Monday, July 29, 2019

Why Are Americans Much Richer Than Mexicans?

According to the International Monetary Fund, per capita gross domestic product (GDP) in purchasing power parity (PPP) in the United States in 2017 was $59,495.  In Mexico, it was $19,480, 32.7% of that in the U.S.

The income of the average American is three times that of a Mexican, a ratio that has been relatively constant since 1990.  Mexicans have not narrowed the gap in purchasing power in close to three decades.

“Why” is a subject for serious research.  Answers lie in economic, political, cultural, and historical factors for later posts.  Here I want to ask a related question.

The conclusion of the Mexican-American War resulted in the 1848 Treaty of Guadalupe Hidalgo (the Mexican Cession).  The United States government paid Mexico $15 million for 529,000 square miles of territory that included the current states of California, Nevada, Utah, Arizona, one-half of New Mexico, one-quarter of Colorado, and a small sliver of Wyoming.

The U.S. paid another $10 million for the Gadsden Purchase of 1853, an 29,670 square miles region along Southern Arizona and Southwestern New Mexico.

Does anyone believe that the income of the residents in these 558,670 square miles of land would be higher if the territories had remained part of Mexico rather than being ceded to the United States? 

No reasonable person could possibly say yes.

Does anyone believe that Mexico will significantly close the gap in the next few decades?  What would it take?  Will the United States have to coexist with much poorer neighbors south of its border for years to come?  If so, what does that portend for the future of American politics and society? 

Wednesday, July 24, 2019

Trump Could Lose His Trade Dispute With China But Win Reelection

Chinese purchases of U.S. soybeans could influence President Trump’s reelection prospects in 2020.

In 2016, Trump won the Midwestern agricultural states of Iowa, Nebraska, Indiana, Ohio, South Dakota, North Dakota, Missouri, Arkansas, and Kansas.  These 9 states are among the top 11 soybean producing states; the other two are Illinois and Minnesota, both heavily Democrat states.  Without the support of the agricultural Midwest, Trump could be a one-term president.

Since 2000, U.S. agricultural exports to China rose from $3.0 billion to peak at $29.4 billion in 2014, but stayed strong at $23.8 billion in 2017.  Indeed, China is the top market for U.S. agricultural exports (followed by Canada and Mexico).  Then the bottom fell out of China’s imports of U.S. farm products to $9.3 billion in 2018.  Soybeans make up 52% of U.S. agricultural exports to China.  In Trump’s words, “Not Good.”

What happened?  Following Trump’s first wave of tariffs on certain imports from China, China levied retaliatory tariffs on almost all U.S. agricultural and food exports; in particular, 25% tariffs on U.S. soybeans.  Prior to the tariffs, almost half of all soybeans produced in the U.S. was exported to China.  After the tariffs were imposed, U.S. soybean exports to China dropped precipitously.  U.S. producers were not able to replace lost sales to China with increases to other countries.  Prices fell and unsold soybeans piled up.  If producers of soybeans and other agricultural products blame Trump’s tariffs on Chinese goods for their problems, Trump could risk losing their votes in 2020 and perhaps some of the agricultural states he won in 2016.

It’s no accident that China imposed retaliatory tariff on agricultural products, especially soybeans.  China knows that Trump is vulnerable to reduced agricultural exports to China.  Trump tweets that he is waiting for China to fulfill its promise to buy more U.S. farm products, but the Chinese government has not yet rolled back its tariffs and Chinese importers have been slow to act.  As part of a trade deal, China will likely reduce its agricultural tariffs and Chinese importers will likely resume buying soybeans.

If a trade deal is signed, both parties will claim victory for themselves and global trade.  A trade deal that maximizes economic freedom for consumers and producers who rely on imports in the production of goods is a good thing.  Trump is unlikely to get a genuinely enforceable intellectual property rights agreement or an end to Chinese subsidies.  But if Chinese orders for U.S. agricultural products ramp up, Trump will claim both an economic and political victory.

Will a trade deal reduce Chinese exports to America?  Probably not.  Will a deal substantially increase U.S. exports to China?  Probably not.  Trump will have ranted and raved about China “ripping off the United States” with nothing concrete to show for it.  But if the Midwestern industrial and farm states vote for him in 2020, not much harm will have been done, and things will go back to “normal.”

