt by this trade war, this isn't happening in a vacuum. These same folks may also lose their health care, see their taxes increase, face increased costs for food and other necessities, and see their social safety net disappear. At some point people will be unable to continue to ignore their own personal experience and will see the administration's lies for what they really are...I hope.
8
Much of American soybeans were genetically manipulated to be Roundup-ready thanks to Monsanto. The same with corn. Of course organically grown are more expensive, also less toxic. Why should other countries buy US soybeans if they can grow their own organically or at least without glyphosate.
Just like with the cigarette companies, their bottom line is detrimental to our health. But in purely economic terms, they have moved a lot of soybeans and corn.
That's just agriculture, but if we are going compete with the rest of the world on trade we should produce useful goods that don't harm people or the planet.
2
All the negative effects sustained by ardent Trump supporters will be blamed on others (whoever is the convenient scapegoat of the moment). The Forever-Trumpists will-- as usual-- swallow it hook, line, and sinker. Their very egos are enmeshed with the cult; defection would be a kind of death of self. They will go down with the ship, blaming everyone else to their last breath.
What also needs to be examined is the cost of starting/restarting manufacturing in this country that corporations moved to other countries should those corporations move their manufacturing here.
In those costs would be the physical plant, raw materials and/or supplier furnished components and hiring and training the workforce, if workers can be enticed to work at some of these jobs.
All of this will add to the cost of goods at the consumer level just as the tariffs will cost the consumer.
While Trump dog whistles his base and his advisors from either cable TV or on cable TV gaslight the base, have these "experts" performed any analysis that can either prove or disprove Dr. Krugman hypothesis and prove to me and others that Trump's war will benefit this country and bring those affected countries to the negotiating table?
7
So, this seems to be the case for tariff's first order effects: The direct and obvious ones.
What if tariffs raised prices on a fundamental item that is part of a value added chain and for which there is insufficient domestic immediately availabel supply or replacement? Would the economic effect be so limited?
For example, when imported oil prices rose rapidly in 1973 and 1981, the economic effects were much bigger, I think, than the simple trade volume and price increases would look like on a calculator's figures. Those oil price increases were not tariffs, exactly, but they look like that in terms of a rapid price increase controlled by governments and affecting large, inflexible demand here in the US.
I have a bad feeling about these tariffs. You can be sure someone in Trump's inner circle of affluenza affected special interests will make money off them. But the rest of us? No so much.
13
The article makes it seem as if prices are the only determinant in consumer buying. In normal times, I'd agree. But, what about in "abnormal times"?
Canada produces zero fruit in winter and spring. So, Canadians who wish fresh fruit generally buy American fruit in those months. But, when I went to buy fruit Saturday, I found myself examining "country of origin" labels. I chose fresh fruit from Mexico (mangoes). Insulting my country as "spoiled" caused me to change my behaviour. I doubt my untypical $10 shopping expenditure will change President Trump's mind - unless many many Canadian shoppers choose to do do the same.
But, if the 25% threatened auto tariff takes effect, I think that, at the margin, many Canadians will be predisposed not to buy American assembled cars in favour of cars assembled here in Canada (or in favour of cars imported from outside North America). That could really hurt GM and Ford workers in the USA.
I know of no precedent that indicates that car buyers will react to what is widely felt to be sustained national insults to Canada in this way. But, I also know that the President's insults have angered Canadians in a way that I have never before seen Canadians angered.
When does "irrational anger" affect shoppers' buying? Sadly, it seems that President Trump is about to find out if motivating his domestic base may also motivate foreign buyers against buying American. It could become be an interesting experiment in "behavioural economics".
32
A deliberate boycott of American goods adds another variable to all the computations. Hard to gauge given the overlap with politics. Interesting times....
4
You mention the 50s and I feel like Donald thinks he can push us back to making all the items we no longer make it the US again so we're not dependant on the rest of the world. But I think his main motivation is to try and get other countries to pay him off not to do it.
12
The U.S. dominance of the world economy during the 50s had less to do with inherent advantages of the U.S., and more to do with the lasting impact of World War II. Food rationing didn't end in Great Britain until 1954.
1
If you are looking at only the US, you might consider how a trade war would redistribute incomes.
One big problem now is that the share of the GDP paid out to workers as income is steadily decreasing, while the share paid to investors and capitalists is increasing. You may blame the decline of unions or poor education, but a big factor is the availability of cheap overseas labor. If this cheap labor were less available, employers would have to pay more, and workers in the US would be relatively better off.
So even if the GDP declined slightly, the real incomes of workers might still go up.
1
The tariffs do not affect American based corporate products. For example, Ivanka Trump's clothing is made overseas but her products will not be affected by tariffs, same is for other manufacturers who manufacture overseas but are incorporated in the US. This does not increase demand for textile workers in the United States thus should not stimulate increased wages of the current textile workers.
4
Unfortunately you forgot that higher wages result in higher prices for goods and services. Not a winning solution.
1
This is a huge topic to cover and I think Dr. K's article only brushes the surface. Other reader comments do touch on areas where I would like to see Dr. K expand on. These would include:
- the other areas of the globe (China, Euro, Great Britain, Nafta partners, etc) are not getting into a trade war with each other. The USD is the global currency, is this being put at risk
- services, while the USA has a large deficit on goods, I expect they have a large surplus on services
- debt & deficits, the government debt of their USA in particular. The government has a financing requirement that now exceeds $1T annually. Reduced trade will result in other countries / enterprises having reduced USD. How reliant is the US government on foreign governments / enterprises to finance deficits. What is the impact on the US if the demand on US government debt starts to soften.
9
If we look at the last recession which nearly brought the world to the brink of another Great Depression, I think just focusing on the tariff/trade war is looking at just one factor which was not present in 2008 but put with the following: record deficits, an aging population, and a refusal to allow immigrant labor to contribute to the tax base. Pension are nearly extinct, and even 401k investment is limited and less protected. Personal and government debt is significantly higher. Several cities (Detroit and others) and a few states (Illinois and others) are over extended and flirting with bankruptcy. Euro could be drifting towards crisis (Italy, Greece, Spain). Deutsche Bank is on the verge of collapse. Weakening/disruption of NATO, stability of our government, stability of our head of state, and outright criminality and corruption, emergence of China as a dominant world power. emergence of crypto currencies, distrust of fiat currencies (including the US dollar) and distrust of world banks; China and Russia are already circumventing US dollar to pay for oil. If US dollar stops being the dominant world currency, our purchase power will dramatically shrink. Put all this together and we are looking at a gas soaked dumpster at which Trump is throwing lit matches.
8
Quantitative Easing is the best example I can give you of the presence of a sovereign monetary system in the United States. The Federal Reserve, one day in 2009, just issued a statement saying it had adjusted collateral standards in overnight markets and voila shady mortgage-backed securities started showing up on the books of the Federal Reserve. A writing exercise mostly.
The Fed's willingness to balance national accounts, given sharp losses from trade retaliation, is doubtful. If, however, you happen to be a large, Zombie bank on Wall Street with solvency issues, expect your bailout request to be processed in seconds.
1
Bingo.
The dollar's status as the global currency is indeed at risk were Trump to prove anything more than an outlier in American politics.
And once the US has to borrow in a currency other than the dollar, given our currently immense debt - which Republicans only know how to increase, not to decrease (at least without inciting a revolution against them) - our goose would be cooked.
1
I think both Trump and Krugman approach consideration of the tariff issue wrongly.
Tariffs are a tax imposed on imports by the importing country's government. The consumer faces a higher price for the imported good but the increase in price is received by the importing country's government, not by the foreign seller of the product. Other consequences of the the tariff-tax is that less of the imported good will be purchased from the foreign source, demand for domestic production of the same good will increase and the domestically produced good will rise in price as well (up to the cost of the import + the tariff-tax thereon).
The ideal situation for all countries would be totally free trade and all goods produced and sold in free markets. That provides the maximum benefits for consumers in all of the trading countries and it results in maximized efficiency as every nation receives the benefits of their economic comparative advantage.
Now suppose one country imposes tariffs (like China). This harms producers in the US who would otherwise export to China. But if the US responds by imposing a tariff-tax on Chinese goods, then all US consumers suffer without US producers gaining anything. That is what Trump is doing. That is why Trump is wrong.
Trump supporters claim that his tariffs are just a tactic. But like the old wisdom that says you don't point a gun at someone unless you intend to use it, so, too, you don't threaten tariffs unless you intend to impose them.
3
This is confusing as hell. I never studied economics (my bad) so at certain points in an article like this, my eye glazes over waiting for the net net.
But common sense dictates that when you charge foreign customers more with tariffs, they will return the favor, and in the end, everyone ends up paying more and/or producing less.
The premise for all these trade wars is Trump's absolute obsession that the US is somehow being taken advantage of. Where he gets this, I don't know except for the fact that most analysts say he starts with faulty understanding of key terms, including deficits, trade surpluses, and net trade balance.
The prime example is how he counts US trade with Canada, where he claims we're getting ripped off but has left off a huge chunk of what we sell, namely services.
Add to that the fake number he argued with Trudeau over (he later admitted to pulling the percentage out of think air) and what you have is an ignoramus in a position of great power to act on faulty assumptions.
The general assumption is trade wars are bad, which is understandable. When trade goes humming along with each side able to sell their best products, compensating for manufacturing or services the US can't produce en masse, why would you "fix" that?
