Americans Are the Ones Paying for Tariffs, Study Finds

Research contradicts President Trump’s claim that foreigners are footing the bill, and could weaken his hand in the dispute over Greenland

By Tom Fairless of The WSJ. Excerpts:

"Americans, not foreigners, are bearing almost the entire cost of U.S. tariffs, according to new research [published  by the Kiel Institute for the World Economy]"

"suggests that the impact of tariffs is likely to show up over time in the form of higher U.S. consumer prices."

[other research] "by the Budget Lab at Yale and economists at Harvard Business School, finding that only a small fraction of the tariff costs were being borne by foreign producers."

"foreign exporters absorbed only about 4% of the burden of last year’s U.S. tariff increases by lowering their prices, while American consumers and importers absorbed 96%."

"Indian exporters maintained their prices but reduced the volume of shipments to the U.S. by 18%-24% relative to the European Union, Canada and Australia"

"The $200 billion in additional U.S. tariff revenue last year “was paid almost exclusively by Americans”" 

"only around 20% of the tariffs had fed into higher consumer prices six months after their introduction, with the bulk eaten by U.S. importers and retailers."

Evaluating the US-Japan Trade Deal on Mercantilist Terms

By Jon Murphy.

"Short Version: it’s bad, even by the preferred metrics of protectionists.

On July 23, US and Japanese trade negotiators reached a deal on tariffs, investments, and other international transactions.  Much has been written about how bad the deal is from a standard economic perspective (see, for example, here).  But President Trump and his administration, who negotiated the deal, are mercantilist.  So here, I evaluate the trade deal from the mercantilist perspective, focusing primarily on the trade deficit.

A few notes first:

1. Details of not only this deal, but the others negotiated, are sketchy and subject to dispute.  In order to give the Trump Administration the benefit of the doubt, I will be using their announced conditions.
2. These are not deals in the traditional sense of legally binding agreements.  As best we can tell, they are verbal assurances of a potential framework for a legally binding agreements down the line.  But, for the sake of argument, I will treat this deal as if it were a formal, legally binding agreement between the two nations.

With the preliminaries out of the way, let us begin.

Trade Deficit

For mercantilists in general, and President Trump in particular, a trade deficit is a major concern.  Indeed, for the Trump administration, it is the overriding concern.  He invoked the authority to do these deals by declaring the mere presence of a trade deficit to be a national emergency. Therefore, let us begin our analysis by looking at what effect this deal will have on the trade deficit.

This deal will necessarily increase the US trade deficit with Japan.  Part of the deal is a $550 billion investment by Japan into the United States.  When a foreign investor invests in the US, that necessarily increases the trade deficit, because that is how the transaction is recorded in the National Income Accounts.  So, this investment part of the deal will increase the trade deficit.

Furthermore, the Japanese will need US dollars to accomplish this investment.  The only way they can get those dollars is by selling goods to Americans.  That means American imports from Japan will necessarily have to rise, and American exports to Japan will necessarily either not change or fall.  Since a trade deficit is defined as when exports are less than imports, under this scenario, the trade deficit must rise.

There is another, indirect way in which the trade deficit will likely worsen.  The US tariff on Japanese cars is now 15%.  US automakers face a rash of higher taxes, including steel tariffs (50%) and auto parts tariffs (various).  Japanese automakers do not face such tariffs.  Consequently, Japanese imported cars will now be relatively cheaper than their American-made competitors.  On the margin, Americans will purchase more imported cars than domestic cars.  Similarly, American auto exports to Japan are now relatively more expensive, which will reduce exports.  Again, the trade deficit rises.

Thus, given the mercantilist concern about the trade deficit, this deal is a bad one.

Protecting Jobs

A lesser concern for mercantilists is protecting jobs.  The effect the deal will have on jobs is ambiguous.  Assuming the investment deal goes through and doesn’t turn into a significantly scaled-back project like Foxconn, some jobs will be created in the United States, intended to be in LNG exports.  But, as discussed above, American auto manufacturers now face significant competition from Japanese auto firms.  And so, some jobs will be created.  Others, destroyed.  The net effect is probably close to zero.  Thus, from the mercantilist perspective on jobs, this deal is potentially bad, especially since autoworkers are another industry the American mercantilists wish to protect.