Monday, July 22, 2019

The Pros and Cons of Trump’s Tariffs On Chinese Products

In July-August 2018, President Trump imposed 25% tariffs on $50 billion of Chinese high-tech goods imported into the United States.  He followed in September with 10% tariffs on another $200 billion of Chinese products, which he subsequently raised to 25% on May 10, 2019.  The additional $200 billion of Chinese imports included lamps, air conditioners, vacuums, personal grooming items, handbags, raincoats, knitted hats, baseball gloves, headgear, bicycles, tuna, halibut, salmon, pears, dog leashes, collars, harnesses, diaries, toilet paper, tobacco, hammers, faucets, screwdrivers, and other consumer goods.

If the two sides fail to reach a deal by some unspecified date, President Trump has threatened to impose 25% tariffs on an additional $300 billion of Chinese products.

Here are some numbers to assess the impact of Trump’s current and threated tariffs.  In calendar year 2018, the U.S. imported $540 billion of Chinese goods, exported $120 billion of goods to China, resulting in a merchandise trade gap of $420 billion.  (The corresponding numbers for 2017 are $505 billion [his oft repeated number], $130 billion, and $375 billion.)

President Trump refers only to merchandise trade, not the current account, which includes services and factor payments.  The U.S. runs a positive balance on services with China, thus reducing the overall trade gap.

During September-December 2018, U.S. imports of Chinese goods amounted to $195 billion, a small increase of $9 billion over $186 billion for the comparable September-December of 2017.  Trump’s tariffs of 25% on $250 billion of Chinese goods seems to have had no perceptible impact on the dollar value of Chinese products imported  into the U.S in the last four months of 2018.

The pattern changed in January 2019.  During January-May 2019, U.S imports from China fell $25 billion to $180 billion compared with the same five months of 2018.  Since U.S. GDP in Q1 of 2019 grew 3.1%, it’s hard to blame the decline of $17 billion in January-March 2019 year-over-year on slowing growth.

President Trump talks of billions of dollars collected in tariffs.  If fully collected, a 25% tariff on $250 billion in goods from China will yield $62.5 billion in annual revenue.  If Trump were to impose a 25% tariff on all imported Chinese goods (assume $500 billion in value), annual revenue would total $125 billion.

Some of the $125 billion would be borne by Chinese producers who lower their prices and some by American importers who reduce their prices to maintain a competitive edge.  Some would be borne by workers who lose their jobs and some by consumers in higher prices.  The precise percentages borne in each category are statistical guesswork based on various economic assumptions about elasticities (never mind that here), but Americans will pay some of the tariffs, a transfer from U.S. producers, retailers, workers, and consumers to the U.S. Treasury.  

Let’s put tariffs on Chinese goods in perspective.  July 2019 federal budget estimates for Fiscal Year 2019 (October 1, 2018 through September 30, 2019) are $4.529 trillion in spending, $3.438 trillion in revenue, with a deficit of $1.092 trillion.

Tariffs of $62.5 billion, the current level, amount to 21 days of the federal deficit, 7 days of revenue (non-borrowed), and 5 days of expenditure.

If Trump applies 25% tariffs on all Chinese imports, $125 billion in revenue amounts to 42 days of the deficit, 13 days of revenue, and 10 days of spending.

Billions are big numbers, but tariffs on Chinese imports are a small percentage of federal borrowing, revenue, and spending.  Worse, from these billions must be subtracted slower growth, less business activity, and lost jobs, resulting in less revenue from income, corporate, and social insurance taxes.  Trump’s tariffs could be fully offset or more in lost revenue from other taxes.

So, why impose them?  Maybe Trump’s economic advisors failed in explaining the balance of payments to him, or the impact of tariffs on economic activity, or gave up trying given his obsession with bilateral merchandise trade.

Perhaps President Trump believes that tariffs will force China to agree to more favorable trade practices, maybe necessary for U.S. national security and protection of next generation technology, and preservation of jobs in key political battleground states to enhance his reelection prospects.

Where do I come out on Trump’s trade policy?  The idea of any of the current Democrat candidates taking over the White House is too painful to bear.  If jobs in the battleground states are enhanced by tariffs on Chinese goods, so be it.  Apart from that and national security, there is little, if any, case to be made for U.S. benefits of tariffs on Chinese goods.  Preserving economic freedom, with a few caveats, is a high priority.