Bourbon Exports: Casualty of the Trade War
It’s a cornerstone of political economy that producers and traders need stable rules.
It’s a cornerstone of political economy that producers and traders need stable rules. In this sense, it is like sports. Imagine golf or baseball in which the commissioner or course owner could switch around what constitutes a score and a win, depending entirely on a whim. This is basically where American trade policy is today.
The costs to global economic health have been high. The International Monetary Fund slashed its global growth forecast for this year, blaming trade problems resulting from US belligerence. What’s more serious is that biggest costs are incalculable simply because they consist in deals not made, plans scrapped, and efficiency improvements not gained.
It’s all taken place without a great deal of public alarm, and no serious concern in Washington. The opposition party even seems to agree with the protectionist wave, more or less. There seems not to be a loud constituency for free trade, so it is left to earnest economists to try to explain what’s going on.
After hundreds of years proving a million times over that the expansion of the division of labor is always good for prosperity — and its forcible shrinkage is always dangerous to economic well-being — the lesson still hasn’t sunk in.
Loss of Foreign Markets
The carnage is everywhere but doesn’t always make the headlines. Consider for example the export markets for American liquor. The impact is reported by the Distilled Spirits Council:
Globally, for the first six months of the year American Whiskey exports grew 28 percent to a total of $595 million. Following the imposition of the retaliatory tariffs, exports during the second half of the year declined 11 percent compared to 2017, for a total of $593 million. Typically, U.S. distilled spirits exports in the second half of the year are much higher than in the first half, underscoring the harm the tariffs have caused.
The costs are even higher looking at Europe in particular:
The EU, which accounted for nearly 60 percent of total American Whiskey exports in 2018, experienced sizzling first half growth of 33 percent but whiplashed into a 13.4 percent decline in the second half when the tariffs slammed on the brakes. That is a significant deceleration in American Whiskey exports to the EU from the 8.7 percent decrease the Council first reported in February resulting from the 25 percent import tariff. American Whiskey exports to the EU still reached a record $704 million, up from $667 million in 2017.
Keep in mind that this is only the export market. Internally, we’ve seen factory closings, price increases, and reduced, disrupted supply chains. Absurdly, the U.S. is spending tens of billions to bail out farmers from the effects of bad policy – a wasteful spending intervention to cover up the effects of a misguided taxing intervention.
No Rule of Law
But there is an additional problem beyond the tariffs: the regime uncertainty that comes with a president who doesn’t keep his word. For example, the Trump administration negotiated a new Nafta deal with an understanding that it would come with an end to steel and aluminum tariffs targeting Mexico and Canada. Instead, the Trump administration is introducing a strange contingency: there must be fewer imports of steel into the U.S. This is essentially ridiculous and means robbery from U.S. producers and consumers, an outright denial of the right to buy cheap.
The new proviso is also contrary to the understanding of the deal. The insistence — which makes U.S. policy roughly akin to what the U.S. accuses China of doing — has outraged our neighbors and trading partners.
It gets worse: a Trump tweet outright threatened to close the border with Mexico, briefly causing avocado prices to soar higher than in 10 years, as buyers absolutely freaked out. Rightly so. Prices serve as signals to producers and consumers about relative scarcities. The price system is working. Arbitrary government threats are not.
It seems like the chaos never ends: just last week, Trump threatened to impose another $11 billion (who’s counting?) on the EU for some reason or another. What 10 years ago would have been a shocking departure from a free trade consensus barely even made the news.
China, meanwhile, has become weary of the never-ending shifts in U.S. demands. There are probably a half-dozen issues that negotiators bring up, but as soon as one is addressed, another is on the table. One can fully understand that China has come to believe the unthinkable: Washington doesn’t actually want a deal.
Permit me a word about this term deal. It’s something that businesspeople do with their own property, seeking mutually beneficial gains from trade. The head of state, however, cannot rationally make deals between whole countries with the same eye to mutual benefit. The president is not the CEO of the country because a nation is not a business with a single end in mind. In absence of an obvious single end, it is woefully tempting to make one up. In the case of the US president, what is that goal?
Until recently, most coverage of this topic has presumed that the Trump administration wants a deal that results in free trade for everyone. Which is to say: people have assumed that a world without trade barriers is what Trump wants. That would be a good thing. But actually, it depends on what you mean by free. For U.S. negotiators, free means turning trade deficits to trade surpluses, as if this number means anything about winning and losing.
It’s time that we think about this topic more realistically in light of what we’ve seen so far. The key to understanding the shifts, the changed terms, the amped-up demands, the constant new threats, the overturning of rules and agreements, the unending chaos of trade policy over the last year is the following truth that few want to accept: the U.S. president believes in his heart of hearts that tariffs are a good and productive thing and that autarky is a healthy economic policy.
All the rest is just making noise.
That Trump believes this has been obvious to me since I first heard him give his second campaign speech in 2015. It was clear from his choice of topic that he saw all solutions to the country’s troubles not in freedom but in three essential pillars: limits on immigration, trade protection, and executive power.
He has never been shy about stating that this is what he believes. His focus on protection as a solution goes back to the 1980s.
It’s an ideology, and it has a name. Let’s just say that this has nothing to do with conservatism historically understood, much less classical liberalism or constitutionalism. That he is a “tariff man” is one of the few points of constantly that persists throughout his public career. Not even shaken markets or obvious terrible effects have shaken his beliefs. He wants tariffs, exactly in the spirit of Friedrich List. That we keep pretending this is not so is a tribute to the journalists’ and the public’s capacity to live in denial of a reality no one wants to face. The only real trade deals worthy of the name will happen after this administration leaves office in five years.
The casualty has been the rule of law that international trade needs to thrive. The World Trade Organization, and its predecessor with Gatt, were attempts to impose the rule of law on an international level. But both institutions rely on an underlying hope that everyone agrees that freer trade is better than trade barriers. When that presumption is gone, the institutions can no longer serve their function.
In the end, Veronique de Rugy is exactly right: the only real path finally to establishing genuine free trade is through practicing it not through deals but through freedom itself. It should not be complicated. Let one country, let every country, permit its citizens the freedom to trade, to import and export, without hindrance or management by government. Anything less than that will turn the art of the deal to the art of the political whim.
[Originally Published at AIER]