Economic policy uncertainty as measured by the Baker, Bloom and Davis index is elevated (again) due to trade policy.
Figure 1: US Economic Policy Uncertainty index (blue) and centered 7-day moving average (bold red). Source: policyuncertainty.com accessed 14 May 2018, and author’s calculations.
Does this uncertainty matter? This article addressing just the Section 232 sanctions suggests the answer is “yes” (I must admit it’s kind of funny as an economist to try to convince people that uncertainty matters for investment and planning purposes — I thought it was a no-brainer).
As a social scientist, I am curious to see what happens if additional Section 301 sanctions are placed on another $100 billion of Chinese exports to the United States. And to then see the effects as Mr. Trump wavers and zig-zags.
Whatever the VSG Trump decides, it’s a good wager it will have no logic, consistency, or continuity. And will be destructive the very group (Republican soybean farmers etc) who voted for the bastard.
I got around the NYTimes firewall:
“For several weeks this spring, a handful of employees at a Texas steel manufacturer stopped producing the pipes used to drill thousands of feet below the earth’s surface to concentrate full time on another task: trying to win the company an exemption from President Donald Trump’s metals tariffs.
Borusan Mannesmann Pipe U.S. filed 19 separate requests with the Commerce Department asking it to exempt the multiple shapes, sizes and forms of steel pipes that it imports from its parent company in Turkey and then finishes at a plant in Baytown, Texas. Until it gets an answer, the 60-year-old business is paying significantly higher prices for imports of the raw material and is putting off any major projects.
In the two months since the Trump administration’s steel and aluminum tariffs went into effect, the Commerce Department has been deluged with more than 8,200 exemption requests from companies that import foreign metals. With just a handful of countries temporarily exempted from Trump’s steel and aluminum tariffs, companies are scrambling to win exemptions for every screw and spring they import, with each width and length requiring stand-alone filings. One company alone has submitted 1,167 of the filings, according to government officials.”
Oh my – Trump’s trade tirade has increased the regulatory burden, raised the cost of production for many American factories lowering investment and shutting down US factories. The reality directly contradicts the fact free spin from PeakIgnorance. I can’t wait for the next Fox and Friends so Peaky has a whole new set of lies to tell us.
Turkey’s leading pipe manufacturer opens a U.S. affiliate that hired American workers. But they did not pay bribes to Essential Concepts (aka Michael Cohen who is Trump’s attorney) so Trump puts a knife in their pack. Crony capitalism gone amok. But I’m sure PeakIgnorance will mansplain to us why this is good policy.
Interesting. Which factories have shut down?
If Trump and his fellow cohorts have a problem with some trade issues I have one word for them ( three actually but you get my meaning) WTO. It seems to me China has a better case than the USA in this dispute which is why it is China not the USA that has referred this to the WTO.
Any person who did not know what would occur was clearly out for a nap when Reagan and then Bush Jnr increased tariffs and quotas.
Two words back ‘three years’. If things go normal, that’s what it takes to get through WTO bureaucracy to get a decision, after the time it decides to take a case. And sometimes that decision turns out not to be final. WTO is a wet dream of those who believe creation of a bureaucracy was one of the pillars of modern civilization. The goal of President Trump of bilateral treaties is, if possible and by far a better process. Direct, smaller bureaucracy, and probably capable of being dealt with by existing customs service. If it becomes truly a treaty problem, then that’s what state department diplomats are for.
Aussies used to have the reputation of telling the lording bureaucrat where to stick it. What happen.
Ed Hanson: I must not be “any person”. I do not know of any academic study which concludes bilateral FTAs are inherently superior to plurilateral ones. Indeed, as Not Trampis alludes to, the likelihood of trade diversion is higher with bilateral treaties.
But be not troubled by academic research. The world is much more simple if you stick with bumper sticker formulation of trade policy…
“The goal of President Trump of bilateral treaties is, if possible and by far a better process. Direct, smaller bureaucracy”. Seriously? Did you read that NYTimes story that Menzie linked to and I quoted?
