A Lay Person’s Guide To Tariffs And Economic Growth

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Trump’s vision of tariffs assume successful political economies are based mainly on trade. He views economies as mainly blocks of goods, traded back and forth. He thinks economies are like real estate inventories, so many bought and sold, and thinks to “win” a nation has to sell more than it buys.

This view turns a blind eye to supply chains, pricing, demand, innovation, income, new markets, niche products, financing, investment, multi-national ownership, public-private partnerships and education–all vital features of an economy. Tariffs on goods put law and power first: tariffs are an extension of the idea that economies operate by fiat and that  decisions will have a single effect and no more.

This view is simple–and incredibly wrong! Economies are orderly, but they have a series of complicated relationships. A Brookings report points out 11 Midwest states export 48 percent of US exports to Canada. The Midwest would experience economic shocks if a trade war begin, and other nations raised prices on its grain and food exports.

Returning to steel, the Commerce Department’s International Trade Administration reports the US imports steel from 85 countries, 9 countries providing 75 percent of the total. Imports fall into 5 categories: flat-rolled (automotive, machines, appliance), semi-finished (billets, slabs, ingots), long (bars, rails, rods, beams), tube (pipes and tubes for construction and energy), stainless (corrosion resistant). Of the 5 categories, China only appears in the top 5 exports in one category, long steel. Canada leads in flat and long exports; it is number two in tube imports. Brasil leads in semi-finished products; Taiwan leads in stainless.

Steel: A Statistical Profile, What It Reveals

Last year, 2017, according to the Commerce Department’s International Trade Administration (ITA), steel imports declined from the top 10 US exporters, except Canada. Overall, China ranked 26th.

According to an ITA profile, a major reason the US imports steel is not price–since 2009, US consumption (demand) has exceeded production (supply). This shortfall is made up by imports. Of the top 7 steel producers in the US, 2 are foreign-owned, by companies headquartered in Luxembourg and Brasil. China’s steel production is decentralized and has many small companies; an ITA report points out China’s top 10 steel makers only produce 34 percent of its total production. Yet China is the world’s largest exporter of steel, exporting to 220 countries–although its exports are only 14 percent of its total production.

Although ranked 26th among US steel importers, China has 16 US anti-dumping duties and 12 countervailing duties in place (total: 28) to protect against unfair trade in steel. China consumes most of its own production. Its top 3 export markets are South Korea, Vietnam, and the Philippines. Yet both the political and popular narratives in the US blame China for catastrophic US job losses, claiming government subsidies and low wages are stealing market share, in trade with the US. This narrative hides and distorts the real reasons for China’s success and US decline. Success and decline are connected, not by wage differences, production or trade, but by differing visions and strategies.


China’s vision is seen in its major economic project, a trillion dollar, multi-national infrastructure plan, the One Belt, One Road Initiative (BRI, OBOR). Recalling the phenomenal, long lasting success of the ancient Silk Road that tied trade and prosperity across the continental landmass of Asia and Europe and into Africa, the BRI criss-crosses Asia, moves west across Asia Minor and the Arabian peninsula to Istanbul and Rotterdam on new roads and rails. Crossing the oceans, BRI will build new, world class facilities in port cities in Asia, India and East Africa.

The World Bank describes the BRI objectives: “closer coordination of economic development policies, harmonization of technical standards for infrastructure, removal of investment and trade barriers, establishment of free trade areas, financial cooperation and “people to people bonds” involving cultural and academic exchanges.”





The bank notes:

“There are at least four reasons why OBOR (BRI) can succeed better than individual countries fending for themselves: network effects, finance, leadership and China’s current stage of economic development. On network effects, benefits to individual countries accrue if each part of the Belt and Road gets built. It simply does not pay for individual countries to move forward on their own. In addition, the initiative helps individual countries align with each other, and China’s finances and leadership provide vital credibility.”

