Wednesday, August 7, 2019

Comparing Presidents Reagan and Trump: The Case of International Trade

I am a tariff man...President Trump, December 2018

(If you have five extra minutes -- and tissues to wipe away tears of joy, affection, and patriotism -- watch the full Reagan defense of free trade.)

Many people would end the comparison here, but this is a blog for scholars, who look at actions as well as words.  Even for Reagan fans such as me, measurement is especially required when the rhetoric comes from an accomplished actor and politician succeeding at the highest levels – winning two governor elections in the largest U.S. state and two presidential elections – and thus not isolated from political pressures.

Thanks to a book written in 1986 by former Reagan CEA member William Niskanen, it is easy for an economist from the Trump CEA to rigorously compare economic policies and processes between the two presidents.  The comparisons for international trade restrictions are surprising, both in direction and magnitude.  The table below summarizes.  (Although not exhaustive, the list of Reagan restrictions are long enough to be exhausting!)

Words versus Actions

Contrary to many of the President’s speeches, Niskanen in 1986 saw the Reagan Administration as restricting international trade rather than promoting it:
 “…the administration imposed more new restraints on trade than any administration since Hoover.” 
“…the administration was on both sides of [trade issues], articulating a policy of free trade and implementing an extensive set of new import quotas.” 
(Niskanen, pp. 137, 143, emphasis added)
“the share of American imports covered by some sort of trade restriction soared under ‘free-trader’ Reagan, moving from only 8% in 1975 to 21% by 1984.” (Hanke, a friend and colleague of Niskanen)

I emphasize “import quotas” (much the same as export restraints made by foreign countries) because President Reagan was a quota man whereas President Trump is a tariff man.  There is an important difference.  As discussed elsewhere, quotas have different winners and losers than tariffs do.  Quotas are an “America last” policy because, unless the quotas are allocated to domestic businesses or are sold by the U.S. government, foreign businesses are major beneficiaries while the Treasury loses revenue on import duties and other taxes.  Tariffs at least bring revenue to the U.S. Treasury without necessarily creating profits for foreign businesses at U.S.-consumer expense. Milton Friedman compared Reagan’s trade policy with the infamous Smoot-Hawley Tariff Act of 1930,
“[The Reagan Administration had] been making Smoot Hawley look positively benign. Despite the harm it did, Smoot-Hawley had at least one virtue—the tariffs it imposed did yield revenue to the Treasury.”
I agree with Friedman’s qualitative assessment, but note that tariffs shift some revenue from other taxes and may also result in retaliatory tariffs (as beneficiaries of quotas, foreigners have little reason to retaliate against them).  It should also be noted that tariff rules often have quota elements to them, such as quotas on exemptions from tariffs (“tariff quotas”) that create windfall profits for the foreign businesses possessing an exemption.

Protecting Automobile and Motorcycle Producers

Let's begin by agreeing that protectionism is and has been the norm in the U.S. automobile market.  A 25 percent tariff on light trucks and cargo vans (almost half of the current U.S. auto market), dating back to the 1960s and known as “the chicken tax,” remains in place with no changes during that time except that Mexico and Canada became exempt with the 1993 NAFTA agreement.  Why would we have a tariff that obtains essentially no revenue?  Protectionism is the only credible answer.

Presidents Nixon, Ford, Carter, Reagan, Bush, Clinton, Bush, and Obama all maintained the chicken tax.  So far President Trump has too, although there have been occasions when Presidents set out plans (later discarded) to phase out the chicken tax after they left office.  Looking through the ERPs back to Reagan, I see zero mentions of this tariff.  (The 2018 ERP alludes to it on page 247. The 2002 ERP mentioned a Mexican tariff on light trucks, without acknowledging the U.S. tariff.  Multiple ERPs asserted that fuel-economy standards distorted sales toward light trucks, without mentioning that the chicken tax distorts in the other direction.)