When it comes to trade, belligerence and anger are never good negotiating tools.
16
Isn't the ultimate impact of an all-out trade war the destruction of comparative advantage? In that case the entire world will become less wealthy. The US is the wealthiest nation on the planet, although much of that wealth is concentrated. Nevertheless, this isn't going to feel like "winning", not by a long shot. And, as you explain, the investment in global supply chains is massive, and when the potential loss of that investment dawns on the captains of industry (which I am certain it hasn't as yet) some phones are going to start ringing off the hook.
3
As an angry Canadian, I will not be taking any vacations in the U.S. and will be boycotting U.S. source goods. What analysis has been done to assess the economic effects of boycotts in a trade war?
15
Your question has exceed the thought process in the Trump "administration" and Trump himself.
I thought the big thing for trump was not to protect industries but to swing a big stick around, and make our trade partners give in to a sweeping remake of trade agreements, so we wouldn't be getting "terrible terrible deals". Then when everyone falls in line we would go back to low or no tariffs.
I never thought THAT was much of a likely outcome either but I thought that was the motivation
As far as big business having a vested interest in business as usual with China no doubt some do. But looking at even big business monolithically is a big problem. Most large corporations go into China's huge market kicking and screaming.
Remember the CEO of GE, Jeff Immelt publicly remarking that China really doesn't want U.S. companies to win. Even those veiled remarks were walked back primarily due to Immelt's role as chairman of President Obama's panel on job creation.
Big companies zealously protect their intellectual property and every single innovation. They despise having to give up their most precious assets to China Inc. in order to get access to their huge market. Most desperately want something to change.
What is Krugman's alternative?
3
Paul, at this moment in time our democracy is being weighed in the balance.
A majority of the American people who bothered to vote refused to vote for Dumbo; but enough of them did to make him President (thanks to the archaic electoral college).
And in calling this bankruptcy queen Dumbo, I'm merely stating the obvious.
Trump is an idiot's idea of a business genius. And networks like FOX exist to make and keep their viewer idiots - just like the NY Post does.
Trump's reign of error will not end well - but hopefully enough of either the voters who stayed home or those who cast their ballot for Dumbo on ephemeral issues will learn a life lesson from this experience that they will take with them going forward.
Democracy is not a reality TV series or a spectator sport - and a government is only as wise as the voters who bi-yearly elect it.
If a voter is uncomfortable with the current style of globalism, then it behooves them to elect someone with the smarts to envision and implement a superior style - not a dummy who has routinely run his businesses into the ground.
14
Wouldn't there be a deadweight loss incurred?
Would it anyway be hard to assign to the bottom lines of any group of firms?
1
All the things the Doc says will happen, can happen. But not likely. Because China is more vulnerable than we imagine, and Europe is less cohesive than they claim. They will blink. Trump will declare victory.
This is the first step. Then Trump is likely to bomb some nation and declare war to win in 2020. This event is sadly more likely.
3
50 billion on a $20 trillion dollar economy seems to be a very small number Mr. Wonkish. Try google to do the math, your calculator from junior high doesn’t have that many zeros.
1
A few weeks ago, using the same chart as Figure 2, you gave us a partial equilibrium estimate of the cost of Trump tariffs at just 1.5% of GDP. Now it's roughly doubled, to 2-3% of GDP; I don't like where this trend is going.
6
Speaking of disruption, there was a very interesting article in MacLean's recently pointing out that PM Trudeau could savage the US pharmaceutical industry with the stroke of a pen; simply by expropriating their drug patents.
Of course, everyone still hopes that cooler, rational heads will prevail and "it won't actually come to that". The US stock market is certainly still in the denial stage. But WHO will stop this from spiraling out of control and WHEN?
11
Of course the wealthy have a pipeline into the White House--it used to be called the checking account. If and when big business thinks it will be hurt, watch the river of money to the GOP and Trump slow to a trickle. Why has that not happened? Are the wealthy now so wealthy that they can luxuriate in ideology? The Koch Bros certainly are. The Mercers, too. The Scaife Foundations are based on that assumption. Medieval princes first built palaces, then they built cathedrals, wanting a legacy and the regard of history. It isn't always about the economy, sir.
7
Would the tariffs go toward our deficit and debt? Perhaps this is a way to level income? I was raised to be suspect of anything using the word free.
1
Anything that reduces domestic product will increase the shortfall of revenue following from the "Tax Cuts and Jobs Act".
3
When your fearless leader says he is imposing $50 billion in tariffs that doesn’t mean that the US treasury will be $50 billion richer.
The $50B is the amount the tariffs would generate if the supply remained constant. But demand at a premium is unlikely to remain constant. Supply will fall.
And as the recipients of these tariffs impose countervailing tariffs demand for US products will also fall. That will affect US businesses and their employees.
4
While Trump and his base seem to thrive in a tornado of chaos and disruption, no one else does. At this point, regardless of the specific tariffs he may impose, he has created a high degree of uncertainty on many fronts. And as we know, business doesn’t do uncertainty.
I have read reports that businesses are delaying new investment because they (along with Trump himself) have no idea where Trump is headed. There is no tax cut scam large enough that will convince a business to invest in an expensive, long-term project that is built on a foundation of quicksand.
I used to negotiate contacts, and learned that in the end, no matter how comprehensively written a contract was, it was only as good as the parties who entered into it. The loss of trust in the US, more than any particular tariff, will be the lasting damage that the Trump administration has inflicted.
19
Thank you for this clear-eyed analysis. Yes, many communities will be disrupted. And let's remember that the "disruption" of the Rust Belt is widely considered a key factor in the election of Donald Trump, even though the US is a big and very rich country, currently at (almost) full employment.
What is missing from this analysis though are the politics of international trade. First off, there is no guarantee that Trump's trade wars will lead to a war of all against all - which is a very American perspective. It rather seems possible that China, the EU, and others like Japan will continue to uphold the WTO, which would leave the US isolated.
Also, there has already been a lot of talk in the wake of Trump's Iran blunder that China and the EU might set up alternative payment systems that would bypass the dollar and the American banking system - which would mean that dollar would no longer be the world's *only* reserve currency, which brings me to finance.
At this point, roughly 60% of America's national debt and 40% of its stocks and equities are owned by foreigners, which means that American businesses and consumers have easy access to credit. If foreign trade dwindles, shouldn't we expect less FDI in the US? And won't that mean that the US economy, which is about 70% consumer spending, will be hit as well because credit will be harder to come by?
8
"Tariff" is just another word for "tax".
Trump is raising the taxes of the 99%. This is to offset the billionaire tax giveaway enacted in December. This is why the Big Money is silent on this trade war.
14
I am interested in Krugman's thoughts about the end of the monetary stimulus and the interest rate hikes by the FED, while China may be heading the other way, and ECB at a stand still. How different this is now compared with the GFC happening 10 years ago when the central banks were in sync. Perhaps this collision course is of greater importance than the trade war.
4
I think it's a fiction that major corporations have the power to stamp out an escalating trade war. They may have influence in some quarters but most aren't heard by the administration. Trump will do what he wants to in any case, and too many Republicans who have to run for office will be too scared to run against Trump's base. If major corporations want to deflect the coming Trump Winter they will have to put their support behind the political forces who oppose him and work to enable those forces to take control of Congress. The corporations can help to shape the attitude and conviction of the nation. They'll have a better chance at doing that than they will of affecting the White House.
4
I have to say I shared the kabuki view of all this. I'm surprised major corporations didn't stamp on it fairly quickly. Apart from some noises from the US Chamber, this doesn't seem to have happened probably because the effects so far have been marginal, they got their tax cuts, and are generally making a lot of money.
The sort of major trade war Krugman describes still seems rather remote as he acknowledges. It's more of a skirmish and it's going to hit certain sectors fairly hard and produce a largely un-noticed increase US consumer prices. Witness gas prices which are connected to the Iran treaty revocation.
3
The disruption cost is also smaller than the estimate here. Mostly because this isn't accounting for companies who see their cost of offshoring increased and decline to exit the US manufacturing sector.
I don't like this particular type of policy targeting - there are many less costly ways of achieving similar goals, and reactionary industrial policy tends to lead to deadweight loss (unlike anticipatory industrial policy)... but the relative mobility of capital and labor has led to a hollowing out of small urban centers and rural areas in the US, and it's been going on for almost 40 years now (1980 was a long time ago). The empirical literature in economics, political economy, and sociology are clear that financial mobility, free trade, and technological change all bear part of the blame.
Frankly, I would take these scare-tactics more seriously if Dr. Krugman was actually arguing for strong capital mobility controls, and hadn't been extolling the virtues of nearly-toothless Dodd-Frank during the Obama administration. The US economy is slowly but steadily becoming less internally articulated, and "globalization" - especially financial globalization - bears a large part of the blame. If Democrats won't take action because they listen to Very Serious People (to use Dr. Krugman's phrase)... then the nativist-isolationist manufacturing base of the Republican party will.
3
On the subject of disruption, while you note the impact on labor, have you considered the impact on capital? As you note, multinationals have invested heavily in international value chains and important portions of that investment would be abandoned. Any idea how large the likely losses are? Is there any reason to think that debt-financed overseas investment could spread the pain from stockholders to bondholders?
