An Event Study: How Do Equity Markets View National Security-based Trade Protection?

Figure 1: Dow Jones, 15 minute increments. Source: TradingEconomics.

From Bloomberg:

The S&P 500 Index briefly fell below its 100-day moving average while the Dow Jones Industrial Average dropped more than 400 points as Trump added to earlier confusion on the fate of proposed tariffs by announcing the levies in a meeting with industry executives. The Institute for Supply Management called the proposal a “big mistake.” European Commission President Jean-Claude Juncker said Europe will respond “firmly” to any new tariffs. And Federal Reserve Chairman Jerome Powell earlier praised the benefits of trade.

It’s at times like this I refer to this passage, from Peter Navarro, The Policy Game (Wiley, 1984), p.82.

National Security Benefits and Costs. On the benefit side, protectionism within certain basic industries like autos, steel, and electronics helps to create and sustain and industrial base that, in times of war or national peril, can be shifted to defense purposes. However, this national security argument–and the existence of any benefits resulting from protecting these industries–can legitimately be called into question for several reasons.

First, the existence of any sizable benefits rests on the assumptions that import competition in our defense-related industries would not only reduce the size of these industries but also shrink them to the point where they would be too small to support our defense needs…

Second, it is highly possible that our defense capability might actually be enhanced–not damaged-by import competition. Without the umbrella of protectionism, our defense-related industries would be forced to operate at lowest cost, engage in more research and development, aggressively innovate to stay one step ahead of the competition, and modernize their plants at a faster pace. …

On the national security cost side, the major effect of protectionism is to threaten the stability of the international economic order through a global trade war. …

(Full disclosure: I was research assistant on this book.)

Addendum: Chad Bown assesses.

117 thoughts on “An Event Study: How Do Equity Markets View National Security-based Trade Protection?

  1. Moses Herzog

    @ Menzie
    Menzie, I'm honestly curious if you meant to put quotation marks around the "National Security-based" in the title, or if you think there is an argument to be made there, in basis and fact??

    1. Menzie Chinn Post author

      Moses Herzog: Yes, but doubt it’s in steel or aluminum which we can get from countries that (currenly — who knows what Trump will do in the future) our allies. Advanced semiconductors, software, etc. different matter. There are legitimate national security based rationales for restriction in FDI as well.

      1. Bruce Hall

        Menzie, there is economic logic and there is strategic logic… and the two don’t have to align. For decades, economists have said that China “subsidizes” us with their cheap exports and if our domestic manufacturers can’t compete, it’s not a big deal … economically speaking. Your statement “There are legitimate national security based rationales for restriction in FDI as well” recognizes that there is some (very limited?) action to protect domestic industries. I suggest is a parochial view of the situation.

        China, the primary “subsidizer” of industry annihilating economics, has a different strategic agenda for which economics plays an enabling role: . That was written in 2007.

        While there may be increasing awareness of China’s strategic ambitions, perhaps no nation is so acutely aware of that than India: . This validates the 2007 analysis and explains why economic logic may not be in our best interests when it competes with strategic logic.

  2. PeakTrader

    The stock market has been unsteady, since late January. It may just be looking for excuses to shake out some investors and resume the rally.

    “Commerce Secretary Wilbur Ross had said that the Commerce Department would complete its study of the national security issue by the end of June.”

    Like under JFK? (Who knows?)

      1. noneconomist

        A massive tax increase on American families? That Ben Sasse. What a liberal cry baby.
        Along with Roberts, Hatch, Lee, Cornyn, and the rest of those leftist troublemakers. What’s their problem?
        They don’t love America.

          1. pgl

            This is nothing more than a bailout for Alcoa so stop these disingenous excuses. I guess you have never read Alcoa’s 10-K. I have. They had 3 US smelter plant and when they decided to open their 4th one – it was in Iceland. They then decided to construct a second Iceland smelter plant which has not done as well. I see you and Trump want to promote jobs in Iceland. MIGA. Make Iceland Great Again!

          2. Dave

            PT said: “Trump has a chance to capture “environmentalists” .

            That’s a knee slapper PT. You are truly delusional. Seriously, I’m concerned about your cognitive health. Get yourself a checkup.

          3. noneconomist

            PT: Don’t you conservatives understand……Sorry, you’re obviously not a conservative.
            Don’t you libertarians understand……Sorry, you’re obviously not a libertarian either unless libertarians have suddenly become fans of budget deficits, military buildups for a global empire, and protective tariffs (good laugh, though)
            Let’s try Don’t you Gephardt/Sherrod Brown progressives understand there’s more to trade than satisfying people in Ohio and Pennsylvania?

          4. noneconomist

            PT finally admits the protective tariff is little more than a political ploy to attract more voters.

          5. Dave

            “And Dave, the real knee slapper is Trump won in spite of your delusions.”

            And what delusions would those be?

          1. PeakTrader

            Pgl, the #1 negative name caller, anything beyond your biased narrow and shallow view is way over your head.

          2. PeakTrader

            Dave, name calling is calling pgl a progressive gutter liberal.

            Or calling you – Dave the delusional dunderhead.

          3. Dave

            “Dave the delusional dunderhead.”

            The typical high-minded discourse we expect from PT.

          4. ilsm

            Welfare for industry look at the pentagon trough.

            Why not have US made aluminum go in to the F-35 welfare system? Or mixed with steel for the added corrosion in Navy ships. The appeal to national security sells a trillion dollar a year taxpayer and sovereign debt funded con.

            If you all worry national security on the 2 major wars level (Pacific Command and European Command blow up at once) you need to kill a few expensive dogs that don’t hunt and stop spending $70B a year on overhead for the one quarter of a major war fought the last 16 years for Saudi royalty.

  3. 2slugbaits

    Ironically, a lot of the exotic steels used in DoD weapon systems actually come from foreign sources. For example, the Belgian firm Fabrique Nationale is the prime contractor for a lot of the high end small arms in the DoD inventory:
    Some of the specialty steels are downright exotic and are only manufactured in annual production lots. But the Trump tariff won’t do anything to shift the production of those exotic steels to domestic sources. So even in the rare cases in which a tariff might serve a national security purpose, the Trump tariff will still fail because the intellectual property rights are foreign owned.

