How will Brexit affect the US economy?
Change of Direction in the USA - Consequences of the New Presidency for the Economy –
Changes in direction in various areas are associated with the new presidency in the USA: A prominent feature is trade policy, which is intended to give domestic industry a competitive advantage through punitive tariffs, but also through the import-burdening cash flow tax with border adjustment and a weak US dollar. Multilateral rules in international trade are disregarded and agreements are to be renegotiated bilaterally. To what extent this strategy can be implemented and what consequences it will have for world trade cannot yet be conclusively stated. A comprehensive infrastructure program and tax cuts with potentially massive budget deficits are also planned. In the financial market, lending is to be made easier by the relaxation of strict rules.
The big experiment: economic policy for renationalization and reindustrialization
Almost every day new reports, announcements and decrees on economic policy come from the White House. Which strategy the new president is ultimately trying to implement - and whether a reasonably coherent strategy exists or can be expected - is still completely unclear. On the one hand, President Trump's solo efforts, especially in health policy and financial market regulation, have been limited to repealing existing rules and have shown no perspective on what should take the place of the old regulations. With his migration ban, he made the chaos complete, even green card holders have meanwhile been refused entry to the USA. On the other hand, the statements made by the President and his various advisors on key issues such as attitudes towards NATO or the European Union are highly contradictory. A consistent picture for the economic policy of this administration cannot yet be drawn.
In the past, many presidents had to apologize for political missteps or problems shortly after the business of government was handed over. In economic policy in particular, however, certain decisions can turn out to be irreversible and put a country on a new path that can hardly be abandoned even with wise decisions ex post. For example, the import restrictions on Japanese automobiles shortly after Ronald Reagan took office in 1981 did not, as hoped, result in production facilities being relocated from Japan to the Midwest and the US automotive industry being boosted.1 Rather, the lower domestic competition has resulted in less competition, higher prices and ultimately a deterioration in the competitive position of the US auto industry. Protectionism and competitiveness don't go well together.
The loss of importance of industry in the USA, which has continued over almost the past four decades, was the central election campaign topic for Trump. While a persistent quality problem and a striking productivity problem in the processes were responsible for this in the 1980s, 2 this is no longer the case today, but the industry suffers from stand-alone companies that do not benefit from the combined effects of an open economic structure Small and medium-sized companies in particular, which can be found quite widely in the USA, have to cope with the resources they generate internally.
There is no connection with other companies, as is characteristic of German industry4 - via research associations, links with university institutions, wholesale, knowledge and production networks. In particular, the loss of vertically integrated companies went hand in hand with the abandonment of on-site production. “The great new American companies of the past 30 years… have little or no manufacturing in-house.” 5 This has far-reaching consequences beyond the loss of production flexibility and experience: Companies today lack the resources, further training and qualifications for employment to operate; they lack the opportunity to commit to basic research in the long term; there is a lack of funds to scale production. Above all, however, no network goods arise from the spillover effects of intensive research, qualification and diffusion of new technologies via supplier relationships.
So the industrial ecosystems are missing, they are badly riddled with holes, if they still exist. The causes lie in management trends, far back, it is about tectonic shifts "in corporate ownership and control that took place well before globalization or Asian development had come into full play" 6. In short: Trump certainly has a topic, but the wrong analyzes (the Chinese and Germans are to blame) and the wrong answers: It's not about infrastructure, financial market regulation or tariffs, but about network building, training and further education, research funding and regional development as well international competitiveness of companies through global competition. Reindustrialization does not go hand in hand with renationalization.
Trump questions the institutional base
With the current proceedings in the White House, however, one must not only worry about the economic future of the USA, but rather fundamental institutions at the national and international level are called into question. The fact that Donald Trump questions the independence of judges and courts after court rulings against his executive orders shows the lack of respect for his country's constitutional order. The refusal to sell his company, the Trump Organization, casts doubt on the independence of the economic operator and President Trump and has even brought him a constitutional complaint.7 All of this is important from an economic point of view as it causes a high degree of uncertainty, on the one hand stands in the way of any prosperous macroeconomic development in the long run. Never before has a US president in recent history put such pressure on the separation of powers. On the other hand, the attempted and planned rule violations can endanger the control efficiency of the state and international coordination, so that the ability to act is lost.
Even if it should turn out that his plans and actions should stand up to US law, legality should not be confused with legitimacy. Trump's efforts lead to an institutional damage to the liberal-capitalist functioning democracy. His disregard for existing institutions has devastating effects on global political security. The speed with which the political mood in the USA has turned makes it clear to all actors how vulnerable our normative, western-based world order seems to be.