It's hard to take Krugman seriously when he discourses on the likely harm caused by tariffs when he doesn't even mention the 78-year old Stolper-Samuelson theorem which posits that reducing or eliminating tariffs leads to permanently reduced wages in high-wage nations (like the US). The corollary of course is that imposing tariffs (in high-wage nations) will result in higher wages. The Stolper-Samuelson theorem has repeatedly been borne out in the real world.
1
Mexico, Canada, the EU and China -- the leading trading partners we have -- all know where to place their tariffs, on goods produced by Trump supporters. Because just as it's all about Trump to Trump, it's all about Trump to our trading partners. My money says that tariffs will only be added by our trading partners to goods traded to the US -- not traded between themselves. Just how would that affect your analysis Dr. Krugman? If we're the ones outside looking in?
5
Professor, please comment on the scenario if all major trading partners that Trump has angered band together as one trading bloc. What do they need to do? Would it reduce negative impact of the trade war with USA?
It seems the first step is to list American products or services that cannot be easily replaced and supplied by members of the group. What products carry the Made in USA label that cannot be bought elsewhere in sufficient quantity, or put on hold? Another list is materials & products that Americans cannot produce themselves and rely on import. The third list: where do Trump supporters live and what do they produce?
Armed with big data, these countries together can essentially boycott American products and services that are available from each other, raise price on products that Americans cannot easily produce themselves, and levy heavy tariff on those products made by Trump supporters. Given the quick responses from countries like China & E.U. they must have done their homework already. The only missing piece is to formally declare that they are forming one big trading bloc. After that they can move on to remove their participation with USA on the military front.
9
Weiqi? Baduk? Go? No wonder your reasoning is so clear.
Aside from the wonky part, the real and personal effect of a trade war will show up in a way that poses real problems for Trump's base and thus political problems for him. That is, what will happen when folks, particularly white working folks who figure very large in Trump's base, walk in to Walmart like always and discover that the things they depend on for their families, like clothing, appliances, electronics, tools, home furnishings, etc etc., have gone way up in price from the levels to which they have become accustomed? They will not be happy.
It's very easy for people to talk about keeping jobs in the good ol' USA, but when the rubber meets the road and they discover the effect on their pocketbooks, that will put a different complexion on it.
7
Yes, higher prices at Walmart would be a big problem for Trump's base but would they connect these higher prices to Trump? Isn't it more likely that they would continue to believe Trump and Fox News and blame it on liberals?
4
I hope you're wrong, but your scenario does bother me. In one of Churchill's early volumes of his famous history of WW II, he spoke of great masses of people ignorant of the most basic economic facts. And such people vote. Our political system has many ways of absorbing and deflecting popular ignorance, but Trump is doing great damage to the correctives. In his hands, the vast power of the presidency to shape public opinion is put to purposes of a lie, and in his case very probably to more than one criminal lie. America is much more vulnerable to our illusions about ourselves than we are to any "threats" from the rest of the world--and yet we hear this word on all sides of political life, repeatedly.
Three thoughts: 1, this seems to deal with trade in goods, rather than services - what if other countries began to selectively tariff imports of US services in retaliation for US tariffs on their goods?
2, economic nationalism or mercantilism, which Trump and Bannon appear to believe in, makes even less sense if you raise tariff barriers but freely allow foreign firms to open factories in your country and export their profits. If Trump really wants to rid Manhattan of Mercedes cars, he would have to shut down the Mercedes plant in Alabama, exposing the Ford plants in Germany, Britain, Romania and Spain to European countermeasures.
3, there is only one reason for moving goods production from one country to another - it's cheaper. Almost always the element that makes it cheaper is labour. To put it another way, offshoring manufacturing is not only a way to increase profits, or for customers to get cheaper goods, it's a way to postpone the other, more expensive way of increasing profits and cheapening goods through cheaper labour, which is automation. Is a plausible outcome for the US of an all-out trade war, and a consequent reshoring of manufacturing, an increase in US robots, rather than US human jobs?
22
Answering the last question: Yes. Something that completely escapes the mind of this President.
The graph you give us showing increasing trade since the 1950s could just as well be labeled:
percentage of workers without union protection
percentage of national income captured by the top 1%
percentage of prime working age men not working or looking for work
All those things increased at the same time in roughly the same proportions. What a coincidence!
32
Very interesting. Thank you. This steers my thoughts to elasticity and disruption. It seems the effects of a full on trade war will vary significantly across income ranges and products. Take cars. Wouldn't these be very inelastic for those who buy high dollar cars imported from Germany or Italy say. However, as the lower and middle classes have seen their buying power diminished over the last several decades, cars would be much more elastic and these consumers would opt out of that purchase for as long as possible. Thus the disruptions would likely be much lower for higher income people and higher for lower and even middle, income people. Once again Donald Trump will hurt the very people who support him.
11
A trade war could take the form of a generalized rise in tariffs. Or it could be different. Other countries can target tariffs to cause particular pain to the constituencies of specific legislators.
They can also threaten actions - not necessarily tariffs - that get the attention of influential industries. This latter point is nicely discussed in the CBC article "Drug patents could be Canada's special weapon in U.S. trade dispute" (http://www.cbc.ca/news/health/second-opinion-trade-dispute-canada-us-dru....
Having the largest national economy also means we have the largest "attack surface" – very complicated to defend.
9
He doesn’t mention the downward spiral of the stock market which operates on a psychology that sometimes is not logical. A severe downturn that moves on momentum devastates retirement portfolios and ultimately real estate and the entire consumer economy. This goes beyond exports and imports snowballing and taking on a life of its own.
16
I think Dr. Krugman's calculation of trade war losses just mirrors the faulty logic of free trade gains: a mere focus on GDP/GNP, without a deeper dive into who's benefitting or suffering from changes.
As we all know, economic growth over the last decades has disproportionately benefitted the rich owners of corporations rather than lifting all boats equally with the rising tide. We can attribute a large share of the gains to open trade, i.e. the ability of American companies to produce and procure in low wage countries and of course to export and compete globally.
I wouldn't be too quick to follow the economists' dogma that all trade barriers are bad, in fact when looking at the long existing Buy American Act for example, it has unequivocally lead to more employment in the US. Belgian bus maker Van Hool only recently announced a new factory in Tennessee, adding 500 jobs, citing the Buy American Act specifically as its reason i.e. they can't sell public transportation buses produced in Macedonia or Belgium here by law. In Dr. Krugman's logic however, we should open up public procurement to the world because the gains of lower purchasing prices would be higher than the gains of local production benefits like low entry jobs.
We need to take a more holistic approach to global trade and I hope the new data coming from a trade war will lead to new econometric models.
3
Dr. Krugman doesn't fully factor in 3 important transitional effects of a global trade war:
1. While side trade wars between countries and trade blocs not including the US could erupt in the wake of a broad array of countries & blocks confronting the US, there is a reasonable chance that the US will find itself the odd one out & facing much of the world. All will suffer but the impact on the US will be especially high, especially at the onset of this trade chaos.
2. Canada, the US & Mexico will be especially hard hit by disruptions in the production & supply chains that typically extend across several countries. Much production & availability of needed components will simply break down & significant time will pass at exceedingly low production rates until national supply & production chains partially fill the void.
3. International debt markets will break down, credit markets will implode & the role & status of the US dollar as a reserve currency will face a severe challenge.
Will the cumulative effect of the foregoing not be a deepening & lengthening of the implosion of the global economy (& especially the US economy) greater than Dr. Krugman estimates? The economies across the world are much more interrelated & interdependent than during past generations (a factor that too many of us neglect to adequately appreciate) & this makes these economies more subject to breakdown & less capable of recovering in the event of the sort of trade war(s) under discussion.
18
To your point about economies being interrelated and interdependent, I found this analysis of trade import/export numbers enlightening. The Business Roundtable also has a lot say on Trump's policies.
How the U.S. Economy Benefits from International Trade & Investment
https://tradepartnership.com/wp-content/uploads/2015/01/US_State_Study.pdf
https://www.businessroundtable.org/search
Your point #3 doesn't follow.
Global debt markets won't break down; there will still be lots of govt and good-quality corporate debt to trade. Furthermore, those markets break down when it's hard to tell who's solvent and who isn't. Here we'll have more transparency on who invested how much and where.
My family has owned a self-sufficient farm for two centuries (wheat, corn, flax, fruit, produce, nuts, cows, horses, sheep, firewood) which was put to test in The Great Depression. The gas well is yet to be put into production.
Trade relates to luxuries and military domination (my family gained its luxuries from building weapons-platforms for a half-millennium).
I would like to see another figure. How much, what percent, of world trade are for goods that are actually necessary? This would be from over sized cars and trucks from Japan, bourbon from the U.S., perfume from France, to pork going to China. The recent rise in atmospheric CO2 levels is attributed to a rise in economic activity worldwide including trade. The data from the last 5 years shows a faster ice melt of the polar ice caps,with a good possibility of an increasing rate as the oceans warm.
The data is sketchy about the amount of melt away from the coasts of Antarctica and how fast warming in the ocean will affect the deep currents that will cause more melting. My back of the envelope calculation based on the new data is 1 inch of sea level rise every 7 years, or a foot by the end of the century, and this not taking into consideration an increase in warming events, which is also predicted as the ice caps disappear and methane is released from melting tundra. It's not just that the U.S. is backward in this (criminally so if you look at human rights violations now taking place at the border, which are illegal and also how our new EPA is operating), but the Paris Accords need enforcement and definite mechanisms for achieving its goals, such as a carbon tax and big incentives to switch to renewables. GDP growth should be towards zero emissions, not more of the same pollution.