Conclusion

Other details of the deal are still obscure, so there is not much more to write.  But, given the information we do have based on the announcements from the Trump Administration, this is a bad deal by their own metrics."

Insider Trading Bans are Ineffective

By Jeffrey Miron and Jacob Winter.

"A Senate committee recently advanced a bill that would ban members of Congress from trading individual stocks. Federal law already prohibits federal employees from insider trading.

The case for insider trading bans is weak, partly because enforcement is difficult. A recent study illustrates by examining

whether the stock trades of high-ranking IRS officials are associated with tax-related information.

The authors found

that IRS officials’ trades, predominantly their purchases, generated abnormal returns of 0.7–3.5 percent 60 to 120 days after the trade. These findings suggest that IRS officials had relevant information that the market had yet to fully incorporate into stock prices.

Furthermore, their

findings suggest that IRS officials’ purchases of a stock predict more favorable tax enforcement outcomes against that firm, while sales predict less favorable tax enforcement outcomes.

As with other prohibitions that are difficult to enforce, insider trading bans privilege those who can avoid getting caught. For other reasons why these bans are bad policy, see a prior piece by one of us."

Adam Smith Would not Approve (of the recent tariffs)

By Janet Bufton. She is Program Coordinator & Co-Founder the Institute for Liberal Studies in Ottawa.

"Someone asked recently what would change as a result of the world being plunged into a trade war by the Rose Garden tariffs. I quipped that either Adam Smith would be proved wrong or we’d all get poorer. (This is also true of the scaled-back tariffs, which still leave American tariffs higher than they’ve been in a century.)

In response, as sometimes happens, they brought up Adam Smith’s arguments for tariffs. These arguments come from Book 4, Chapter 2 of Wealth of Nations. They’re a red herring, as we’ll see. But let’s look at how they apply.

There are two instances in which Smith says you can always justify managing trade, and two cases in which managing trade can’t be automatically condemned. Restrictions on imports can always be justified (1) in shipping because it’s tied to military defence, and (2) by taxing imports at the same rate that domestic goods are taxed to create a level playing field. Trade restrictions shouldn’t be automatically condemned when (A) they are retaliatory tariffs, or (B) free trade is being phased in.

So what’s the big deal? Retaliatory tariffs are right there in the list. Why would the Rose Garden tariffs vex Adam Smith?

Smith is very specific about when retaliatory tariffs are appropriate. “There may be good policy in retaliations of this kind, when there is a probability that they will procure the repeal of the high duties or prohibitions complained of.” (IV.ii.39) In other words, retaliatory tariffs are good if they secure freer trade. Israel’s elimination of tariffs against the United States did not spare them. When Vietnam and the European Union offered to eliminate all tariffs, the administration rejected these offers as insufficient. If these were meant to be retaliatory tariffs, they’ve failed.

But the Rose Garden tariffs were never retaliatory. They were not based on how much other countries tariff the United States. They are not even based on estimates of non-tariff barriers. The White House confirmed that the method used to calculate the tariffs was the trade deficit divided by U.S. imports from that country, then divided again by 2 (Unless a country does not run a trade deficit with the United States, in which case the tariff was set to 10%).

So it’s not about retaliation, but—at best—a negative trade balance. And we all know what Adam Smith said about the balance of trade, right?

“Nothing, however, can be more absurd than this whole doctrine of the balance of trade, upon which, not only these restraints, but almost all the other regulations of commerce are founded. When two places trade with one another, this doctrine supposes that, if the balance be even, neither of them either loses or gains; but if it leans in any degree to one side, that one of them loses and the other gains in proportion to its declension from the exact equilibrium. Both suppositions are false.” (WN IV.iii.a)

But anyway, Adam Smith’s arguments about tariffs are a red herring if we want to know what Adam Smith would think of these tariffs.