After the US economy first reacted in the affirmative to the America First announcements - lower corporate taxes, deregulation in the financial and energy sectors, tax breaks for corporate profits parked in tax havens, and a huge stimulus package - the wind now seems to have turned. Because the supposedly business-friendly policy could turn out to be extremely problematic in retrospect. The actors in the USA are increasingly recognizing this.
The pressure comes not only from consumers - as with the resignation of Uber boss Travis Kalanick from the advisory committee of the president - but also from the leadership of American corporations, which on the one hand see their economic interests threatened and on the other hand the normative backing of politics is missing. The protests from the technology companies in Silicon Valley against the entry ban for people from different, predominantly Muslim countries are just one example of how the economy openly opposes the president in order to stand up for the business location and a liberal system of values. We are only just at the beginning of the new legislative period. How far the impetuous politics will be put in its place by decree by the old institutions is speculation today.
If one looks at the individual announced economic policy fields of action, then the prospects for broad acceptance in the Congress are very different:
- An investment program for the improvement of the infrastructure is widely announced and objectively justifiable. This is evident to everyone in all network areas - traffic, energy, broadband - in many cases at the level of a developing country. The US is paying the price for decades of underinvestment. At the same time, it is not a matter of course that the infrastructure plan - which has been announced at US $ 1 trillion (three times the European counterpart European Fund for Strategic Investments - EFSI) 8 - will get the necessary parliamentary majorities at all. After all, the Republicans have resisted such programs with hands and feet for years. Such a package would only have a good chance of success if there was considerable mobilization of private funds
- The situation is different with the tax plans, since Trump is basically following the proposals made by Republican Paul Ryan in the summer of 2016.10 The idea of reforming corporate taxation is also well founded, but this does not apply to the proposal for a border Adjustment Tax. According to this, exports should be tax-free and imports not tax-deductible. In times of global value chains and in view of the findings of US industry outlined above, that would be a considerable burden. It would be an anti-globalization tax, which would presumably call the World Trade Organization (WTO) on the scene. It is not economically efficient to introduce such a border adjustment via a production tax, but it is expedient to organize it with a net all-phase sales tax of the consumption type. Here, too, it becomes clear: reindustrialization does not go hand in hand with renationalization. It remains unclear for a long time how high the overall tax cuts and spending cuts will be and how strong they will affect the fiscal balance sheet and public debt.
- The deregulation of the banking system is the third discernible path of action for the US president. For this purpose, various regulations of the Dodd-Frank-Act11 are to be overridden by a presidential order and new solutions are required. It is remarkable how little resistance this has caused in Congress so far, because the law was passed in 2010 across parties to make the financial system more crisis-proof and better protect consumers. The law limited the possibility for banks to conduct risky business and implemented the Volcker rule, according to which proprietary trading and participation in hedge funds and private equity were severely restricted. This regulation has also been discussed critically among financial market experts; more decisive is the even regulation of shadow banks in particular. What exactly follows is open, the result is initially: new games for the banks, a boost for the stock market.
What is required is a world of "dealmakers"
The implications of US trade policy are more foreseeable. Here you can clearly read the handwriting of Peter Navarro, Trump's most important economic advisor. In particular, this stylizes the free trade efforts of recent years as the job destruction machine in US industry. The transpacific TPP agreement has been terminated, the transatlantic TTIP agreement is unlikely to be completed, the North American NAFTA agreement is to be renegotiated. The biggest institutional mistake, however, is blamed on the World Trade Organization. China's WTO membership in particular allowed the country to flood the USA with its subsidized goods
In fact, a current study by the research team led by Daron Acemoglu quantifies the number of US jobs that have fallen victim to the import competition from China at over 2 million.13 However, the correctness of the finding does not support Navarro's argument. The opening of the new markets did the German industrial location good, not bad.14 So it is not free trade per se that puts jobs at risk, and the vague allegations of manipulation against China also turn out to be insignificant here. Rather, it is patterns of specialization and comparative advantages that become more apparent after trade frictions have been dismantled. These result in winners and losers. Clever economic policy can cushion these effects by actively accompanying structural change.
The role of the WTO is relatively neutral: after all, it is a multilateral institution that relies on independent jurisdiction in the event of rule violations. However, this does not play a role at all in Navarro's argument. Various US import tariffs currently under discussion are also likely to violate WTO requirements. US policy, protectionism in this case, has the power to hold back the global economy. Real problems are caused by the ignorance of the new administration towards the institutions that have been developed over a long period of time. If the US simply disregards WTO rules, it discredits the rules of international trade. Global economic activity far beyond US national borders is at risk.