24
Very good points. I hate the fact that our supermarkets are full of papayas ( or any fruit from Mexico or Central America), that will mostly rot, after being transported thousands of miles. Just so people can have exotic fruit in December (or any time). Also, shipping clothes, furniture, household goods ad infinitium from all parts of the globe? Wow, slave labor is really profitiable for some people, and you can't see the slums from here. I understand that in the last 40 years a lot of businesses have constructed supply lines and businesses have sprung up to make and move their stuff, but at some point transport costs have to go up above the profitiability line. More local business and less diesel burning while moving the stuff would be a big improvement for us....not for China or Big Oil so much. Global trade is great, but it's gone too far with slave labor and poor environmental standards. It has to change.
What President Trump should be doing on trade is fairly simple. Here are three principles.
1/ Target the worst abusers, who are most reluctant to buy American goods. The way to measure this is to look at the ratio of imports into the US versus US exports to the country. An import to export ratio of over 2 is unusual. There are about 10 countries who fall into that category.
2/ Give allies a break for now. It is a good idea to avoid trade fights with countries who are close US allies. Japan is the most difficult case here.
3/ Remember that rebuilding the industrial system will take 3 to 5 years, and don't expect immediate results. Tariffs are about imposing incentives for a long run change.
So, to keep things really simple, what it comes down to is this. Impose tariffs on China. Adjust them on an annual basis with the goal of bringing trade into balance in 5 to 10 years. When countries like Japan and Germany see the Chinese losing their American markets they will get the message and start building American factories or buying more US products.
To move foreign countries in the direction we want them to go it is important to have a consistent system of rewards and punishments. There may be individual US companies who have fights with Canadian firms. However, the big picture is that the Canadians are a model trade partner and a military ally. As such they should not be hit with tariffs. China gets hit because they are a bad trade partner and a rival.
6
It will take a lot longer than three to five years.
I work in the NYC area; we have lost almost all of our injection molding houses, our metal stamping houses, sheet metal benders, PCB houses, took makers, etc. We've lost an entire generation of workers needed to run these machines and those who remain are mostly foreign born or their children. Without an industrial base, the only companies who can manufacturer are large companies, not the small and mid-sized firms that existed in the past.
42
And the reason trade with the US needs to balanced is ..... ?
I'm Canadian. Every year, millions of Canadians flock to US beaches in winter. We don't think Canadian beaches are as nice at that time of year.
This gives us a big deficit with the US. So why would it be reasonable for us to expect Americans to buy enough from us to pay for our sunny southern vacations?
3
I think that both your assumption that trade is 'simple' and that the USA is in a position to coerce the rest of the world are naive.
1
Surprisingly, I think this is a Panglossian view of the coming Trade War. PK focuses on the welfare losses associated with the decline in imports, 2%-3% of GDP, but doesn't appear to try to quantify the welfare losses of supply chain disruption. These are likely to be substantial. As we learned from "China shock," abrupt changes in demand can be devastating for firms and communities.
7
To summarize the piece 'unwonkishly', one can conclude that the power of corporations would normally outweigh the bluster of Trump, allowing them to continue free-trading and freeloading across the globe, but that Trump is so crazy about fulfilling campaign promises that he will pursue protectionism and damage precisely those corporations (not to mention the poor) who supported his 'America First' blarney.
I also believe nations are on the war path against Trump, and that tariffs that will put paid to "the beautiful stock market" and to Trump. It can't come soon enough.
14
The deeper question is who gave Trump the mandate and authority to make this decision in the first place.
This is an abdication of Congressional authority by illegitimately invoking the national security clause.
100
Congress has the power to overrule him on this. He is using a loophole Congress gave him, that is totally in the power of Congress to review and revise as it wishes.
This Congress obviously won't. The next Congress could.
37
It would also seem that Trump's invocation of the national-security loophole should be litigable. He should have to present evidence supporting his claim that the trade relations he's affecting actually have some rational relationship to national security in fact. In other words, he can't make it so just by saying so.
The law says the president can levy tariffs in situations where national security is involved. That is why Trump is saying importing steel from Canada, Japan, Mexico and the EU is a threat to national security. (China is sometimes one of the top ten steel exporters to the US, sometimes not.) Stupid logic for a stupid move from a "very stable genius."
Aren't Mr. Krugman's assumptions incorrect? He seems to be assuming a trade war where every country raises its tariffs (to 40% or so), but in the actual case at hand only trade to and from the U.S. will have tariffs raised to 40%. Trade between other countries, e.g. Germany and China, will not have tariffs raised at all. So there seems to be no way that world trade will suffer a 70 per cent reduction, because American trade with the rest of the world is far below that.
20
Why are you assuming that if Trump starts a trade war, then other countries will raise tariffs against each other, instead of against only the US?
I think the more likely outcome is that countries will simply raise tariffs against the US, and continue to pursue free trade amongst themselves. I say this for two reasons: First, it's the rational response. Whether we are talking about a trade war or a shooting war, countries have no incentive to attack countries with whom they have no disagreements. Second, it's what we've seen so far. After the US left TPP, the countries involved didn't give up on the project; they simply pursued it without the US.
154
Trade deficits result in large hoards of US cash held by trading partners. The logical method for storing that cash is as debt securities denominated in dollars. So a trade war would likely result in soaring rates and difficulty rolling debt. This isn't a good time to have four empty seats on the Fed.
11
"In fact, I still find it hard to believe that we’re really going to go down this path."
This irresponsible leap into protectionism is not as reversible a trend as some may hope. Loyalty is a two way street, and those who play games for short term profit will surely rue this hard ball approach in the long run. The cascading effects of Trump's attack on off shore industries and purveyors of raw materials are still anecdotal, but Canada (and too many other nations to name) will not soon forget the cavalier disregard today being shown them by their once upon a time reliable trading partner and friend.
56
What if individual consumers the world over decide to not to purchase American made goods and services to the best of our ability.
70
I am hearing from many Canadians their intention to stop buying "Made in the USA" products. A justifiable response to being insulted in my opinion.
9
American resins, apples, almonds and similar products have flooded Indian markets. The local varieties, much cheaper but slightly inferior quality, have virtually disappeared. Once the local varieties are killed- it takes about 5-7 years- then only we will see the prices rise. We have the largest share of the world's poor and they are not going to like it.
The model assumes that everybody is playing their best- as per the rules- and focused on wining. What happens if one of the players is a crook and is not willing to play by the rules? Also, assume the trade is an intelligent person and is focused on survival.
7
I as well as many people I know in Sweden have been boycotting US goods for many years. Anti-Americanism had decreased substantially during the Obama presidency, but now it is rising to even greater levels than the W Bush years.
Wouldn't it be reasonable for all major exporters - the EU, Canada, Australia, China, India, Japan, ASEAN, etc. - to "quarantine" a trade war with the US by increasing free trade (or low tariff trade) among themselves? The US is the world's largest economy, but couldn't the other countries make up for lost US markets by trading more intensively with each other, e.g. like China, India and Japan importing more agricultural products from Australia and Canada rather than the United States?
Also, Prof. Krugman doesn't mention that China (along with Japan, Taiwan, etc.) could deal a destructive blow to our economy by refusing to buy any more US government bonds.
52
When China stops buying gov. Bonds interest rates will skyrocket, US dollar will strengthen again as currency of last resort. In a highy protectionist world the US economy would still be the biggest island.
1
Not really, they own roughly 6% of U.S. debt, just slightly more than Japan does. If you compare the rates in Japan and Germany to ours, we are still very, very attractive to foreign investors.
Dr Krugman,
John Ralston Saul published his Collapse of Globalism and the Reinvention of the World in 2005. I would like to say that The GOP takeover of the USA has confirmed the collapse of globalism which was never truly globalism but an economic Pax Americana. It is 45 years since the end of Bretton Woods.
Neither Mexico nor Canada can reenter Nafta it would be political suicide the vast majority in Canada and Mexico see the USA administration as an enemy.
I would suggest the reinvention of the world is taking place and old alliances mean little if anything. When the cartoon of the month in a leading Canadian center right newspaper the Montreal Gazette is a beaver building a wall economics must take a backseat to social dynamics. What might have been normal economics yesterday will never be normal again.
The USA is now a nation of lies and "fair is foul and foul is fair" so that exporting superior quality dairy, beef, poultry and pork to the USA has not been allowed and we receiving lesser quality agricultural products "WE" are unfair.
Dr Krugman you were the go to economist for many decades but the world has been reinvented and America's new trading partners will be Russia, the Philippines, India and Saudi Arabia who don't need to cater to their citizens the way we in Canada and Europe needed to.
An isolated USA may well succeed but it will need to realize it is a whole new ballgame with a new set of rules.
15
John Ralston Saul is is still with us and is as sharp as ever. He avoids talking about the USA as much as possible but this lecture at King's College London shows him at his best in explaining complexity. The lecture titled The end of Globalism: populism or citizenship shows us the Trump supporters and the Bernie supporters have much in common in trying for a return to citizenship and a middle tied to efficiency and corporatism without a tie to each other. It is time to stop fighting each other and look to changing ac2500 system.
https://www.youtube.com/watch?v=ouoHlQdEA6Y&t=4153s
OK so:
At what point should we say, hey, US equity markets have hit a plateau and we're about to start seeing the effect of these tariffs, time to buy some 2-year out-of-the-money put options on the S&P 500?
