Category Archives: Trump, taxes and trade

the US and trade protection

August 20, 2018 By in foreign trade, tariff protection, tariffs, Trump, taxes and trade, Uncategorized Tags: , , , , , , 1 Comment

tariffs and quotas

There are two main ways in which a country can shield a domestic industry from foreign competition.  Tariffs are taxes on imports, which make foreign goods more expensive for domestic purchasers.  Quotas are limits on the amount of a foreign good that can be imported over a specific time period.   The first controls the price of the foreign good, the second its availability.  Unless the quota is set at an wildly high level, tariffs and quotas have generally the same effect.

The main impact is that both allow domestic producers to raise prices.  This is very good for those working in the protected industry, which will have higher profits than before.  It’s at least mildly bad for everyone else, who will have fewer choices and must pay more for what they need.

infant industries/developing countries

There can be a legitimate place for trade protection.  A developing country, for example, may want to establish a textile manufacturing industry.  In the early days, the infant industry may not have the technical skill or economies of scale to compete with more established foreign competitors.  So the home country government may limit foreign competition for a period of time to give the new endeavor a chance to get on its feet.  Tariffs/quotas may also guard against predatory pricing by foreign firms that want to keep the local industry from ever developing into a competitor by “dumping” product at below production cost.

effects of protection

There are several:

–overall GDP growth slows; domestic users of imported goods or their domestic substitutes now pay higher prices and are most likely worse off.  This economic loss may be hard to trace back to the protection, making the tactic more attractive to elected officials

–economic energy shifts to the protected industries, which raise prices and become more profitable.  In many instances, however, the protected industry doesn’t modernize but simply collects the extra revenue and continues its outmoded/inefficient practices.  So it falls progressively further behind world standards, with it and domestic consumers ending up worse off in the long run vs. having had no protection.  The domestic auto/light truck industry in the US during the 1980s is a prime example.

–affected parties figure out how to deal with tariffs.  In the case of the 25% US tariff on light trucks imported into the US, protection forced foreign automakers to establish plants in the US to serve the market.  In the case of current US tariffs on imported aluminum and steel, on the other hand, manufacturers who use these inputs have cancelled US expansion plans and have begun to shift production to other countries.

–we can see the negative long-term effects of protectionism around the world in the ossified telecom industry in the EU, the pickup truck business in the US, the semi-bankrupt state-owned industries in China or the senescent keiretsu structure in Japan.  Generally speaking, except for infant industries in developing countries, the state planning that tariffs exemplify seems to have worked out pretty badly just about everywhere in the OECD.

retaliation

When a country alters the trade status quo by applying a tariff or import quotas, the affected countries most often respond in a tit-for-tat fashion.  The original tariff is intended to help a politically important industry in the home country.  The response, called retaliation, has the aim of hurting a politically important industry in the home country.  If it also helps an industry in the original target, fine;  if not, also fine.  In this sense, retaliation is different from the initial tariff.

After the US placed tariffs on imported steel and aluminum, for example, the EU has responded with a retaliatory tariff on imports of Harley Davidson motorcycles (an early supporter of Mr. Trump) made in the US.  China has placed a similar retaliatory tariff on US soybeans.  HOG has since announced plans to move manufacturing of Harleys for export to the EU from the US to Thailand.  Chinese soybean buyers have shifted to Brazilian output, a loss that US farmers worry may end up being permanent.

 

Next time:  the Trump tariff plans, as far as I can figure out, and stock market implications

 

 

 

 

 

the administration, the economy and the stock market

August 15, 2018 By in corporate income tax reform, corporate tax reform in the US, government economic policy, income tax rates, taxes, Trump, taxes and trade, Uncategorized Tags: , , , , , 1 Comment

I’m taking off my hat as an American and putting on my hat as an investor for this post.

That is, I’m putting aside questions like whether the Trump agenda forms a coherent whole, whether Mr. Trump understands much/any of what he’s doing, whether Trump is implementing policies whispered in his ear by backers in the shadows–and why congressmen of both parties have been little more than rubber stamps for his proposals.

My main concern is the effect of his economic policies on stocks.

the tax cut

The top corporate tax rate was reduced from 35% to 21% late last year.  In addition, the wealthiest individuals received tax breaks, a continuation of the “trickle down” economics that has been the mainstay of Washington tax policy since the 1980s.

The new 21% rate is about average for the rest of the world.  This suggests that US corporations will no longer see much advantage in reincorporating abroad in low-tax jurisdictions.  The evidence so far is that they are also dismantling the elaborate tax avoidance schemes they have created by holding their intellectual property, and recognizing most of their profits, in foreign low-tax jurisdictions.  (An aside:  this should have a positive effect on the trade deficit since we are now recognizing the value of American IP as part of the cost of goods made by American companies overseas (think: smartphones.)

My view is that this development was fully discounted in share prices last year.

The original idea was that tax reform would also encompass tax simplification–the elimination of at least part of the rats nest of special interest tax breaks that plagues the federal tax code.  It’s conceivable that Mr. Trump could have used his enormous power over the majority Republican Party to achieve this laudable goal.  But he seems to have made no effort to do so.

Two important consequences of this last:

–the tax cut is a beg reduction in government income, meaning that it is a strong stimulus to economic activity.  That would have been extremely useful, say, nine years ago, but at full employment and above-trend growth, it puts the US at risk of overheating.

–who pays for this?  The bill’s proponents claim that the tax cut will pay for itself through higher growth.  The more likely outcome as things stand now, I think, is that Millennials will inherit a country with a least a trillion dollars more in sovereign debt than would otherwise be the case.

One positive consequence of the untimely fiscal stimulus is that it makes room for the Fed to remove its monetary stimulus (it now has rates at least 100 basis points lower than they should be) faster, and with greater confidence that will do no harm.

Two complications:  Mr. Trump has begun to jawbone the Fed not to do this, apparently thinking a supercharged, unstable economy will be to his advantage.  Also, higher rates raise the cost of borrowing to fund a higher government budget deficit + burgeoning government debt.

 

Tomorrow: the messy trade arena