The effect of the tariff announcement in the Rose Garden was not simply to raise the price of international trade. As Thomas Sowell observed, the tariff announcement also introduced uncertainty that makes foreign investment and globally integrated supply chains more vulnerable—more risky—at the same time as the tariffs themselves make international trade more expensive. The overall effect of these policies is the effect of all trade restrictions: they effectively shrink the global market. Exchanges that would otherwise make sense become more expensive and they don’t happen.

Adam Smith’s core economic insight, the one from which all other arguments in the Wealth of Nations follows, is that the wealth of nations is a product of the division of labour (Book 1, Chapter 1), of cooperation facilitated by our natural propensity to truck, barter, and exchange (Book 1, Chapter 2). The division of labour is limited by how many people we can divide labour between, what Smith calls the “extent of the market” (Book 1, Chapter 3).

If we will not be poorer because the tariff announcement in the Rose Garden shrunk the number of potential trades, and with them the extent of the market, then the division of labour is not the source of the wealth of nations. If the Rose Garden tariffs won’t make us all poorer, then Adam Smith was wrong about everything.

If Smith was wrong about everything, who cares when he says tariffs are good?"

Trump’s Latest Tariff Idea Is Dangerously Foolish

Terrible economics aside, there’s simply no possible way it could work

By Scott Lincicome of Cato.

This iron law of economics is one that, as Dartmouth economic historian Doug Irwin explains, even protectionist heroes like Alexander Hamilton understood. Congress adopted tariffs that the founding father (and author of the famous/infamous Report on Manufactures) recommended, but these tariffs “were not highly protectionist because Hamilton feared discouraging imports, which were the critical tax base on which he planned to fund the public debt.” This dynamic is also something that today’s Republicans understand—at least when it comes to income taxes: the oft-cited “Laffer curve” posits that a tax on a certain economic activity (usually labor) won’t raise any revenue when it’s set at zero or 100 percent, with a hump (curve) in between.

…..

The tariff plan would also be plagued with practical problems. In just coverage alone, would Trump’s tariffs apply to all imported necessities like food and beverages (almost $200 billion last year); clothing ($51 billion); shoes ($18 billion); and medicines ($203 billion)? Would it apply to the almost half of all imported goods that are industrial inputs used by American manufacturers to produce (and often export) other stuff? Would it apply to that $700-plus billion in services, including the ever-increasing share transmitted digitally or the $149 billion that Americans spent traveling abroad last year (considered a “travel services import”)? Would it apply to Americans’ personal, small-dollar purchases of retail items, whether made as tourists abroad or via direct mail?

The list goes on and on.

 

On the Nippon Steel‐​US Steel Deal, Politics (Again) Tops Policy

By Scott Lincicome and Alfredo Carrillo Obregon of Cato.

"In a “highly unusual” move, President Biden yesterday voiced his opposition to Japan‐​based Nippon Steel’s bid to acquire US Steel, saying that it’s “vital” for US Steel “to remain an American steel company that is domestically owned and operated.”

Vital for whom?

If the president were concerned about the vitality of the company, as well as the US steel industry and the US economy more broadly, he’d quietly let the deal proceed. As Scott Lincicome explained in a recent column, this isn’t your grandfather’s US Steel: after decades of poor management and stagnation, the company is today only the third largest steel producer in the United States (27th in the world) and employs just 20,000 people—less than the number of manufacturing jobs the US economy gained in November 2023 alone.

Nippon Steel, meanwhile, is not paying a large premium—over $5 billion above US Steel’s market capitalization—to shutter the company. It’s doing so because it sees an opportunity for growth and expansion in an American steel market that—thanks to US protectionism—has long been difficult to access. Nippon Steel management has accordingly stated their intention to invest in and enhance the technology of US Steel’s production facilities—investment that most steel industry experts and US steel‐​consuming manufacturers believe will benefit US Steel, its American workforce, and the broader manufacturing sector.

