Wednesday, July 25, 2018

Winning at trade requires zero

Here is some excellent news that just recently hit the tape:

President Trump on Wednesday declared a “new phase” in the relationship between the U.S. and the European Union, agreeing to hold off on proposed car tariffs and work with the EU to resolve their dispute over metals duties, while also promoting bilateral trade. 
Speaking in the Rose Garden of the White House alongside European Commission President Jean-Claude Juncker, Mr. Trump said the U.S. and the EU had agreed to “work together toward zero tariffs, zero non-tariff barriers and zero subsidies on non auto-industrial goods.” 
“This was a very big day for free and fair trade,” Mr. Trump said. He said the U.S. and EU would “resolve” the steel and aluminum tariffs he imposed earlier this year and the retaliatory tariffs the EU imposed in response.

These are the key words: work together toward zero tariffs, zero non-tariff barriers and zero subsidies. Free and fair trade requires the absence of government-imposed restrictions and subsidies. Trump gets this; he's not a madman intent on starting another global trade war. He knows tariffs are bad and even stupid. But the route he chose to get to the goal of zero was circuitous and risky, and he has been justly criticized on both sides of the political aisle for unilaterally imposing tariffs on our major trading partners. He had to credibly threaten to raise tariffs in order to lower them. This could be the beginning of a new era in global trade and prosperity.

If Trump can convince China to follow the European example, the future will look bright indeed.

As I said in my last post, I continue to believe that tariffs are so universally understood to be bad and even stupid that eventually our leaders will do the right thing and make trade freer and fairer. Why bet against what would be a win-win for all parties?

As it has for many years, it makes sense to remain optimistic about the future.


Benjamin Cole said...

I am always happy to see Scott Grannis optimistic. And indeed without optimism there is no point in life, getting out of bed, starting a business or marriage or any other worthwhile endeavor.

I do think there is an intractable problem with Europe and other nations that employ the VAT on imports but not exports.

They say it is not a tariffs on imports, but no matter how you slice it, it really does come down to an export subsidy.

Will European nations agreed to eliminate the VAT on imported goods and services?

I do not see how.

Tom L said...

here here Scott - Same thoughts with me. Optimistically looking toward the future. Our president's tweets are broad strokes to get people moving, but then he can steer them once they are engaged.

Thanks for your posts.

Scott Grannis said...

Benjamin: yes, Europe's VAT is similar to a tariff. And as you say, Europe is not likely to eliminate its VAT, since it brings in significant revenue for revenue-hungry governments. Unfortunately. But we shouldn't forget the fact that any tax that is imposed on imports negatively affects mainly the country that imposes it, by making imported goods and services more expensive than they otherwise could be, leaving its citizens with less money to spend on other things.

Grechster said...

This is the best news since, well, the tax cuts. I still don't like the man but a fair-minded guy must acknowledge when Trump, dare I say, wins.

Rich said...

I hope they finalize something mutually beneficial, and I too do not like this man at all, and it would be that way even if we agreed 100% on policies.

The Cliff Claven of Finance said...

The EU is supposed to be our friends,
so I don't understand why Trump
has them involved, rather than
concentrating on China,
where there are serious
trade barriers, and the leaders
are not friendly!

The primary EU tariff problem
is 10% on automobiles imports
versus our tariff of only 2.5%.

I did not hear EU auto tariffs
mentioned in the Trump announcement.

From my last economics newsletter:

"In particular, the EU’s approach
impedes market access for products
that conform to international standards,
even though international standards
may meet or exceed the EU
(or third country)
regulatory requirements.

For food safety and protecting
human, animal, or plant life
or health there are EU measures
that unnecessarily restrict trade
without furthering their safety objectives.

Despite scientific evidence demonstrating
that their meat is safe for consumers,
U.S. producers cannot export meat
or meat products to the EU
unless they participate in a costly
and burdensome process verification program
to ensure that hormones, beta agonists,
or other growth promoters
have not been used in their production.

Delays in the EU’s approval process
for genetically engineered (GE) crops
have prevented GE crops from being placed
on the EU market even though they have been approved
(and grown) in the United States.

The length of time for EU approvals
of new GE crops appears to be increasing.

U.S. exports of beef, pork, and poultry to the EU
have been significantly hurt, because the Commission
has failed to approve several pathogen reduction treatments (PRTs)
that have been approved for use in the United States.

PRTs are antimicrobial rinses used to kill pathogens
that commonly exist on meat after slaughter.

In 1997, the EU began blocking imports
of U.S. products that had been processed
with PRTs, which have been safely used
by U.S. meat producers for decades.

The EU’s average agricultural tariff rate is 10.9%.

Some specific high tariffs
hurt U.S. exports,
such as rates up to
26% for fish and seafood,
22% for trucks,
14% for audio-visual equipment,
and 14% for bicycles."

My primary source for these trade barrier details,
was the 2018 National Trade Estimate Report
presented by Ambassador Robert E. Lighthizer,
Office of the United States Trade Representative,
published March 2018.

2.5% for

Johnny Bee Dawg said...

Trump keeps winning. America keeps winning.
First politician in my lifetime who spends every waking hour doing exactly what he campaigned on.
Thank God we have him. The USA certainly dodged a bullet.

S&P500 up 20% annualized since Election Day.
NASDAQ up 28.5% annualized.
And we are STILL below trend.

Best trade in America is/was to go long Trump.
Lots of negative sentiment in the face of strengthening fundamentals.
All the hand wringing in mainstream media and popular culture is like a massive put to call ratio.
What will happen when the negative folks finally capitulate, and the remaining cash starts going to work??
Unwinding the negative trade, so to speak...

We will just have to see.

