10/30/2018
Free Trade, Fair Trade & Tariffs
Texas Public Funds Investment Conference
November 8 - 9, 2018
William T. Chittenden, Ph.D. Associate Dean for Graduate Programs McCoy College of Business Administration Texas State University
It’s Not Politics, It’s Economics
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What is Free Trade?
A policy by which a government does not discriminate against imports or interfere with exports by applying tariffs (to imports) or subsidies (to exports)
Source: https://www.britannica.com/topic/free-trade
Free Trade Agreements
Australia Israel Bahrain Jordan Canada Korea Chile Colombia Mexico Costa Rica Morocco Dominican Republic Nicaragua El Salvador Oman Guatemala Panama Honduras Peru https://ustr.gov/trade-agreements/free-trade-agreements Singapore
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Absolute Vs Comparative Advantage
Absolute Advantage
12 wines, 5 pizzas 4 wines, 4 pizzas
Absolute Vs Comparative Advantage
Comparative Advantage
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Absolute Vs Comparative Advantage
Comparative Advantage with Free Trade
Trade 5 wines for 7 pizzas 13 wines, 7 pizzas 5 wines, 5 pizzas
What is Fair Trade?
No universal definition of “fair” Often focus on wages, working conditions, and child labor issues Other areas of focus are government subsidies and intellectual property
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International Trade Goods and Services 2017 $2.3 trillion in exports to the rest of the world $2.9 trillion in imports from the rest of the world • $566 billion trade deficit • 2.9% of U.S. GDP
Source: https://www.census.gov/foreign-trade/Press-Release/2017pr/12/ft900.pdf
Where Does the U.S. Export To?
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Where Does the U.S. Import From?
International Trade Goods and Services 2017 Canada: $2.8 billion surplus • $341.3 billion in exports & $338.5 billion in imports Mexico: $68.7 billion deficit U.K.: $15.6 billion surplus E.U.: $101.2 billion deficit Hong Kong: $35.1 billion surplus China: $335.7 billion deficit • $188.0 billion in exports and $523.7 billion in imports Source: https://www.bea.gov/international/index.htm
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International Trade Goods and Services
Source: https://data.worldbank.org/indicator/
Are Trade Deficits Bad?
Factors Impacting Trade Imbalances Relative Growth Rates of Economies • Faster growth attracts investment funds, which can be used to buy more imports Relative Value of Currencies • ↑ value of the dollar makes U.S. exports more expensive, thus reducing demand for our exports Savings and Investment Rates • If Savings < Investment, U.S. will attract foreign capital
Source: https://www.cato.org/publications/commentary/are-trade-deficits-really-bad-news
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Are Trade Deficits Bad?
Balance of Payments Current Account = Capital Account • “dollars that leave the U.S. to buy foreign goods, services, or assets find their way back to the U.S. economy to purchase U.S. goods, services, and assets” • Current account deficit is a mirror image of the capital account surplus
What is a Tariff?
Tax paid by American consumers in the form of higher prices
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What is a Tariff?
A tax on imports or exports Typically “Ad Valorem” Alternatives Import Quotas Export Subsidies Voluntary Export Restrictions
Arguments for Tariffs
Domestic Jobs Infant Industries National Security Retaliation
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Examples of Tariffs on Imports
Paper Clips 126.94% tariff on paper clips made in China Canned Tuna 35% tariff on canned tuna imported from Ecuador Shoes 48% tariff on foreign shoe imports Tobacco 350% tariff on imported tobacco https://www.investopedia.com/ask/answers/051315/what-are-examples-products-and-companies-rely-protective- tariffs-survive.asp
Examples of Tariffs on Imports
Clothing 16% - 19% tariff on 75% of imported clothing • Costs the average family $300 more per year “Chicken Tax” 25% tariff on imported pickup trucks
https://www.nbcnews.com/business/economy/tariffs-sugar-shoes-mean-higher-costs-consumers-n882071 https://www.npr.org/templates/transcript/transcript.php?storyId=511663527
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Examples of Tariffs on Imports
Sugar 88% tariff on imported raw sugar • 2017 cents per pound • World: 15.81 • U.S. 27.92 73% tariff on imported refined sugar • 2017 cents per pound • World: 19.62 • U.S. 31.33
https://www.ers.usda.gov/data-products/sugar-and-sweeteners-yearbook-tables.aspx
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Which is subject to a tariff?