Such a result would hardly be uncommon. Foreign investments—including by Japanese companies, which had invested $712 billion in the United States by end‐​2022 and employ 963,000 Americans—have often benefited the US companies being acquired and their surrounding communities. The investments can result in increased spending in R&D and capital equipment and internal changes in management or business practices—precisely what both Nippon Steel and US Steel have told their shareholders about the current acquisition.

The president’s opposition also can’t be said to be about the “vitality” of US national security. As Lincicome also explained, Japan has been one of the United States’ closest allies for 60 years, hosts US military personnel and Department of Defense (DOD) civilians and their families and acquires more than 90 percent of its defense imports from the US. Similarly, Japanese investors haven’t been a concern for the Committee on Foreign Investment in the United States (CFIUS), which is reviewing the Nippon deal, since the 1980s. The House Select Committee on the Chinese Communist Party has even gone so far as to recently recommend that Congress put Japan on the CFIUS “whitelist” of close allies. Nippon Steel is also far removed from the days in which it was closely connected to the Japanese government, and almost a quarter of it is owned by foreign (i.e., non‐​Japanese) entities. And if a war or other national emergency arose that did necessitate the federal government nationalizing some of company’s US output, Nippon’s ownership would be immaterial.

This, of course, is extremely unlikely, and more realistic scenarios present even lower risks—or even argue for supporting the deal outright. The Defense Department doesn’t currently buy from US Steel, and DOD needs just 3 percent of domestic steel production to meet its procurement obligations. As former deputy undersecretary of defense for industrial policy William C. Greenwalt recently explained, in fact, the current steel industry—save a couple mills (not owned by US Steel) that produce defense‐​grade metals—“has not only been mostly worthless to national security—it has arguably become detrimental to it” because of its support for protectionism. In particular, the “adoption of domestic source restrictions that torture DOD’s supply chain to buy de minimis levels of steel found in products such as casings, fasteners and spare parts, often at higher prices than it could buy from abroad.” Thus, when DOD urgently needed more steel for its Mine‐​Resistant Ambush Protected (MRAP) program during the 2000s, most of the US steel industry declined to help, while one US company was blocked by “Buy America” restrictions because it sourced crude steel from Mexico. Thus, DOD instead turned to our allies for help, buying steel from Sweden, Germany, Israel, and Australia.

Given these realities, most independent observers understand President Biden’s decision as motivated by politics, not economics or national security. In particular, the president believes he needs the support of unions that oppose the Nippon Steel deal, and his opponent, Donald Trump, has publicly pledged that he would block it if elected. Thus, there’s really only one thing for which the president’s opposition can arguably be said to be “vital”: his reelection prospects."

The SEC’s Latest Insider-Trading Theory

The agency rewrites the law to invent a new offense: ‘shadow trading.’

WSJ editorial.

"Congress has never clearly defined insider trading in stocks, but that hasn’t stopped the Securities and Exchange Commission and prosecutors from finding the meaning in statutory penumbras. Chairman Gary Gensler’s SEC is at it again in a civil trial next month that will try to extend its reach to punish trading in the shares of another company about which the defendant had no insider information.

Federal law doesn’t explicitly ban trading on confidential information. But courts have said that insiders defraud companies by “misappropriating” private information for personal gain. In a classic case, an insider trades in his company’s stock based on proprietary information or tips off someone else who then trades and cashes in. While courts have circumscribed insider-trading liability, regulators keep inventing new theories.

In 2021 the SEC charged Matthew Panuwat, an employee at the biopharmaceutical firm Medivation, with insider trading for a timely and lucrative options trade on another pharmaceutical company’s stock. Having developed a highly effective prostate-cancer drug, Medivation was shopping itself to large drug companies in 2016.

The SEC alleges that Mr. Panuwat started purchasing call options for a different company, Incyte, soon after Medivation’s CEO sent an internal email announcing an imminent deal to be acquired byPfizer. While Incyte and Medivation didn’t directly compete, the SEC alleges that their stock prices were correlated, and that Mr. Panuwat knew this.

