Congress Takes The First Step To Pass Tax Reform: Here's What Comes Next

Today The House passed the 2018 budget resolution in a 219-207 mostly party-line vote (18 republicans voted against the resolution along with all Democrats), representing the first step toward the Republican goal of sending tax-reform legislation to President Trump. Republican lawmakers hailed the vote as meaningful because the due to the budget reconciliation rules, the incorporate tax measures would allow Republicans in the Senate to pass tax reform without any Democratic votes, though Senate Majority Leader Mitch McConnell can only afford two defections (this proved to be a terminal hurdle in repealing Obamacare).

“We haven’t reformed this tax system since 1986. We need to pass this budget so we can help bring more jobs, fairer taxes and bigger paychecks for people across this country,” Speaker Paul Ryan said during House floor debate.

News of the passage provided a fresh burst of upside to the S&P which closed at fresh all time highs, driven by both tech and US-focused small-cap stocks, while the VIX dropped to new all time lows.

To be sure, for the past month, all trader eyes have been focused on the prospect of US tax legislation which has fast become the only catalyst for equity valuations, and especially following last week"s  release of the proposed Republican tax plan, as well as the failure (again) of the party’s efforts on healthcare. Additionally, the tragedy of three major hurricanes hitting Texas, Florida, and Puerto Rico has superimposed a new agenda onto Congress given the urgency of relief needs (which could also open the door to longer-term infrastructure improvements). As a result, how recovery and reconstruction may reshape the fiscal agenda —and the potential of getting it all done — is the main question Goldman asks in its latest "top of mind" periodical publication.

The question is critical because while today"s budget resolution passage suggests a beneficial tailwind far tax reform, there are many who warn that the real work, and major hurdles - not to mention bickering within the Republican party - is only just starting.

So to get a sense of the complexities that lie ahead, here is Goldman"s Washington economist Alec Phillips, laying out the next steps and assessing the prospects for the passage of both tax reform and fiscal policy, one which now faces substantial obstacles.

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An update on the DC fiscal agenda

The recent fiscal deal cleared the decks…

The urgent need to provide hurricane relief funding drove the recent bipartisan deal to suspend the debt limit and extend spending authority, clearing the agenda of near-term fiscal deadlines several weeks earlier than had been expected. As a result, Congress has several more weeks before year-end to consider tax reform and other measures.

…but kicked the can.

However, this newfound breathing room won’t last long. Spending authority must be extended again by December 8 and the debt limit must be raised by late February or March 2018, when Congress is likely to be in the thick of debate on other issues like tax reform. We are not particularly worried about the risk of a shutdown in December but we do believe that the need to raise the debt limit during the final stages of the tax-reform effort poses risks for both issues.

Bipartisan cooperation could increase…

The recent fiscal deal also raised hopes for other bipartisan agreements on immigration, tax reform, and an infrastructure program. We think the chances for bipartisanship in a few areas might have indeed increased, for two reasons. First, additional hurricane funding could compel fiscal conservatives to support spending initiatives that they might otherwise oppose. Second, the positive public reaction to the recent fiscal deal might motivate the White House to pursue more discussions across the aisle.

…but is unlikely to become the norm…

There is simply not much overlap at the moment between lawmakers of each party on key issues under consideration, like healthcare or taxes. In addition, while the president has shown interest in a narrow bipartisan agreement on immigration, his core supporters appear to be strongly opposed.

…particularly where reconciliation could be used.

Republicans can use the reconciliation process to change the tax code or the Affordable Care Act (ACA) and are apt to do so if they can. While a bipartisan process could allow for a wider range of policy changes and would lead to more durable reforms, the drawback is that reaching an agreement is less likely. By contrast, an approach that relies on the majority party alone is likely to succeed even if it faces greater procedural constraints on the types of changes that can be made.

Health reform is off the agenda for now…

The recent Senate debate over healthcare legislation demonstrates that even reconciliation legislation is not guaranteed to pass. We had never expected Congress to repeal the insurance subsidies provided through the ACA, but we did expect Republicans to make changes to ACA policies either a repeal of a few politically unpopular provisions like the individual mandate, or devolution of control over the program to state governments. The Senate attempted to pass both but neither had sufficient Republican support. The most that appears possible in the near term is a set of targeted changes to improve the program for 2018. With the reconciliation strategy on healthcare put aside for now, a bipartisan agreement in this area looks possible, though with potentially modest effects.

…but might return.

Congressional Republicans might make another broader ACA repeal push at some point before the midterm election, by using the reconciliation process in either the FY18 or FY19 budget cycle. At this point, the House and Senate differ, with the House resolution instructing the committees with oversight of the ACA to pass legislation cutting spending by $72bn over the next 10 years, which could come from ACA subsidies or unrelated programs, like Medicare. In the Senate, the draft resolution includes no such instructions and would be incompatible with ACA repeal. We expect the Senate approach to prevail for FY2018, effectively pushing the next repeal/replace opportunity to mid-2018 or, more likely, 2019.

Tax reform is moving forward on two tracks…

With health legislation finally out of the way, the focus has shifted to tax reform. Congressional Republicans expect to use the reconciliation process to pass tax reform, which would require two steps: First, the House and Senate budget committees must lay the procedural groundwork with a budget resolution for FY18 that instructs the tax-writing committees to cut taxes by a certain amount, a process that is underway. Second, once a final budget resolution has passed in the House and Senate, the tax-writing committees—the House Ways and Means and Senate Finance Committees—write the detailed  tax legislation that would carry out those instructions. This must also first pass at the committee level, then the full House and Senate, and finally a conference committee to resolve any differences. In all of these votes, only a simple majority would be required because it is part of the budget process, which is governed by special rules.

…and the recent news on tax reform has been positive…

Over the last few weeks, three developments have raised the odds of tax reform, in our view. First and most importantly, a tentative agreement was struck by Senators Corker (R-Tenn.) and Toomey (R-Penn.) that allows for the FY18 Senate budget resolution—released on September 29—to include instructions to the tax-writing committees to cut taxes by up to $1.5tn over 10 years. This was a critical development since, once finalized, it would allow for a cut in tax rates with less broadening of the tax base than would be necessary under a revenue-neutral instruction, allowing lawmakers to avoid making the most politically difficult choices. Second, the framework released by the “Big Six” signals modest progress on agreeing on a single set of reforms, though the details are not yet fully formed.
Third, the public support from the House Freedom Caucus for the framework and the upcoming budget resolution suggests that its members are unlikely to be a major obstacle to enactment. While the second and third items were not particularly surprising, we believe the tentative budget agreement was likely one of the more important turning points in this debate.

…but there are still plenty of obstacles to overcome.

