Given recent developments in the use of Section 232 in steel, aluminum, possibly uranium and automobiles, as well as the increasingly expensive bailouts of the ag sector, it behooves us to see some earlier perspectives on the use of such protectionist and interventionist measures, as provided by Peter Navarro.
From Peter Navarro, The Policy Game (Wiley, 1984), p.82, on the national security/trade policy nexus.
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. …
From Chinn and Navarro (1984):
It was M. David back then and Menzie today. I wonder if Trump has even read this paper.
Since we have been discussing soybean prices a lot, it is interesting to point out that these prices were near $9.50 per bushel when RONALD REAGAN was elected in Nov. 1980 but fell below $5 a bushel by 1986. How did farmers survive? Oh wait – something to do with inflation adjusted prices. The CPI today is almost 3 times what it was in Nov. 1980.
A 1983 evaluation of the 1981 legislation:
https://www.jstor.org/stable/pdf/1349141.pdf?seq=1#page_scan_tab_contents
The Agriculture and Food Act of 1981: Continued Policy Evolution
R. G. F. Spitze
North Central Journal of Agricultural Economics
Vol. 5, No. 2 (Jul., 1983), pp. 65-75
Under conditions present in the 1980s, I would agree with this assessment, in principle. However, China changed the “rules of the game”. By using espionage to obtain technology secrets and then virtual slave labor to replicate and sell that technology, China has undermined vast segments of U.S. production capabilities while enhancing its own wealth and ability to control its people.
• https://foreignpolicy.com/2019/03/19/962492-orwell-china-socialcredit-surveillance/
• https://thediplomat.com/2018/03/chinas-forced-labor-problem/
• https://durangoherald.com/articles/250831
• https://foreignpolicy.com/2018/10/02/pentagon-accuses-china-of-dumping-products-to-undermine-us-security-rare-earth-minerals/
Sometimes cheap isn’t cheap.
Technology secrets? WTF does that have to do with making steel or with farming? Another patented Bruce Hall diversion. Any more Trumpian BS for us today?
Broaden you thinking. If trade was simply between rice and soybeans, no one would give a c*** [edited by MDC].
Way to not answer my question Bruce!
Bruce Hall China changed the “rules of the game”. By using espionage to obtain technology secrets
Or course, those who live in glass houses shouldn’t throw stones. Remember, the US didn’t recognize international patents until the late 19th century. American entrepreneurs stole all kinds of ideas from Europe; e.g., the steamboat, the light bulb, the telegraph, the internal combustion engine, and more copyright infringements than I can count. And the US also changed the “rules of the game” by unilaterally extending patent and copyrights to absurd lengths of time.
China has undermined vast segments of U.S. production capabilities while enhancing its own wealth
When China subsidizes its domestic industry it does not enhance its own wealth. It definitely enhances the wealth of specific owners of Chinese assets, but the Chinese overall lose wealth. It’s Americans whose wealth is enhanced because we get more goods at a lower price.
I lot of this concern over the ability of the industrial base to surge capacity is based on geezers’ recollections of World War II. Today’s weapon systems take a long time to produce. You go to war with what you have. And the pace of technological change in today’s weapon systems means that you don’t invest in a lot of inventory because it will be obsolete before you know it. For example, the entire fleet of Abrams tanks will see its electronics and fire control completely modernized and replaced every five years; i.e., each year 20% of the fleet is upgraded to the latest and greatest. Industrial surge capabilities don’t make a lot of sense in that kind of world. The stuff that does lend itself to old school World War II thinking is low tech, like bullets and tires. During the Iraq war we had to buy simple munitions from unfriendly foreign sources. And 100% of Goodyear’s European tire manufacturing capacity was dedicated to producing tires for tactical vehicles in Iraq and Afghanistan. If you want to solve that problem, then you need to invest in warm basing…but that’s very expensive and inefficient. Wanna see your taxes increase?
One of the most difficult things to explain to DoD leadership (not to mention congressional staffers!) is how to understand war reserve stocks. It’s nothing like they imagine.
Any idea what the turning point was for Navarro? Did he suffer some psychic trauma that changed his world view so dramatically? Was he one of those many people who tragically transformed into xenophobic nationalists after 911?
Navarro is not one of those malleable sycophants like Stephen Moore who will modify his views as needed to curry favor with the powerful. Navarro is a true believer who wrote his “Death by China” book long before Trump came on the scene.