After news of Medivation’s acquisition broke, the share prices of Incyte and several mid-sized pharmaceutical companies popped. Mr. Panuwat sold his Incyte options for a roughly $107,000 profit. The SEC says Mr. Panuwat committed insider trading by allegedly using confidential Medivation information to bet on Incyte’s stock. Medivation had a company policy that forbade such trades, but violating a company policy isn’t the same as violating a federal statute.

In his defense, Mr. Panuwat says it was publicly known that Medivation was on the sale block, so information about its potential acquisition wasn’t private. He also claims he bet on Incyte because he believed the company was undervalued by the market.

Disagreement over facts aside, the major problem with the SEC case is that it writes new insider-trading law by enforcement with no limiting principle. An executive could be charged with investing in the shares of any stock in his industry group. Yet everyone knows stocks in the same industry often move up or down based on the news of a single firm.

A

Nvidia

employee who knew his company had a strong earnings quarter and bought stock in tech companies, or even a tech-focused ETF, could be charged under this SEC theory. A 2021 academic study dubbed this practice “shadow trading” and “an undocumented and widespread mechanism that insiders use to avoid regulatory scrutiny.”

***

The SEC seems determined to prosecute Mr. Panuwat as a way to send a message across the market that such shadow trading is banned. But it’s an abuse of the law to punish someone after the fact for acts that he didn’t know at the time to be illegal.

In 2014 Justice Antonin Scalia, joined by Justice Clarence Thomas, lambasted the SEC’s penchant for defining insider trading however it wants (in denying a cert petition in Whitman v. U.S.). “Only the legislature may define crimes and fix punishments. Congress cannot, through ambiguity, effectively leave that function to the courts—much less to the administrative bureaucracy,” Justice Scalia wrote.

“When King James I tried to create new crimes by royal command, the judges responded that ‘the King cannot create any offence by his prohibition or proclamation, which was not an offence before,’” Justice Scalia wrote. “James I, however, did not have the benefit of

Chevron

deference.” Mr. Gensler may not have Chevron for long either. The High Court in January heard a challenge to the court-made Chevron doctrine, which requires judges to defer to regulators’ statutory interpretation when the law itself is ambiguous.

The SEC’s shadow insider-trading theory looks like another example of how regulators exploit vague laws to expand their power and undermine legal due process. If Congress wants to ban the practice, it can. But Mr. Gensler isn’t King James I, even if he sometimes acts as if he is."

Insider Trading: The Unknowable Crime

By Thaya Brook Knight and Ilya Shapiro of Cato.

"Under our criminal justice system, ignorance of the law is no defense.  But what if the law is undefined?  Or what if it seems to change with every new case that’s brought?  What if unelected judges (with life tenure) started to invent crimes, piece by piece, case by case?  Holding people accountable for knowing the law is just only if the law is knowable, and only if those creating the law are accountable to the people.  

On Friday, Cato filed an amicus brief in Salman v. U.S. that is aimed at limiting the reach of just such an ill-defined, judicially created law. “Insider trading” is a crime that can put a person away for more than a decade, and yet this crime is judge-made and, as such, is ever-changing. Although individuals may know generally what is prohibited, the exact contours of the crime have remained shrouded, creating traps for the unwary.

The courts, in creating this crime, have relied on a section of the securities laws that prohibits the use of “any manipulative or deceptive device or contrivance” in connection with the purchase or sale of a security. The courts’ rationale has been that by trading on information belonging to the company, and in violation of a position of trust, the trader has committed a fraud.  The law, however, does not mention “insiders” or “insider trading.”  And yet, in 2015 alone, the Securities and Exchange Commission (SEC) charged 87 individuals with insider trading violations.

Broadly speaking, insider trading occurs when someone uses a position of trust to gain information about a company and later trades on that company, without permission, to receive a personal benefit.  But what constitutes a “benefit”?  The law doesn’t say.