There are two important technical obstacles that Republicans must overcome to pass tax reform via reconciliation. First, pay-as-you-go (PAYGO) rules constrain the consideration of deficitincreasing legislation. While most of these rules can be circumvented, one that could be difficult to get around is the statutory PAYGO rule enacted in 2010, which imposes automatic spending cuts via sequestration to offset the effect of any deficit-increasing legislation Congress passes. This would not prevent Congress from passing a net tax cut, but might serve as a deterrent. Second, the “Byrd” rule in the Senate prohibits reconciliation legislation from increasing the budget deficit outside of the window covered by the budget resolution (traditionally 10 years). Waiving either rule requires 60 votes in the Senate.

A more fundamental obstacle is political.

Thin Republican majorities in the House and Senate have made it difficult to reach consensus so far this year. Tax reform needs support from 50 of 52 Senate Republicans, and we expect the 50th vote to come from the same group of centrists who were among those who recently blocked the health bill. These senators might press to keep the size of the tax cut even smaller than the $1.5tn over 10 years allowed under the Senate budget resolution. However, our expectation is that these senators are more likely to limit the size of the tax cut, rather than block the bill entirely as they did with the health bill (find a more detailed look at tax reform prospects here).

The fiscal boost from tax changes will likely be small.

Financial markets are more focused on fiscal stimulus than Congress. However, while we believe there is a 65% probability that Congress will enact tax legislation in 2018, we expect the size of the potential fiscal boost to be fairly small. The Senate budget resolution includes a tax cut placeholder of $1.5tn over 10 years; since roughly $450bn in existing tax breaks are already scheduled to expire over the next 10 years, this works out to around a $1.05tn net tax reduction. The revenue effects of the tax cut might be estimated on a “dynamic” basis, which considers the economic growth implications of the tax bill when determining its cost. Depending on whether the dynamic score is applied to the $1.5tn or the $1.05tn, this could allow for a “real world” tax cut worth 0.4-0.6% of GDP. All else equal, we expect that this would boost growth by around 0.2pp in 2018 and 2019.

Hurricane relief funding presents some upside risk.

The prospects have risen for a year-end agreement that combines hurricane relief funding, a few targeted infrastructure financing mechanisms, and an increase in the caps on defense and non-defense discretionary spending. Following similarly sized hurricanes in the past, Congress appropriated funds equal to about 60% of the total damage estimates; this suggests that Congress could approve as much as $75bn in funding for Hurricanes Harvey and Irma. The total would rise further with damages from Maria. This would not only boost federal spending directly, but could also allow for an agreement to lift the caps on other spending (emergency spending for disaster relief is exempt from the caps). While we are not particularly optimistic that an agreement will be reached on a broad infrastructure program, hurricane spending could represent a similar amount of funds going to similar types of projects.

Finally, here is the full summary of the US budget process:

House Passes Budget, Jumps First (Smallest) Hurdle Towards Tax Reform

The House passed its 2018 budget resolution Thursday (with 18 Reps voting against) crossing the first threshold toward its goal of sending tax reform legislation to President Trump.

As WaPo reports, the House budget resolution includes major spending cuts demanded by the party"s conservative wing, but the party"s focus is now on passing a tax bill that could add as much as $1.5 trillion to the budget deficit. Special procedures set out in the legislation would ultimately allow Republicans to pass the bill over a potential Democratic filibuster in the Senate.

"Our budget specifically paves the way for pro-growth tax reform that will reduce taxes for middle class Americans and free up American businesses to grow and hire," House Budget Committee Chairman Diane Black (R-Tenn.) said during floor debate.

In a 219-206 vote, The Hill reports lawmakers approved a budget resolution for 2018 that sets up a process for shielding the GOP tax bill from a filibuster in the Senate.

A total of 18 Republicans voted against the resolution, along with all the Democrats, but GOP lawmakers hailed the vote as meaningful because of the tax measure.

“We haven’t reformed this tax system since 1986. We need to pass this budget so we can help bring more jobs, fairer taxes, and bigger paychecks for people across this country,” Speaker Paul Ryan (R-Wis.) said during House floor debate.

Ironically, Democrats lambasted it for the same reason.

“This budget isn’t about conservative policy or reducing the size of our debt and deficits. It’s not even about American families. This budget is about one thing – using budget reconciliation to ram through giant tax giveaways to the wealthy and big corporations - and to do it without bipartisan support,” said Rep. John Yarmuth (D-Ky.), the ranking member of the House Budget Committee.

The Senate is proceeding on a separate track toward passing its own budget, which will have to be reconciled with the House version in the coming weeks.

Yet, as The Hill notes, there are already signs of trouble, with some Republicans questioning whether the tax proposal would add too much to the deficit, and others balking at plans to eliminate a deduction for state and local taxes. The tax plan is now estimated to add $1.5 trillion to the deficit over a decade, but that figure would grow if the state and local tax deduction is not eliminated.

Trump Asks That $8 Billion Harvey "Down Payment" Be Added To Debt-Ceiling Bill

Shortly after President Trump backed away from his demand that $1.6 billion in funding for his border wall be included in a continuing-resolution bill to avert a government shutdown, the White House late Friday sent a request for $8 billion in emergency funding for the Hurricane Harvey cleanup effort, and asked that the money be tied to a bill to raise the US debt-ceiling limit. Trump’s request that the two legislative priorities be combined in one bill likely won’t go over well among Congressional Republicans, according to Bloomberg.

Rep. Mark Meadows of North Carolina, the leader of the House Freedom Caucus and perhaps Trump’s most intransigent political adversary, urged lawmakers on Thursday not to bundle the two legislative priorities. In a tweet, Meadows said it’d be “inappropriate” and “would send the wrong message” to use Harvey funds as leverage to force conservatives to vote for a debt-ceiling increase.

The aid money will be needed to shore up the nearly bankrupt FEMA’s finances before some 450,000 Texans file requests for aid. The rising toll of flood-related property damage is expected to quickly deplete the $10 billion left in the coffers of the National Flood Insurance Program.

Using #Harvey relief spending to pass a separate, unrelated bill would be inappropriate and send the wrong message https://t.co/DwHxp6IphB

— Mark Meadows (@RepMarkMeadows) August 31, 2017

Here’s Bloomberg:

“In a letter to House Speaker Paul Ryan requesting the storm aid, Budget Director Mick Mulvaney stops short of explicitly asking for the two to be linked. But the letter makes clear that the emergency spending will accelerate the timetable for raising the limit and conveys the idea that failure to pay obligations could imperil essential government services.

The White House disaster aid request includes $7.4 billion for the Federal Emergency Management Agency and $450 million for the Small Business Administration. The request is intended primarily to cover funding demands through the end of the federal fiscal year on Sept. 30.”

The administration intends to ask Congress to allow the aid to be disbursed in one lump sum, rather than parceling out in monthly installments.

“The White House will ask Congress to provide FEMA with $6.7 billion in that legislation, and provide the full funding upfront, rather than pro-rating the appropriation out over the entire fiscal year, an administration official said. That request, if adopted by lawmakers in a vote likely to come at the end of the month, would provide FEMA with additional flexibility to fund Harvey relief efforts in the new fiscal year.”