    1. Moses Herzog

      @ 2slugbaits
      I am assuming this is the same thing as the “rare earth metals”?? This import is one of the few legitimate National Security-effecting trade products/materials, along with the ones mentioned in Menzie’s response to my comment above. Now maybe this was some “investor prospectus” type salesmanship/marketing that I had read. But it did seem like a legitimate issue to me when I read up on it, maybe about 5 years ago. This “60 Minutes” report is about 3 years old.

      The problem with an American who is too lazy to even read currently inhabiting our White House, is that unlike Menzie and people who stay well-read on issues—the VSG cannot decipher the imports that are a legitimate threat to National Security, and those imports that really don’t have a damned thing to do with it.

    2. Dave

      Very strange interpretation of the facts. IP rights, whether foreign or domestically owned, have no bearing on actual location of production. Foreign-owned IP rights, assuming we are talking about U.S. IP, can be practiced in the U.S BY THE IP OWNER regardless of whether the owner is foreign or not. If we are talking about extra-territorial IP rights, well then it’s even easier. Belgian patents have no force in the US (and vice versa).

      1. 2slugbaits


        I probably wasn’t clear. The manufacturing techniques for some of the more exotic steels are proprietary. In the case of FN, some of what it produces is only manufactured in one place (not necessarily Belgium) because of costs. My larger point was that even in this case of a plausible national security interest in maintaining a specific capability, the Trump tariff is completely useless.

  4. Erik Poole

    For those who see weakening NORAD and NATO as a positive for American security, this is a good initiative.

    If Trump believes that he can lever more concessions out of Canada in NAFTA talks, well I encourage his administration to continue this line of reasoning. Watch what happens.

  5. joseph

    That quote was written by Peter Navarro in 1984. So what in the world happened to him since? According to reports he is the one pushing Trump to invoke tariffs in opposition to economic advisor Gary Cohn. Whence the spectacular 180 degree flip that would win a gold medal in South Korea?

    Is Navarro one of those people who went crazy nationalist after 9/11 so that you would hardly recognize him anymore?

  6. Erik Poole

    Is not Navarro the economist who has argued that a VAT acted as barrier to imports and a subsidy to exports?

  7. Moses Herzog

    Menzie, I don’t mean this in any kind of a confrontational or contentious way— quite the OPPOSITE, but I think if you share with your Mom the negative changes in USCIS written policy, then you also have a modicum of duty to share with your Mom stories like this:

    BTW, Schaaf was a lawyer for 2 years—so she is fully aware of the hornet’s nest she is opening up for herself.

  8. rtd

    Obviously a(nother) bad move from POTUS, but I am interested in your approach of analyzing Trump’s announcement through the djia. The market’s reaction is an interesting (if not seemingly convincing) phenomena. However, I’m wondering your assessment if, ceteris paribus, the djia is back to its pre-press conference level in let’s say… one week? One month? 6 months?
    Somewhat similarly, I almost always seem to notice treasuries experience noticeably large swings immediately following FOMC statements at 2pm but they almost always revert to prior levels in the very same day.
    Just curious as it’s easy to make blog posts ex-post but few seem interested in staking their reputation ex-ante.

    1. Menzie Chinn Post author

      rtd: It’s (utterly) conventional to use a fairly small window when doing event studies, to try to control for other news that comes in. If you could point to some other consequential event in the hour after the news conference, then that would invalidate the approach insofar as this event is concerned.

      1. rtd

        I absolutely agree that it’s conventional and I wasn’t asserting anything different (for example, Dr Hamilton’s recent blog post referencing his research is similar in some respects, however, as Dr Hamilton’s recent research seems to indicate that maybe such “small window when doing event studies” aren’t as informative as we are led to believe). In any case, I certainly never asserted that there was “some other consequential event in the hour after the news conference” in an attempt to “invalidate the approach”. I’m confused as to why you would think such aside from your typical Trump-like paranoia. What I’m interested in is your thoughts on “ceteris paribus, the djia is back to its pre-press conference level in let’s say… one week? One month? 6 months”… is that clearer now? In other words, what if this is akin to “treasuries experience noticeably large swings immediately following FOMC statements at 2pm but they almost always revert to prior levels in the very same day” and was a market over-reaction (whatever that would mean) and merely transitory. Just something I was curious of.

        1. Menzie Chinn Post author

          rtd: Well, stock market is easier, as there is a positive drift in the nominal stock price index. Hence, the fact that on average the stock price re-attains pre-shock levels is not surprising. As for bond prices, I’m not familiar with the stylized fact that prices revert to pre-shock levels within a day or so. I don’t think that was the experience with LSAP announcements, which arguably had a bigger surprise component than a typical run-of-the-mill FOMC announcement in recent times, when the Fed has communicated thoroughly its intent.

          1. rtd

            Albeit generally true, “Hence, the fact that on average the stock price re-attains pre-shock levels is not surprising.” sounds like a hedge. I’m not saying the announcement wasn’t a shock nor am I saying the shock is “good” nor am I saying the announcement is “good”. But, I would think there should need to be some quasi-permanent impact if the announcement was “meaningful” (however we define it). I realize the difficulties involved given the numerous factors which can impact these major indices, but absent other “positive” news, if the market is back to it’s previous levels in a week or so, what do we make of that? What about a month? Just curious.

            My FOMC reference was more so about generic releases and not so much those related to LSAP and other measures. It seems that more often than not one sees a very short-lived spike in treasuries immediately after 2pm. Is that “meaningful” (however we define it)? Is it a proper representation of how “markets view” the FOMC announcement if it reverts shortly thereafter w/o new news? Again, just curious your thoughts.

          2. rtd

            See today’s yields at 2 pm and let me know what you think. Just something I’ve I’ve routinely noticed and found interesting. Maybe it’s nothing.

        2. Moses Herzog

          @ rtd
          “rtd”, with your vast knowledge of event studies (and their various time frames), do you think you could figure out the graph in the link just below for Menzie and his readers?? We know your deep mind takes this to another level entirely, so if you need the entire weekend to “gnaw” on this one, we would all understand.