Left to their own devices, the SEC has pushed the boundaries of what constitutes a “benefit,” making it more and more difficult for people to know when they are breaking the law.  In the case currently before the Court, Bassam Salman was charged with trading on information he received from his future brother-in-law, Mounir Kara, who had, in turn, received the information from his own brother, Maher.  The government has never alleged that Maher Kara received anything at all from either his brother or Salman in exchange for the information.  The government has instead claimed that the simple familial affection the men feel for each other is the “benefit.”  Salman’s trade was illegal because he happens to love the brothers-in-law who gave him the inside information.

Under this rationale, a person who trades on information received while making idle talk in a grocery line would be safe from prosecution while the same person trading on the same information heard at a family meal would be guilty of a felony.  Or maybe not.  After all, if we construe “benefit” this broadly, why not say that whiling away time chit-chatting in line is a “benefit”?   

No one should stumble blindly into a felony.  We hope the Court will take this opportunity to clarify the law and return it to its legislative foundation.  Anything else courts tyranny."

"The 99%" of Us Get Fined and Go to Jail for Insider Trading, But the Exempt "Political 1%" Can Get Rich

Great post by Mark Perry of "Carpe Diem."

"(CBS News) -- "Martha Stewart went to jail for it. Hedge fund honcho Raj Rajaratnam was fined $92 million and will go to jail for years for it. But members of Congress can do the same thing -use non-public information to make stock trades -- and there's no law against it. Steve Kroft on "60 Minutes" reports on how America's lawmakers can legally make tidy profits on information only they know, simply because they won't pass a law against themselves. The report will be broadcast on Sunday, Nov. 13 at 7 p.m. (watch preview above).

If senators and representatives are using non-public information to win in the market, it's all legal says Peter Schweizer, who works for the Hoover Institute, a conservative think tank. He has been examining these issues for some time and has written about them in a book, "Throw them All Out." "Insider trading laws apply to corporate executives, to Americans...If you are a member of Congress, those laws are deemed not to apply," he tells Kroft. "It's really the way the rules have been defined... lawmakers have conveniently written them in such a way as they don't apply to themselves," says Schweizer.

Efforts to make such insider trading off limits to Washington's lawmakers have never been able to get traction."



MP: Maybe the OWS protests should direct some outrage at the greed of the political class "who get rich off insider stock tips, land deals and cronyism that would send the rest of us to prison" (from the front cover of Peter Schweizer's book)?



Update 1: A 2011 research article in the journal Business and Politics ("Abnormal Returns From the Common Stock Investments of Members of the U.S. House of Representatives") found that the stock portfolios of House of Representative members outperformed the overall stock market by 55 basis points per month, or 6.6% on an annual basis between 1985 and 2001, suggesting that lawmakers have a "substantial informational advantage" over the general public and even over corporate insiders.



Update 2: The chart below illustrates how an additional return of 6.6% per year for House Members would have affected an investment in the stock market between 1985 and 2001. A $1,000 investment in the S&P500 at the beginning of 1985 would have grown to $6,043 by the end of 2001, earning an annual return of 11.16%. In contrast, adding a 6.6% premium for lawmakers due to their informational advantage would have generated an annual return of 17.76%, and a $1,000 investment in 1985 would have grown to $16,172, or roughly 2.7 times as much as an investment in the S&P500. Not bad. Insider trading has its advantages."

57.4% Of Imports Are Industrial Supplies And Capital Goods

See this great graph by Mark Perry

Industrial Supplies-34.4%
Capital Goods-23%

Learning to Love Insider Trading

That is an article written by DONALD J. BOUDREAUX in the WSJ a couple of years ago. Click here to read it.

The basic idea seemed to be “… when insiders trade on their nonpublic, nonproprietary information, they cause asset prices to reflect that information sooner than otherwise and therefore prompt other market participants to make better decisions.” For example, if there are accounting shenanigans (like at Enron), inside traders would be forcing the price down and this would call attention to what is happening in the company.

But there is alot more in the article