Such an approach is well calculated. Because, like Trump, multilateralism is a thorn in Navarro's side. The dealmakers prefer to negotiate contracts with other countries directly, in a bilateral exchange. For the USA, this may make sense in terms of negotiation strategy - after all, access to the US market is more important for a single (European) country than the other way around. This approach is poison for world trade, because coordination advantages are lost for everyone. Impetus for free trade would have to come from a revival of the Doha Round, in which developing, emerging and industrialized countries were still sitting together at the same table. Multilateral negotiation rounds are exhausting because all negotiating partners try to bring in their interests, but a globalized world can only be understood if small-scale problems and external effects are taken into account. Cross-border problems can only be solved with respect for the respective peculiarities of the counterpart.
A look at the dealings with the European Union shows that this message has not yet reached Washington. This is seen as a vehicle for German interest politics, the euro has been manipulated and kept artificially low. Great Britain, which has freed itself from the alleged clutches of the Union, is therefore ensnared diplomatically, as the prospects for bilateral negotiations are particularly good there. Trade policy - combined with a corporate tax on imports - is the greatest threat to the global economy. After decades of opening and integration, there is a threat of disintegration, isolation and a loss of prosperity. Renationalization and reindustrialization do not go hand in hand.
- 1 C. van Grasstek: US-Japan Automotive Trade in the Reagan and Obama Administration: Explaining the Rise and Fall of Protectionism, GTA Analytical Paper, No. 1, 2012.
- 2 M. Dertouzos, R. Lester, R. Solow: Made in America: Regaining the Productivity Edge, Cambridge MA 1989,
- 3 S. Berger: Making in America: From Innovation to Market, Cambridge MA 2013.
- 4 IW Köln, IW Consult: Industry as a growth engine in the global economy, Report for BusinessEurope, Cologne 2013.
- 5 S. Berger, op. Cit., P. 17.
- 6 Ibid.
- 7 The suit for violation of the so-called Foreign Emoluments Clause was filed in the Southern District of New York under file number 1: 17-cv-00458.
- 8 M. Diermeier, M. Hüther: With the big lever for more investments: economic evaluation of the Juncker plan, in: Wirtschaftsdienst, 95th year (2015), no. 5, pp. 334-341, http: // archiv.wirtschaftsdienst.eu/jahr/2015/5/mit-dem-grossen-hebel-fuer-mehr-investitions-oekonomische-evaluation-des-juncker-plans/ (8.3.2017).
- 9 Pay as you go: President Trump’s infrastructure plans probably involve more tolls, Economist from January 26, 2017.
- 10 GOP: A Better Way. Our Vision for a confident America: Tax, June 24, 2016, https://abetterway.speaker.gov/_assets/pdf/ABetterWay-Tax-PolicyPaper.pdf (February 25, 2017).
- 11 11th Congress: Public Law: Dodd-Frank Wall Street Reform and Consumer Protection Act, 111-203, July 21, 2010, https://www.gpo.gov/fdsys/pkg/PLAW-111publ203/pdf/PLAW-111publ203. pdf (1.3.2016).
- 12 "Clinton also lobbied for China’s entry into the World Trade Organization (WTO) in 2001, promising China would“ play by the same open trading rules we do. ”Instead, the U.S. has had to file WTO case after case against China's questionable trade practices on products ranging from apparel, aircraft, and autos to shrimp, steel, and textiles. "R. Wilbur, P. Navarro: We need a tough negotiator like Trump to fix US trade policy, http://www.cnbc.com/2016/07/29/we-need-a-tough-negotiator-like-trump-to-fix-us-trade-policy-commentary.html (15.2.2017 ).
- 13 D. Acemoglu, A. Autor, D. Dorn, G. Hanson, B.Price: Import Competition and the Great US Employment Sag of the 2000s, in: Journal of Labor Economics, 34th vol. (2016), no. 2, pp. 141-198.
- 14 J. Südekum, W. Dauth, S. Findeisen: Losers (regions) of globalization in Germany: Who? Why? What now ?, in: Wirtschaftsdienst, Volume 97 (2017), H. 1, S. 24-31, http://blog.zeit.de/herdentrieb/2017/01/05/verlierer-der-globalisierung- who-why-what-do_10072 (8.3.2017).
Trump's economic policy: short-term economic boost with great dangers for world trade
After Donald Trump's election as US president, many observers initially bet that Trump would drop some of his extreme campaign demands after he took office. The hope was that moderate advisers would moderate Trump and that, thanks to the checks and balances built into the US constitution, even a Republican-controlled Congress would block the worst excesses. Against this background, the first days and weeks after Trump took office were a shock: Trump not only rumbled on Twitter and in interviews against open trade in goods, China's alleged currency manipulation and the North American free trade agreement NAFTA, he also followed up his words with deeds: one of his first official acts It was to decree for the USA an exit from the already negotiated transpacific free trade agreement TTP and to impose a - legally questionable - entry ban for people from seven predominantly Islamic countries. Many foreign observers now had to realize that Trump would actually implement at least some of his extreme proposals from the election campaign.