Republicans are expected to vote on disaster relief next week after they return from summer recess. Congress is already facing a grueling legislative calendar in September with only 12 working days to pass a continuing resolution, disaster relief, a debt-ceiling increase and, potentially, their effort to repeal and replace Obamacare after the Senate Parliamentarian informed party leaders that the provisions allowing them to pass their health-care bill with a simple majority will expire at the end of the month.

“The administration’s move will test the willingness of Republicans in Congress to link the two must-pass pieces of legislation. House GOP leaders plan to vote next week on Trump’s request in initial disaster relief funding but they don’t plan to include a U.S. debt-limit increase in the legislation, two GOP congressional aides said before Mulvaney’s letter was sent.

"The president visited Texas on August 29, 2017 to reassure the people of Texas that the Federal Government would help them rebuild from the catastrophic flooding and damage to affected communities," Mulvaney said in the letter. "This request is a down-payment on the President’s commitment to help affected States recover from the storm, and future requests will address longer-term rebuilding needs."

According to Bloomberg, citing unnamed Congressional aides, the Senate might be more willing to combine both measures in a bill, and the House, bizarrely, might be more willing to pass a bundled bill if it makes it through the Senate first. Despite the reported rift between Trump and Senate Majority Leader Mitch McConnell, the Kentucky Republican has promised to cooperate with the president. He hasn’t said whether he’d prefer to combine, or separate, Harvey funding and the debt-ceiling increase.

“‘Working closely with the President and the House of Representatives, the Senate stands ready to act quickly to provide this much-needed assistance to those impacted communities, and support first responders and volunteers,’ he said.”

House Speaker Paul Ryan has also been conspicuously silent about how the House intends to pass Harvey relief…

As families & communities begin long recovery from Hurricane Harvey, House will act quickly on @POTUS request for emergency relief funding.

— Paul Ryan (@SpeakerRyan) September 2, 2017

…though he recently told a Wisconsin newspaper that Congress “will not default” on its debts.

“Ryan told the Milwaukee Journal Sentinel, though, that Congress has until October to act on the debt limit.

‘We will not default,’ the Wisconsin newspaper quoted Ryan as saying. ‘We’ve got a lot of options on our plate. We’re going to assess those options. We have until October to figure that one out.’”

We probably won’t have a clear picture of the combined bill’s chances. For what it’s worth, Goldman is optimistic that a compromise can be reached. It recently lowered its odds of a government shutdown to 15%, down from 50% last week.

Goldman: the probability of a government shutdown has declined further from our prior assessment of 35% and now put it at around 15%.

— zerohedge (@zerohedge) September 1, 2017

Let"s hope, for the disaster victims" sake, that the squid is right.

Japan's Shifting Power Alliances

Authored by Nomi Prins via The Daily Reckoning,

I’ve just wrapped up a long trip to Japan. And I’ve taken away one lesson from all of my conversations, speeches and research: The rise of nationalism in the U.S. will cause massive shifts in global trade alliances.

One of the main beneficiaries will be Japan. Now, Japan might not be on your radar, day-to-day, but it’s about to play a very important role in the world of Donald Trump.

Here’s what I mean…

During President Trump’s campaign, he often discussed making “better” trade deals for the United States with its partners.

Indeed, one of his first executive orders as President on January 23, 2017 involved removing the U.S. from the Trans Pacific Partnership Trade Agreement, or TPP. That agreement originally involved 12 countries including the U.S.

Now, TPP is left with 11: Japan, Mexico, Australia, Brunei, Canada, Chile, Malaysia, New Zealand, Peru, Singapore and Vietnam. The TPP’s member countries account for 40 percent of global GDP, 20 percent of global trade, and 11.3 percent of the world’s population. It will still likely go ahead without the U.S., which will put America at a trading disadvantage.

However, this offers Japan good news for future trade and projects. Japan is well positioned to benefit both from existing alliances with the U.S. and growing ones in the rest of the world, particularly with China and the EU.

Another key agreement, called the RCEP, also excludes the U.S. but includes Japan. It represents 16 countries that account for almost half the world’s population, contribute 24% percent of global GDP and over a quarter of world exports.

The countries are Japan, Australia, Brunei, Cambodia, China, India, Indonesia, Laos, Malaysia, Myanmar, New Zealand, Philippines, Singapore, South Korea, Thailand and Vietnam. The economic and population growth rates of the RCEP countries far outpaces that of the U.S. and EU.

This trend of non-U.S. trade alliances is more pronounced than ever for three reasons:

First, because of the United Kingdom vote for Brexit last summer, which cast into flux the future trade and capital flows between the U.K. and its trading partners.

The second reason is the Trump doctrine of bilateral rather than multi-lateral trade agreements. Taking the U.S. out of critical multilateral contention during an intense period of international re-alignment means more economic opportunity for other budding alliances as well as a long-term power shift.  This would benefit Japan.

Finally, there is the ongoing West to East shift of power and influence. Since the Federal Reserve and its cohorts at the ECB and BOJ embarked upon quantitative easing, or asset buying to bolster the markets, debt to GDP levels in those areas jumped as well. Respectively, they are 90.1 percent for the ECB, 104.3 percent for the U.S., and 250.4 percent for Japan).

Nomi Prins delivering a speech to Canon Institute for Global Studies in Japan. Canon is a prestigious think tank populated with former government and central bank officials, and academics.

Pushback, particularly from China’s central bank, the People’s Bank of China, has resulted in the yuan’s inclusion into the IMF’s special drawing right, or SDR. This is a way of securing currency flows and challenging the world’s main reserve currency, the U.S. dollar.

Japan stands ready to benefit from both its existing relationship with the U.S. and its involvement with China, the EU and other regional agreements.

All that said, the U.S. and Japan still represent about 30 percent of global GDP. With so much in flux worldwide and in Asia, their combined strength and diplomatic ties could prove more fruitful for both countries if translated quickly to real infrastructure building and development projects. These could create long-term demand for knowledge, supplies and jobs.

New Infrastructure Projects for Japan

The last time I was in Tokyo was a week after the U.S. election when I addressed the Tokyo stock exchange. There was much interest from the Japanese as to what the Trump presidency would mean for Japan, particularly in the areas of defense and trade.

Six months into Trump’s administration, that interest remains acute. In February, President Trump addressed military and defense, saying he is committed to “the security of Japan and all areas under its administrative control.”

This was a victory for Abe, who came to Washington to develop a sense of trust with Trump and a solidification of the post-WWII U.S.-Japan alliance.

A White House statement confirmed policy continuity, noting, “Amid an increasingly difficult security environment in the Asia-Pacific region, the United States will strengthen its presence in the region, and Japan will assume larger roles and responsibilities in the alliance.”