The bureaucracy is not exactly small or direct. Just ask those folks in Texas.
Ed Hanson So now you prefer bilateral trade agreements? Weren’t you the guy who urged Menzie to read the wise words found in the letter written by the 100 economists who supported Trump’s trade policies. That would be the same letter that contained this quote:
…hope that the President’s efforts to negotiate better trade deals, including willingness to re-enter the Trans Pacific Partnership (TPP),
You do know that TPP is a multilateral trade agreement and an explicit rejection of bilateral trade agreements, right? The letter you endorsed is at odds with what you’re saying here. A week ago you were all for bilateral agreements, yesterday you were praising a letter that supported multilateral trade agreements, and today you’re back to bilateral trade agreements. Lately you’ve been contradicting yourself almost as much as PeakTrader. And not just with trade issues. I guess that’s the price you have to pay when you mold your views around the latest tweet from Dear Leader rather than reading thoughtful academic papers.
so you do not support a rules based regime. interesting
Bilateral treaties usually end up causing trade diversion. Our Productivity Commission has found this with our country. I very much doubt if your president or his ‘advisors/ cabinet members even know what this means
“Bilateral treaties usually end up causing trade diversion.”
Good point. Note to Ed- Jacob Viner wrote a paper on trade diversion. Check it out.
The geopolitical games to eliminate perceived threats, for dominance, for resources and wealth,…have been in play since time immemorial, often with devastating effects and extreme collateral damages. What we are seeing today involving NK, Iran, Palestine, Syria, Russia, China,… are just US maneuvers seeking out or applying lever points or pivots to overpower, weaken, isolate US opponents to achieve US geopolitical aims or US leaders’ personal/group ambitions. In such a context, beyond the geopolitical strategy, tactic, aim or purpose, I think it is quite futile to take the rationality, logic, theoretical correctness and propriety of US narrative for each move too seriously.
Trade Diversion, a 1950s term/finding, was coined before the major implementations of the VAT. It assumes efficiency of production of products naturally means lowest price for products and subsequent purchases of them in international trade. The VAT changed that assumption. There are far more changes that impacted international trade since the 50s. It is, therefore, more difficult to determine the negative impacts of Trade Diversion on “NATIONAL” economies today than in the 50s.
“Trade Diversion, a 1950s term/finding, was coined before the major implementations of the VAT. It assumes efficiency of production of products naturally means lowest price for products and subsequent purchases of them in international trade. The VAT changed that assumption.”
Seriously? Europe never had any form of excise or sales tax before 1950? God – what a dumb comment. But pray tell – where is your revision of the Viner model dude? I am sure the American Economic Review is waiting for your 1st draft!
Pgl, why all the anger? Being such a negative commenter gets you what?
“Seriously? Europe never had any form of excise or sales tax before 1950? God – what a dumb comment.”???? No, Europe did not. Specific countries did though. What a dumb comment. VAT is not the same as a sales nor excise taxes. But, since you are an educated economist, you can believe what you must to make another meaningless point.
The European Economic Community EEC was created in 1957, consisting of 6 member states, but did not include all of Europe.
Harmonizing the VAT in the EEC member states began in 1977.
The Maastricht Treaty (1992) created the European Union, which has now grown to 28 countries.
So your dumb comment was wildly inaccurate.
CoRev: I really don’t understand what the relevance of VAT is. You can have trade diversion even with a VAT (just like you can have trade diversio with excise taxes; and under certain assumptions an income tax is equivalent to a consumption tax, so…)
Menzie, trade diversion was being presented as bad and due to the current ZTE sanction/tariff actions, but trade diversion has many other causes (taxes, sanctions, political changes, trade agreements, etc.) and is not necessarily bad. What amazes me is the the lack of understanding of the bigger picture surrounding Trump’s actions. Negotiation leverage may be manufactured and alleviated when needed.
But then I’m not afflicted with TDS, as I wasn’t afflicted with Obama, even though I disliked some of both their actions.