          The tariff happened during the Bush presidency in 2002. Rumor has it, that was a “pro trade” Republican administration, but rtd, you’re welcome to add your deep insight there as well.

          1. rtd

            “Moses Herzog”, figure out what?

            Maybe there aren’t enough bolded words in your comment for me to know what I should focus on.

          2. Moses Herzog

            @ rtd
            Aaaaaawwww, “rtd”?? Is that you?? Shooting blanks?? I really thought you were up for this one. Oh well, you always were kind of a coy one. It’s understandable, PeakIgnorance has worked so hard for his crown of idiocy on this site. Going beyond coy responses and addressing the graph in my comment and you might have given PeakIgnorance a run for his money.

            Still, the graph calls out for your insight….. What a severe disappointment.

          3. rtd

            “Moses Herzog”, more bold from you but no more insight from you. The graph seems quite obvious, I’m just not certain what you’re asking and/or i’m confused what it is that you don’t understand in the graph. All you ask is “could figure out the graph”.

          4. Moses Herzog

            “rtd”, you aren’t one of those people at the office that is the last one to get the joke, and then laughs about 2 beats late saying “Yeah, yeah, that’s a classic guys!!!”, are you??? You say “the graph seems quite obvious”, but the conclusion of what the graph strongly indicates seems like a kind of typhoid fever for you.

          5. rtd

            Yes!!! That is me!!! You pegged me!!!
            So, now that you’ve gotten the irrelevant personal digs out of the way, what is it you’re asking?

          6. JBH

            The fact of the matter is this Zero Hedge graph is all sound and fury signifying nothing.
            The backdrop to stocks in early-2002 consisted of two elements. The market was hugely overbought per the Shiller PE10 and other metrics. Stocks were still more overbought than at any time between 1929 and 2000, except for a brief period in the 60s. Secondly, the first shooting war since Vietnam was about to break out. A moment similar to 1917 and 1941, though hardly as grave. Strong hands privy to Pentagon intentions knew this full well. Since prelude to war drives a stake of uncertainty into the market, the market was going down no matter what. Either until much lower. Or until the uncertainty about the fog of war cleared up somewhat. The Dow fell to a lower plateau and then stayed there until the first shot was fired. Steel tariffs back then had little or nothing to do with the market’s drop.
            That prior December, China gained full membership in the WTO. The US trade deficit with China then went ballistic. The current account deficit of $86 billion in 2001:Q4 took a straight line ride all the way to $216 billion by 2006:Q3. Big move! The jpeg shows the first segment of this period, but does not show the more meaningful path of the current account balance at all. The US lost face because of the 9/11 attack. All the world could see that in fact the giant was quite vulnerable. 9/11 was a pivotal moment. The surprise shock had to have aftershocks, one of them being a revaluation of the dollar’s global reserve status. The value of the dollar actually started down before the Dow did. It never looked back until its nadir in 2008.
            President Bush announced the tariff on steel on March 5th. Yet on that day, and on each of the following four days, advancers led decliners on the NYSE. The Dow didn’t top until two weeks later on March 19th. Of course (as shown on the jpeg) long yields fell once the drop in the Dow gained traction, since along with stocks leading indicators topped too in March. A composite of key indicators fell nearly 3% by September, outright flirting with a recession signal. Zero Hedge overlaid these three series to prove a point … but with Zero Analysis to back it up.
            This pretty well explains the graph in the link. Applying this kind of analysis to the present, I can say odds are around 95% that the Dow will make a new all-time high, without at first falling far enough to turn this correction into a a full-fledged bear market. Such is the power of granularly studying an event, that a statement like this can be made at all. Let alone with confidence. I will also give one important countercase that could make me wrong. Central bankers could gang up and do the precise opposite of what they did on and around March 11th 2016.

  9. PeakTrader

    Regarding a prior negative comment, it looks like the tax cuts are having a positive impact on consumption and investment:

    “The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2018 is 3.5 percent on March 1, up from 2.6 percent on February 27. The nowcasts of first-quarter real consumer spending growth and first-quarter real private fixed-investment growth increased from 2.0 percent and 2.7 percent, respectively, to 2.9 percent and 4.4 percent, respectively.”

  10. Ed Hanson.

    Regardless if you think it has effected the stock market, or if you think unilateral tariffs are a good idea, basing new tariffs on national security is just plain wrong, and the rest of the real world will see it for what its, just a means to attempt to circumvent current trade treaties. Because that the spirit of the scheme is wrong, the world will have no qualms from using both legal, illegal, or circumventional means to counter or retaliate against such.

    Personally, I happen to believe that two party, that is direct country to country tariff treaties, are far superior to these bureaucratic multinational agreements which result in complicated formulas as well as ill advised compromises to satisfy so many actors. These multi-country arrangements seem to have a propensity to create side agreements which are often hidden from even Congress as well as the rest of us.

    Get on with renegotiation of current agreements, continue the two party diplomatic tariff talks, but most of all, quit trying for the quick fix. That has no purpose for serious economic matters.


    1. pgl

      This national security canard has a long history. I can recall a seminar 35 years ago led by Thomas Willett on this topic. Tom is a dyed in the wool free trader so it should come as no surprise that this seminar exposed the illogic of this specious argument.

  11. 2slugbaits

    So when I squint at the event chart it looks like the steep downward slide started about 2 hours (hard to tell with these over 40 eyes) before the official WH announcement. Is this evidence of some possible insider trading?

    1. Menzie Chinn Post author

      2slugbaits: Not sure – timing is inexact. Also the timing pertains to press conference, so things might have slipped out during the meeting. In any case, meeting was announced the night before, with intimations that this was the likely outcome (that was my guess when I saw it announced on the news).

      1. pgl

        There were a lot of press reports that he was likely to announce these tariffs well before he actually did. Plus – didn’t some of the steel CEOs talk to the White House earlier?

        1. Menzie Chinn Post author

          pgl: The invitation was announced late Wednesday night; the meeting w/CEOs took place just before press conference – that is my understanding of the time line.

        2. 2slugbaits

          I could be wrong, but weren’t the original tariff rumors 10% for aluminum and 20% for steel? What Trump announced was 10% for aluminum and 25% for steel.