In the quota area, President Reagan’s trade negotiators persuaded (forced?) Japan
“to adopt a VER [Voluntary Export Restraint] on automobile exports to the United States, a trade restraint that dramatically increased the price of Japanese (and European) cars to U.S. consumers … the main beneficiaries of higher automobile prices were the Japanese (and European) automakers who captured scarcity rents: Japanese automakers reaped more than $2 billion in 1982 alone, while their European counterparts also raised their prices, to capture $1.5 billion that year” (Irwin 1994, p. 6)
President Trump has threatened auto tariffs, but as of my writing this (August 2019) had not imposed them.  Meanwhile, President Trump’s Department of Transportation (DOT) and Environmental Protection Agency (EPA) have formally proposed to remove regulations that are in many ways the economic equivalent of auto import tariffs: emissions and fuel-economy standards that are most costly to European auto manufacturers.

If the joint DOT-EPA rulemaking were finalized, and tariffs were not permanently imposed, then President Trump would be making international automobile trade freer whereas President Reagan (and also Obama) had made it less free.  Because the apparent contrast between the Trump Administration and previous administrations is so stark, and I know first hand that special interest pressures on Federal policymaking did not wholly disappear in January 2017, only time will tell whether these aspirations become reality.

As part of regional trade agreement negotiations, the Reagan Administration proposed to base tariffs on the regional content (“rules of origin”) of automobile imports (Niskanen p. 141).  This proposal was not adopted as of 1986.  In its negotiation of the United States Mexico Canada Agreement (USMCA), the Trump Administration has proposed to tighten the rules of origin for automobile imports.  This proposal has not yet been approved by Congress.

The Reagan Administration imposed a 45 percent tariff on motorcycle imports from Japan, “which dominate[d] every sector of the American motorcycle market” (a Section 201 action: see p. 140 of Irwin’s 2009 book).  Motorcycle tariffs have been discussed by the Trump Administration, but not implemented as of my writing this.

Protecting Steel and Aluminum Producers

President Reagan protected the steel industry with VERs and quotas (see also pp. 114-6 of the 1986 ERP; or pp. 77, 138 of Irwin’s 2009 book).  The U.S. International Trade Commission (ITC) recommended countervailing duties (CVDs) on steel, but CVDs require Presidential approval, and he chose VERs instead.  This choice was a redistribution of revenue from the U.S. Treasury to foreign steel manufacturers.

In both economic and legal contrast to President Reagan's quotas, President Trump levied tariffs on steel (25 percent) and aluminum (10 percent) imports (although Reuters reported that Department of Agriculture Secretary Perdue has tried to persuade the President to replace those tariffs with quotas; presumably he is reacting to foreign retaliatory tariffs on agriculture that make the tariff-quota contrast less stark than the textbooks make it out to be).  The tariff on South Korean, Brazilian and Argentinian steel, however, was replaced with a quota by agreement with the Trump Administration.

I am not aware of any aluminum tariffs or quotas from the Reagan Administration.

(One person present at the Hoover Institution explains how Governor Reagan spoke there about steel tariffs for national security purposes.  That sounds like Trump Administration policy (Section 232 tariffs) ... I wonder what changed the Reagan Administration to quotas/VERs?  Perhaps the threat of retaliation?)

Asian Adversaries

During the Reagan years, the U.S. had a large bilateral trade deficit with Japan and much trade policy rhetoric related to that.  Today it is China rather than Japan.

The Reagan Administration restricted trade with Japan in the ways noted above (esp. autos and steel), as well as semiconductors, machine tools, computers, televisions, forklifts, and roller bearings.  The largest of these were quotas rather than tariffs: that is, they typically removed revenue from the U.S. Treasury and created profits for Japanese businesses.  As Milton Friedman described the semiconductor restrictions (see also Irwin’s paper on the subject),
“After engineering a cartel between Japanese and U.S. chip makers—again something clearly illegal if done by domestic companies alone—[Reagan officials] profess to be outraged that, like most cartel agreements, it proved to be a leaky sieve—fortunately, I may add. In retaliation, they threatened heavy tariffs against Japanese electronic products, which they have now reluctantly imposed, while broadcasting their intention that the tariffs last only until they have succeeded in bludgeoning Japan into enforcing the cartel agreement on its own firms. If successful, that would lead to the transfer of microchip production to areas other than the U.S. and the Japanese microchip industries. An OPEC in microchips at the demand of the customers! It boggles the imagination.”
The Reagan Administration also levied 100 percent tariffs on imports of Japanese computers, televisions and power tools.