From the standpoint of joint infrastructure projects, there are other, nearer term synergies that are also attractive investment opportunities.

Since the beginning of the Trump administration, there have been two official visits between President Trump and Prime Minister Abe. Trump has not been to Japan as President yet but it’s rumored that he has a trip planned for November.

Meanwhile, the two leaders just met at the G20 summit in Hamburg, Germany. Before that meeting, Japan and the EU signed a historic, free trade agreement that will greatly increase trade and coordination between the two regions.

This is yet another sign about how eager Japan is to take a bigger position on the world stage. As the U.S. adopts a more nationalist tone to trade, major trading partners like Japan are looking for more regional capacity building. By diversifying international agreements, Japan could solidify its security while re-establishing itself as a reemerging Asian powerhouse.

Japan is also eager to get more involved in major infrastructure projects around the world. Just last week, the Japanese government set a new goal for Japan Inc., a network of corporate allegiances supporting construction, labor, and jobs. The goal is to export 30 trillion yen ($268 billion) worth of infrastructure packages by 2020.

According to its just-released draft plans, Japan Inc. will seek involvement in infrastructure projects over multiple phases, spanning development through post-completion, providing on-the-ground ongoing operational, maintenance, personnel training and consulting services.

Japan Inc. plans are multinational. The group, or its participating companies, could target India to get involved in the development of bullet trains and the Association of Southeast Asian Nations for high-speed rail systems and non-public transportation projects.

Japan Emerges in High-Speed Competition

Japan, Inc. also launched a competitive move against China for a high-speed train from Malaysia to Thailand. This is a 350-kilometer link project, worth about $14 billion. Winning that, or a portion of that contract, could prove a boon for Japanese construction and engineering companies.

The winning company would be responsible for the design and construction of the railway systems, including tracks, power, signaling and telecommunications. The train will have a maximum operating speed of 320 kilometers per hour and cut travel time between the capitals to 90 minutes, compared with nearly five hours by car.

But there’s more. Japan, Inc. is also angling for the U.S. maglev train project. The initial leg is estimated at $10 billion to build — the Japan Bank of International Cooperation has offered to pay half of the cost.

Reuters (CNBC) reported on Feb. 3 that Tokyo had proposed an investment package for Trump that could generate 700,000 U.S. jobs and help create a $450 billion market. The proposal was in line with Abe’s strategy of promoting Japanese high-tech exports and expertise overseas.

Reuters sources also noted that Japan was proposing to invest 17 trillion yen (US$150 billion) in public and private funds in the U.S. over the next decade.

Japan’s main regional competitor, China, has also been gaining momentum on regional and international projects. Japan has missed some bids there, but it has the opportunity to use its unique favored-nation position with the U.S., and as a major partner in the ASEAN and RCEP agreements, to be well-placed to pick up fresh, lucrative contracts.

Topping that all off, Japan’s new free trade agreement with the EU will be the third largest in the world. It’s expected to benefit both powers immediately by removing tariffs for a number of products, including electronics, sake and tea from Japan.

If the Trump administration makes good on its promise to build cooperation with the Japanese, collaborating on infrastructure projects would only further Japan’s position in the region.

TISA Ready to Take the Place of TPP

TISA’s Worse Than TPP—Kiss Internet privacy and national sovereignty goodbye  – National Economics

We got rid of TPP and now they’re bringing it back with TISA. In some ways it’s even worse that TPP.

TPP was killed because Congress wasn’t going to go along with it and US President Donald Trump withdrew the county from the Trans-Pacific Partnership (TPP) as soon as he got into office.

But now we’re finding out that it lives on through the Trade In Services Agreement (TISA). TISA has actually been around for a long time, some 21 rounds of negotiations since April 2013.

And while many things can be said about TISA, it was obviously designed as a back up to TPP. In fact one can speculate that TPP was actually expected to fail and TISA was developed to take its place.

What is TISA? It’s another version of corporate globalism that further deregulates banks, reduces Internet privacy and turns various kinds of manufacturing into services to make internationalization ever easier.

Not only is TISA similar to TPP, it’s a lot bigger, including the US, the European Union and numerous South American and Asian countries. It’s actually a good deal more inclusive than TPP.

Article 9 of TISA’s draft legislation makes sure nations cannot create separate, domestic rules for banks that are not their own. Small, local banks would thus be thrust into competition with overseas multinationals.

Additionally it demands that individual countries allow all sorts of financial products to be sold, including derivatives.

And, like TPP, it allows corporations to sue counties that have passed legislation that would adversely affect corporations. Just as with TPP, disputes would be handled by an as-yes-to-be-created international system.

This was perhaps the most disputed part of TPP, and here it is once more, coming right back again.

They call TISA free-trade, but just like TPP and other recent agreements it’s nothing but managed trade, designed to get corporate advantages.

TISA doesn’t seem to be going anywhere at the moment. The Trump administration claims it wants bilateral trade  talks, not multi-lateral ones. So perhaps it will be on the back burner for a while.

On the other hand, Trump can recreate TISA-TPP with bilateral agreements, so the danger is not over. The next globalist step is to make large corporations equal to nation states or even superior to them. That is what these agreements are supposed to accomplish.

People should be careful about what kind of bilateral agreements Trump wants to make. He already seems to have potentially endorsed a one-world currency in talks with China,

Certainly Trump is no libertarian. He’s not seeking to roll back anything in terms of increasing authoritarian structures, like Homeland Security, that have been erected in the last 20 years.

He seems fine with the structure as it is. He just wants to make sure he can use it for his own purposes.

It’s not clear where Trump is going with TISA. He may well let it die. But he could resurrect it bilaterally if he doesn’t have negative feelings about the larger corporate versus nation-state debate.

Trump may be comfortable giving corporations more power. We would not be, for  reasons stated many times before. Modern corporations are pumped up on the steroids of court decisions that have handed them their monstrous size.

Essentially what we have is a form of corporate fascism that is directly related to the vast structure of these corporate entities. Let them collapse to normal size rather than being inflated by intellectual property rights, corporate personhood, and various regulatory constructs, and we would be much more amenable to letting corporations do as they choose.

But then again, if corporations were merely normal sized, they wouldn’t be the chosen vehicle of the elites. That’s what this is all about really. The top banking elites have created modern corporations from government power, and now they want to extend their control.

Conclusion: They call these agreements “free trade” but the vehicles they use are developed by government not competition. They are supposed to represent the next stage of capitalism. But they are nothing of the sort.

Trump, TPP, And Taking On China

By Chris at www.CapitalistExploits.at

Market dislocations occur when financial markets, operating under stressful conditions, experience large widespread asset mispricing.

Welcome to this week’s edition of “World Out Of Whack” where every Wednesday we take time out of our day to laugh, poke fun at and present to you absurdity in global financial markets in all its glorious insanity.