          1. pgl

            Did you see Wilbur holding up the cans of Campbell Soup and a Coke to tell us that these products do not contain a lot of aluminum or steel? I wish someone had driven up in “a new car”! Let’s see aluminum goes for $2000 a ton so we are talking about a $200 tariff. But no big deal as that is only 10 cents a pound. And we do not import a lot of aluminum – right? Oh wait!

            BTW Wilbur reminds me of Mr. Ed.

  12. noneconomist

    Perusing latest headlines from CNBC
    Here’s How Your State would get hit by a global trade war
    Trump’s easy-win trade war is a no win situation for Wall Street and Main Street
    Trump made tariff decision in a fit of anger
    Wilbur Ross needs another prop, Campbell says tariffs will make soup cans more expensive
    Trump’s tariffs “like first shot in a war”: Robert Schiller (Schiller says the tariffs will hurt most people….)
    IMF warns steel, aluminum tariffs will likely hurt economies
    Looks like the Dow is down again, but we haven’t heard much here from those who touted it’s run-up. No surprise.
    And that awful liberal cry baby, Orin Hatch, continues to say bad things about the tariff plan. How un-American!

    1. pgl

      “Trump made tariff decision in a fit of anger”

      Could we take away the nuclear codes from him? Please!

  13. Moses Herzog

    I’m trying to decide if my excitement over the remake of “Death Wish” (with at least 3 of my favorite movie stars) is totally natural and to be expected, or it just means I have become one of those old white guys that teens and college kids despise now. Critical comments, (hateful or otherwise) welcomed.

    P.S. On a slightly negative note, there is no way the awesome “Death Wish 2” soundtrack by Jimmy Page can be matched.

  14. joseph

    “I could be wrong, but weren’t the original tariff rumors 10% for aluminum and 20% for steel? What Trump announced was 10% for aluminum and 25% for steel.”

    Ha, it’s even crazier than you can imagine. Wilbur Ross recommended 7.7% on aluminum and 24% on steel based on some Commerce Department analysis. Trump said he likes round numbers so literally on the spur of the moment that morning just before the cameras went live Trump decided on 10% and 25%.

    That’s how policy is made in the White House these days.

    1. pgl

      Trump reminds me of that dude in Animal House when he tried to pick up on the dean’s wife in the grocery store. “Mine’s bigger”!

    1. PeakTrader

      The Administration’s argument:

      “He (Wilber Ross) explained that the U.S. military has precise requirements for aluminum in defense applications. Ross said the U.S. military requires high-purity aluminum to produce the F-35 Joint Strike Fighter plane, F-18 aircraft and armor plating for vessels and missiles.

      There is only one company left in the U.S. that can produce the kind of high-purity aluminum required for aerospace applications, Ross added.

      That company is Century Aluminum, the only U.S. producer of commercial-grade, high-purity aluminum. The United States’ primary aluminum production has declined to a level comparable to 1952 production, Ross said. Eight smelters have closed or curbed production since 2015, with only two fully-operational smelters left, he added.

      “The question is, what happens if we have to mobilize, if we have to get into a different environment?,” Ross asked.”

      1. PeakTrader

        Canadian production:

        “Canada’s primary aluminum production through March of this year (2017) has totaled 797,208 metric tons; U.S. smelters output was 181,763 mt, according to Aluminum Association statistics.”

        Wilbur Ross: “…the net effect of the tariff…won’t be to prohibit foreign imports, it just will be to change the price.””

        1. pgl

          You do realize that the American companies are opening production in Iceland. Maybe not but the slogan should be Make Iceland Great Again!

      2. 2slugbaits

        PeakTrader Now we know you’re doing Putin’s work. Too bad you know nothing about the defense business. The US military’s consumption of primary high-purity aluminum is trivial…around 30K tons per year. That’s a tiny fraction of current US capacity. And the technology for turning ordinary commercial aluminum into military high-purity aluminum is well known and inexpensive (around $25M). What you’re posting is just nonsense driven by your increasingly desperate attempts to defend every brain fart that comes out of Trump’s Twitter feed. And unlike the Trump Administration, the Canadian government is not run by Putin’s stooges. The Canadians are reliable allies.

        Over the last couple of years we’ve watched you descend into something bordering on mental derangement. Please take Dave’s advice and get some help. This isn’t just internet snark. I’m serious. You need some help. Something is wrong.

        1. PeakTrader

          2slugbaits, you’ve always provided only one view – a politically biased, ignorant, narrow, and shallow view, like your fellow crazy liberals on this blog. You’ve consistently proven you’re the one with mental problems and living in a fantasy world.

          The liberal/moderates, along with anyone on the right, disagree with you once again:

          1. pgl

            “you’ve always provided only one view – a politically biased, ignorant, narrow, and shallow view”.

            I trust you were looking in the mirror when you wrote this line!

          2. 2slugbaits

            PeakTrader Wait. You just shifted your argument. Having been shown that your aluminum-for-defense argument is bogus, now you’re trying to sell it as a jobs program for steel and aluminum workers. Is that what you’re supporting? You claim to have some formal training in economics, but yet you think a tariff is an optimal jobs program? Really? And if the problem is excess capacity, then how in the hell does a tariff reduce global capacity??? And you don’t seem to understand the difference between primary aluminum (of which China exports virtually zero) and semi-manufactured aluminum products.

            As to mental problems, it seems to me that anyone who thinks Trump is a competent and stable person must have serious mental issues of their own.

        1. PeakTrader

          Pgl, you’re worse than 2slugbaits, and that’s saying a lot.

          And, you make up so many fantasies, it would be surprising that anyone, even other crazy liberals, takes you seriously.

          1. pgl

            You are ducking everyone of the legitimate issues. Let me repeat what 2slug asked you:

            “You just shifted your argument. Having been shown that your aluminum-for-defense argument is bogus, now you’re trying to sell it as a jobs program for steel and aluminum workers. Is that what you’re supporting? You claim to have some formal training in economics, but yet you think a tariff is an optimal jobs program? Really? And if the problem is excess capacity, then how in the hell does a tariff reduce global capacity??? And you don’t seem to understand the difference between primary aluminum (of which China exports virtually zero) and semi-manufactured aluminum products.”