The Trump Administration has levied tariffs on a significant fraction of imports from China, using Section 301 of the Trade Act of 1974.  It added the Chinese company Huawei to the U.S. Department of Commerce’s Entity List, thereby effectively prohibiting U.S. businesses from trading with Huawei.  Huawei’s status has been a matter of ongoing negotiations.

Protecting Producers of Textiles, Apparel, and Sugar

President Reagan vetoed the Textile and Apparel Trade Enforcement Act, which would have tightened textile import quotas (pp. 116-8 of the 1986 ERP).  However, with the support of the Reagan Administration, quotas were tightened twice with the Multifibre Agreement when it was renewed in 1982 and 1986 (see p. 139 of Irwin’s 2009 book or pp. 212-13 of this article).

The Reagan Administration tightened quotas on imported sugar (see also pp. 70-71 of Irwin’s 2009 book), which is one of the most notorious trade restrictions in modern America.

Navarro Farts

The Trump Administration supports a House bill known as the "US Reciprocal Trade Act."  Before it was introduced, Peter Navarro was leading the White House effort in this area, which he called the Fair And Reciprocal Tariff act.  To the amusement of the rest of the White House staff, Mr. Navarro got an "F" in marketing; this was one of several occasions that the President was understandably upset with Mr. Navarro.

It stinks that neither the House bill nor the FART act have any chance of becoming Federal law.

(I am unaware of a Navarro-type character in the Reagan White House, but perhaps there was one.)

Other trade restrictions

President Reagan’s Proclamation 4901 extended the 1979 quotas on imported clothespins.  The Reagan Administration increased tariffs on Canadian lumber.

Using Section 301 of the Trade Act of 1974, President Reagan threatened tariffs in several cases that resulted in no U.S. tariffs and reductions in foreign tariff or nontariff barriers to U.S. exports, as they did for the Japanese tobacco-product market or the South Korean film market (pp. 132-33 of the 1987 ERP and p. 177 of the 1989 ERP).

The Trump Administration levied tariffs on solar panels and washing machines, using Section 201 of the Trade Act of 1974.

The Reagan Administration initiated the Plaza Accord where major countries agreed to coordinated interventions in currency markets.  Yesterday the Trump Administration declared China to be a currency manipulator, which the Wall Street Journal called "mostly symbolic" although financial market reactions were not trivial.  The Trump Administration has also proposed to include currency values in determining the applicability of countervailing duties.

For over 100 years, the U.S. postal service has subsidized shipments originating in foreign (esp. developing) countries, pursuant to the rules of the Universal Postal Union (UPU).  As Alfredo Ortiz explained in this article, "it costs around $20 to mail a small parcel weighing 4.4 pounds from one U.S. state to another, yet mailing the same package from China only costs about $5."  The Reagan Administration was aware of this problem, but no solution was implemented.  The Trump Administration has directed that either the UPU reduce the distortions in its terminal dues structure, or the U.S. will set its own terminal dues (withdrawing from the UPU).

Administration components

Niskanen (p. 138) reports that White House components disagreed as to the desirability of trade restrictions, with the Council of Economic Advisers (CEA), Office of Management and Budget, and Department of Treasury emphasizing the economic benefits of free trade while the Department of Commerce, Office of Science and Technology Policy (OSTP), and Office of the U.S. Trade Representative (USTR) emphasized the (political?) need to protect domestic producers.

The component configuration is similar in the Trump White House, although I cannot be sure about OSTP due to few first hand interactions with them.  Also in some instances USTR opposed proposed trade restrictions.

