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."

Don’t Succumb to Fatalism—or Mercantilism

Governments needn’t inflict economic harm on their own citizens

Letters to The WSJ. 

"Greg Jensen concludes that “we are all mercantilists now, and the implications are profound and unavoidable” (“We Are All Mercantilists Now,” op-ed, Dec. 13). The implications of the world-wide turn to mercantilism truly are profound, but if enough people resist the fatalism that seems to afflict Mr. Jensen, this turn isn’t unavoidable.

A good start is to recognize that many of the facts on which mercantilists today rest their case are, in reality, false. For example, mercantilist sympathies in the U.S. today cannot, contrary to Mr. Jensen’s claim, be explained by “lost domestic manufacturing jobs” as a result of the rise of China’s economy. As a share of total nonfarm employment, manufacturing jobs peaked during World War II and have fallen steadily ever since. Since China joined the World Trade Organization in December 2001, the average monthly decline in U.S. manufacturing jobs as a share of nonfarm employment has been slightly lower than was this monthly decline from the end of World War II until China’s membership in the WTO.

While it’s true that “each time another country adopted mercantilist policies, it pushed others to react similarly,” nothing is inevitable about such reactions. They are chosen, and they’re unequivocally foolish. If more people understood that mercantilist policies damage all economies that adopt them, each government would be less inclined to inflict economic harm on its own citizens simply because foreign governments inflict economic harm on their citizens.

People of good sense will warn of the dangers of mercantilism rather than succumb to Mr. Jensen’s fatalism.

Prof. Donald J. Boudreaux

George Mason U., Mercatus Center

Fairfax, Va.

Much like the dinosaurs in the op-ed’s cover art, mercantilism is an idea best left in the past. Mercantilists would have us believe that what makes us wealthy is the amount of money we have. But this can’t be the case. Tom Hanks’s character in “Cast Away” would have fared worse, not better, if a crate of money had washed up on shore instead of a volleyball.

Mercantilists have the relationship between imports and wealth backward: Imports are the benefit of production, not a cost to it. Mr. Jensen understands this perfectly fine in other contexts. He exports investment advice to his clients each day. In return, he imports food from the grocery store, electricity from the power plant and internet from the cable company. It isn’t the exporting that makes him wealthy; it is the ability of his household to import goods and services that makes him so.

If we want to see Americans continue to flourish, we need to increase their access to goods and services, not hinder it. To do this, we must lower barriers to trade, not erect new ones.

David Hebert

American Inst. for Economic Research"

There Ain’t No Such Thing As A Free Subsidy

Another great letter from Don Boudreaux at Cafe Hayek. Here it is:

"Gideon Rachman believes that “the normal rules about the mutual benefits of trade do not necessarily apply when one trading partner is practicing mercantilist or protectionist policies” (“Think Again: American Decline,” Jan./Feb.).

He’s correct, but not in the way that he thinks. Whereas Mr. Rachman believes that mercantilist and other protectionist policies help the countries that practice these policies and harm countries that trade freely, something closer to the opposite is true.

By erecting tariffs that dampen competition, mercantilism encourages home producers to become unresponsive and uncreative. By issuing subsidies paid for with higher taxes, government debt, or distortionary monetary policies, mercantilism helps exporters only by inflicting more-sizable damages on the nation’s economy writ large. By turning the national government into a bazaar for the buying and selling of monopoly privileges, mercantilism deflects entrepreneurial energies away from building better mousetraps and into building politically advantageous political connections. And by raising prices in the home market, mercantilism makes consumers poorer as well as makes producers who rely upon imported inputs less efficient.

So indeed, to the extent that Americans’ trades with non-Americans are conditioned by foreign-governments’ mercantilist policies, the gains from these trades are not mutual: they flow exclusively to Americans."