While we enjoy a good laugh, the truth is that the first step to protecting ourselves from losses is to protect ourselves from ignorance. Think of the “World Out Of Whack” as your double thick armour plated side impact protection system in a financial world littered with drunk drivers.

Selfishly we also know that the biggest (and often the fastest) returns come from asymmetric market moves. But, in order to identify these moves we must first identify where they live.

Occasionally we find opportunities where we can buy (or sell) assets for mere cents on the dollar – because, after all, we are capitalists.

Join our Insider membership and find out what we"re doing with our own money... targeting asymmetric investment opportunities

In this week"s edition of the WOW we"re covering the US withdrawal from TPP and the repercussions

There"s always something new.

Take US presidents. Americans have had old codgers, young bucks, white men, a black man, dark haired, light haired, even red-haired, and now there"s one with a fox"s hair. Nobody is surprised by this and yet they"re surprised by what "the Donald" has done in his first few days in that ugly looking office that is clearly decorated by an avid fan of the antiques road show.

He promised to be a wrecking ball and now that he"s in that ugly-as-sin chair (who decorates that place, really?) he"s actually doing what he promised and people"s jaws are grazing the floor.

This is the consequence of decades of politics.

Recall the story of the boy that cried wolf?

The podium donuts get up there promise warm milk and cookies, bunnies and rainbows, and chickens in every pot; the largely illiterate electorate play their part, liking what they hear, hoping and praying that it won"t be them that has to pay for it all, and deep down not fully expecting all that is promised.

They can"t pin the feeling down so I"ll do it for them. It"s called experience. Recall Trump"s long line of predecessors and the promises they made on the campaign trails? Point proven.

Now, along comes the ginger ninja who promises all manner of things, many outrageous, and in his first few days of office sets to work delivering them. WHOAH!

Today we"ll cover just one: the Trans-Pacific Partnership (TPP), which is now toast.

To be clear, even though I repeatedly stated that Trump would win and pointed out why (here, here, here, and here) this doesn"t make me a Trump supporter. You can play the probabilities of a horse race without having any "favourite horse". Heck, I carry 3 passports and none are blue.

My job isn"t to opine on what should or shouldn"t happen. Markets don"t give a rat"s furry behind about my opinion (or yours for that matter). My job is to allocate capital according to the best probabilities and continue to profit regardless.

So who benefits and who loses - short-term and long-term?

Firstly, let"s be clear: This is a big deal.

Consider that even though congress never ratified former President Obama"s deal, the signatories to the TPP together represent 40% of world GDP and about a third of world trade. Not insignificant.

Short-Term: The Losers

Vietnam, Mexico, and Malaysia have been beneficiaries as low cost manufacturing hubs. The market has long ago woken up to the stresses the Trump administration puts on Mexico and it"s gotten a lot cheaper as a result. I spoke just last week about Mexico and previously featured Mexico in an edition of World Out of Whack.  

Vietnam index in green, Mexican in orange, and Malaysian in purple.

As you can see both Malaysia and Mexico have been punished by the markets. Strangely elevated and sticking out like a leg in a cast sits Vietnam. Considering that Vietnam"s largest export partner is in fact the United States ($29.9b) I think the market has yet to fully digest this information. When it does I"d rather not be long.

Here"s Vietnam"s breakdown of export destinations:

Vietnam trading partners in terms of exports

You"ll notice that China ($17.5b) sits in second place in terms of exports. Also, let me remind you that China is grappling with a ginormous credit problem and the most appropriate release valve is its currency. And right now China is enjoying rising liquidity problems but this is a topic for another day.

Suffice to say the odds of a nasty surprise coming from China are elevated and there will be secondary trades to be made as they attempt to deal with the confluence of exploding NPLs (non-performing loans) and continued credit expansion. Bullish Vietnam? Not that I can see.

The US?

Bullish. Capital moves like water and Trump"s likely to torch a lot of really idiotic bureaucratic red tape as well as lowering corporate tax rates. Capital will continue to move to the US.

So that"s the quick and nasty on the short term.

The Long Game: Winners and Losers

It was interesting to see Chinese President Xi Jinping denouncing Trumps populism, protectionism, and de-globalization, likening it to “locking oneself in a dark room.” 

Is Trump planning on starting a trade war with China? I don"t know what"s on the man"s mind and annoyingly he"s failed to brief me.

What we do know is that even though China has some serious problems in the immediate future, its long-term prospects are undeniably attractive.

At the end of the day, America has nowhere to go. It"s a fully developed economy that will struggle to grow and it is suffering from a decaying education system, falling living standards, and a crippling military budget. And I"ve not even mentioned the debt...

China, on the other hand, has a billion hungry, and increasingly educated workforce with high rates of growth. Much of Asia is like this. Despite my reservations in the shorter term you can"t ignore this.

So while the west turns inward RCEP is taking shape.

RCEP?

The Regional Comprehensive Partnership will simply get a further boost from partners. Now that TPP is off the table expect the "disenfranchised" to do what humans do in such situations. React. I just got of the phone with a friend whose firm provides economic advisory to governments in Asia and this is definitely happening. Now!

Economic, political, and military ties will be strengthened as a result. Russia, Iran, and China are already moving closer together. This is a force to be reckoned with.

The Consqeuences

So America closes its doors. Now, what if China does the opposite?

When one ally shuts their doors to you, isn"t it in your interests to strengthen ties with those who aren"t?

China, the forerunner for the establishment of the 16-country Regional Comprehensive Economic Partnership, is punching forward. The RCEP would be the 10 ASEAN nations and their six FTA partners: Australia, China, India, Japan, New Zealand, and South Korea.

Interestingly, Australia, Brunei, Japan, Malaysia, New Zealand, Singapore, and Vietnam would all see trade ties weaken with the U.S. due to America’s withdrawal from the TPP. Human nature will be kicking in and RCEP will likely gain greater support and participation.

Once RCEP goes through, American manufacturers are likely to find that breaking through supply chains between these regions, especially as China strengthens its trade ties with low-cost havens such as Philippines and Malaysia, is not going to be easy. Regional deals offering more favorable terms of trade via RCEP could well help these emerging markets grab additional market share from US’s exports to Japan. Slow at first, but watch.

Losing Control

America can"t afford to lose control of Europe"s governments, which is bound to happen as European trade with China increases and decreases with America. This is a natural thing.

Last week something happened which went largely unreported in the tabloids MSM.

The first direct freight train from China to London arrived.

This isn"t completely new but it is a significant sign. Take a look at what China"s access directly into Europe looks like:

Students of history (of which I stand accused) understand that as goods flow and as trade increases so follows influence. China understands this.

This is bad news for Washington. Their influence in Europe will decline and China"s will increase. Watch for it.