Most observers agree BRI’s mission will redefine global and local economies as it builds out new, coordinated global instructure. It will reduce costs, provide efficiency, improve security, expedite customs clearance and inspections, open new markets, and create local jobs. The project, well on its way, touches 40% of global GNP. That figure will grow as it routes capture a sizeable share of the commerce of the new emerging middle class centered in Asia, which will reach 6 billion in size by 2025.

For the BRI, China is acting as its own supplier. For example, China is building cement plants along the routes, 37 to date. It plans to build steel plants in several countries and will obviously see a rising demand in long steel products.

Moreover, China’s largest coal company merged with the country’s largest power generator to create the world’s 2nd largest power company. It will service BRI routes. At the same time, China is closing low-grade iron mines (over a 1,000), preferring higher grade raw materials purchases on the world markets. By building global infrastructure outside of China, China is helping global trade: but by taking the lead, setting standards, developing and leading financing, creating new economic agreements, involving the private sector, China is helping itself: guaranteeing long term, structural, financial, and regulatory access to new markets and greater coordination and integration of its economic goals within the world stage. Because of a history of conflict with China, India is pushing back, but the sheer size of the project will make it difficult for India to avoid being drawn to its advantages.

Walter Rhett writes about power, power: its worst and best cases, its hidden relationships; the strategies, paradoxes, pursuit and scorecard of its prize.


China’s US Investment

China’s economic vision and strategy seeks investments outside of China in order to expand its domestic growth and establish its standards as the default standards in world markets, giving China an advantage in production and intellectual property.

For instance, China’s new coal and power company, China Energy Investment, signed a memorandum of understanding with West Virginia, not for coal, but for chemical products, and liquefied natural gas and its underground storage. Drawn by the strength of West Virginia’s 5 county Chemical Alliance Zone, a 5 county zone anchored by 5 of the world’s largest chemical companies exporting over a $1 billion annually in chemical products, China’s MOU represented investments totaling $84 billion—a total larger than the state’s GDP!

China has subtly shifted its “going out” strategies from ownership–criticised as one sided–to return on investment and opening up to public and private partners. Improving its understanding of labor and capital forces, China’s leadership now engages all sides, public and private, in its projects; through shared ownership, investment, supply chains, services, and open markets.
In contrast, Trump’s turn to tariffs, freezes markets, stifles demand and expansion–and goes against the principle of American economic value that describes its historic success–competition!
China Tibet
In 2014, the Secretary-General of the OECD, speaking in Washington, DC, pointed to competition as a key driver for growing jobs (a counter-intuitive idea: doesn’t competition kill jobs?) by pointing to its hidden benefits and positive effects:
Where would this additional growth come from? The answer is a two-pronged reform strategy aimed at fostering productivity growth and labour force participation at the same time. I would like to highlight one area where you have great opportunities to achieve higher productivity growth, raise investment and foster job creation: this is competition. 
We all need to foster competition in our economies. A lack of competition in many markets keeps prices high and output low. Too many firms are sheltered from the incentives to innovate and adopt management best practices. Competition is hampered in some countries by an outdated regulatory framework and rules which do not foster innovation and keep new firms out of the market. Weak enforcement of competition law adds to the problem. Also our education and apprenticeships systems need to look more at creativity and “innovative spirit.”

This really matters! A large part in our IMF/OECD/World Bank analysis to identify gains from stronger G20 action come from higher productivity through stronger competition and more innovation. OECD estimates suggest that a 10% reduction in the level product market regulations can boost GDP by 1 to 1.5%. This corresponds to the size of reforms made by countries that have undertaken significant reforms over the past decade. And this is a challenge and an opportunity for advanced and emerging economies alike.

In particular, we need more competition in services to make them more efficient – which in turn will help your countries compete and upgrade in global value chains. Services sectors such as transport, logistics, trade finance are key to a smooth functioning of global value chains, while domestic services are increasingly important components in exports of valued added. Yet, these sectors often lagged behind with respect to the modernisation of their regulatory framework and remain impervious to competition – it’s time to catch up!

