Reuters reports that Donald Trump threatened to pursue German carmakers until there their cars are no longer rolling down New York’s Fifth Avenue. He thinks that imported cars pose a threat to national security.

In response, BMW declared that its South Carolina plant will see job cuts and investment cuts. The South Carolina plant is BMW’s largest globally, with 70 percent of its production going to other export markets. Chinese tariffs on U.S. passenger cars, imposed in retaliation for U.S. duties on Chinese goods, have already hiked up the cost of exporting to China, BMW said. Any U.S. tariffs would likely lead to further retaliatory measures from China and the European Union.  And… the top three US auto exports to China are German branded (BMW X5 and Mercedes GLE/GLS).

To add insult to injury: foreign branded car manufacturers are now making more cars In U.S. than U.S. car companies, and BMW is the largest US car exporter.

Higher tariffs on car components imported to the United States would make other production locations outside the country more competitive. “All of these factors would substantially increase the costs of exporting passenger cars to these markets from the United States and deteriorate the market access for BMW in these jurisdictions, potentially leading to strongly reduced export volumes and negative effects on investment and employment in the United States,” BMW said in the letter.

There is an entire strand in the trade literature called “Tariff Jumping Foreign Direct Investment.” The idea is that, instead of exporting, firms may move production locations to avoid high tariffs. This literature is equally well known as the Tariff-Retaliation literature, which outlines that tariffs are seldom imposed unilaterally, but followed by retaliation from countries that are hard hit.

Donald Trump has just provided two new case studies. His tariffs on European Steel produced retaliatory tariffs from the EU — The EU tariffs then induced Harley Davidson to move production out of the US and abroad to avoid the tariffs. As theory predicts, trade restrictions reduce national income and employment.  No one but Trump is surprised. perhaps with the exception of Peter Navarro.

In keeping with Trump’s previous attempts to micromanage multinational investment decisions, he  threatened  to tax Harley-Davidson “like never before.” His statements that “A Harley-Davidson should never be built in another country-never!” implies he is unaware that Harley Davidson is already a multinational company with factories in Brazil, India and Australia.

The US is finally on its way to win its trade war with the rest of the world. Forbes Magazine reports “Koreans agreed to allow U.S. automakers to export 50,000 cars per year to Korea, up from 25,000.” Finally, victory! But wait there is more: “The Koreans also agreed to limit their annual steel exports to the U.S. to [a self administered quota of] 70% of their average over the last three years.” That’s the stuff that the news cycle loves, as Trump promised, the US “is gonna win so much you may even get tired of winning.”

Then there are the pesky details:

1. The agreement with S. Korea to “allow 50,000 US car into its market is utterly meaningless, because U.S. automakers have never exported anything close to 25,000 cars to South Korea in any year. They exported 16,400 passenger vehicles there in 2016 and that included golf carts. In 2017, they exported 7,000 cars and golf carts.”
2. The agreement on self administered steel tariffs is going to be expensive, since World Trade Organization rules expressly forbid voluntary export restraints (VERs)…  Other countries will challenge the agreement at the WTO, which will then result in compensation that has to be paid.
3. And all this is to reduce the bilateral US – S. Korea Trade deficit, although focusing on bilateral trade deficits is futile. 

Japanese farmers enjoy a 777.7% tariff on imported rice. Some say its a matter of national security. The new Trans Pacific Partnership would unhinge these tariffs in exchange for unfettered Japanese car and television exports… They should talk to the Indonesian farmers, Korean farmers, or even those European farmers whose livelihoods are protected by subsidies…

The WSJ reports another nugget that relates to trade wars. The next installment on Chicken Wars seems to be in the make. WHY is it always over chicken?

A WSJ/NBC poll shows that most Americans now think free trade agreements hurt the US.

Forbes thinks it is simply the media bias. But USA Today makes a good point, From 2000 to 2009, America’s trade deficit with China surged nearly 300%. During that same time, 5.4 million American jobs in manufacturing were eliminated. It’s tough for U.S. manufacturers to compete against China’s lower wages, looser regulations and cheaper currency.