CoRev: Actually, I brought up trade diversion in the context of your assertion that bilateral trade agreements were better than plurilateral. Trade diversion as understood in the economics literature (and this is an economics blog) is when differential tariffs are applied in the context of a preferential trading arrangement. At the limit, when the preferential trading arrangement is the world (i.e., signatories to the WTO), then trade diversion — which is diversion of trade from the lowest cost producer — is by definition zero. Look it up. You might find actually reading an economics textbook edifying.
CoRev does not understand his own comment either. He clearly has no clue about even the basics of economics.
Menzie you can be amazing. Where did I assert: “I brought up trade diversion in the context of your assertion that bilateral trade agreements were better than plurilateral.”? My assertion was there are multiple reasons, some very good, to implement the actions resulting in trade diversion. Tariff’s are only one example.
I stand by this comment: “Menzie, trade diversion was being presented as bad and due to the current ZTE sanction/tariff actions, but trade diversion has many other causes (taxes, sanctions, political changes, trade agreements, etc.) and is not necessarily bad. ” We establish and support the conditions for preferential trading (trade diversions) every day, with (bi and multi)-lateral trade agreements.
Why do you, not trampis, pgl, etc, consider that tariffs are the only cause for trade diversion and trade diversion is (always overall) negative? Why ignore logic to make a point obscured by your TDS?
CoRev: Your first comment on this post was:
This seems to be a general statement referring to FTAs. Sanctioning ZTE which is a purchaser of semiconductors sold by American companies does not have any implications for trade diversion for the US… so what else could your critique of trade diversion refer to? Please clarify.
I was too kind to you. I guess you do not know that the whole purpose of VAT was to have a non-distorting way to raise sales taxes. So if you actually bothered to model this out, VAT would not impact Viner’s conclusions.
Yes – yours was more than a dumb comment. It was an incredible dumb comment.
I would suggest you actually learn economics before dismissing Viner’s seminal paper.
Menzie, I don’t see how you could interpret my quoted comment to mean:” This seems to be a general statement referring to FTAs.” You clearly understood my meaning from the beginning: “CoRev: I really don’t understand what the relevance of VAT is.You can have trade diversion even with a VAT (just like you can have trade diversio with excise taxes; and under certain assumptions an income tax is equivalent to a consumption tax, so…). Exactly so and my point.
About bilateral trade deals.
Of course you haven’t seen any academic studies of bilateral trade advantages, it is too straight forward, and not to your international leanings which cause you to try to diminish the US. Without your assumed breadth of knowledge of ‘trade diversion’ studies, I would bet not one of them was a case study that fits the US situation, where we have negotiated ourselves into unequal tariff treatment, Our trading partners are allowed and do place higher tariffs on our products than we place on theirs. The WTO can not and does not do anything to right that wrong. Bilateral trades deals would. You want a theoretical case study Menzie, lets assume that trade retaliatory trade tariff on Wisconsin Cheese you thought was so important by implementation turned out to be blatantly against WTO rules and obligation. Since you are such a lover of the WTO, you obviously am happy that a year will go by before the WTO appoints a judge to look at the case. Then glory be, the greatness of waiting another three years for a settlement. Nice for the ivory tower academic social scientist economist, but much too slow and too late for the poor cheesemaker. But of course all this is just hypothetical.
Unlike you lefties, conservatives are do not lock themselves into only one direction. As President Trump said about the Japanese initiative to bring back the US into the TPP, it is possible to return is to the deal if revised such it too good to turn down, fine, but if not bilateral is the way to go.
Ed Hanson conservatives are do not lock themselves into only one direction.
Can’t argue with that, but I think you might be taking the “consistency is the hobgoblin of small minds” thing a little too far.
I would bet not one of them was a case study that fits the US situation, where we have negotiated ourselves into unequal tariff treatment, Our trading partners are allowed (emphasis added) and do place higher tariffs on our products than we place on theirs.