The worst part is that some of these subsidies don’t even benefit the folks they’re supposed to benefit. For example, corn farmers seem to believe that ethanol subsidies are critical to farmers. The 15% year round ethanol debate between Sen. Grassley and Sen. Cruz is a good example. The 2011 VEETC is another example; however, as this study found, very little of the subsidy actually went to the farmer:
https://www.sciencedirect.com/science/article/pii/S0047272718300458?via%3Dihub
At the end of 2011, the Volumetric Ethanol Excise Tax Credit (VEETC), which had subsidized the blending of ethanol in gasoline, was allowed to expire. During its tenure, the subsidy was the subject of intense scrutiny concerning who benefited from its existence. Using commodity price data, we estimate the subsidy incidence accruing to corn farmers, ethanol producers, gasoline blenders, and gasoline consumers around the time of expiration. Our empirical approach contributes methodologically to the event studies literature by analyzing futures contract prices (as opposed to spot prices) when possible. Ultimately, we find compelling evidence that, at the date of VEETC expiration, ethanol producers captured about 25¢ of the 45¢ subsidy per gallon of ethanol blended. We find suggestive, albeit inconclusive, evidence that a portion of this benefit (about 5¢ per gallon) was passed further upstream from ethanol producers to corn farmers. Most of the remainder seems most likely to have been captured by the blenders themselves. On the petroleum side, we find no evidence that oil refiners captured any part of the subsidy. We also find no evidence that the subsidy was passed downstream to gasoline consumers in the form of lower gasoline prices.
It’s important to note that the authors looked at the incidence of the subsidy and not the impact. Most farmers and politicians (wrongly) think in terms of the impact (because it’s more intuitive) rather than the economic incidence.
“The worst part is that some of these subsidies don’t even benefit the folks they’re supposed to benefit.”
Now if the goal is to allow Wilbur Ross and Trump’s kids to game the stock market using insider trading – they are benefiting the chosen crowd.
“It’s important to note that the authors looked at the incidence of the subsidy and not the impact.”
A crucial distinction. I get really tired of even the MSNBC wannabe economists (not economists but they play one on the TV) talking about whether the consumer or the importer pays the incidence. Of course a distributor with a 5% broker’s commission is not going to pay for a 25% tariff. But the idea that the incidence might be passed back onto the manufacturer in any way is beyond the intelligence of these TV economists.
An old story I first heard long ago whose veracity I am uncertain of but that shows how silly most of these national security arguments for protectionism are involves bicycles in the 1950s. Supposedly Schwinn and some other domestic bicycle producers got some sort of protection by arguing that if there was a nuclear war that destroyed out airports, train stations, and auto factories, well, we would have to rely on bicycles in order to transport ourselves.
The steel tariffs may now be gone, but they were also put on for supposed national security reasons, even though the DOD officially considered Canadian steel production to be equivalent to domestic production for national security purposes. But, hey, we can make Canada an enemy and change that. Blame Canada!
“Supposedly Schwinn and some other domestic bicycle producers got some sort of protection by arguing that if there was a nuclear war that destroyed out airports, train stations, and auto factories, well, we would have to rely on bicycles in order to transport ourselves.”
If this happened to NYC we would have to rely on those Citibikes – which are rather dreadful. Maybe I should go purhcase a real bike!
Send your women and children inside. The invasion is coming.
https://www.telegraph.co.uk/news/worldnews/asia/china/1519002/These-days-Chinese-cyclists-wont-be-seen-dead-on-a-Flying-Pigeon.html
Thomas Woods has referred to Frederic Bastiat and Seymour Melman:
https://www.theamericanconservative.com/articles/less-bang-for-the-buck/
“Melman’s work amounted to an extended analysis of the true costs not only of war but also of the military establishment itself. As he observed,
Industrial productivity, the foundation of every nation’s economic growth, is eroded by the relentlessly predatory effects of the military economy. …
“Traditional economic competence of every sort is being eroded by the state capitalist directorate that elevates inefficiency into a national purpose, that disables the market system, that destroys the value of the currency, and that diminishes the decision power of all institutions other than its own.”
I think the private arsenals should be only as large as their burden is justified by the reduction of risk of invasion. To use Bastiat’s French perspective.
In the end inefficiencies come back to haunt.