In a way the public sentiment is understandable. Nobel laureate Paul Samuelson (1969) was once challenged by the mathematician Stanislaw Ulam to "name me one proposition in all of the social sciences which is both true and non-trivial." It was several years later than he thought of the correct response: comparative advantage. "That it is logically true need not be argued before a mathematician; that is is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them." 

Now here is a beautiful story of Trade Creation and Trade Diversion:

Brent Borrell  has the story how Bananarama started; the UN CONFERENCE ON TRADE AND DEVELOPMENT (UNCTAD) has its own report on the Banana Split, an the  BBC supplies the video documenting the happy end. 

That's how I came to grow up in Germany without ever eating a really good banana. That (and the artificially higher cost of European bananas) was the cost of trade diversion. When the EU was formed, a common tariff was imposed to favor consumption of bananas from southern European EU members, rather than Africa and Latin American. The justification was (I am not making this up) " EU officials have conceded that their banana program violates free-trade rules, but have defended it as the by-product of historical and moral obligations to struggling nations dependent on access to the European market."  

This line of reasoning is always a slippery slope – one can easily rewrite the above sentence and replace the term "EU" with the name of any other country in the world, if that argument stuck (and the WTO agreed, many, many times).  Sanctions were imposed (on French handbags, British bed linens !??), to no avail. But then again, the WTO is quite busy investigating all the other free trade infractions (I was stunned to find this website that provides an index of all WTO disputes). 

Gary Hufbauer Jeffrey Schott outline why "Buy American" is not only bad for US jobs, but even worse for US reputation. It is a classic "beggar-thy-neighbor"  policy…

More applications of Large Open Economy interactions, this time from the WTO.

The collapse of world trade is partly due to insufficient trade credit financing. The global market for trade finance (credit and insurance) represents approximately 80% of 2008 trade flows, valued at $15 trillion. The World Bank estimates that the fall in the supply of trade finance has contributed some 10% to 15% of the decrease in world trade since the second half of 2008.  

This would imply a $2.25 trillion (15% of $15 trillion) decline in trade since June 08.

There are green shoots, however, which can be confirmed using the Baltic Dry Index. The WTO writes

The most recent information indicates that the situation seems to have eased a bit in Asia, particularly in China, although some countries see their access to finance still very restricted (Philippines, Vietnam). In Africa, the situation remains tense, and active banks are seeking support from international financial institutions. In Latin America, credit rates have somewhat eased up since the fall of 2008, but are still higher than usual both in small Latin American states, and increasingly in larger countries such as Mexico and Argentina. 

Stunning: has any industrialized country ever experienced income reductions of -14% and -15% (annualized) in successive quarters?

But now the good news (from Bloomberg): The consensus forecast had been a 16% reduction in Japanese income… This gives a whole new meaning to the Brad Sester's comment that the US is exporting the crisis by not importing. Below is a picture from GCaptain's blog. Of course, all this is captured succinctly by the Baltic Dry Index that shows the collapse of shipping as the price for container capacity has tanked in the face of huge excess capacity. A wonderful application of the locomotive effect discussed in Chapter 15. It is an interesting exercise to work through Figure 15.9, how a drop in imports hurts the rest of the world.  

The great depression brought us the American Smoot-Hawley Tariff Act (enacted June 17, 1930). Most nations reciprocated and imposed their own trade restrictions, raised existing ones, or set quotas on foreign imports. The effect of these measures was to greatly reduce the volume of international trade: by 1932 the total value of world trade had fallen by more than half. Try the simplest open economy trade model you can write down (see chapter 14) to see if you can reproduce the effects and identify the effect on output…

The Stimulus Package (aka “the American Recovery and Reinvestment Act” passed on Tuesday February 17, 2009) has a whole new set of “Buy American” expenditure switching provisions (chapter 15)…