Allowed??? You make it sound like we’re being played for suckers. This is an excellent example of the kind of zero sum mercantilist “thinking” that stands behind a lot of the Trump nonsense. It’s the kind of thinking that I’d expect from someone who has spent his entire life working within a NYC real estate market. It’s as though tariffs that other countries impose on US goods are somehow a benefit for those countries! Trumpinistas have this misguided view that tariffs are something that countries should try and use to extract value and the only check on the ability to impose tariffs is the threat of retaliation. This view is profoundly wrong. In general, when a country imposes a tariff it’s the tariff collecting country that is made relatively worse off. When we impose a retaliatory tariff the net loss to ourselves is greater than the loss to the foreign country. Do you understand why? Is it time for that famous English cloth and Portuguese wine lecture? Your reasons for supporting a retaliatory tariff make about as much sense as cutting off your nose to spite your face.
As to that tariff on imported cheese, no doubt it would help Wisconsin cheese producers. Of course, it would also hurt producers of other commodities, such as poultry, pork and beef. The net effect would be an overall welfare loss.
Please read an econ book.
To the lefties, who are so typical in reaction.
The big words today are ‘Trade Diversion’. Think now as if you are in a Washington DC protest and action gathering. Repeat after me, bullhorn: “trade diversion” (listening), bullhorn: “trade diversion” (still listening). Please continue until you have reached your chant quota.
Now lets talk about ‘trade diversion’. Studies have gone beyond the theoretical two country studies and have included multi-country custom unions. Custom unions, what a quaint phrase, surely this is not something of the 21st century? And if such a custom union was of a sufficiently large economic entity, then trade diversion would be of a major concern to the chanting lefties. There must be no worry, we are protected by the WTO.
But returning to the matter seriously, the WTO does make exceptions for custom unions. And the biggest custom union is the EU. To make it clear, customs unions are allowed to make exception to Most Favored Nation status nondiscrimination. So where is the lefty protest to such a large economic entity causing this trade diversion. It does not exist. It is not blame America first (and always).
Also it should be noted this feigned trade diversion outrage did not in anyway answer the problem which bilateral trade agreements can solve. That is the unequal tariff treatments between the two countries. A problem that the WTO can not and will not solve. And I ask a simple question, if bilateral trade agreements pose a possible problem of inefficient exports, due to higher possible tariffs toward other countries, then think this through. Assume a product which the US is the most efficient producer and therefore should be the most effective exporter. But because the WTO allows higher tariffs on some than others, the US and the world is possibly already suffering from trade diversion. But who cares, not the lefties, because this fits their agenda.
Let me guess. You probably bought the Brexit lie that Britain would be able to enter a series of highly favorable bilateral trade agreements. How’s that working out?
Studies? I bet you have not even read Viner’s 1950 classic so I have to wonder what “studies” you are referring to as you provided zero citations. Here’s one from a few years ago. Now STFU and READ!
A more recent study that Ed has not read:
Make that zero studies Ed has cited versus these two!
Pgl, your referenced study in Figure 1 shows well why RTAs may need renegotiation after year 5. Furthermore your reference tries to model this empirical failure: “The net result is that “the empirical work has failed to reach firm conclusions on even the most basic issue regarding preferential trading agreements: whether trade creation outweighs trade diversion.” (Clausing, 2001, 678″) ”
Which has been my point, is trade diversion good or bad? Probably both depending on the bi-lateral trade implemented under these agreements. Please remember non-economists do not suspend logic over economic hypotheticals.
CoRev: I don’t think one ever says “trade diversion” is good — as it means you are sourcing from a higher cost producer. The question is whether trade creation benefits outweight trade diversion, i.e., the net effect. So, trade diversion is always bad (unless you have some weird weighting scheme for the marginal utility of a dollar for consumers vs. producers, and even then I’m not sure how you get there…)
Please, please, please read a trade economics textbook. And while you’re at it, please, please, please read an intermediate macro textbook.
Menzie, every study I see referenced is based upon a hypothetical model. We don’t live in a hypothetical but a reality-based world. I’ve already used an economics definition, and that doesn’t seem to register, so I’ll try a wiki definition: “Trade diversion. Trade diversion is an economic term related to international economics in which trade is diverted from a more efficient exporter towards a less efficient one by the formation of a free trade agreement or a customs union.”