            BTW – I have noted how both of the US aluminum are doing their smeltering in Iceland now. It is not about hiring more American workers. At best – it is about hiring more workers in Iceland.

            But go ahead and duck the actual economic issues given you know nothing about economics.

          2. PeakTrader

            You completely miss the point.

            Global prices of steel and aluminum are too low, because of overcapacity, subsidies, dumping, etc..

    2. pgl

      Oh gee – the world is coming to an end! NOT! Secondary aluminum production is still strong per your link. More Bottom Feeder forgot to mention:

      “Although the recent downturn in U.S. primary production of aluminum was initially attributed to declining aluminum prices, the price of aluminum has nearly returned to early 2015 levels, while primary aluminum smelting levels remain relatively low. Several other factors have contributed to the recent decline in domestic primary aluminum production, including higher labor costs and the strength of the U.S. dollar. Primary aluminum production is extremely energy-intensive and uses electricity throughout the smelting operation.”

      I noted over at Econospeak that prices have been recovering recently. Dollar appreciation is one factor! Trump’s fiscal stimulus will make that worse. Higher US energy costs relative to those of Iceland – also noted over at my Econospeak post.

      I wonder why Bottom Feeder did not mention the market reasons for the drop in primary aluminum production. Either he does not get what is plainly mentioned by his own link or his bosses in the White House told him not to omit these key details.

      1. 2slugbaits

        pgl …or his bosses in the White House…

        I believe that was a typo and you meant to say “…or his bosses in the Kremlin…”

  15. joseph

    Trump says he will put tariffs on aluminum and steel. Yesterday the EU says they will put tariffs on Harley Davidson motorcycles. Today Trump says he will put tariffs on EU automobiles. And so it goes.

    Republicans have a lot to answer for. They put this abomination in the White House and covered for and enabled him at every step, just so they could get their tax cuts for the rich.

    Never forget and never forgive the Republican Party.

    1. 2slugbaits

      I think the Electoral College has a lot to answer for as well. It was Republicans who nominated this clown show, but it was the Electoral College that voted for him. We wouldn’t be facing this crisis if the voters had been allowed to decide the election. The usual rationale for having an Electoral College is that it’s supposed to act as a check against the voters directly electing a guy like Trump. But yet in this case the Electoral College misfired. It was the voters who got it right and the Electoral College that gave us the megalomaniac. And with a few exceptions, the “never Trump Republicans” deserve a lot of blame as well. During the primary they swore on a stack of Bibles that they would never support the guy. But how quickly they turned around. How does Ted Cruz face his wife each morning after the insults Trump threw her way? I suspect that PeakTrader might be the only person on this blog who would grovel before Trump even after Trump insulted his wife the way Trump insulted Cruz’s wife and lied about Cruz’s father. And even at this blog Rick Stryker used to complain about what an ignorant pig Trump was…but yet, Rick Stryker always manages to find a way to defend Trump.

      1. dilbert dogbert

        Read Hamilton, Federalist Papers, on the need for the electoral college. His point was that it would check the election of someone like Trump. Massive failure on his part. Not really. He did not anticipate how the states would choose electors. In many states they are just rubberstamps.

  16. Steven Kopits


    Some numbers:

    US steel production is essentially unchanged in the last thirty years.,

    In 2017, the top steel exporters to the US were:

    – Canada: 16%
    – Brazil: 13%
    – S. Korea: 10%
    – Mexico: 9%
    – Russia: 9%
    – Turkey: 7%
    – Taiwan, Germany, India together: 9%
    – China was 11th, at less than 2%, and declining

    Other countries collectively contributed 22% of US imports, all with individual market shares less than 2%.

    If one is arguing strategic vulnerability, then we are speaking of Russia and China, so a fairly negligible 10% of US imports. S. Korea and Japan could be at risk in a world war, but right now, the focus should be on maintaining a united front with S. Korea againt N. Korea, not starting a trade war.

    It is true that steel industry employment has shrunk in recent decades, in part due to productivity investments US plants have made to remain competitive.

    I would note, to Slugs point, that there is some risk to treating steel as a uniform commodity. In my experience, even commodities that look completely fungible on the surface are not when it comes to actual applications.

    On the whole, however, neither the production level nor the security arguments hold up.

    1. Steven Kopits

      I’d add that the tariffs are not on manufactured products. Therefore, US manufacturers of such products — automobiles, hammers and toaster ovens — will have to pay a higher, US price for steel, which will put them at a competitive disadvantage. That’s why Ford’s share price fell 3%.

      The tariffs are an implicit subsidy to foreign manufacturers of finished products who export to the US.

    2. dilbert dogbert

      “I would note, to Slugs point, that there is some risk to treating steel as a uniform commodity.”
      It would be interesting to see the types of steel being imported from each of these countries. Rebar or auto body steel anyone.
      From sometime in the last century I read that American mini mills were hurting big steel. They operated on scrap instead of raw ore. Still true?

  17. Steven Kopits


    The protection of aluminum is a less clear cut matter. The US has closed most of its smelters, and only one remains which can produce aircraft grade aluminum used in, for example, US fighter jets.

    It appears aluminum prices are unnaturally low because China has vast excess capacity and is subsidizing their output to maintain production and employment.

    Based on what I have read (not a huge amount), the protection of the aluminum industry appears justified at this time.

    1. 2slugbaits

      Steven Kopits To the extent that the Administration truly believes lost capability to produce high grade aluminum represents a national security threat (and given the very small amount needed to support defense requirements I’m skeptical), the rational “second best” option is to build an organic “warm base” using government owned arsenals. That’s why we have arsenals. Arsenals are dreadfully inefficient business entities, but that inefficiency doesn’t spill over to other sectors of the economy, as would happen with tariffs. The worst that happens is that we waste a few more taxpayer dollars. That’s not good, but it’s a far better choice than the kind of losses we’d get from tariffs. Remember, we’re only talking about 30K tons per year needed to satisfy defense requirements.

      1. Steven Kopits

        Yes, one could assemble a strategic stockpile.

        I think behind it is a broader logistics and supply analysis of military vulnerability in time of war (might need more than 30k tons of aluminum during wartime).