Tariffs vs. Competition

Instead, Trump’s use of tariffs penalizes competition. Tariffs limit market growth, tamp down demand, investment, jobs  and wages. Tariffs, in the end, are a political form of  price fixing. Tariffs don’t create new demand, build plants, encourage innovation, or raise wages. Instead, they lower demand through higher costs and cause job losses in related industries. Tariffs on steel would have ripple effects in the auto industry and heavy equipment manufacturing. Tariffs redistribute the negative effects of higher prices to other sectors in an economy.
Successful economic reforms take into account political consequences and social support. Reforms must be complementary to the progress and growth of benefits and social safety nets, they work best when they are consistent with current policies, and they must stand on the credibility of the governing authority and practice.
Trump’s reversals of longstanding policy breaks with all three consensus markers. His use of tariffs is not reform or an adjustment in the economy, it creates bigger imbalances more deeply within the US system, and the balance sheet will show these scattered statistical effects. Moreover, the pillar of Trump’s thinking, economic isolation, ignores and dismisses major global dynamics. His “winning” stunts the US economy, sidelining it in an expanding world. It holds back growth, innovation, wages and jobs.
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The Politics of Past and Future

Now is a good time to redefine the notion of party and its relationship to voters. The seeds of new understanding are evident in the nearly-unthinkable, oppositional victories of both Barack Obama and Donald Trump, in the consecutive losses of Hillary Clinton’s national campaigns, in the redistributive, culturally challenged socialism of Bernie Sanders–and in the sexual politics and child-bashing of state GOP legislators/candidates who have chased teenagers, lied about abortions, and called students trying to gain attention for gun control “shameful” and initiated personal attacks once reserved for high office.

The need for new understanding is seen in the unresolved tensions in a nation whose leader fires its highest officials on twitter, who tells us the way to remember the horrors of slavery by honoring the men on iron pedestals who fought viciously to preserve it.

The Party Paradox

Political parties, Democratic or Republican, conceal the white male paradox. Unspoken is the new redefinition: justice-is-punishment. Abandon democracy for wealth. Become nation amished and fearful and blind to its future.

Parties spin! Republicans dazzle flag-wrap messages of hate. They legislate redistribution of income to the waiting arms of the rich; they bash young survivors of mass shootings due to age, not principles; parties no longer test integrity. Instead, they tempt voters with messages void of public service, and wrestle away a shining vision of progress and way-making, leaving a battle royale of empty promises.

White supremacist made robo-calls for Trump in 2016, attempting to trick us that their message was mainstream—embraced by many “fine” folk, Trump declared. Democrats depended upon algorithms, abandoning yard signs, symbols of commitment and a proud public declaration; their voter drives didn’t provide poll rides. What’s the fix?

A Politics of Solutions

The fix means seeing problems through new lens! New thinking, both big and small, wins–elections bear this out! Obama went big: his fierce urgency of now, embedded in new hope, was also embedded by a 50 state grass roots campaign that organized every precinct, spoke to neighbors, and articulated messages of decency that withstood smear attacks. This campaign style enabled a first time, Democratic transgender candidate to handily defeat an iconic foe in a Virginia House of Delegates race, the self-declared “chief homophobe” of Virginia. His appeals to fear and bias impotent, because he served power—and couldn’t fix roads. He didn’t think small.

The campaign style worked in the working class US House district of Pennsylvania 18. Overcoming labels of “godless” and “unAmerican,” outspent 17 to 1, a Democrat won–as Trump came to campaign and called for a tariff on imported steel by providing artificial price support and raising the price of steel products–an appeal in a district with many former steel workers. The Democrat kept politics local, offering ideas big and small. Republicans gave back 20 points.