Robert Lighthizer heads USTR in the Trump Administration.  He was the USTR first deputy during the Reagan Administration.

In both Reagan and Trump White Houses, CEA provided a catalog of trade actions in the annual Economic Report of the President designed to assist researchers outside the Federal government who are gathering facts about Federal trade policy.  Compare, for example, Table 4-3 of the 1988 ERP and Table 10-1 of the 2019 ERP.

Trade policy reprise

To reprise the quotas cited above (all Reagan): autos, steel, sugar, semiconductors, textiles, machine tools, and clothespins.  The Trump Administration did create steel quotas for South Korea, Brazil, and Argentina as substitutes for its Section 232 steel tariffs.

To reprise the tariff increases cited above: steel (Trump), aluminum (Trump), motorcycles (Reagan), Canadian lumber (Reagan), Chinese goods (Trump), various Japanese goods (Reagan), solar panels (Trump), and washing machines (Trump).

To reprise the (economic equivalent of) tariff decreases cited above: autos (Trump), and postal terminal dues (Trump).

It is clear that the Reagan administration restricted trade, and did so more than the Trump Administration has.  The Reagan administration harmed consumers in doing so.

While not making comparisons with the Reagan years, Robert Barro and many others have said that the Trump Administration has been reducing economic growth with its trade policies, and enough to fully offset the pro-growth effects of tax and regulatory reform.  What is the quantitative analysis to show how they conclude that the offset is full?  A first pass at the numbers suggests the opposite, even if the tariff increases were permanent: the corporate tax cut alone generated static taxpayer savings of about $200 billion per year, while taxpayers would be paying about $30 billion per year more for tariffs (again, a static calculation).  Yes, there is uncertainty as to whether the annual tariffs will ultimately prove to be $0 billion, $60 billion, or somewhere in between, but is there any doubt as to whether it would be less than $200 billion? In terms of quantifying the cost of a trade war, perhaps they are thinking about the fairly large stock market swings that coincide with trade news.  But would the stock market drop less if there was a credible threat of eliminating the corporate tax cut and reversing all of the deregulation?

(See also CEA’s assessment of the significant benefits of deregulatory policy, which did not include the DOT-EPA rule).

The way I look at it, the proposed DOT-EPA rule would enhance U.S. international trade and consumer benefits so significantly that it would, if finalized, overwhelm the various tariff actions cited above.  In addition, the Reagan experience with Section 301 actions also shows that it is possible for those actions to enhance trade by reducing tariff and nontariff barriers that foreign countries have erected against U.S. imports.  Therefore, while it is clear that trade restrictions from the Trump Administration are significantly less than President Reagan's, more time is needed to determine the overall sign of the Trump Administration’s trade restrictions.

Monday, August 5, 2019

Some Relevant International Trade Theory

Wednesday I will offer comparisons of international trade policies in the Reagan and Trump Administrations.  The purpose of this post is to provide some relevant background from international economics: quotas versus tariffs, the Lerner symmetry theorem, zero-revenue tariffs, and the magnitude of the economic costs of tariffs.

Quotas versus tariffs

When domestic producers seek protection from international competition, two policy tools have proven to be of interest: tariffs and quotas.  In theory, tariffs are straightforward: the foreign producers have to pay a tax on sales in the U.S. while domestic producers do not, which (hopefully) permits the domestic producers to either raise prices or make more domestic sales or both.  Domestic consumers pay more, domestic producers earn more profit, and foreign producers potentially earn less profit.

When protection is provided by quota (called an import quota from the U.S. perspective or an “export restraint” from the foreign perspective), the extra sales for domestic producers come from the fact that the foreign producers have a low cap (a.k.a., quota) on their sales in the domestic market.  Consumers lose by paying more and/or losing access to their preferred foreign brands, but otherwise the winners and losers from quotas depend very much on how the quota is administered.  That is, which foreign producers are allowed to make domestic sales, and how much?  If the rights to sell into the U.S. market were auctioned off by the Federal government, we would essentially have a tariff system.  But many times the foreign government allocates the rights to sell into the U.S. market under the quota.  In effect, the foreign government leads a cartel of its producers to restrain U.S. sales and thereby elevate what they charge in the U.S. market.