It is already foreseeable that Trump will not be a free trader. Rather, it is to be expected that from a certain point onwards he will actually introduce higher tariffs on some or all imports from one or more countries - such as the punitive tariff of 35% on cars that were built in Mexico but sold in the USA, also threatened by BMW become.
Although US law generally requires a law passed by the US Congress to levy tariffs, a number of existing laws have built in authorizations with which the president alone can enforce tariffs. For example, the “Trading with the Enemy Act of 1917” allows the president to introduce tariffs and other import restrictions during “times of war”. According to some experts, limited military action by US troops, for example in North Africa or Syria, is sufficient as a legal basis to impose such tariffs. Richard Nixon's decision to impose a 10% tariff on all US imports in 1971 was also justified by this law (the US was involved in the Vietnam War at the time). Other possible legal bases for tariffs introduced by the president would be the "International Emergency Powers Act of 1977", the "Trade Expansion Act of 1962" or the "Trade Act of 1974" .1
Corporate tax reform
It is also quite realistic that under Trump's presidency the tax system will promote US exports and make imports more difficult. The Republicans in the House of Representatives proposed corporate tax reform last summer that would do just that. According to these plans, the corporate tax, which previously taxed corporate profits as in Germany, is to be replaced by a cash flow tax with a “tax border adjustment”, the so-called “border tax adjustment” .2 In the future, a tax on the difference between corporate income and Corporate spending collected. An important difference to the previous regulation is that this means that expenses for the acquisition of machines can be fully deducted in the first year instead of having to be written off over several years. This means that companies that invest a lot are pushing their tax debt into the future, which is supposed to make investments more attractive. The non-deductibility of loan interest is intended to eliminate distortions in the financing structure.
For the effect on foreign trade, however, the second element is more important, the “tax border adjustment”. Under these rules, companies are no longer allowed to deduct payments for imports as expenses, but they would no longer have to pay tax on income from exports. So if an American retailer sells a pair of shoes in the US for US $ 100 in the future, which they imported from Italy for US $ 70 and spent US $ 25 in labor costs to sell them in the US, it must in the future Pay 20% tax (i.e. US $ 15) on a sum of US $ 75 (US $ 100 minus US $ 25), even though the actual profit is only US $ 5. If the retailer buys the same shoes from a factory in the United States for $ 70, they only pay a tax of $ 1 (20% of $ 5) because they are now $ 70 from cash flow may be deducted. If the retailer sells the shoes produced in the USA abroad, he does not have to pay any corporate taxes. It is easy to see that this makes imports more expensive and at the same time makes it more attractive to export abroad. In economic terms, such a tax system has the effect of a tariff on imports and a subsidy on exports
The chances of implementing this reform are good. It is true that some large retailers and companies that use a large number of imported primary products are up against the plans. However, the idea of the cash flow tax with border tax adjustment has fans not only among Republicans but also among Democrats. In fact, a detailed concept for such a reform was presented by Alan Auerbach as early as 2010 as part of the (democratic) “Hamilton Project ”.4 The industrialized country organization OECD has repeatedly expressed its positive opinion about a switch to such a cash flow tax, including with the hope that tax avoidance would be reduced through international profit shifting. 5
Trump himself has recently expressed skepticism about a tax reform with border tax adjustment because he considers this to be “too complicated” and would rather have a simple punitive tariff. The tax border adjustment is necessary to finance the planned reduction of the tax rate from 35% to 20% by the Republicans. It is also unclear how great Trump's aversion to the border tax adjustment really is, and whether he would not sign a corresponding reform law in order to implement his basic idea of reducing corporate taxes.
Trump's demands for income tax cuts have at least as good a chance of implementation as the corporate tax reform. The Republicans' plans from last summer envisage lowering tax rates across the board, including lowering the top tax rate from the current 39.6% to 33%. Here, too, the Republicans are expected to introduce appropriate bills to Congress soon.