The grass roots/think-big-and-small campaign worked in Alabama to win a US Senate seat. A former state Supreme Court Justice and former troll of teenagers who he sought to kiss and touch, blamed not his indecency but partisan politics for his loss. His supporters claiming stalking teenagers was acceptable to God on historic grounds, and imagined busloads of out of state black voters getting past local GOP precinct watchers to cast ballots. A Democrat lost a Georgia US House seat by abandoning this style: he embraced money and celebrity instead of grassroots, and thinking big and small.

Solutions: Theory and Practice

What are the specifics of grassroots, think big and small? First abandon algorithms, but use data. Data reflects, algorithms project. Clinton accepted projections in Michigan, Wisconsin, and Pennsylvania because her data didn’t reflect the obvious—a campaign’s arithmetic must count crowds, appearances, yard signs, rides organized, not previous voter totals. Her dark silence on black radio sealed her fate in Michigan. It said “we don’t have to engage you.”

Grassroots politics, Donna Brazile says, is reaching voters where they “eat, work, and pray.” Failing to heed this maxim, Clinton’s insular staff (Joe Podesta?) watched as her numbers slip when it counted—at the voting polls. Obama focused on counts. How many voters called; how many teams working. The process was his structure for winning. But be careful: Trump exported it into television, making its appeal into entertainment. He gave star power to hate.

Strom Thurmond practiced thinking small. He spent Christmas day making 100s of calls to his supporters. He visited courthouses and delivered social security checks, paved roads, built schools and put in sewer lines. Tim Scott, having defeated his son, follows his way.

In contrast, thinking big means assembling and sharing a future: solution based politics! The future’s biggest trend: the global middle class, centered in Asia and the Pacific rim, doubling to 6 billion people in a decade—as America’s share shrinks from 18% to 9%. US government/businesses have no perception or position about this trend! It is frozen in a headlock of old battles. Whoever wins, the past will be moot. Unprecedented opportunity lies ahead!

American business trends show early signs of its potential: South Carolina is the new hub of transportation manufacturing not because of low wages, but because of educational opportunities and infrastructure; BMW’s largest plant globally is in the state. Boeing builds in new 787 Dreamliner locally, in Charleston. Nearby, Volvo has broken ground; Benz is following. All drawn by great the engineering programs in the Southeast at Georgia Tech, Clemson, North Carolina State, and special institutes and community colleges, the brain power needed for forward design. All supported by infrastructure that offers global connections.

West Virginia has similar success in chemical polymers. The state’s 5 county Chemical Alliance Zone is the site of top global companies, domestic and international. They employ more than 15,000 workers at wages above $77,000 annually. Over 400 ancillary businesses have been attracted, many with new opportunities; medical devices, among them.

As Trump made a big show of refusing to sign the 11 nation Trans-Pacific trade pact Obama carefully crafted, installing America as a trans-Pacific leader, covering both the South American and Asian sides of the Pacific rim, Trump turned a loss for China into a win. He handed them economic hegemony by default, as China rolls out its One Belt, One Road Initiative, a new Silk crossing Asia with new rails and roads and building and updating ports around the Indian Ocean to Africa. It touches 50% of the global population with 40% of global GDP–while encouraging the adoption of Chinese standards and offering China’s goods in new markets.

Trump wants to win trade (raising prices using tariffs), states want to win investments. China, in its pursuit of greatness, signed a $84 billion ($83.7B) energy and chemical pact memorandum of understanding with West Virginia for shale and chemical production and underground liquid natural gas storage, the potential deal larger than the state’s GDP and representing one third of China’s US energy investment. It’s not official or final, but it’s a good start.

The Chinese were led by the country’s top coal company, now shifting its outlook to new energy sources and supplies and embracing chemical products. Coal is the past. Chemicals and energy are the future of new jobs and the good life. Progress is not winning based on the past, it’s the path forward.

Winning politics must see a successful future.

Democrats Are Primed for 2018 and Looking Pretty in 2020 https://nyti.ms/2tZRdX1.

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Worker’s family home, near a Nicolas county lumber mill. Circa 1940s.