If it was so bad why would any international entity enter into a trade agreement, since any transaction could be improved with a new more efficient source. But the real world doesn’t buy on efficiency, but does buy on cost (price and other factors included) as you pointed out.
In your hypothetical world efficiency is supposed to equate to lowest cost (price and other factors included). It’s those other factors that can drive the costs of trade. I realize as a purist you do not recognize the “other factors” related to trade “(unless you have some weird weighting scheme for the marginal utility of a dollar for consumers vs. producers, and even then I’m not sure how you get there…).
CoRev: I can’t understand what the heck you’re trying to argue. I doubt any economist who had trained in international economics could either.
(From an author of a forthcoming textbook on international economics).
Menzie – what do you think of Kevin Drum’s take?
I do not know what world you live in but conservatives usually support free trade. We abhor trade barriers as they distort the allocation of resources and increase the prices of goods for the less well of. It is people of the left that want trade barriers which is why I say either people who support Trump on this are either ignorant or secret lefties.
Trade diversion is part of studying international economics. I think it was taught in my second year perhaps about 40 years ago.
As I said our Productivity commission has shown this has occurred in numerous bi-lateral treaties we have signed and hence it does not have a very high opinion of such treaties.
I would normally be staggered by this administration’s lack of understudying of what occurred when messrs Reagan and Bush raised trade barriers however ignorance seems to be their ‘best’ trait.
I am interested in your Productivity Commission. Would you point a link their way?
no problem tramp
I was wondering who Jim was but I been called worse.
To all those who aren’t lockstep lefties.
Note the responses to my post. Not one dealt with the issue that ‘trade diversion’ is already a fact and built into the WTO. The fact of the matter ‘trade diversion’ is just a talking point of little importance but available for the loud left.
Finally, what an opportune time for a WTO ruling on Boeing and Airbus. This is the exalted WTO at its best, and currently loved by the lefties. Remember the three year results I kept referring to, well that number really underestimates the ability of the WTO to rise to bureaucratic heaven. The beginning of this dispute was not 3 years ago not 2014, but 2004. yes that’s right, 14 years ago. Not that I care, but if you want a good laugh (works better than a good cry) read this:
And our imposing tariffs is supposed to improve things? And I didn’t know “lefties” were in love with the WTO. So I guess all those protesters in Seattle were really alt-right types. I don’t know about you, but I’m not a voter an EU country. If I were, then I’d be complaining about EU protectionist policies making me worse off. But I am a voter in this country, so I naturally focus my attention on US economic issues. Anti-trade policies within the EU mostly hurt EU citizens. Too bad for them, but that’s their problem not mine. Anti-trade policies in the US mostly hurt US citizens, and that’s why I pay more attention to US policies.
You seem to think that the reason we have foreign trade is to provide domestic companies with opportunities to export goods and services. In your mind it’s all about opening up markets for US based companies. That’s mercantilist thinking and it’s wrong. The reason we have international trade is because we want to consume more and engaging in trade allows us to do just that. The only reason we export goods is so we can pay for imports. We don’t export in order to enrich Boeing shareholders. We export in order to buy imports.
Jabob Viner was neither “loud” nor a leftie. But at least he understood basic international economics. You clearly do not given your dismissal of his seminal work.
Airbus v. Boeing – a duopoly. Not exactly a competitive market. But yea France subsidizes the Airbus and we subsidize the products Boeing produces. Ever heard of the Foreign Sales Corporation tax dodge? Didn’t think so.
All this mean is that the lawyers get rich off of avoiding real competition. Sort of like how Apple and Samsung play the smart phone wars.
Ed, here’s another like. “Note the responses to my post. Not one dealt with the issue that ‘trade diversion’ is already a fact and built into the WTO. The fact of the matter ‘trade diversion’ is just a talking point of little importance but available for the loud left.”