On the expenditure side, Trump had proposed an immense infrastructure program. In his campaign material there was talk of US $ 1,000 billion over the next ten years - slightly more than 5% of the gross domestic product of 2016. However, these investments should not be financed through higher government spending and the resulting higher public borrowing. Rather, Trump advisors Wilbur Ross and Peter Navarro point to increasing investments as a result of lax regulation (for example in the construction of large pipelines that were blocked under the Obama administration), as well as the potential of tax-subsidized private investments in infrastructure such as toll roads or airports .6 This promotion is to be financed, on the one hand, by additional tax revenue from the wages and profits generated by the projects and, on the other hand, through tax relief for profits repatriated to the USA. In the past, many large US corporations had parked billions in euros with foreign subsidiaries, as foreign profits only become taxable in the USA when they are brought back into the country. Ross and Navarro are now proposing a regulation under which companies can transfer profits parked abroad back to the US for a one-off payment of 10% - and they expect revenues of around US $ 100 billion from this operation.
Consequences of Trump’s Policy
In addition, Trump also decreed in his first days in office that positions in the federal administration that became vacant for cost-saving purposes should not be filled again. During the election campaign, he also called for all federal spending beyond defense and the statutory social programs to be cut by a nominal 1% per year. It remains to be seen whether the latter will be reflected in the final budget, which will be drawn up by the US Congress and not by the President.
What will the overall consequences of such a policy be? Trump's fiscal policy should initially lead to a certain economic boost. Lower taxes and publicly funded investment projects will result in higher consumer and investment demand. The spending cuts, on the other hand, are unlikely to have any economic impact, mainly because federal spending beyond the defense budget and social programs is relatively small.
Despite the spending restrictions, the plans are likely to initially widen the public deficit. With the vast majority of tax cuts in recent decades, US politicians had calculated the proportion of self-financing through higher economic growth: The actual loss of income was greater than initially planned. For most Republicans, if tax cuts initially grow deficits, it is not a big problem, as many of them see it as an opportunity for later spending cuts. All of this indicates greater funding needs from the US Treasury Department.
The combination of a somewhat stronger economy and higher funding needs of the US government is likely to induce the US Federal Reserve to raise money market rates faster than previously expected and to increase long-term interest rates on the bond market. Should Trump actually enforce his tax border adjustment, additional inflationary pressure from rising prices of imported goods is likely to reinforce this tendency.
As a consequence, it is quite clear what this policy combination should mean for the dollar exchange rate: The US dollar should tend to strengthen. Part of this revaluation was anticipated in the weeks after the election. Both the dollar's appreciation and the additional economic boost could in the short term benefit the US trading partners through higher demand from the US.
Any joy over a global growth spurt induced by higher US imports could, however, be short-lived. Because Trump's trade policy is likely to become a burden on the world trading system and the world economy in the medium and long term. The punitive tariffs announced by Trump for cars produced in Mexico are still the simplest case: A tariff of 35% on imported cars undoubtedly violates the obligations entered into by the USA under the WTO agreements. Should another state take action against the USA before the WTO because of such a tariff, it should almost certainly be right. However, such a victory only helps indirectly: the US would then be asked to abolish customs duties, but the WTO does not have any instruments to enforce such demands. Rather, it would allow the affected partners to react with their own trade barriers against US products. At least larger trading partners such as the EU, China or Japan would be expected to actually use the WTO's leeway to counterattack. Trump's punitive tariffs would very quickly lead to a wave of transatlantic and transpacific protectionism.
It is a little more complicated in the case of the introduction of a cash flow tax with tax border adjustment: Here at least the US Republicans insist on the position that such a tax is WTO-compliant. They argue that countries with a value-added tax that is only levied on products and services sold domestically also operate a tax border adjustment and that this is comparable to the planned cash flow tax. In fact, such a position is extremely questionable economically. At least in the form proposed by the US Republicans in the summer of 2016, the tax clearly discriminates against imports. While the tax base for domestic products is, to put it simply, the value added minus the domestic wage costs, the tax base for foreign products is the total value added. In addition, according to WTO rules, the tax exemption of export revenues is very likely to be assessed as an illegal export subsidy
Regardless of how the WTO ultimately assesses the admissibility of the tax rules, a US corporate tax reform with border adjustment as well as an inadmissible tariff threatens to lead to a new wave of protectionism. If the WTO evaluates the tax change as illegal, the question is whether the US Congress will collect its tax reform for this reason alone. In the past, MPs have hardly allowed themselves to be influenced by WTO arbitration awards in their tax or subsidy policy. If the Congress then rejects the withdrawal of the reform, the trading partners are allowed to react with punitive tariffs according to the WTO rule book. As in the case of the inadmissible tariffs, it is to be expected that the Europeans, the Chinese and the Japanese will do this too, if only so as not to dismantle the WTO. If, on the other hand, the WTO evaluates the plans as legal, other countries with similar tax rules are likely to follow suit. This result, too, would ultimately lead to a world with higher trade barriers: Although each country would increase the attractiveness of its own production location again, in the end there would be a system in which domestic production would be preferred to imports for tax purposes
In summary, one can say that in the short term the now recognizable elements of economic policy under Donald Trump are likely to stimulate economic growth in the USA and lead to an appreciation of the US dollar and thus could definitely have positive effects for the rest of the world. In the medium and long term, however, the Republicans' tax plans and Donald Trump's fundamental orientation in trade policy pose risks for world trade and the world economy.