        Are we smart enough to do that? Probably not.

  18. joseph

    Good golly. Now Peter Navarro with Wilbur Mills has put out a paper saying that European value added taxes are protectionist because, for example, Germans get a rebate of the tax for exports. This is so mathematically incorrect, how can Navarro even call himself an economist when he gets something so fundamentally wrong.

    A VAT is just a sales tax. It doesn’t advantage domestic production. It is the same sales tax charged on cars sold in Germany regardless of whether they are domestic or imported, no advantage for either. Likewise, for cars sold in the U.S., consumers pay a sales tax, regardless of whether they are domestic or imported, no advantage for either.

    Germans get a VAT rebate on cars they export. U.S. manufacturers don’t pay a sales tax on cars they export. Neither has a protectionist advantage.

    How can a so-called “economist” like Peter Navarro get this so wrong? How can someone write something so reasonable in 1984 as in the opening post and then become so brain damaged as to write this Commerce paper in 2018?

    As I wrote before, is Navarro one of those people who went full crazy nationalist after 9/11? Did he suffer some other psychic trauma? How do you explain the radical transformation to Trumpist fascist.

    1. Steven Kopits

      A high VAT is, in some sense, protectionist. Because it makes consumer consumables and durables more expensive — 27% more expensive in Hungary — it causes the consumers to move down market. This in turn will tend to favor cheaper imports for South and East Asia. So, yes, it pushes Europe more into the Wal-Mart direction, which tends to disadvantage advanced country exports. At least that was my experience in Hungary.

    2. PeakTrader

      Here’s what Business Insider’s “Trump’s anti-China trade chief is no economic illiterate” says about your comment:

      “Navarro’s critics accuse him of “a very basic error”, arguing that VAT is neutral towards trade. But that is to miss the point. VAT may be neutral to trade, but the US tax system is not, effectively imposing double taxation on US producers attempting to compete in international markets.

      In short, it looks very much as if Navarro’s opponents have leaped on a couple of points in his paper, taking them out of context in order to point, shriek and ridicule in a vicious ad hominem attack that does their criticism no favors.”

  19. Ed Hanson.


    According to your explanation, which is reasonable as far as it goes, it does not matter what the size of either the sales tax or the VAT is. So lets go a little deeper in the numbers. The highest sales tax rate in the US is about 10%, and EU VAT tax is 21.5%. Now lets make an assumption, reasonable I believe. The governments of both the US and EU need all the tax revenues it gathers to function. So what would happen in the EU if the VAT was 10%. It would need to raise other taxes to recover the less VAT collected. These taxes could be property, income, capital gains, or whatever category you could imagine. But whatever category one thing true, they are not allowed by international trade rules to be rebated to the exporter, if so, they become an illegal subsidy. That is the situation in the US, exporting companies are paying more in non-rebate taxes relative to their total tax bill than the companies in the EU. And this is part of the explanation showing that international trade treaties formerly negotiated are unfair to the US. The percentage size of taxes legal to rebate should have be taken into account,


  20. joseph

    Kopits: “A high VAT is, in some sense, protectionist. Because it makes consumer consumables and durables more expensive — 27% more expensive in Hungary — it causes the consumers to move down market. This in turn will tend to favor cheaper imports for South and East Asia. So, yes, it pushes Europe more into the Wal-Mart direction, which tends to disadvantage advanced country exports. At least that was my experience in Hungary.”

    Did Kopits take the same crazy pills as Navarro? He says that high taxes in Hungary make consumers too poor to buy expensive cars from the U.S disadvantaging U.S. manufacturers. Using your logic, then it also means that low taxes in the U.S. cause U.S. consumers to be so rich they buy too many European luxury cars also disadvantaging U.S. manufacturers.

    Taxes are too high — no, wait, taxes are too low. Whatever, taxes are protectionist!

    Sheesh, this is what passes for reasoned thought on the right.

    1. Steven Kopits

      Joseph –

      I fail to see what it is you don’t understand.

      A high VAT rate will tend to drive consumption to lower priced goods given a fixed budget constraint from the consumer, and thus may favor countries with a comparative advantage in lower priced goods. This is not conceptually difficult. This is not protectionism in the sense of picking out a specific good or exporting country. It may, however, distort trade to a certain class of countries. And, yes, that is what I observed in Hungary.

      1. Steven Kopits

        To be clear: A VAT is not otherwise protectionist.

        If Ford exports to Hungary, that car will be purchased by Ford Hungaria Kft, which pays VAT on imports and recieves VAT on the resale of the car, with the difference the effect tax revenue to the Hungarian government.

        If Ford manufactures a car in Hungary, it will pay VAT on materials and energy used (but not labor) and receive VAT when it sells the car. The difference is the net revenue to the Hungarian government.

        Either way, Ford only pays VAT on the value-added, hence the name, VAT.

  21. PeakTrader

    Differences in disposible income between countries affects the quantity and quality of goods purchased regardless where they’re produced.

  22. joseph

    Ed, the relative sizes of local taxes does not cause protectionism. Let’s use your example of a 10% sales tax in the U.S. and 22% VAT in the EU.

    Manufacturers in U.S. and EU both produce an item with a value of $1000.

    In the U.S., with sales tax, both the U.S. made and the EU made items cost the consumer $1100. Where the protectionism?

    In the EU, with VAT, both the U.S. made and the EU made items cost the consumer $1220. Where is the protectionism?

    The EU manufacturer does not pay VAT on its exported item so that its export cost is $1000. Likewise the U.S. manufacturer does not pay sales tax on its exported items, so its export cost is still $1000. Where’s the protectionism? (Don’t get hung up on the idea of “rebate”. It’s just a way of saying there is no export tax, same as as in the U.S.)

    And you can’t just pick and choose which taxes you want to compare just to make an argument. For example, you could argue that the new 20% corporate income tax, lowest in the developed world, is protectionist. In fact, the Republicans explicitly said that their corporate tax cut was to make U.S. goods more competitive. Since the tax cut is debt financed, you would say the government is unfairly subsidizing domestic corporations at a loss.