The West has routinely underestimated China. Why, I can"t fathom. We"ve had 30 years to witness one of the greatest economic miracles the world"s ever seen as scrawny little brown people clinging to their rice bowls clawed their way out of poverty, amassing increasing wealth - to the extent that they"ve now almost single handedly fuelled bubbles in Vancouver, Sydney, and Hong Kong real estate.

"Illiterate peasants producing plastic garbage" is what a friend, a patriotic American, suggested to me. I suggested a stiffer drink and some education.

Consider the following:

Medicine:

Tu wins China"s first Nobel Prize for medicine

"Chinese scientist Tu Youyou, 84, was awarded the 2015 Nobel Prize in Physiology or Medicine for her contribution in fighting malaria. She won the prize for her work using artemisinin to treat malaria based on a traditional Chinese herb treatment, making her China"s first medicine Nobel laureate."

Technology:

Beidou system extends its reach to global users

"A new-generation satellite of China"s Beidou Navigation Satellite System was launched in March, enabling the Beidou system to expand its coverage out of the Asia-Pacific area."

"The Beidou system, named after the Chinese term for the Big Dipper constellation, is a domestic alternative to the United States-operated GPS. The first Beidou satellite was launched in 2000. By 2012, a regional network of the Beidou system had been formed, providing positioning, navigation, timing and messaging services in China and several other Asian countries."

China launches its first dark-matter satellite

"China successfully launched its first dark-matter satellite at a launch centre in Gansu province on 17 December. The satellite, nicknamed "Wukong", is named after the heroic Monkey King in the Chinese classic novel Journey to the West. Designed in a one-cubic-metre box weighing two tons and with four probes aboard, in the next three years Wukong will search for dark matter, which is believed to make up a large part of the cosmos."

Already the leader in supercomputers, China plans to introduce the first exascale supercomputer by 2018.

Recent PISA scores paint a pretty clear picture. This is an OECD ranking of students" performance in math, science, and reading. The top countries:

You"ll notice China isn"t all thicko in math and science. USA, on the other hand, doesn"t even feature and is in fact below average.

It"s University professors suggest that "algebra is too hard and schools should drop it." (no, really!)

You can"t make this stuff up. America increasingly leads the world in gender studies, safe spaces, and trigger warnings. Snowflakes rejoice. Watch out Beijing.

Trump, a bully with the manners of an ill-tempered and badly trained shitzu, tells Americans that China needs America much more than America needs China. Apart from being ridiculous, you may recall the same thing being said of Iran, Cuba, Russia, and a host of others. How"d that work out?

The taco eating neighbours to the south make for an easy punchbag. China is not that.

Empires typically last for roughly 100 years. Check your calendars.

A Question

2016 was a year of the "unthinkable", Brexit and Trump to name just two.

Why should 2017 be any different?

Cast your vote here and also see what others think

- Chris

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” — Benjamin Graham

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Trump Signs 3 Executive Orders: Withdraws From TPP, Freezes Federal Hiring, Limits Overseas Abortion Funding

As we previewed and was widely expected, President Trump has just signed 3 executive orders: one officially withdrawing the US from the Trans Pacific Partnership, a second one instituting a federal hiring freeze except for the military, and a 3rd executive order limiting abortion funding overseas.

Pres Trump signs 3 Exec Orders including federal hiring freeze "except for the military" and withdrawing US from Trans-Pacific Partnership. pic.twitter.com/XYxMFi8QDj

— Mark Knoller (@markknoller) January 23, 2017

“It"s a great thing for the American worker, what we just did,” Trump said on Monday after signing an order withdrawing the U.S. from the Trans-Pacific Partnership accord with 11 other nations. He didn’t sign any actions to direct a renegotiation of the Nafta accord with Mexico and Canada, yet he said on Sunday he would begin talks with the two leaders on modifying the accord, BBG reported. “We’ve been talking about this a long time,” Trump said.

Trump just signed executive orders to withdraw from TPP, limit abortion funding overseas, and limit federal hiring https://t.co/EYmHTvbi73 pic.twitter.com/uJ1crpIEyd

— Bloomberg TV (@BloombergTV) January 23, 2017

 As the AP notes, the move is basically a formality, since the agreement had yet to receive required Senate ratification. Trade experts say that approval was unlikely to happen given voters" anxiety about trade deals and the potential for job losses.  It remains unclear if Trump would seek individual deals with the 11 other nations in TPP— a group that represents roughly 13.5 percent of the global economy, according to World Bank figures. Trump has blamed past trade deals such as the North American Free Trade Agreement and China"s entrance into the World Trade Organization for a decline in U.S. factory jobs.

Trump’s trade focus fulfills a campaign promise to rewrite America’s trade policy during his first days as president. In declaring his determination to renegotiate Nafta, Trump would rework an agreement that has governed commerce in much of the Western hemisphere for 22 years. By scrapping the Trans-Pacific Partnership accord negotiated by former President Barack Obama, Trump will delight many of his most fervent supporters as well as a good many Democrats, while opening an economic vacuum in Asia that China is eager to fill.

Trump campaigned against the TPP and other trade deals, including Nafta, during his campaign for the White House. In a video released in November, Trump promised to exit TPP “on day one,” calling it “a potential disaster for our country.”

The TPP, a 12-country deal that sought to liberalize trade between the U.S. and Pacific Rim nations including Japan, Mexico and Singapore, was a signature piece of former Obama’s attempt to pivot U.S. global strategy to focus on the fast-growing economies of Asia.

With TPP now history, Trump will next focus on NAFTA.

The president said Sunday that he’ll meet with Canadian Prime Minister Justin Trudeau and Mexican President Enrique Pena Nieto to begin discussing NAFTA, which he has routinely blamed for the loss of U.S. jobs. The newly sworn-in president praised Mexico for being “terrific” and signaled that he’s willing to work with the U.S.’s closest neighbors.

“We’re going to start renegotiating on Nafta, on immigration, and on security at the border,” Trump said at the start of a swearing-in ceremony for top White House staff. “I think we’re going to have a very good result for Mexico, for the United States, for everybody involved. It’s really very important.”

Officials in Canada, which is the biggest buyer of U.S. exports, have indicated they want to avoid getting entangled with the Trump administration’s targeting of imports from Mexico and China. The three countries are the biggest trading partners of the U.S.

David MacNaughton, Canada’s ambassador to the U.S., told reporters his focus is on avoiding Canada being "collateral damage" in trade actions.

We wish David the best of luck, especially since the ball is now entirely in Trump"s court.

* * *

  A second Executive order confirms a federal hiring freeze, “except for military,” President Trump tells reporters while signing order.

  President Donald Trump is signing a memorandum that freezes hiring for some federal government workers as a way to reduce payrolls and rein in the size of the federal workforce.

Trump"s directive is fulfilling one of his campaign promises. He tells reporters that members of the military will be exempted from the hiring freeze.

The new president has vowed to take on the federal bureaucracy and the action could be the first step in an attempt to curtail government employment.