- 1 For a comprehensive overview, see M. Noland, G. C. Hufbauer, S. Robinson, T. Moran: Assessing Trade Agendas in the US Presidential Campaign, Peterson Institute for International Economics, Briefing 16-17.9.2016.
- 2 For details, see Better.gop: A Better Way: Our Vision for A Confident America: Tax, June 24, 2016, http://abetterway.speaker.gov/_assets/pdf/ABetterWay-Tax-PolicyPaper.pdf (February 13, 2016). 2017).
- 3 However, some economists believe that the effect on foreign trade would be put into perspective by the fact that the US dollar would appreciate after such a tax was introduced. For example, Johannes Becker and Joachim Englisch argue that a country's trade balance must be balanced in the long term and therefore exchange rate movements would offset any change in competitiveness caused by such a tax reform. See J. Becker, J. English: The radical tax plans of the US Republicans and the consequences for the EU, in: Wirtschaftsdienst, 97th vol. (2017), no. 2, pp. 103-110, http: // archiv.wirtschaftsdienst.eu/jahr/2017/2/die-raduellen-steuerplaene-der-us-republikaner-und-die-haben-fuer-die-eu/ (8.3.2017). Given that the US has not had a single year of trade even remotely balanced in the last 25 years, and that macroeconomists usually assume that the effects of capital flows on the exchange rate are far more important than those of the trade balance, this argument seems rather tighter for theoretical models as relevant for the analysis of tax reforms in the real world.
- 4 See AJ Auerbach: A Modern Corporate Tax, The Hamilton Project, December 2010, https://www.americanprogress.org/wp-content/uploads/issues/2010/12/pdf/auerbachpaper.pdf (February 13, 2017) .
- 5 See, for example, OECD: Fundamental Reform of Corporate Income Tax, OECD Tax Policy Studies, No. 16, Paris 2007.
- 6 See W. Ross, P. Navarro: Trump Versus Clinton on Infrastructure, October 27, 2016, http://peternavarro.com/sitebuildercontent/sitebuilderfiles/infrastructurereport.pdf (February 13, 2017).
- 7 For an overview of possible commercial law issues, see S. Lincicome, R. Eglin: Border-Adjustable Taxes under the WTO Agreements, White & Case Client Alert, New York, January 2017; or J. Becker, J. Englisch, loc. cit.
- 8 Advocates of the cash flow tax claim that if it is implemented by all countries, it would be neutral for trade flows (e.g. A. Auerbach, M. Devereux: Cash Flow Taxes in an International Setting, Said Business School Research Papers, No. 2015-3 , Oxford, 2015). In fact, this conclusion can only be drawn under very restrictive assumptions about the global implementation of the tax, which in reality are unlikely to be met.
Attack on Free Trade
We shouldn't really be surprised by the US turn to protectionism.In March 1990 Donald Trump gave an interview to Playboy and when asked what his first action as US President would be, he replied: "I'd throw a tax on every Mercedes-Benz rolling into this country." Now it will be more likely Hit BMW as Mercedes-Benz, and the tax could become a tariff, but Trump has not changed the basic approach since 1990. But are the widespread concerns justified that it is steering the world economy into an era that will be characterized by the guiding principle of protectionism instead of free trade?
The exact direction in which US trade policy will move can currently only be guessed at. However, this is less due to the volatility of Trump, as diagnosed by some observers, than to the fact that it is currently difficult to estimate how far the US Congress will be prepared to follow the president. A distinction should be made within trade policy between the area of trade agreements and that of trade measures.
As one of the first acts, Trump stopped the ratification process of the Trans-Pacific Partnership (TPP). In doing so, he prevented an agreement that would have covered around a quarter of world trade. In itself, of course, this is regrettable and clearly to the detriment of all TPP partners. From the Chinese point of view, however, the assessment is certainly different. Because one can understand TPP as the attempt of the USA to forge an alliance of almost all Pacific countries under the explicit exclusion of China. It is definitely not in the interests of Europe to isolate China in terms of trade policy. That is why one can see the failure of TPP from Europe with one crying and one laughing eye.