  23. SecondLook

    A quick note about the Electoral College – none of the founding fathers envisioned that a number of states would become “rotten boroughs” (a problem they were aware of and tried to avoid in how the House of Representatives was constructed). Population ratios between the states were no greater than 10:1, now it is closing in on 75:1. Madison, et al, never considered that possibility.
    Sadly, it’s an unfixable problem, and only going to get worse over time.

    1. PeakTrader

      The Electoral College moderates Presidential elections. Nationally, Hillary received about 3 million more votes than Trump, but received over 4 million more votes in California. So, extremists were moderated.

      1. PeakTrader

        Actually, it has moderated a lopsided vote in one large state, i.e. California in 2000 and 2016, but hasn’t moderated regions, i.e. Southern or Rocky Mountain/Midwest states.

      2. PeakTrader

        It may not be a good idea when one very liberal state or one very conservative state has a major influence on a Presidential election. It may be better when moderate states prevail.

        1. PeakTrader

          In the 2016 election, California’s lopsided vote more than offset all the votes in moderate states, which included many states large and small in all regions of the country.

  24. Ed Hanson.


    I know your socialist ideals keep you from thinking in terms of profit, but it is what business is based on. Taxes are fixed cost, they must be paid before a profit can be realized; except, of course, those taxes which do not have to be paid. You missed my point, so I will put it another way. Because the EU uses VAT taxation it receives more taxes from VAT than the US receives from sales taxes. That comes from the difference of 21.5% and 10% and less throughout the US. So I will attempt to simplify an example.

    EU country A gathers 50% of its GDP in taxes – 20% of GDP from the VAT and 30% of GDP from all other forms of taxation. For export products, a business in A has a 30% fixed cost into that product.

    US exporting state plus Federal government gathers 50% of its GDP in taxes. 10% of GDP from sales taxes and 40% from all other forms of taxation. For export products, a US business has 40% fixed cost into that product.

    Although over all taxation of both the EU country and the US are the same, because of the form of taxation used, the EU company has a 10% cushion for profit or more importantly lower sale price of the product while maintaining the same profit on that product.

    So don’t tell ask me where is the protectionism. It comes, for export, within the form of taxes. The protectionism shows up not necessarily in the price, but the health of, and the creation of, businesses. It is a result of the high differential between the VAT and the sales tax.


  25. 2slugbaits

    PeakTrader Global prices of steel and aluminum are too low, because of overcapacity, subsidies, dumping, etc..

    And a tariff intended to boost US domestic production will somehow reduce global overcapacity???

    1. PeakTrader

      2slugbaits, the U.S. has no control over foreign overcapacity. It does have control over U.S. undercapacity.

  26. Ed Hanson.


    It is not the differential in state population that is important but the population of a state compared to the whole population.

    1790 – US population 3,500,000. Population of Virginia 500,000. That is Virginia alone had 1/7 the US population.

    2016 – US population 328,000,000. Population of California 39,000,000. California is less than 1/8 the total population.

    The problem is less so now, the electoral college works better through time. But that is not and never has been the problem. The electoral college is one of the pillars of Federalism. Besides its creation being necessary for the uniting of small states with the large to form the US, it enforces the ideal of 51 separate Presidential elections. It continues to ensure that the whole country large and small remains important for the elections.


    1. dilbert dogbert

      Read somewhere that 3 states elected Trump. Doesn’t seem to be a very unifying election.

    2. 2slugbaits

      Ed Hanson
      Wrong. The primary source of the distortion in the Electoral College comes from allocating 2 senators per state irrespective of economic size or population. Voters in Idaho have many times the electoral influence of voters in California. The Electoral College has misfired twice in the last five elections. That’s hardly an improvement over its historical average, which was never good to begin with. In fact, it failed with the very first contested Presidential election and led to Twelfth Amendment. And the Twelfth Amendment soon led to a perverse result in the 1824 election. It’s been an abject failure from the get go.

      it enforces the ideal of 51 separate Presidential elections

      In what sense is it “ideal” to have 51 separate Presidential elections? In fact, what the Electoral College typically gives us is 41 largely irrelevant elections that get no attention and a handful of states that get all of the attention and consequently disproportionately unequal and outsized political power. The popular vote would force politicians to campaign on platforms that would attract the median national voter rather than the parochial interests of a few states. I don’t think Presidents would be so tempted to impose steel tariffs to attract a small but critical voting group if we elections were based on popular votes.

      electoral college is one of the pillars of Federalism

      Actually, it was an afterthought. And I think you are perverting Madison’s original (i.e., prior to writing the Federalist Papers) understanding of “federalism”. The kind of mish-mash we have today is due to the mish-mash thinking that said the federal government should be a mish-mash of popular government and a confederation of states. Hamilton thought that it was a kind of halfway house to a national government. His vehicle for transforming it into a national government was the “commerce clause” of the Constitution. Don’t just read the Federalist Papers…try reading their private correspondences in which they argued about what they actually believed and what kinds of disingenuous arguments they had to present in order to achieve a “more perfect union.”

      As to democracy versus republican government. This is an invented distinction created by Madison for tactical purposes. For a good discussion of this, see Robert Dahl’s “On Democracy”:

      If you don’t know who Robert Dahl is, then you probably don’t have any business commenting on American political theory:

  27. joseph

    “It continues to ensure that the whole country large and small remains important for the elections.”

    Huh? The demos in democracy means “the people”. Who knew that the Greeks 2500 years ago were really referring to square footage.

    1. Ed Hanson.

      Jo and demos

      Which is why we are a Republic with democratic institutions, not a democracy. We are better because of it.


      The election was not three states. Of the 51 elections, Trump won 30, Clinton won 20, and Maine was ambiguous. the Electoral results were 304 to 227. Also, there were 7 electoral votes that shamed themselves and their states and their country.