The memorandum signed by Trump"s is similar to one that President George W. Bush signed at the start of his administration in 2001.

And a third executive order saw President Donald Trump is reinstating a ban on providing federal money to international groups that perform abortions or provide information on the option.

The regulation has been something of a political football, instituted by Republican administrations and rescinded by Democratic ones since 1984.

Most recently, President Barack Obama ended the ban in 2009.

Trump signed it one day after the Jan. 22 anniversary of the Supreme Court"s 1973 Roe vs. Wade decision that legalized abortion in the United States, the date which is traditionally when presidents take action on the policy.

The policy also prohibits taxpayer funding for groups that lobby to legalize abortion or promote it as a family planning method.

As we laid out before, here is a brief summary of what Trump can (and can not do) on day one. Exhibit 3 lists the President’s “Contract with Voters”, which includes several items that can be accomplished through executive action but involves significant legislative activity as well.

Global Trade War Baked In The Cake: Boeing Faces China's Wrath

Submitted by Michael Shedlock via MishTalk.com,

I have been warning about the increasing likelihood of a serious global trade war for quite some time.

That warning is now my baseline scenario. Unless there is an immediate deescalation of rhetoric and a return to rational thinking, a very destructive global trade war is baked in the cake.

I seek ways that a global trade war does not start, but I come up short.

China is upset because the EU and US Rejected China’s Market Economy Status over alleged steel dumping. In response, Beijing fired counterattack charges at the WTO.

China has launched a legal challenge against the EU and US over their reluctance to treat it as a “market economy” under World Trade Organisation rules.

Beijing is unhappy with a provision that allows trading partners to use a special formula and prices in third countries to calculate punitive tariffs for non-market economies in anti-dumping cases. It is pushing for the provision to expire with Sunday’s 15th anniversary of its WTO membership.

But the EU, US, Japan and other WTO members have resisted the move, prompting China on Monday to take the first step in launching a case with the global trade regulator.

In a statement, China’s commerce ministry said it had requested consultations with both the EU and US and would seek to have a WTO panel rule.

“China has communicated through many channels for the third-country comparison to expire. What’s very regrettable is that EU and US have not acted to allow it to expire. It has had a severe impact on Chinese exports,” it said. “China is protecting its lawful rights and acting appropriately to maintain the WTO rules.”

In the EU, fears of an onslaught of cheap Chinese goods prompted the European Commission to recommend a fundamental shift in how it conducts anti-dumping cases. Under EU rules, Brussels imposed a 21 per cent tariff on the same steel products that were hit with a 266 per cent US tariff in 2015.

In a sign of the commercial stakes, the US on Friday imposed punitive anti-dumping tariffs on Chinese-made washing machines, imports of which into the US were worth more than $1.1bn last year. It also announced the launch of an anti-dumping investigation into plywood imports from China, which were also worth more than $1bn last year.

Those US cases and the fight over Beijing’s market economy status point to the trade battles already being fought with China even as Donald Trump, the incoming president, promises to get tough with Beijing over trade and other issues.

“One of the most important relations we must improve . . . is our relationship with China,” Mr Trump said last week. “China is responsible for almost half of America’s trade deficit [and] they haven’t played by the rules.”

“They have acted like a non-market economy in so many respects with their state-owned companies, with subsidies, with dumping . . . there are more dumping cases brought against China than against all the other countries combined,” said Sandy Levin, the top Democrat on the House ways and means committee.

A US official said it would continue to fight any attempt to grant China market economy status at the WTO, pointing to “serious imbalances in China’s state-directed economy”.

“China has not made the reforms necessary to operate on market principles,” the official said. “The United States is prepared to defend its right at the WTO to protect American workers and firms from the damaging effects of persistent distortions in the Chinese economy.”

Boeing Faces China’s Wrath

Please consider Boeing Faces Prospect of China’s Political Wrath Thanks to Trump.

“China Inc.,” the combined group of airlines and lessors directed or controlled by the government, is Boeing’s largest customer, an analysis of the company’s’ backlog at Dec. 5 shows.

Boeing’s website lists “China” with 292 orders in backlog. Fifty of these appear to by Unidentified orders. LNC arrived at this figure by viewing the Chinese customers in Boeing’s identified list, which amounts to 242 orders. Some believe the number of Unidentifieds attributable to China may be higher.

The data shows just how much Boeing has at risk with the so-far unpredictable foreign trade policy espoused by President-Elect Donald J. Trump.

Will the EU Benefit from a Trump Trade Policies?

After reading the above snips, readers may conclude the EU will benefit from Trump actions.

Banish the thought. Instead consider Iran, Boeing reach agreement on big aircraft order; Trump casts cloud.

Iran and Boeing reached an agreement on the 80-airplane order that includes 50 737 MAX 8s, 15 777-300ERs and 15 777-9s.

The final contract still has unspecified contingencies before it can be booked as firm orders, Boeing said. One of those contingencies is clearly President-Elect Donald Trump, who criticized the larger Iran-US-allies deal of which the Boeing order is a part.

Airbus has 116 orders pending that could also be upended if Trump, upon taking office, vitiates the deal.

The US House of Representatives passed a bill to prevent any US-sourced financing for the Boeing purchases. The Senate hasn’t acted on the bill and President Obama vowed to veto it. The legislation doesn’t kill the Boeing deal, per se–just US-sourced financing, leaving open non-US financing.

But President-Elect Trump said he opposed the Iran nuclear deal, which involves the US and five allies. Trump vowed to cancel the agreement, which would kill the Boeing order. It probably would kill the Airbus order, because of the US content in the Airbus airplanes.

Trump to Blame?

When this blows up, and it will unless cooler heads prevail immediately, Trump will undoubtedly take the blame. But as I have pointed out, Trump is no different than Hillary or Bernie Sanders.

I you disagree, please take my Trade Quiz: Donald Trump, Bernie Sanders, Hillary Clinton – Who Said It?

Close analysis shows that Hillary, Bernie Sanders, Donald Trump and even president Obama all have the same trade policies. If you disagree, please explain 266 per cent US tariff on China that Obama placed in 2015.

Dangerous Game

Earlier today I noted China Tells Trump “Nothing to Discuss” If US Drops “One China” Policy.

At best, Trump is playing a dangerous game. No one ever wins trade wars.

The Smoot-Hawley Tariff Act at the start of the Great depression is the classic example.

Retaliation

Threats of retaliation by other countries began long before the bill was enacted into law in June 1930. As it passed the House of Representatives in May 1929, boycotts broke out and foreign governments moved to increase rates against American products, even though rates could be increased or decreased by the Senate or by the conference committee. By September 1929, Hoover’s administration had received protest notes from 23 trading partners, but threats of retaliatory actions were ignored.