In addition, Trump has announced that the negotiations on the Transatlantic Trade and Investment Partnership (TTIP) will be canceled. The tears that have been shed over them in Europe can confidently be described as crocodile tears. Because during the Obama presidency, resistance to TTIP came mainly from Europe and not from America. The direct economic damage caused by the failure of TTIP is manageable anyway. According to the available empirical studies on this, the growth effects of TTIP would largely be drowned out in the white noise of general economic fluctuations. Anything else would also be surprising, since TTIP should not be about the transition from self-sufficiency to free trade, but rather about making the largely free trade between the USA and Europe a little more free.
The liberalization steps in the NAFTA agreement, which came into force in 1994, were much more pronounced, particularly with regard to trade between the USA and Mexico. Trump wants to renegotiate this agreement. He definitely has the necessary powers, because the US president requires the approval of Congress to conclude new trade agreements, but an executive order is sufficient for the effective termination of trade agreements. And since the NAFTA treaty provides for a 180-day notice period, the renegotiations that Trump is aiming for are within the legal framework. If the tariff walls were actually to be raised again, it would be a far greater disaster than the much-discussed physical wall between the United States and Mexico. The Mexican economy would probably suffer the greatest damage, but large areas of the US economy, which are closely linked to Mexico via supplier networks, would also be hard hit.
The economist's heart is even more attached to multilateralism, such as is manifested in the WTO, even more than to such regional trade agreements. After all, experience has shown that the WTO principles of most-favored nation treatment and non-discrimination are a good basis for keeping collateral damage from regional trade agreements for uninvolved third countries (trade diversion) within narrow limits. But multilateralism did not fall victim to the new US president, it was dead for many years. In the 70-year history of the WTO (or the GATT as a predecessor organization), extremely notable successes have been achieved in dismantling trade barriers and these successes are now benefiting over 160 partner countries. But the last of these successes was more than two decades ago with the conclusion of the Uruguay Round in 1994. The success story of the WTO should be continued in the so-called Doha Round, which was started in 2001 and which has been bobbing around with no results to this day. Hardly anyone expects the Doha Round to ever come to a successful conclusion.
One approach to explaining the secular decline of multilateralism is offered by the Diminishing Giant Syndrome, which Jagdish Bhagwati first described in the journal Foreign Affairs in 1993 and which has largely disappeared from the literature today.1 Bhagwati started out from the observation that all nine successful GATT rounds - starting with the Geneva Round (1947) through the Kennedy Round (1964 to 1967) to the Uruguay Round (1986 to 1994) - were initiated by the USA. In his opinion, the explanation for this lies not in the pronounced love of freedom of the Americans, but in their global economic dominance at the time: If free trade - as postulated by traditional foreign trade theory - brings advantages to all countries involved, then the largest of these countries can also achieve the greatest share of the advantages . In contrast, the positive externalities that free-rider countries flow into are less significant. The global economic giant will therefore advocate multilateral free trade in its own interest, instead of concluding a spaghetti bowl of bilateral agreements (also a word created by Bhagwati) with many small countries.
The American giant is no longer a giant. The US share of global gross domestic product has fallen from over 40% (1960) to below 25% (2016). The decline in global industrial production, which is the more relevant variable for global trade, was even more pronounced. Accordingly, the US has largely lost interest in engaging in a Pax Americana in world trade. The US has withdrawn from multilateralism not just since Trump, but since the 1990s.
At first it seemed that so-called mega-regionals could take the place of multilateralism. Examples of this from earlier decades are the ASEAN Agreement (1967) or the Mercosur Agreement (1991) and, last but not least, the European Union / European Economic Community (1958), which essentially began as a customs union. NAFTA (1994) represented a clear step in this direction and further steps should follow with TPP (negotiated since 2010) and TTIP (negotiated since 2013). But nothing will come of it for the time being - at least not if the USA is involved.
From a European point of view, the direct economic damage of changing course in US policy towards international trade agreements is likely to be quite limited. The long-term damage that could result from a general paradigm shift in international trade policy appears to be more serious. Even in the pre-Trump era, there were thousands and thousands of international trade barriers, and politicians and lobbyists pondered non-stop how their numbers could be increased. But at least in the Sunday speeches there was a basic consensus that free trade is better than protectionism. This basic consensus has now been terminated by Trump.
