No Comment From Kudlow
- Trump is trusting his instincts and ignoring the advice of his aides regarding issues surrounding the trade conflict with the world’s second largest economy, said five people briefed on the action.
- National Economic Council director Larry Kudlow declined to comment in a CNBC interview Tuesday that he and other advisors disagree with Trump’s trade war actions.
- Last week, Politico reported that Trump’s advisors are pushing him to focus on keeping the economy strong even if it means letting up on China in the trade war and loosening Trump’s intense criticism of the Federal Reserve Chairman Jerome Powell.
No Comment is a Comment
No comment on such questions is indeed a comment.
There is clear dissent among Trump's advisors.
Trump's Trade Quagmire
I do not often agree with Krugman, but this is one of the times that I do.
In Trump’s Trade Quagmire (Wonkish), Krugman notes the obvious "He just keeps escalating as his strategy fails."
Remember the Vietnam quagmire? Well, here’s my thought: Trump’s trade war is looking more and more like a classic policy quagmire. It’s not working — that is, it isn’t at all delivering the results Trump wants. But he’s even less willing than the average politician to admit to a mistake, so he keeps doing even more of what’s not working. And if you extrapolate based on that insight, the implications for the U.S. and world economies are starting to get pretty scary.
Krugman's Five Points
- The trade war is getting big. Tariffs on Chinese goods are back to levels we associate with pre-1930s protectionism. And the trade war is reaching the point where it becomes a significant drag on the U.S. economy.
- The trade war is failing in its goals, at least as Trump sees them: the Chinese aren’t crying uncle, and the trade deficit is rising, not falling.
- The Fed probably can’t offset the harm the trade war is doing, and is probably getting less willing even to try.
- Trump is likely to respond to his disappointments by escalating, with tariffs on more stuff and more countries, and — despite denials — in the end, with currency intervention.
- Other countries will retaliate, and this will get very ugly, very fast.
US Treasury Declares China a Currency Manipulator
I agree with Krugman on all five points.
Of course, I do, because I have made those same points myself over the past year.
The situation came to a head yesterday as noted in US Treasury Declares China a Currency Manipulator Under Orders From Trump
The currency manipulation charge came following a tit-for-tat retaliation in which China Halts All US Ag Imports in response to Trump placing additional tariffs on China.
Failure of Trump's Tariffs
Krugman posted some charts showing Trump's failures and lies.
They are from Fred, the St. Louis Fed, repository and PIIE.
I recreated the Fred charts with extra details and comments.
Those tariffs act as a tax on consumers, approximately 21% on $500 billion in imports.
How much customs duties are collected?
Let's give Trump credit for roughly $33.9 billion in increased tariff duties per year.
What about exports?
Let's home in on that starting with the moment Trump placed tariffs on China.
Tariff Man Success
Since Trump launched his ever-escalating trade war:
- Net exports have fallen by $90.8 billion
- Customs duties have risen by $33.9 billion
- Taxes on consumers and business are up by about $100 billion
If that's not success, what is?
Lie of the Day
Massive amounts of money from China and other parts of the world is pouring into the United States for reasons of safety, investment, and interest rates! We are in a very strong position. Companies are also coming to the U.S. in big numbers. A beautiful thing to watch!— Donald J. Trump (@realDonaldTrump) August 6, 2019
The alleged "massive" amount of money is an additional $33.9 billion while net exports are down by $90.8 billion and taxes on consumers are up.
We call this "winning".
Why Trump's Policies Aren't Shrinking the Deficit
Krugman has this explanation:
"Mainly the answer is that Trump’s theory of the case is all wrong. Trade balances are mainly about macroeconomics, not tariff policy. In particular, the persistent weakness of the Japanese and European economies, probably mainly the result of shrinking prime-age work forces, keeps the yen and the euro low and makes the U.S. less competitive."
Krugman also notes, as have I, "U.S. tariffs on Chinese goods don’t do much to reduce overall imports, because we just shift to products from other Asian economies."
In Import Shuffle: Canada, Mexico Surpass China as the US' Biggest Trading Partner, I noted Vietnam is the biggest beneficiary of in percentage terms, followed by the Netherlands, Belgium and Taiwan.
I follow many people I typically disagree with. Paul Krugman is one of them.
Because sometimes they are spot on. Krugman wrote an excellent column that led to this one.
Never let personalities get in the way of a well-presented case.
Fancy that.— Mike Mish Shedlock (@MishGEA) August 6, 2019
I don't ever recall agreeing with Larry Summers. https://t.co/zT4k6w5UEs
In contrast with Krugman with whom I agree about 20% of the time, I don't ever recall agreeing with Larry Summers on anything significant.
Recession May "Help"
In a perverse way, Trump may manage to reduce the trade imbalance.
Trump's tariffs are certainly recessionary. Note what happens to trade in recession in my first chart on net exports above.
And please note the average lead time between manufacturing recessions is less than a full quarter.
For discussion, please see Manufacturing Recessions vs Real Recessions: How Much Lead Time Do You Expect?