Are you already massively short SPY (or do you own options to hedge to that effect?)
2
Yes, very wonkish indeed! In a near future piece, it would be good, I think, to go into more detail about the kinds of disruptions that we could expect to see. Talk about which industries would be hurt the most (as well as those that might benefit). Which sectors stand to lose the most, where they mostly are located and who gets hurt (and, again, which might benefit). What a trade war might mean for the cost of basic goods. Wonkish discussions have their place, but 'making it real' does, too.
12
To follow "computable general equilibrium model" much less be actually interested in this level of game theory really does take 'A Beautiful Mind' (or at least a prettier one than mine).
So are all those demonstrators that used to riot outside G8 meetings & rail at the WTO actually getting what they wanted if trade is shut down?
Does Trump's pulling out of agreements fulfill any of Bernie Sanders' stump speeches about tossing the TPP & NAFTA?
I couldn't help noticing that Trump hijacked the term 'Fair Trade' in stumping for his policies.
'Fair Trade' should be reclaimed for its prior definition.
What if Fair Trade had been the goal of the agreements, so that workers & the environment were not to be exploited in order to produce all these cheap products.
What if we calculated the actual cost of all those products produced at criminally exploitative wages & environmental cost, what would paying them back & cleaning up the environmental mess were charged to the books of the American consumerist addiction, where would that leave our bottom line?
Would the USA be so inundated with offshored cheap-labor imports if World Trade was actually Fair to the workers & the environment they live?
10
"What if Fair Trade had been the goal of the agreements, so that workers & the environment were not to be exploited"
Exactly. Trade agreements are not the problem, these particular trade agreements were the problem. That is because of who controlled the terms in the writing of them.
4
Two things may yet save the Republic. Koch Industries profits are and will be hit hard by the Trump tariffs, which means the Koch Brothers well funded conservative PAC will all be funding candidates in the general election in opposition to Trump across the board, and across the aisle.
And, like any One Trick Pony, Trump's Act is really starting to wear thin, and boring because it is too repetitive, even with his base of evangelicals and aggrieved blue collar America.
15
U.S. companies have been giving China their IP when demanded in order to get access to China's market. They could say "no", but they don't. If they banded together, they could do so relatively safely. But they give in to China's conditions one at a time in order to get the short term profit. This is a modern version of Lenin's actual or attributed dictum that "the capitalists will sell you the rope with which you will hang them." Some jawboning and some leadership by the U.S. government probably could have dealt with that problem. This is a separate problem than Chinese theft of IP. The Chinese made the American companies a deal they could have refused, but for greed. The same thing goes for accepting censorship on the their content in China, whether we are talking about Facebook or academic journals. Western governments should have been making it safe for companies to "just say no", and shameful for them not to.
21
I live in Australia. You’re right about banding together to “just say no” to China. That’s what 11 countries just did, in ratifying the TPP.
The US reneged on its membership in the TPP. Too bad.
The other side of this is what will be the slightly longer term effects on employment and production? With tariffs on imports adding significant cost to imports, production will move back to the US in the form of factories filled with new efficient robots owned by large capitalists like Amazon. A much smaller number of higher (than last generations lost jobs) skilled workers will be created to produce most of the manufactured goods now being imported, but many fewer than the jobs lost at first due to reduced exports. The net result will be to accelerate the shift to robotic manufacturing in the US and speed up the dehumanizing of the manufacturing sector and accelerate the rate of structural unemployment, i.e. decreased labor participation, not counted as unemployment due to the unemployed not being in the labor market at all.
So we will see much increased numbers of poor unemployable people and more ultra rich.
12
I agree those shifts in manufacturing are likely.
However, I do not agree that total manufacturing output is zero sum.
The higher skill workers this posits will have greater productivity, and in a properly run society they'd be paid for that. That demand would then increase the needed supply, and so employment. Those extra employees for the same reason would be more productive. The shift to higher productivity ought to create increased growth for all.
Of course for the last four decades and more it did not work that way, but that was a government choice made via tax laws and labor regulation, in which both parties were complicit.
This shift could stall the economy and leave out even more of our population from our economy, but that is political choice, not necessity.
2
The productivity gains from increased robotic manufacturing will accrue to the owners of the corporations, not to employees, and certainly not to displaced workers. Thus increasing significantly the trend toward concentration of wealth.
One seems to forget that an educated workforce would be required as the days of simply pushing one item to the next location is in a by gone era. The American education systems has faltered and will never recover due to policies we currently see in effect. So the foolish trump supporters will still be left behind as technology overwhelms the existing system.
"And if we have the kind of trade war I’ve been envisaging, something like 70 percent of that part of the economy – say, 9 or 10 million workers – will have to start doing something else." Thank you for the big picture, tho it's almost more than I can bite off.
On a tiny picture scale, personally I believe how I spend money is voting with dollars: I shop for food at local farmers' markets and elsewhere look for country of origin and lean heavily to U.S.A. and Mexico. I've avoided Made in China for years, as much as I can. We have excellent local beers. Occasionally I'll get a domestic wine, but the heavy use of pesticides here ordinarily informs my purchase of wines from France, New Zealand, Italy, or Spain. If I eat out it's generally at a locally owned restaurant. I'm relentless in searching for Made in the U.S.A. It may be pointless. Or it may not be...
5
My sense is that these small things you mention are insignificant; the real trade that matters are in crops, raw materials and components, going one way, and the large manufactured goods and food going the other - in the same way that me buying a few hundred shares of stocks don't actually affect the price of stocks, but large institutional investors do.
5
Agreed, these small things are insignificant. For me I guess it's more symbolic, similar to flying a flag. But I think it does make a small difference with the local farmers' markets and businesses.
And how will this affect China's large purchase of US Treasury bonds, which as I (barely) understand, is done primarily to support China's export economy with the US?
Note: I do not feel that manufacturing job losses are primarily due to trade agreements, because products need markets. I think jobs became dispensable once corporations decided (or were bullied into deciding) that the success of the corporation was based on one factor only: the price of its stock. Once that decision was made, everything was sacrificed to that quarterly number and jobs literally went south - to the non-union southern states and then over the border.
In my opinion, we can thank corporate raiders like Donald Trump's big buddy, Carl Icahn, for the destructive transformation of American business.
65
Yes, but it was also the thinking that stock price was more about quarterly financial performance than about long term growth of the corporation. That is why they could disregard the stakeholders like employees and their skills, and the local communities whose infrastructure they used.
7
And we can thank all those Wharton-graduated MBA's who were taught that "Shareholder Value" was the ONLY worthwhile measurement to justify a business enterprise.
2
Many of our trade figures are inaccurate, as Krugman notes, because much of the value added is parts made one place, then assembled in another place, and sold in yet another. We don't have especially good figures on where value is added, or how much. It is likely to make all the damage smaller.
This also does not attempt to quantify any advantages of growing protected industry. That is a major topic, and for example made the US Embargo Act in the Napoleonic period a major factor in the industrialization of America. These are real effects, but no doubt very different from 200 years ago.
Krugman's numbers are a valuable start, but must be adjusted by these two factors.
I don't mean to justify a trade war. The end of this line of thinking is attempts at autarky, and that is known to reduce economies overall. Still, the final numbers and the shape of the impact must take these other things into more account. That would be two more very different columns of course, at least as wonkish as this one.
2
Excellent, written clearly and logically, and unfortunately appears to be an accurate model of reality.
One correction: not every Republican in Congress is terrified of the Trump base. Increasingly they are in love with the Trump base.
36
At last, Dr. Krugman points out many aspects of the rising trade war that most financial journalists have overlooked or never really understood. Shame on those journalists.
But 4 points should be noted:
1. Under the General Agreement on Tariffs and Trade (GATT), 1948, and the World Trade Organization (WTO) 1995, GATT/WTO established the conditions for the trade equivalent of a circular firing squad of reciprocal tariffs, with all ancillary countries suffering as the firing squad proceeds among the primary target countries.
2. What seems oddly missing from the current US-China trade flap is that successive US trade representatives failed to challenge China's significant currency devaluation, beginning in the early 90's and continuing well after China joined the WTO in 2001, as China exports soared to the disadvantage of US firms.
3. Sure, China, as a dictatorship has ruthlessly demanded access to US intellectual property rights as a condition for operating in China, but where were successive US administrations since the early 1990's in calling their hand and demanding reform?
4. So, now we have a president who speaks like a toddler and has only his checkered experience as a real estate developer to rectify the situation. Go look at the world trade data after the Smoot-Hawley Tariff Act of 1930 was passed to get a preview of what holds for Trump's supposed trade policy.
9
This article is pretty good at identifimg the costs of a trade war. It does it self to present the outcome of the trade war without taking any particular side.
I think, however, the questions around the trade war is more about how it started, than what it will result in. I wasn't sure what to intitially think of the trade war (it doesn't directly impact me) but I was curious and after some research I believe that Trump and the US are not to blame for the trade war.