In May 1930, Canada, the country’s most loyal trading partner, retaliated by imposing new tariffs on 16 products that accounted altogether for around 30% of U.S. exports to Canada.[18] Canada later also forged closer economic links with the British Empire via the British Empire Economic Conference of 1932. France and Britain protested and developed new trade partners. Germany developed a system of autarky.

In 1932, with the depression only having worsened for workers and farmers despite Smoot and Hawley’s promises of prosperity from a high tariff, the two lost their seats in the elections that year.

For or Against Free Trade?

The above discussion ought to settle the hash once and for all, but economic illiteracy prevails.

Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, was the economic adviser to Vice President Joseph R. Biden Jr. from 2009 to 2011, has this March 14, 2016 Op-Ed in the New York Times: The Era of Free Trade Might Be Over. That’s a Good Thing.

In Defense of Free Trade

Sam Seitz, presents a nice case for free trade in his article In Defense of Free Trade.

I want to address NAFTA because it’s the bogeyman of the Left and according to Trump “a bad deal.” NAFTA was actually a very successful free trade agreement. When it was implemented, the number of American jobs increased. Of course, some low-skilled labor was displaced, but because NAFTA increased the size of the overall economy, it actually increased the demand for labor and boosted employment in the U.S.

Finally, I want to talk about trade surpluses/deficits because they are a common argument used by opponents of free trade. A trade surplus is just the total value of exports minus the total value of imports. However, it doesn’t mean that much. For example, the United States maintained a trade surplus throughout the entire Great Depression, yet it clearly didn’t make life easier or the economy stronger. Conversely, the U.S. has a significant trade deficit now, yet it has the largest, most dynamic economy of any country on the planet. What matters is not the total amount of net-trade income, it’s the amount of goods and services American citizens can access. To quote Thomas Sowell, “If the goods and services available to the American people are greater as a result of international trade, then Americans are wealthier, not poorer, regardless of whether there is  a ‘deficit’ or a ‘surplus’ in the international balance of trade.” It’s also important to realize that even though Americans don’t produce as much as the Chinese, we invent pretty much everything that other countries produce. So, while iPhones are built in China, the profits flow back to an American company that pays taxes to the American government and employs American computer scientists and engineers. Instead of focusing only on where the end product is produced, it is crucial to also account for the non-tangible elements of production: the innovation, R&D, and investment. It is easy to pretend that the U.S. is weakened because of the trade deficit, <atarget=”_blank” href=”http://www.slate.com/articles/business/the_edgy_optimist/2014/03/u_s_china_trade_deficit_it_s_not_what_you_think_it_is.html”>but if one actually accurately accounts for the value of American innovation, it becomes clear that the U.S. possesses a trade surplus with China. Just don’t tell Trump or Sanders.

The Question of “Fair Trade”

The best case I have seen for free trade comes from Ana Eiras, Senior Policy Analyst on International Economics, Center for Trade and Economics (CTE).

Eiras explains Why America Needs to Support Free Trade.

Eiras provides five well thought out positions why free trade is good. More importantly she puts a knife in the ridiculous discussion about “fair trade”. Let’s pick up the discussion from that point.

The Question of “Fair Trade”

Politicians, opinion makers, journalists, and businessmen commonly talk about the need to support “fair trade.” Seldom, however, does anyone explain either what fair trade is or–even more to the point–to whom trade should be fair. In the name of fairness, different groups advocate different protections for their specific industries and call the comparative advantage of other countries “unfair.”

For example, U.S. manufacturers think it is unfair that labor in China is cheaper than labor in the United States, and therefore ask for tariffs against Chinese products. But those tariffs would, in reality, be unfair to millions of U.S. consumers and producers who would be forced to pay higher prices for locally manufactured goods. “Fairness” assumes a dubious character in policies that pick and choose whom to treat “fairly.”

Others argue that America needs to enact barriers to free trade in order to strengthen national defense. For example, a tariff to protect steel would be justified because we need our own steel to support the construction of tanks, missiles, and arms. This argument is built on the faulty assumption that America’s wealth is at least constant. But a constant level may imply that the U.S. is falling behind other nations in relative terms. The strongest national defense depends on a relatively strong economy, and a strong economy is possible only with economic freedom.

Once economic barriers begin to emerge, a nation’s wealth begins to decline. America’s relative economic freedom and wealth have already begun to decline. In fact, according to the Index, the United States has lost considerable ground in economic freedom (declining from 4th freest economy to 10th freest in 2004), which means it has also lost more and more opportunities to increase wealth.

The only form of fair trade–if such thing exists–is free trade. When facing competition from Chinese manufacturing, U.S. manufacturers have two options: either adopt new technologies to cut costs and become more competitive or shift the focus of their operations to different areas in which they can be more competitive. Neither of these two options harms consumers, since they will continue to have access to the least expensive, best-quality products.

Most workers benefit as well. For some people, free trade requires change, but they also now have opportunities to use their skills in more efficient, advantageous, and productive ways that are created by the innovation and prosperity that competition promotes. Likewise, for a strong national defense, America needs the resources, innovation, and income that are derived from the absence of barriers to trade and investment.

Consumers Key to Debate

Consumers are key to this debate. If it’s good for consumers, it’s good for the economy, and by default it is good for trade.

I encourage everyone to read the rest of Eiras’ excellent article.

Fair Trade Fantasy

“Fair trade” is nothing but a misguided fantasy from producers who cannot compete in the real world.

It makes no economic sense for US citizens to pay double or triple for underwear, TVs, phones or anything else to “save American jobs”.

The amazing irony in this debate is no jobs will be saved anyway!

NAFTA did not cause a loss of manufacturing jobs, productivity and robots did. No matter what Trump or anyone else promises, those jobs are not coming back.

Sure, the US has misguided tax policy that encourages foreign production. But that is a separate issue. At least Trump is correct on that score. Lowering corporate taxes is the right thing to do.

Tariffs are precisely the wrong thing to do. I fear we are going to find that out again, while the parrots all chant “Fair Trade, Not Free Trade”.

Related Articles

1. Reflections and Reader Comments on Free Trade: “China Doesn’t Play Fair!”


2. Fair Trade is Unfair; In Praise of Cheap Labor; Are Bad Jobs at Bad Wages Better than No Jobs at All?


3. Obama’s Trans-Pacific Partnership Fiasco vs. Mish’s Proposed Free Trade Alternative; How Will TPP Function in Practice?


4. Stacked Deck: US Bullies WTO, TPP Revisited


5. Legacy Skills and Capital; Sugar and Steel; Turning TPP to TP

Trade is not between nations. Trade is between individuals who make constant decisions about what and when to buy.

Tariffs distort that relationship, and only the weak produces benefit. Everyone else loses.

Consumers benefits are what’s important in trade.

No one wins trade wars. As as side note, and I as often pointed out, the Fed, and its foolish policy of insisting on inflation in a deflationary world is largely to blame.

For discussion of that point, please see Decade of Negative Real Interest Rates: Who Benefited?