To the extent that the various foreign producers compete with each other more than they compete with domestic producers, the quota elevates the price of foreign-produced goods more than the price of the domestic-produced ones, and the quota amounts to redistribution from U.S. consumers to foreign producers.  As Professor Irwin described for the automobile export restraints of the 1980’s,
“In 1981, for example, Japan was persuaded to adopt a VER on automobile export to the United States, a trade restraint that dramatically increased the price of Japanese (and European) cars to U.S. consumers … the main beneficiaries of higher automobile prices were the Japanese (and European) automakers who captured scarcity rents: Japanese automakers reaped more than $2 billion in 1982 alone, while their European counterparts also raised their prices, to capture $1.5 billion that year” (Irwin 1994 p. 6)
Note that Irwin and others comparing tariffs favorably to quotas are comparing hypothetical tariffs to actual quotas.  In reality, tariffs may generate retaliation.  Moreover, especially since the advent of the WTO, actual tariffs often have quota elements to them (alternatively, quotas have been “tarifficated”).  In these cases, countries are provided with a quota of tariff exemptions that may allow at least some of the foreign businesses to profit from the tariff action.  These all make the incidence of tariffs more similar to quotas, although I accept the qualitative result that tariffs bring more revenue to the treasury and less profit to foreign producers than quotas do.

The Lerner Symmetry Theorem

“The Lerner symmetry theorem holds that a tax on imports is functionally equivalent to a tax on exports” (Irwin 2009, p. 72) even without tariff retaliation by the exporting country.  Similarly, a non-tariff restriction on imports imposes a cost on exports.

As I like to explain it, raising the Manhattan bridge and tunnel tolls on inbound vehicles, with no change in outbound tolls, will reduce both the number of inbound vehicles as well as reduce the number of outbound vehicles.  I have found that people from New York, of which there are a number in the current White House, readily understand the Lerner symmetry theorem this way.  At least one White House staff from Irvine, CA does not think that the Lerner symmetry theorem is relevant for international trade policy evaluation and is eager to have others share that opinion.

Zero-revenue Tariffs

At least one important tariff -- the longstanding 25 percent tariff on imported light trucks and cargo vans (almost half of the current auto market; hereafter "light trucks") -- collects essentially zero revenue because the tariff moved practically all production for domestic consumers to the U.S.  As shown in the chart below, such a tariff increases the price of light trucks even consumers pay no tariff and the treasury receives no tariff revenue.  The elevated price goes to domestic manufacturers, including those who are less efficient that international suppliers.

Quantifying Economic Costs of Tariffs

The attention that Federal international trade policy receives from the economics profession seems disproportionate to Federal intranational trade policy (namely, taxes and economic regulation).  The vast majority of trade involving Americans is from American-to-American.  At various times, the Federal government has introduced extraordinary barriers to this trade and hardly any economist notices.  As Professor Krugman put it in 2015,
“comparative advantage says “yay free trade”, but also suggests that once trade is already fairly open, the gains from opening it further are small. But because economists want to keep shouting yay free trade, they look for reasons why those gains might be larger….One particular misuse of the yay-free-trade sentiment is the persistent effort to make protectionism a cause of economic slumps, and trade liberalization a route to recovery.”
(Since President Trump took office, Professor Krugman is more cryptic about this point because “yay free trade” is one of the most common critiques of current Federal economic policy).

With that said, as an economist in the WhiteHouse I welcomed and appreciated the effort put by “outside economists” toward trade analysis.  That effort facilitated leveraging my comparative advantage on various intranational trade topics.