If you go to the WTOs data on tarrif rates you can see that the US and Canada had one of the lowest average applied MFN tarrif rate in the world of around 3.3. The EU is ~5.1 and China is 9.9! The US is essentially just leveling the playing field and most other countries are upset because they are used to it being in their favor.
5
Well said. Countries devalue or use their sovereign monetary authority to balance accounts. America gets rich, products get cheaper, and world trade continues. No biggie.
Any discussion of international trade, without mentioning the offsetting effect of financial movements, is solid fantasy. Banks research departments sponsor fanciful equilibrium models (that ignore private debt) for a reason; banks benefit when sovereign monetary authority is under control.
Ross, on behalf of Wall Street, was in Beijing last month telling Chinese officials to limit their financial involvement in the economy. Call it: Making government safe for austerity and private lending.
Then why is is the US punishing Canada? You have a trade surplus in goods and services with us. If the MFN number is correct, we are similar. I can assure that Canadians can count and, though not histrionic, are very patriotic and will demand our government tit-for-tat tariffs on US goods and services.. We are the number one customer for ~35 states representing millions of jobs. If it keeps it up, the US' friends will be only Russia, Turkey and the Philippines and good luck with that.
So why the steep tariffs and insults aimed at the Canadian Prime Minister? The Canadian population has had it and the levels of anti-American sentiment is high (people canceling trips to US, refusing to drink wines from napa valley etc.). I have heard from my Canadian relatives that if my wedding is in US they will not come.
The patriotic push back of populations who have been insulted by Trump is not included in this analysis. The damage to our alliances will likely be even more severe than the damage to the GDP.
Sounds like a big sales tax to me. US trade was worth 2.34 trillion dollars in 2017. So if we have a 40% tariff and a 70% reduction in trade we get $2.24 trillion x .3 x .4 = $280 billion. This would more than make up for the income tax cut last year and better yet (from Trump's perspective) shift the tax from the rich to the poor (sales taxes always affect the poor more than income taxes). And (according to your analysis) not affect the economy that much. This could be the real reason for this trade war. Dr. Krugman and other people, what do you think? Is this possible?
5
Where does you .3 come from? Shouldn't it be $2.24 x .7 x.4 = $627.2 billion? (about 3% of GDP)
1
Red ink is flowing heavily in Washington because of Trump's huge windfall tax cuts for the wealthy. Tariffs are a stealth tax on the middle class and Trump is going that route to stop the bleeding. You are right, he can get 2 or 3 hundred billion in revenues by a stealth tax on the middle class and pose he is saving jobs. A trade war will increase the already obscene wealth disparity in this country. Have to hand it to him, he is an incredibly talented conman. Sometimes he gets stopped like with Trump University but most of the time he pulls it off.
Dr. K., even though the Orange Jabberwock is casting his economic actions in terms of ' tariffs ', can't we just call them by their rightful name " taxes ", since they have that economic effect on the American consumer ?
How would Frank Luntz message this ?
Progressives should be just as astute, don't you think ?
13
Terrific analysis, worth all the attention necessary and then some. I am so grateful.
3
The corporations that are at risk will need to get some spokespeople on Fox News in order to have a chance of shifting Trump from his "they're taking advantage of us" and "I have the best instincts" mentality.
12
We have a $375 Billion+ trade deficit with China. China doesn't allow our top service companies to operate (Amazon, Google, Netflix, Uber, Facebook) and continuously harasses/restricts Apple, Facebook, Cisco through censorship and IP theft. Any US company is forced to transfer tech to a local partner who steals the tech through back door and sets up their own shop undercutting the partner.
USA did not start the trade war as China has engaged in unilateral trade war for 20+ years. Free trade proponents like Krugman said when we lose low cost manufacturing jobs we move up the value chain. We did but all of our high tech service companies are banned and in the sheltered market there came about Baidu, Tencent and Alibaba and they are free to do business in USA. What gives? It was high time to take action after empty talk and more empty talk.
I support free trade when it is fair as it mutually enriches and benefits both the trading partners. But continuing to engage in trade when the rules are so patently unfair and biased means it is not benefiting USA anymore commensurate to the benefits delivered to Chinese economy.
Maybe another simpler way to look at it is if we have $375 billion deficit and trade reduces 70% then our deficit should go down also by 70% and conversely China’s trade surplus goes down by 70%. Maybe that is what is needed to break past the comfortable logjam China and other mercatalist countries have settled down to, by exploiting trade to enrich themselves.
7
This is fundamentally wrong.
Among the things it ignores is the supply chain. American finished good contain components that are imported from China. Shutdown or increase costs of components, via tariffs, and a) there is no short term replacement for components; and b) prices of finished goods rise. This then makes U.S. exports less competitive, overall resulting in a drop in GDP and increased U.S. unemployment.
13
Facts matter - most people actually just look at the attention grabbing headlines.
Facts matter: Don't only look at the headline - details below:
In 2016, according to the World Bank, the average applied U.S. tariff across all products was 1.61%; that was about the same as the average rate of 1.6% for the 28-nation EU, and not much higher than Japan’s 1.35%. Among other major U.S. trading partners, Canada’s average applied tariff rate was 0.85%, China’s was 3.54% and Mexico’s was 4.36%. (Those average rates are weighted by product import shares with all of each nation’s trading partners, and don’t necessarily reflect the provisions of specific trade deals. Under NAFTA, for instance, most trade between the U.S., Canada and Mexico is duty-free.)
http://www.pewresearch.org/fact-tank/2018/03/22/u-s-tariffs-are-among-th...
The country that imposes the most restrictions on trade might surprise you
http://uk.businessinsider.com/the-us-is-the-most-protectionist-nation-20...
1
As we know, the big boogeyman is china. Donald the Mad and his sycophants believe these tariffs will bring manufacturing back to the U.S. Here china certainly has the upper hand. with 1.3 billion people, and a state controlled economic system, it can keep them producing and sell to ot8her countries..
China may have taken technology from the U.S. it also has its own tech sector, and that is growing. Until a few weeks ago it had the fastest super computers. It is China that is expanding its trading partners. It is building a railroad to Europe, has businesses in Africa,
The EU has its problems, particularly with England, and now Italy with a nativist tack, but italy is not the biggest player in Europe, Germany is. many of us buy German products not because of the price, but for the quality.. In the long run you save when your purchase lasts longer. The biggest losers in this trade war will be the Walmart and Target shoppers. If you can afford a BMW, you are not going to buy a Ford because it is cheaper.
11
I currently buy and drive new Porsche 911s. If prices increase markedly due to tariffs, I will probably drive high-performance US cars instead. I have done so in the not too distant past and could certainly do so again.
2
"many of us buy German products not because of the price, but for the quality"
Trump seems rather keen to make such purchasing difficult: 'US President Donald Trump wants to escalate his trade war to include a total ban on German luxury cars, says a report in WirtschaftsWoche. According to the German publication, which says its report results from talking to several unnamed US and European diplomats during French President Macron's recent visit to Washington, Trump told him that he would "maintain his trade policy until no Mercedes models rolled on Fifth Avenue in New York."' Ars Technica, May 31, 2018
Maybe you should by an American car simply because it is NOT German
As I recall while talking about the after effects of the 2008 difficulties Trump said if that happened again he would make money.
AKA loss = make money.
4
Considering only the US and China.
With disruption, says Krugman, perhaps 9,10 million American workers will have to start doing something else. And, while Krugman doesn't speak about it, there would be similar disruption in China. But here China has a great plus. In their state controlled capitalism (or whatever you wish to call it) they can reallocate human resources far far better than we can. So this gives them a real advantage if the question becomes which system can survive best the pain.
Hopefully we won't go down that road.
7
Trade policy can also be examined by looking at a pattern in several large corporations over time. Most people who have worked for a large corporation over a long time will see several cycles of centralizing and decentralizing, depending on the zeitgeist. If there were a simple best solution, everyone would do it.
I like the terms centralization/decentralization better than globalization/trade war. Decentralization is less pejorative than trade war.
1
You've modeled a trade war in which every country imposes tariffs on every other country. But perhaps a better model would be one in which all countries trade freely without tariffs, except when they trade with the US?
182
Watching news coming out of countries with middle-sized economies (all continents except Europe) suggests to me that Josh Yelon's model ("in which all countries trade freely without tariffs, except when they trade with the US?") is being considered by a fair number of politicians "out there" right now.
Everyone in those countries look at the US from a distance. Seeing the US as dispensable is fairly easy (even when the US isn't exactly dispensable in a given case).
Josh's model feels politically attractive from those countries' points of view.
Dr K mentions disruption. The word may well have undreamt-of definitions.
5
I, too, would like to see a column on what a rest-of-the-world vs. US trade war would look like. (We carry U.S. passports, but we've purchased Canadian-flag luggage tags for our European trip this summer. Strange to be pariahs in a world that used to respect us.)
From the look of things at this point, this is the likely outcome of Mr. Trump's tariff policies.
It is necessary to add some specifics to the equations that only look at aggregate results. I'm in the electronics business. China is the primary supplier of most electronic components for the entire world. All those little parts on circuit boards come from China. Reducing their supply would be devastating to domestic manufacturers.
China is also the sole source for many specialty alloys, metals and materials. Any of them may be primary ingredients of a product or they may be essential minor ingredients that the product cannot exist without. This is also devastating.
Therefore, supply disruption has the potential to cause much more reduction in commerce than price increases alone.