Vespasianus said...

Scott & Benjamin, you are right about the VAT issue, but I would add that it is not only a tax on imports, but also a tax of 21%, in most cases, for all types of economic transactions within the EU.

Curiously enough, VAT often does not compute in order to determine the real fiscal pressure; official figures only calculated on direct taxation. My impression is that for medium or high incomes the effective tax rate in many countries can be close to 70% of the income, certainly reaching confiscatory levels.

And returning to free trade, we must not forget that it is not only a question of lowering tariffs, but of harmonizing the legislation of both partners. For example, genetically modified food can not be sold in the EU, on food safety grounds. This questionable prohibition prevents European producers from using genetically measured seeds, which would allow them to compete on equal terms with their international counterparts.

Larry said...

Johnny bee, you are right!!
go long Trump, long live Trump

steve said...

Scott, you give Trump way too much credit. This will not end well.

WealthMony said...

Steve, you should explain.

randy said...


What might not end well is the US standing as the best international partner to have, and the advantages that gives us in shaping world affairs. China will likely become the worlds largest economy in the not distant future, and by some measures already has. China plays a longer game - and yes we may win the short term tariff bluff between our two countries. In the meantime, China is happy to fill the leadership vacuum and mistrust we are creating with the rest of the world. I wouldn't expect our international nastiness to outlast Trump - but it's foolish to cede our influence.

steve said...

OK, I will.

Trump is a megalomaniac who cannot except any criticism. His tactics of picking winners and losers re trade are obtuse to the extreme. By his logic, the farmers win while consumers pay more. And therein lies the big problem; tariffs by their very nature are taxes and picking winners and losers smacks of cronyism-the very idea that the right is supposed to despise while the left embraces it. But what really riles me up about Trump (besides his despicable personality) is his inability to listen to any advice that counters his own. He surrounds himself with sycophants who don't have the balls to speak out.

I cannot imagine this working out well in the long run and as a Ronald Reagan conservative who hates arrogance will never vote for Trump. A vote for him is a vote for all the qualities in a human that I have spent my entire life trying to show my children to avoid. If that means a crazy whacko left wing nut gets into office-so be it.

randy said...

Regarding my comments.. It seems clear to me that Trump's trade tactics and zero sum aggression with our world partners is just stupid and is detrimental to our larger goals. At the same time - Obama was worse. The Great Apologizer was anxious to give away something for nothing in return- except adulation for his sensitivity. Worse than what we have now. The most interesting notion I've heard lately to enable center right/left candidates to succeed is ranked-choice voting. Somethings gotta change.

WealthMony said...

Randy, sorry but I am not familiar with "ranked-choice voting."

WealthMony said...

Steve, I'm not sure your characterization of those surrounding President Trump as "sycophants" is accurate. I find it hard to believe that of those with whom I am familiar. You may be correct that he is unable to listen to advice that counters his own, but I would expect members of his cabinet to speak out. I too do not care for his personality. If it comes down to voting either for Donald Trump or a liberal, I'll go for Trump, not a "crazy whacko left wing nut." I'd much rather have a "crazy whacko right-wing nut."

Johnny Bee Dawg said...
This comment has been removed by the author.
Johnny Bee Dawg said...

Trump critics act as if tariffs are the end result that he is shooting for.
They are a means to an end. Trump is putting China on an island vs the rest of the world.
EU and US are getting to ZERO tariffs.
All without the unConstitutional TPP which would've made the US Congress subservient to a world governing body.

China already had 20,000 tariffs on US goods before Trump ever started.
And they steal. And half our politicians are in their pocket.
Trump is demanding fair and reciprocal trade, instead of bribes and cow-towing and secret Swamp deals.
China and their US politician lackeys dont want free trade, obviously. Trump does.
People are clutching their pearls because he talks too mean to Communists with 20,000 tariffs.

Preferring a "crazy whacko left wing nut" to a pro-America Constitutionalist is amazing.
We've tried crazy whacko left wing nut, and it was destructive. We're still digging out of that ditch.

Market shot up like a rocket when Trump won, vs tanking when Obama won. (Worst post-election market in US history)
Let that sink in. America was BEGGING for relief.
We dodged a HUGE bullet.

Who would want to go back to that sub 2% growth, and the unlawful scandals in every agency??
Weaponizing FBI, CIA, DOJ, and IRS against political opponents. Unconstitutional takeover of health care with soaring costs.
Homeland Security letting millions of unknown illegals stream in with impunity. Gangs, terrorists.
State Dept trading favors to dictators in exchange for millions in "private donations".

Never-Trumpers are the big put to call ratio in the face of increasing prosperity.
We will just have to see.

WealthMony said...

The US economy is going our way. 2Q GDP of 4.1% speaks to better performance ahead. We may not be over the hill, however, because we did have 3 quarters with higher GDP during the Obama 2.1% growth years. New Home Sales for June were low and Existing Home Sales declined for a 3rd consecutive month. This Wednesday we'll get more insight into construction spending as well as manufacturing, which has also been on a roll.

Product innovation, a strong global economy led by the US, and tax reform are causing CIOs to invest in IT infrastructure. Global IT spending should reach $3.7 trillion by the end of 2018 which is 6.2% higher than 2017.

Bloomberg has reported that among the S&P 500 companies that have reported results for 2Q2018, capital spending increased by a whopping 29%, the fastest growth in 7 years.

Although markets have been relatively soft for a few weeks, the economic fundamentals are too strong to derail the bull market in stocks and foreign money continues to flow into the safe haven of the United States and into equities.

As progress is made on trade issues with Canada, Mexico, the EU and eventually with China, the boom should continue. I really do see reasons to be optimistic as an investor and as an American.