Examples of Tariffs on Exports
Canada North American Free-Trade Agreement (NAFTA)* 245% on cheese 298% on butter 0% on ultra-filtered milk Peru Peru Trade Promotion Agreement (PTPA) 80% of exports to Peru are duty-free Remaining tariffs being phased out by 2025 https://ustr.gov/sites/default/files/files/reports/2017/NTE/2017%20NTE.pdf
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Examples of Tariffs on Exports
European Union 10.9% average on agricultural goods 3.9% average on non-agricultural goods • 26% on fish and seafood • 22% on trucks • 10% on processed wood products • 14% percent on bicycles
https://ustr.gov/sites/default/files/files/reports/2017/NTE/2017%20NTE.pdf
Current “Trump” Tariffs
January 2018 20%/50% on imported washing machines • $1.8 billion 30% on solar panel components • $8.5 billion
https://www.npr.org/sections/thetwo-way/2018/01/22/579848409/trump-slaps-tariffs-on-imported-solar-panels- and-washing-machines
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Current “Trump” Tariffs
March 2018 25% on steel & 10% on aluminum imports • $33 billion Canada, Mexico, and EU exempt
https://www.wsj.com/articles/u-s-slaps-steel-aluminum-tariffs-on-canada-mexico-european-union-1527774283
Current “Trump” Tariffs
April 2018 25% on 1,333 Chinese products • $46 billion • Mostly intermediate inputs and capital goods
https://piie.com/blogs/trade-investment-policy-watch/trump-trade-war-china-date-guide
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Current “Trump” Tariffs
June 2018 Canada, Mexico, and EU steel and aluminum exemption revoked • $15 billion
https://www.wsj.com/articles/u-s-slaps-steel-aluminum-tariffs-on-canada-mexico-european-union-1527774283
Current “Trump” Tariffs
August 2018 China • 25% tariff on $16 billion of goods
https://www.cnn.com/2018/08/21/politics/chinese-tariffs/index.html
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Current “Trump” Tariffs
September 24, 2018 10% tariff on $200 billion of Chinese goods • 25% by end of the year • Exempt: • Smart Watches • Bluetooth Devices • Car Seats • High Chairs
https://www.wsj.com/articles/trump-to-lay-out-line-on-china-trade-1537213209?mod=djem10point
Retaliation
Mexico Tariffs on “steel products, lamps, berries, grapes, apples, cold cuts, pork and various cheeses” • June/July 2018: $3 billion Canada “25% tariff on steel imports from the U.S. and a 10% tariff on aluminum and a wide range of other U.S. goods, including some food and household products” • June 2018: $12.8 billion
Source: https://www.wsj.com/articles/u-s-slaps-steel-aluminum-tariffs-on-canada-mexico-european-union- 1527774283
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Retaliation
European Union Tariffs on hundreds of items, including peanut butter, bourbon, motorcycles, cranberry juice, denim, corn, and T-shirts • June 2018: $3.2 billion
http://time.com/money/5304493/us-exports-tariffs-list/
Retaliation
China Tariffs on items including soybeans, automobiles, frozen orange juice, beef, and aircrafts • April 2018: $2.8 billion • June 2018: $34 billion • August 2018: $16 billion • September 24, 2018: $60 billion • 5,207 U.S. products, including farm goods, machinery and chemicals http://fortune.com/2018/04/04/china-tariffs-new-products-trade-war/ http://time.com/money/5304493/us-exports-tariffs-list/ https://www.cnn.com/2018/08/21/politics/chinese-tariffs/index.html https://www.wsj.com/articles/chinese-officials-scramble-to-respond-to-trumps-new-tariffs- 1537275015?mod=hp_lead_pos2
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Business Reaction
Shift Production Foreign Investment Automation/Increased Productivity
Do Tariffs Save Jobs?
Yes, but …
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Do Tariffs Save Jobs?
2000 - 2007 2017 Federal Reserve Study on Impact of Chinese Imports 800,000 manufacturing jobs in U.S. lost but offset by like number of jobs in other sectors Increased “buying power of $260 a year on average for every American for life”
https://www.stlouisfed.org/open-vault/2018/march/roundup-tariffs-jobs-trade-deficit
Do Tariffs Save Jobs?
2009 35% tariff imposed on tires imported from China Saved 1,200 U.S. tire-manufacturing jobs through 2012 Cost Americans $1.1 billion or $917,000 per job paying an average of $40,000 per year
Source: http://money.cnn.com/2017/01/03/news/economy/obama-china-tire-tariff/index.html
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Do Tariffs Save Jobs?
2018 Estimated Steel and Aluminum Tariffs will save 33,464 jobs in those industries But will cost 179,334 jobs throughout the rest of the economy
http://tradepartnership.com/wp-content/uploads/2018/03/232EmploymentPolicyBrief.pdf
Real Trade Issues with China
Market Access Intellectual Property Currency Exchange Rates Government Subsidies
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Summary
Trade Deficits are not inherently bad Faster Economic Growth contributes to the Trade Deficit Government Budget Deficit can contribute to the Trade Deficit Strong Dollar contributes to the Trade Deficit Tariffs make all countries worse off
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Questions?
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