These all put the domestic manufacturer at a tremendous competitive disadvantage.
Also, do not discount the effect of loss of good will. My little business exports abut half of sales. I have customers all over the world. All American businesses will get tarred with the same brush that Trump is painting our nation with. The bad will generated by Trump will cause us to lose many future sales.
Because of globalization and the specialization of production for the entire planet, a significant trade war could be devastating to many industries. A few equations will never reveal that.
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Bruce, I too am in the electronics industry and I'm already seeing problems with components like capacitors and transistors moving to 40+ week lead times.
I design printed circuit boards (PCBs) and help some of my clients get them manufactured; my PCBs typically have 100 or more components on them but it only takes 1 to be in short supply to cause huge disruptions to the supply chain.
Trump only has sycophants around him now because the smart people have left or have been fired for disagreeing with Herr Tяump. What's left can be compared to the inept crew of the Chernobyl plant yanking on levers that they think they understand - trade tariffs, immigration, climate, existing treaties with allies.. let's pull this lever and see what happens - what could possibly go wrong?
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"China is the sole supplier..." Not a good situation for US or any companies to be in, either for economic or security reasons, and China has been working toward this in many commodities. It now supplies about half the world's steel. This is not entirely the working of a "free market". True international free trade would lead to flattening of wages world wide. This may be a desirable long-term goal, but American workers do not need to put up with having their wages dragged down, rather than allowing the wages elsewhere to catch up.
Correcting the real problems which exist in world trade would necessarily disrupt the way globalization has worked. If Trump is allowed to exercise his caprice the results will not be good. Democrats and economists who call themselves liberal should be promising to take really constructive action, rather than maintain the status quo which favors American capital and the nations which have aggressive trade policies.
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This is a profound insight.
I disagree with you, however, about what you call "good will" and basically equate with our having a clownish President. Without being TOO (Terribly) cynical, "Business IS business," and just as most of Europe & America "found a way" to trade with Germany pre-1939, I'd say that the blowback you fear is less likely than 10 types of natural disasters (individually.)
But, as I began, you hit the nail on the head with both components and the occasional "ingredient."
And Mr. Krugman doesn't bother to "tease out" the connections between economics and politics.
Just as China targeted Kentucky whiskey and Harleys early on, if things get worse (before they - please G-d - get better), China could direct Foxconn to NOT run around the clock ... or to alter its pricing. When Trump says, "Sue me" about tariff agreements, you can't quite take "we agreed on prices" entirely for granted.
I think they used to say that if the U.S. economy caught a cold, other nations got pneumonia.
In this day and age, if Apple has an un-merry Xmas, I think we're talking about something similar!
Trump is not looking for trade concessions, although he'll take them as they come. He really wants to break the current model of international relations.
His (and Bannon's) vision of the future is a combination of power and transaction. The first step is to eliminate multilateral trade agreements. He has started the battle by taking on allies as well as adversaries. He believes current allies are politically weak. Their regimes will be replaced by authoritarian leaders once the effects of a trade war are realized.
Allies who are not willing to project white nationalist cultural power will become subservient to Russia. Trump will make transactions with those who follow his model.
In the end, Trump sees three axes of power: China, Russia and the US. It's pretty obvious which of these two Trump wishes to have as a partner in the ultimate game of control.
Finally, for the strategy to work, Trump believes the US needs citizens who are culturally unified by the values of a white, straight, patriarchy. Agitators will be kept in line through lies, the police, and militias. Eliminating labor and environmental laws will keep the rich on board.
Basically, he's setting up an authoritarian police state. Great suffering will occur in the process. This man has to be impeached before it goes any farther.
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Thanks for this comment. It's the most plausible explanation of Trump's behaviour that I have read. Also very chilling.
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David,
Might you be giving too much credit (in the sense of having clear objectives, a settled strategy & detailed implementation plans) to President Trump & his enablers?
Might the better view be that President Trump might find some of the realpolitik, national stereotyping, Mercantile & jingoistic themes of past centuries emotionally attractive but that he responds isolated transaction by isolated transaction to feed a personal need to 'win' based on his gut reactions, fragile but aggressive general operational approach to all things, & hope that he can triumph within the chaos he engenders?
I acknowledge that my interpretation isn't any more reassuring than yours but I think that my interpretation might explain some of the crises & breakdowns that US initiatives under the Trump Administration will engender & the deepening crises that would follow such crises & breakdowns.
In short, if Trump bets on some initiative that doesn't work our (& if he doesn't find some way to cut his losses early & at little ego or political cost), then will he not be driven by personal needs to double down & hope for the best on a losing hand?
Or the Three Super Nations of Oceana, Eurasia and Eastasia. 1984 is here. We are in perpetual war with one of these. War is Peace
1
Good column, Dr. Krugman. I make bicycles. The last US maker of bicycle tubing (Tru-temper) just closed out this year. All the tubes I use are now imported and face a 25% tariff.
The tariff adds $25-75 to the cost of a custom-made frame. So what do I do? I raise my prices.
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Wouldn’t then an opportunity be available for the Tru-temper company to reopen or another new nimble competitor to start manufacturing in USA. It takes some time maybe, but that’s how countries like China operate. How long should we be afraid and not take action when the trade is so patently unfair?
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Yes, that will happen eventually (although jonnorstog's company may go bankrupt in the meantime). But that just means that the world as a whole is wasting capital building excess tubing capacity - worldwide more factories are built than are needed to supply the demand.
It's tempting to say that we still win - we get a factory and some jobs, and that's better than some other country doing it. The problem is that in a trade war they're doing the same thing to us with some other product, so all countries end up with less efficient economies and misallocated capital - we all end up poorer.
Maybe, though it depends on whether Tru-temper finds a profitable enough market selling in the US alone. The Chinese manufacturers will continue to outcompete Tru-temper overseas and, even with the tariff, could still be competitive in the US if their cost structures are a lot lower than Tru-temper's, allowing them to drop their prices to offset the tariff and continue to compete with Tru-temper. In any case, American bicycle purchasers will pay more regardless of which companies survive.
1
A trade war means countries raise tarifs in order to price out foreign goods. When that happens, either the consumers keep buying them anyway but pay a lot more money for the same products or the foreign product is replaced by a domestic product that that becomes affordable because the foreign products been priced out by the tarifs.
Either way, the consumer has to pay more unless he decides to not buy the product altogether or delays the purchase until the trade war ends. The people who shop at Walmart's are about to face this dilemma.
But high tarifs don't mean businesses will be rushing to reopen mothballed plants or start building new ones immediately. Those decisions are made based on long term risk evaluation, so in the short term, consumers are hit immediately while the new jobs promised may be created...eventually.
Of course, if everything had been planed in advance, there would be less cause for worry, but Trump is improvising from day to day, baffling his own close advisors, so all we know is that the pain will be real while the benefits are doubtful at best. Who knew trade wars were so hard and difficult to win?
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Thanks for explaining this complex subject to us. I think Trump's actions are mainly political, to convince a few Democrats "left behind" by globalization in swing states to vote for him. It isn't about optimizing the economy or even results for Americans.
Conservative darling Henry Hazlitt explained in "Economics in One Lesson" what import tariffs do:
1. Tariffs raise the price of imports. The tariff is essentially a tax on those who buy the imports.
2. Some jobs may be protected or created in the protected industries.
3. However, since the consumer is paying more for the imported goods, they have less money to spend in other industries, costing jobs or reducing incomes there.
4. Productivity is reduced, as Americans do more of what we do less efficiently than other countries. This means our economy (and thus real incomes) are smaller than what they would otherwise be.
Trade War is deflecting from the real issue: Recasting 2012 incomes using the 1979 income distribution, the average household in the bottom 99% would be getting about $7,000 more per year in income.
It's a lot more efficient to simply tax that away from the top 1% and use it for healthcare and education for the bottom 99%. And we avoid losing our friends and aggravating our competitors as well.
15
"It's a lot more efficient to simply tax that away from the top 1% and use it for healthcare and education for the bottom 99%. And we avoid losing our friends and aggravating our competitors as well."
This is so obvious, yet somehow its truth has been masked by corruption in politics and workaholism by everyone else.
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So there are no decent models for projecting the actual costs of a trade war. The economics and politics are similar even if not precesise - the increase in uncertainty and potential for disruption in itself reduces global investment and greatly raises the risk of a "black swan" disruption. I have nothing against some hard bargaining or jawboning if the intent is to reduce global tariffs, especially if the US is (in some cases) getting a somewhat raw deal. However, this is playing with fire solely to feed someone's ego? Preposterous.
6
I don't know about the numbers but what strikes me is that it would be a trade war between the United States and most everybody else. The US has already cut itself out of the Transpacific Partnership. Nafta is looking shaky but here in Canada we're making deals with the Europeans and the Chinese and we will with the Mexicans without you if things go on like this. China's Silk Road initiative is moving along and looking for European capital. I suppose it's within the realm of possibility that the United States could bring the rest of the world to heel but I doubt it. What have you got that can't be gotten elsewhere nowadays? When the dust settles and the crying is over and the US wants to renegotiate trade deals who will be on its side I wonder. So much for "hegemony."