Friday, August 2, 2019

Economic Theory in the White House: An Index of 67 Instances in One Year

It is difficult to exaggerate the usefulness of Chicago Price Theory for economic analysis in the White House.  Below is an index of 67 instances that I can remember where Chicago Price Theory was directly and specifically applied to analysis (usually publicly released) of economic issues over a one year time frame.  As an example of what I mean by "directly and specifically," compare Chicago Price Theory's Figure 19-3 to Figure 7-2 in the 2019 Economic Report of the President.

Figure 19-3 from Chicago Price Theory

From the 2019 Economic Report of the President
(the second derivative of the after-AI demand curve is part of the discussion in both sources).

Economic issue analyzed by CEA CPT pages
ACA employer mandate 75 - 75
Agency Compliance with Circular A-4 131 - 132
Artificial Intelligence and the labor market 120 - 121
Artificial Intelligence and the labor market 132 - 133
Artificial Intelligence and the labor market 147 - 148
Artificial Intelligence and the labor market 176 - 179
Artificial Intelligence and the labor market 182 - 183
Artificial Intelligence and the labor market 186 - 186
Artificial Intelligence and the labor market 189 - 191
Artificial Intelligence and the labor market 195 - 196
CEA's sample of 20 deregulatory actions 7 - 9
CEA's sample of 20 deregulatory actions 59 - 61
CEA's sample of 20 deregulatory actions 131 - 132
CEA's sample of 20 deregulatory actions 135 - 138
CEA's sample of 20 deregulatory actions 140 - 144
Corporate-income taxation 184 - 185
Corporate-income taxation 185 - 186
Corporate-income taxation 210 - 210
Green New Deal 116 - 119
Green New Deal 131 - 132
Health insurance deregulation 59 - 61
Health insurance deregulation 102 - 103
Health insurance deregulation 131 - 132
Health insurance deregulation 150 - 150
HHS Removal of Safe Harbor for Rebates 66 - 72
HHS Removal of Safe Harbor for Rebates 140 - 144
Highly socialist countries 135 - 138
Highly socialist countries 150 - 150
Macro effects of trade policy 32 - 32
Macro effects of trade policy 176 - 179
Measuring Rx drug prices 48 - 55
Measuring Rx drug prices 55 - 57
Medicare for All 157 - 159
Medicare for All 160 - 161
Medicare for All 168 - 170
Medicare for All 176 - 179
Medicare for All 209 - 209
Opportunity Zones 98 - 99
Pandemic Innovation Values 206 - 206
Telecommunications deregulation 7 - 9
Telecommunications deregulation 79 - 81
Telecommunications deregulation 102 - 103
Telecommunications deregulation 140 - 144
Telecommunications deregulation 150 - 150
The "doubling effect" of switching from reg to dereg 106 - 107
The cumulative impact of regulation (conceptual) 116 - 119
The cumulative impact of regulation (conceptual) 120 - 121
The cumulative impact of regulation (conceptual) 131 - 132
The cumulative impact of regulation (conceptual) 132 - 133
The cumulative impact of regulation (conceptual) 135 - 138
The cumulative impact of regulation (conceptual) 147 - 148
The cumulative impact of regulation (conceptual) 176 - 179
The opioid epidemic 7 - 9
The opioid epidemic 44 - 45
The opioid epidemic 66 - 72
The opioid epidemic 74 - 75
The opioid epidemic 128 - 129
The opioid epidemic 131 - 132
The opioid epidemic 135 - 138
The opioid epidemic 204 - 206
USMCA 96 - 98
Wage growth 48 - 55
[redacted regulatory impact analysis] 48 - 55
[redacted regulatory impact analysis] 157 - 159
[redacted regulatory impact analysis] 186 - 188
[redacted trade deregulation] 131 - 132
[redacted trade deregulation] 135 - 138

I suspect that this is historically unusual.  For example, the neoclassical growth model (standard training in Economics PhD programs and on pages 176-196 of Chicago Price Theory) had never been mentioned in an Economic Report of the President until 2018.  In 2018 and 2019 that model was used to address several policy questions, especially those cited above.