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Friday, March 31, 2017

The Daily Combover - March 31, 2017


Today Trump signed two executive orders dealing with trade restrictions (orders 39 and 40). Essentially they empower the Executive Branch to collect duties from companies and governments that the Trump Regime denotes as selling below cost.

In economic terms, this is known as anti-dumping legislation. Essentially the theory of dumping plays out like this:
1. Country A has a thriving manufacturing industry.
2. Country B wants to take a slice of Country A's pie so they direct their companies to export goods to Country A that are similar to what A already manufactures.
3. To ensure that B's goods sell, Country B subsidizes its companies so they can sell below cost.
4. Eventually Country A's companies are no longer competitive so they either shut down or relocate to Country B where it is cheaper to produce.

Anti-dumping legislature creates a punishment mechanism so Country A can protect its own manufacturing industry by imposing a tariff on B so that its goods become more expensive. But tariffs always lead to counter-tariffs.

A great historical example is the Panic of 1837 and subsequent Depression that lasted well into the next decade.  A great driver of that was the extreme tariff placed on British goods (historically referred to as the Tariff of Abominations) that was followed up in the 1830s by British counter-tariffs (the Corn Laws). The global implications were immensely horrifying. Aside from the immediate increase in unemployment, the tariffs triggered an over-reliance on potatoes in the British Isles, particularly in Ireland. And in the 1840s, when a blight hit the potato crop, millions of Irish starved to death.

This is one example, but it's far from the only one.  In fact, as Bruce Bartlett wrote, throughout US economic history, evidence shows that our economy grew in spite of tariffs and not because of them.

As an economist, I'm constantly scratching my head wondering what exactly Trump could possibly be thinking. But I'm even more concerned that he doesn't have a single real economist in the White House that could advise him on the travesty that he will be creating when he imposes tariffs on Canada, Mexico, and China.  No developed country has imposed tariffs of this scale since globalization began.  The shock to the global economy has the potential to be worse than the Great Recession.
 If he really wants to help the American worker, he'll think about the longer run implications and keep his tiny hands off our economy.

Have a great weekend.

Catch you on the flipside.