One of the problems with the term is it is based upon the hypothetical “perfect” international trade model:
Tejvan Pettinger November 10, 2017
Trade diversion occurs when tariff agreements cause imports to shift from low-cost countries to higher cost countries. Trade diversion is considered undesirable because it concentrates production in countries with a higher opportunity cost and lower comparative advantage.
Trade diversion may occur when a country joins a free trade area with a common external tariff.” https://www.economicshelp.org/blog/glossary/trade-diversion/
How often does that “perfect” model actually exist in international trade? There are so many other causes for trade creation and diversion that tariffs can too often be subordinate. But those of “the loud left” commenting here think tariffs are the primary cause. It’s another example of how economic thinking can be restrictive or just plain wrong.
CoRev: So we shouldn’t use the concept of trade diversion? Why model anything, then. The rate of acceleration of an object on earth is 9.8 meters/second per second. But that’s in the imperfect world where there’s…an atmosphere. Should we junk that idea?
Geez indeed. Diverting away from the topic again.
Why do you insist on putting words into Corev’s writing. He wrote not one word against modeling but properly and correctly wrote of the limitations of modeling and how they are blindly referred to without acknowledgement of the limitations. An in this case and unfortunately, you to are a prime example of this blind economic referral to the models.
Just like the other lefties, you to do not comment on the fact that ‘trade diversion’ is a fact within the WTO and not just minor bit as would be between two countries but one that entails one of the great economic powers and every other country in the world. This attitude ignoring the real world just exposes your real agenda. That agenda is not ‘trade diversion’ but to wallow in and ignite anti President Trump sentiment.
Menzie, here is an idea for you. Put an economic letter together telling the of the drawbacks of custom unions, and for the sake of worldwide economic improvement insist such custom unions to grant the countries of the ROW the same terms of trade that exist within the unions. You should be able to gather not 101 signatures not 1001 signatures but 100,001 signatures. After all what good economist can not see the utility in freer trade, and without this ‘trade diversion.’
Oh yeah, never mind, I momentarily forgot that ‘trade diversion’ of itself is not part of your agenda. Geez.
Ed Hanson: The point is that CoRev was trying to assert that the theory of trade diversion didn’t work in a world with VATs. There is no reason why that should be the case, and it is hard to think of a model where it would be. Then CoRev tries to change the argument from “trade diversion doesn’t make sense” to “trade diversion costs might be outweighed by trade creation benefits”. Well, that’s not his original argument, and the reason he changed his argument is because it is indefensible.
Please, please, please, read an international economics textbook…
Menzie, Please, please, please, understand that hypothetical models may not represent empirical result, and we live in the empirical/real world with its results.
Menzie, as I already pointed out, you understood my original point from the beginning and added to it. When you say: “Why model anything, then.” you have a point that explains the old adage: “All models are wrong some have value.”
You also argued: “So we shouldn’t use the concept of trade diversion?”, but I never said that. you are arguing for arguments sake to make some meaningless point. Trade diversion has a varied causes within economics research, although you would have us believe it is SOLELY due to TARIFFS. My points were there are many causes for trade diversion othe4r than tariffs and they may be over ride the impacts of tariffs. You, and others, have argued all aroudn that point, but failed to clearly refute it. Instead you provided a confirmation. How, other than making a pointless argument, can this be interpreted?
Moreover, trade diversion is not a term localized solely to economics. Did you ever consider that those nuanced meanings are more valid to the real versus hypothetical economics world? Yes, this is an economics blog, but it operates in the real world.
See sometimes I get it right,
A rules based trading system is a conservative policy made in stone.
your link is
be warned the reports are quite long
Thanks for the link the reports are not only long, they are also prolific. The truth be told, I was hoping you would link directly to the reports you wrote about in particular. bilateral trade and ‘trade diversion’. That way we could compare notes apple to apple. None the less, I do appreciate the work done by the Aussies. It will take time, but I do need good night reading for better and quicker sleep.
Personal question, and if you wish, any chance your are involved in Australian Libertarian movement?