      1. noneconomist

        Ed Hanson: your discussion of the Electoral vote lacks both depth and understanding.
        The Constitution gives the states the power to determine how electors are chosen. No surprise that all 50 states and DC now choose electors by popular vote. No surprise either that popular vote winners/electoral losers (beginning with Jackson when larger numbers of citizens gained the vote) had what they felt were legitimate gripes. Combining popular vote totals is the natural result of 51 elections determined by people’s votes.
        The number of states won by a candidate can be insignificant. Had a few thousand votes shifted in Michigan, Pennsylvania, and Florida, Trump would still have won more states but would have lost the election.
        Much was also made of how many counties Trump won in comparison. Not a big deal when you consider Trump won every county in Nevada with the exception of Washoe and Clark but lost the election by almost 3%.
        Even in California, there’s a large swath of red up and down the state. The northeast corner alone is a large region carried solidly by Trump; it’s geographically larger than some eastern states. Problem? Very little population over very large expanses with very little influence on election outcomes.

  28. 2slugbaits

    Trump’s tweet: “Tariffs on steel and aluminum will only come off if new & fair NAFTA agreement is signed”.

    WTF??? Japan bombs Pearl Harbor…therefore, let’s declare war on Brazil! This guy is nuts.

    1. noneconomist

      Which, of course slugs, puts a spotlight on the dimwits Nunes and McCarthy (the guy Trump calls “My Kevin”)whose congressional districts are huge agricultural exporters to, yes, NAFTA countries as well as Asia. These districts are also home to thousands of undocumented ag laborers who are the targets of the dimwits’ congressional allies (they want them to go home and then come back to work….).
      Added dimwit bonus: McCarthy, a big supporter of Trump’s infrastructure plan, has contributed significant dough to an effort by California Trumpers to repeal the state’s recently enacted additional 12cents/gallon gas tax. The same Trump infrastructure plan that will require plenty of matching funds from the state. Maybe an additional 12 cents/gallon after the current tax is repealed?

  29. joseph

    Ed, you contrived an absurd example which unfortunately illustrates exactly where you went wrong.

    You assumed that both the EU and the U.S. have the same 50% of GDP tax rate. But this couldn’t be more wrong. The U.S. has one of the lowest tax rates in the OECD, 26% of GDP. (And before you start squawking, that includes federal, state and local taxes).

    Meanwhile the OECD median is 34%, Germany is 36%, France is 45%, and Denmark is 46%.

    So your argument is turned completely upside down. Even considering the difference between U.S. sales tax and EU VAT rates, U.S. exporters are receiving an enormous subsidy in the from of low tax rates.

    So again, where is the EU protectionism?

  30. Ed Hanson.


    “No surprise that all 50 states and DC now choose electors by popular vote.”
    This is quite unclear. Do you mean that there is active head to head electioneering for who will be the state reps to the electoral college? This is not my experience. What I have seen is competing slates of electors are nominated, and the slate representing the popular vote winner is selected to represent the state at the electoral college. They are pledged to vote accordingly, not their conscious. Admittedly,
    states can be different how the choose their electors. Maine and Nebraska experiment being the most obvious to their detriment I would opine.

    “Combining popular vote totals is the natural result of 51 elections determined by people’s votes.”
    Natural maybe but completely outside the reality of our election process.

    As for the rest of you post, take it up with DDog who’s post implied the number of states was important and only three states counted and were counted. I merely tried to give a more accurate accounting, not a legal opinion of US elections.

    So what was really your point?


    1. noneconomist

      Confused about what? Since the election of 1824, the popular vote has gained more and more significance. Granted, it–the vote for President– is an indirect vote, but you would be hard pressed to convince voters they did not vote FOR Trump or Clinton. Each state chooses its electors by popular vote. Very few voters know WHO is included in the electoral slates. What they do know is that each slate is pledged to cast its votes for the candidate they represent. Again, whichever slate receives the most POPULAR VOTES wins. I’m confused about your insistence that popular votes DON’T matter.
      Originally, Ed, the Founders believed the electoral vote would ideally be nonpartisan, that those electors chosen by each state legislature would be patriotic enough to choose the best and most qualified person. That, obviously, lasted until the election of 1800.
      Unless your cave is cut off from the real world, you can’t miss the popular vote tally (I first noticed it in 1960), which was much discussed in 2000 because of 512 POPULAR VOTES deciding the election.
      You also must realize that a candidate who won the right 12 states (beginning with California and Texas and concluding with Wisconsin and Minnesota) could win the presidency. Theoretically, that candidate could lose 39 states, making those votes–and those states–irrelevant. That will likely never happen, but in numerous past elections–1960, 1976, 2000 to name three–minor shifts in popular vote totals in only a few specific states would have resulted in much different election results.

      1. noneconomist

        It also occurs to me, Ed, that, having lectured to the unfaithful here, you have little idea about the Founders’ concepts re: the electoral system.
        For review, you might want to re-examine “The Federalist Papers,” specifically #64 (Jay) and #68 (Hamilton).
        Jay, for example, points to the importance of the electors themselves. “…men of whom the people have had time to form a judgment and with respect to whom they will not be liable to be deceived by those brilliant appearances of genius and patriotism which, like transient meteors, sometimes mislead as well as dazzle.” There’s much more and certainly worth examination.
        Hamilton was even more succinct. In choosing a leader for the highest office, “…the immediate election should be made by men most capable of analyzing the qualities adopted to the station and acting under circumstances favorable to deliberation and to a judicious combination of all the reasons and inducements which were proper to govern their choice.”
        The electors should be, in Hamilton’s view, a SMALL number of persons selected by their fellow citizens from the general mass (who) will be most likely to possess the information and discernment requisite to so complicated an investigation.”
        The electors, far from being rubber stamps, were to make wise, prudent choices because they would be men of “ability and virtue,” who would guard against “heats and ferments…tumult and disorder.”
        Hamilton even warned about the “…most deadly adversaries of republican government…chiefly from the desire in foreign powers to gain an improper ascendant in our councils…”

  31. Ed Hanson.


    subsidies are not derived from nor defined by generally applied low tax rates. And yes I know it is thought so at least publically by leftist ad socialist. Make no difference though, that thought is just wrong.

    As for the rest, I explained my example was simplified, deal with it.

    And finally to the newly converted leftist who have found now that debt is ad, spending is taxation eventually. All US government spending is in the mid-30% range of GDP.


    1. 2slugbaits

      All US government spending is in the mid-30% range of GDP.

      Do you understand why the NIPA tables do not include transfers in government purchases and investment?

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