Trump’s pick for commerce secretary is a mercantilist!

Donald Trump is expected soon to confirm Wilbur Ross as commerce secretary. Mr Ross (born 1937) is a billionaire investor who specializes in leveraged buyouts and restructuring distressed businesses. I learned, reading this weekend’s Financial Times, that he is also a vocal proponent of mercantilism.

The starting point of any trade deal, Mr Ross told the FT this month, should be to ensure that each side share its estimates of the effects on its own industries and jobs. ….

It is time to focus on deals which make sense, he says. That does not include the North American Free Trade Agreement of 1994, for example, which appeared to flip America’s trade surplus with Mexico into a deficit. Nor the Trans-Pacific Partnership, a sweeping 12-nation accord that has yet to be ratified, but which Mr Trump has promised to scrap.

“One thing I disliked about [Hillary] Clinton is that there was only one trade deal she voted against — the Central American Free Trade Agreement. That’s crazy, since the only deal we have a trade surplus from was CAFTA!” he says. [Emphasis added.]

Ben McLannahan  and Laura Noonan, “Wilbur Ross tries to turn round US heartland“, Financial Times, 26 November 2016 (metered paywall).

Mr Ross does not use the term, but this is mercantilism, pure and simple. For those unfamiliar with the doctrine, here is a succinct definition, from Wikipedia:

Mercantilism includes a national economic policy aimed at accumulating monetary reserves through a positive balance of trade, especially of finished goods. …. High tariffs, especially on manufactured goods, are an almost universal feature of mercantilist policy.

Much of Adam Smith’s Wealth of Nations (1776) is an attack on mercantilism. Nearly all modern economists accept Smith’s dictum “Consumption is the sole end of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer”.

An important quirk of protection, an earlier FT article notes, is its adverse effect on exports (and smaller effect on imports) because of changes in the exchange rate.

Janet Yellen, the Fed chair, and the president-elect are cut from different cloths but both have expressed concern about the impact of dollar strength on US companies ….

The quandary for Mr Trump is this, said [Deutsche Bank’s Alan] Ruskin. A tilt to protectionism may help the trade balance by suppressing imports but “it would be damning” if an overly strong dollar ended up hurting exporters and boosting imports.

Roger Blitz, “Donald Trump and the dangerous allure of a strong dollar“, Financial Times, 25 November 2016 (metered paywall).

For more on the relationship between trade balances and “competitiveness”, I recommend one of Paul Krugman’s best essays, written long ago, without jargon. Spoiler alert: No relationship exists.

Most people who use the term “competitiveness” do so without a second thought. It seems obvious to them that the analogy between a country and a corporation is reasonable and that to ask whether the United States is competitive in the world market is no different in principle from asking whether General Motors is competitive in the North American minivan market.

In fact, however, trying to define the competitiveness of a nation is much more problematic than defining that of a corporation. The bottom line for a corporation is literally its bottom line: if a corporation cannot afford to pay its workers, suppliers, and bondholders, it will go out of business. So when we say that a corporation is uncompetitive, we mean that its market position is unsustainable — that unless it improves its performance, it will cease to exist. Countries, on the other hand, do not go out of business. ….

One might suppose, naively, that the bottom line of a national economy is simply its trade balance, that competitiveness can be measured by the ability of a country to sell more abroad than it buys. But in both theory and practice a trade surplus may be a sign of national weakness, a deficit a sign of strength. For example, Mexico was forced to run huge trade surpluses in the 1980s in order to pay the interest on its foreign debt since international investors refused to lend it any more money; it began to run large trade deficits after 1990 as foreign investors recovered confidence and began to pour in new funds. Would anyone want to describe Mexico as a highly competitive nation during the debt crisis era or describe what has happened since 1990 as a loss in competitiveness?

Paul Krugman, “Competitiveness: A Dangerous Obsession“, Foreign Affairs, 73:2 (March/April 1994), pp. 30-31.

Here is a link to an ungated version of the paper.

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