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When the U.S. led a Western alliance, the interests of our allies were aligned with ours, and that's why the alliance endured under U.S. leadership (also because of our wealth). As Trump and our government are going, that will no longer be true, and the U.S. will no longer be able to find followers except among client states. We'll be back in the world of selfish, short-sighted Great Power diplomacy that led to the World Wars, only now many countries have atomic weapons. Thank you, GOP, for preparing this, from Goldwater and Reagan onward.
1
But I thought Trade Wars were easy and simple to win? Looks like any business that wants to export or import will have to invest in Democratic Candidates in 2018.
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The Kochs are thinking ahead, with support for rightish Democratic Senator Heidi Heitkamp.
Trump is about one thing: Trump winning for Trump. He needs an issue for 2018 elections his base bought into in 2016 and which he can rally them to the polls to keep the elites from making them lose. (As he’ll claim.)
He wants a trade war. He wants painful stories in the news. He wants to be able to shout about how if the Dems take the House it will signal to the rest of the world they won the trade war and all America’s losses and pain will never be recovered or avenged.
If he holds the House, he’ll then declare he won the trade war because now,(he’ll claim),he’ll get good deals and cancel the tariffs in exchange for other countries cancelling theirs that they raised.
This is why he attacked the G7. He needs to be at war with everybody for the “nation under seige” propaganda effect; and he wants it to be his war so he gets sole credit for the win when he declares he won.
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A good point. Trump can thrive only if "wars war that are not wars" continue. In other words, wars that are largely imaginary. He already has wars in the Middle East to fight, and the "war against terrorism" that will never, never end; he is fighting a war against illegal immigrants. A trade war would give his supporters further reason to believe the United States is surrounded by barbarians, terrorists and and the dusky dregs eager to penetrate our country's borders, steal our wealth and commit heinous crimes against our citizens.
Trump against the world: a perfect "1984" scenario.
3
Yahtzee!
War is peace.
Freedom is slavery.
Ignorance is strength.
--George Orwell, 1984
2
One thing that will drop: demand for Bunker C fuel for all those big freighters. Once trade volumes drop, so will the demand for shipping.
This will have a permanent effect on how the world operates. Once confidence in the stability of global supply chains is shattered, it's unlikely that they'll be reinstated.
20
I'm confused; this seems to be assuming that other countries will raise tariffs against each other and not just against the United States. Why would they do that? And what if companies facing supply chain disruption assume (perhaps falsely) that Trump is a temporary aberration that will end in 2020?
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EMB raises a good question. It's not the one Krugman was answering this time.
"But I also don’t have any plausible stories about what’s going to make Trump stop, or induce other big players to give in to his demands"
Agriculture is a likely target of retaliatory tarrifs.
A farmers march on Washington usually grabs attention. Post harvest tractors rolling through D.C. are hard to ignore. Even Fox would have to break into their seasonal coverage of the War on Christmas for at least a few minutes.
Some may sooner lose the family farm than blame Dear Leader but they probably could be convinced to blame congressional Republicans. Or maybe just stay home on election day.
Would a Blue Wave stop Trump from his destructive policies? Maybe not.
But it's a good start.
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Other posters have already started to point out the damage:
* 25% of Maine's lobster sales to China
* Losses that can break Alaska's family fishing businesses and related industries
* Decline in pork and soy bean/protein sales in the Midwest
* Higher priced aluminum for canned products like beer
* And on and on...
Trump's capricious and reckless policies essentially represent a tax hike on American businesses and families.
3
In the case of a farmers march, I think Trump would quickly pivot, blame the democrats, and call for congress to fix the problem (that, incredulously, had nothing to do with him).
Unfortunately, that strategy has worked uncannily well for him his whole life. Fortunately, few other people seem to be able to employ it with the same success, so such a scenario might hopefully lead to a big swing in the next congressional election.
Would any greater lessons be learned? I'd offer, "Of course, but not by the people who need to learn them."
3
I hope the modest hit to GDP suggested here by Krugman is all we suffer from this folly. My fear is that there are negative feedback mechanisms that the model doesn't capture that will lead to catastrophe: If distressed sectors of the economy can't pay their bills, then healthy sectors owed money will too become insolvent and so on and so on.
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I still can't get over his statement of "only 2 to 3% - half of the Great Recession". So now 2 to 3% are peanuts? Does anyone remember the mayhem in the labor market last time around when the economy started dropping it's first percentage point??? God help us!
"And Congressional Republicans, terrified of the Trump base, have proved unwilling to take a stand on anything, even if big money is at stake."
That assumes they're united in opposition. My reading is that this is far from the truth. While they may not like the optics projected by Trump, they do like what he's done so far. They're divided between those who wanted the Tax Scam Bill and those who wanted it but didn't dare. Now that they have it and can continue to operate outside the bounds of fiscal responsibility in the US, they'll work around trade wars in ways that benefit them, without regard for American citizens.
That was the point of all the rollbacks effected by the Trump administration from day one. You have to read eighteen months of roll back news to fully appreciate how thoroughly they prepared for this.
The trick is to understand how oligarchs and plutocrats think and stop applying the rules we used to operate under. Those days are dead and gone.
My worry, with so many millionaires, billionaires, and corporate-sponsored Democrats running, how much of Trump's work will be undone once Democrats are back on top. As it is, the Bush taxes were made permanent by many of the Democrats in Congress today. What will they do when they have power, under the guise of bipartisanship? https://wp.me/p2KJ3H-2Jr
---
Things Trump Did While You Weren't Looking
https://www.rimaregas.com/2018/01/07/politicos-running-list-of-what-trum...
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A world class economist cannot bring mathematics (let alone facts and figures) to any argument where the other side is bringing ? (that is to say there is no real rhyme nor reason, because the President has not released his tax returns)
This administration is doing things along extreme ideological lines, coupled with political cravenness. (most in an effort to wipe out any vestige of what the last administration/President did)
We do not know (because of the secrecy around tax returns) what back rooms deals, kickbacks and pay for play schemes abound.
We do know that the President is flagrantly abusing the emoluments clause of the Constitution as foreign dignitaries pay him (and his family) for supposed access.
It's enough to cry over heavily tariff spilled milk.
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Exactly. This column is an unnecessary complication of a simple calculation: the administration is responding to blackmail or payoffs.
2
It's ominous that the Big Money with trillions at stake is unable to modify Trump's will. That means nothing can stop our march into the authoritarian abyss because we're already there.
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Yep. They've certainly been weighing in.
https://www.businessroundtable.org
2
"... I thought big business would get either manage to get that message through to Trump or at least get it through to Republicans in Congress, who would act to limit his room for maneuver."
Trade will go on as before. One of the characteristics of oligarchy (plutocracy to a lesser extent) is that they are not defined by the bounds of patriotism in the same way we are as citizens. Plutocrats and oligarchs run in cliques that are based on mutual (financial) interest, rather than geography or nationality.
While we've heard verbal grumblings from this or that member of the House or Senate, they've done nothing to stop Trump from going in the direction he's been going in. While it is true that these policies are largely at his discretion, we only saw movement when there was a national security threat.
In the event that Trump starts one or more wars (I think he already has), it is not inconceivable for Congress to determine that he is putting our national security at risk.
As for corporations not having a pipeline to the White House. Well... We now know that North Korea got to Trump by approaching Jared Kushner. If Apple, Microsoft, anyone on Wall Street, or anyone else really wanted, they know how to reach Trump.
The reality is, that much of America's business $$ are overseas. Had they not been, people would be in the streets and we'd have had at least one general strike. We haven't. Why's that?
===
Calling the Resistance...
https://wp.me/p2KJ3H-2Sm
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I guess it's quaint that Karl Marx gets to vent in 2018 in the "pages" of the NY Times.
Yes, we have different "world views," although I actually respect yours more than you might think.
As it happens, I commented before seeing yours, almost word-for-word re Trump's "reachability.
But you seem too smart to have written that last paragraph:
The reality is, that much of America's business $$ are overseas. Had they not been, people would be in the streets and we'd have had at least one general strike. We haven't. Why's that?
Your question makes no sense, because the paragraph doesn't. YOU WOULD THINK that people seeing their jobs being "exported" would "rise up."
But that obviously didn't happen.
Unless you call the elections of 2016 a kind of "protest" at the events of the last 20-50 years.
It's very inconvenient for Marxists that the "working class" probably has a majority of people variously afflicted by opioids, criminality and/or bigotry.
Yes, I'm sure - in a Jesuitical way, an idealogue like you would fall back on how the ruling class engineered all that, but I think we need less tortured - and more plausible and actionable - reasoning at this point. Your ideology has NOT aged well.
1
Resistance? What resistance? There is no resistance. Congress will recess for its summer vacation soon. Summer for everyone means fun in the sun not resistance and demonstrations.
Face facts Rima--no one cares about a resistance anymore. This is America 2018 not France 1848.
1
@RR
The financial powers that be that have trillions sitting offshore are fine with the status quo. (so long as the President/republicans don't blow up the world).
They got their massive tax theft and were able to buy back shares with relatively minor percentages having to go to actual ''workers''.
The inversion set up is still in place, so they can move around their 100's of billions on paper along with the profits, while escaping the taxman.
Meanwhile republicans are working on stripping away Dodd/Frank completely so the rigged game of pre-2009 can start up all over again.
This ''trade war'' is merely a smokescreen for bargaining chips to further lock in ''deals'' (to a select few) down the road. Watch.
I have to say, you are so on point, post after post. I hope people are listening. Carry on.
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