For many decades we have become used to the fact that the international division of labor continues to deepen - to the potential benefit of all countries involved. In addition to the GATT / WTO rounds, technological advances in transport and communication technologies and, last but not least, the fall of the Iron Curtain have contributed to this. World trade regularly grew faster than world production and, since the 1980s, there has been an enormous increase in international direct investment. However, the extent to which the deepening of the international division of labor is dependent on external impulses was underestimated. There seems to be a lack of these impulses at the moment. The elasticity of world trade in relation to world production has been around 2 in the decades since 1960; i.e. world trade grew almost twice as fast as the world economy. Since 2012, world trade has hardly grown faster than world production. The same applies to global direct investment, which has weakened so much that the Economist is already speaking of the “retreat of the global company”. 2
For some, the stagnation of globalization may be just right, as they see it as the main cause of deepening social rifts and the flattening of cultural diversity. Others, however (like the author of this article), who see the division of labor as the most important source of all prosperity, do not enjoy this development. They are anxiously on the lookout for where the international division of labor might gain new impetus. The new US president is obviously not available for this. And the EU will probably not have the political strength to step into the breach in the future either.
Since the announcement in the aforementioned Playboy interview, numerous other announcements have been made about how Donald Trump wants to bring industrial jobs back to the USA. He has announced punitive tariffs of 35% on imported cars, dumping products and re-imports; he is considering a general duty of 45% on China, which is accused of manipulating exchange rates; and a general duty of 20% is to be levied on products from Mexico (among other things to finance the wall). Whether Trump will limit himself to these areas and whether it will stick to the specific percentages is currently difficult to assess. It seems relatively certain, however, that Trump is willing to build relatively broad and presumably permanent tariff walls to protect industrial jobs in the USA.
The extent to which the instrument of presidential decrees also allows such tariff measures is not as clear as in the case of the trade agreements discussed above. In the US Constitution, the decrees are not mentioned at all. Article 2 merely states that “the executive power shall be vested in a President of the United States.” Due to longstanding constitutional practice, the competence in customs policy lies with the Congress. However, there are exceptions that are derived from various individual laws. For example, the US President could rely on the International Emergency Economic Powers Act of 1977. Or the Trading with the Enemy Act of 1917. The latter was drawn in 1971 (sic!) By then President Richard Nixon to order a general import duty of 10% to avert a balance of payments crisis. It is at least doubtful whether the US courts would also allow the tariff measures targeted by Trump to pass. If not, Trump would have to persuade Congress to enact appropriate customs laws, for which the necessary majorities are also unlikely to be easy to win.
Trump would certainly have had the opportunity to point a finger at EU trade policy. He publicly complained that there was a Mercedes Benz in front of every house on Fifth Avenue, but not a single Chevrolet on the Kö in Düsseldorf or Mönckebergstrasse in Hamburg. On the occasion he could have pointed out that the EU levies an import duty of 10% on imported cars, while the USA only charges a duty of 2.5%. And the pickups that are so popular in the USA are even classified as trucks by the EU and are therefore subject to an import duty of 22%. Now you could not really use the advantages of a Ford F-150, a Chevrolet Silverado or a Dodge Ram, which have occupied the first three places in the US new registrations for years, on the Kö anyway. But in view of the high EU tariffs, one gets the impression that the tears shed in Europe over Trump protectionism also contain a clear proportion of crocodile tears in this case.
Trump commits a serious mistake in thinking when he believes that protective tariffs can bring lost jobs back to the USA. Not only economic theory speaks against it, but also all practical experience. In Germany, attempts have been in vain for decades to prevent the loss of jobs in shipbuilding and mining with aid to shipowners and strict import quotas for hard coal and coal pennies; in Great Britain it was the automobile industry which, despite subsidies and local content regulations, became increasingly insignificant; In France, politicians have been unsuccessful to this day with protective measures against the shrinking domestic film production. If the USA were to impose drastic import duties on car imports now, many jobs in Mexico and some in Germany would certainly be lost, but not to US industrial workers, but to industrial robots.
In fact, the US auto industry has been recovering significantly for years. Compared to the crisis year 2009, car production has almost doubled; even the numbers from the pre-crisis year 2007 are now slightly exceeded again. And for commercial vehicles, where the USA has always been the world market leader, the production figures have been clearly increasing since 2010. The growth was made possible not least by the installation of around 70,000 industrial robots in the US automotive industry since 2010. If Trump actually succeeds in implementing his tariff plans against car imports, this should really boost the sales prospects of the manufacturers of industrial robots . The “forgotten” from the Midwest would have nothing of it.
In the medium and longer term, however, it would primarily be the US auto industry itself that would have the damage. Like the automotive industry in all other countries, it is currently integrated into a global network of suppliers. If the protection policy cut the US manufacturers off from this network, they would probably not be able to maintain their price standards or their quality standards. And they would lack the competitive pressure without which the efficiency and international competitiveness of the US automotive industry could creep in and erode. Then the “forgotten” from the Midwest would definitely be the losers.
The European response
How should Europe respond to all the challenges?
- In the area of trade agreements, a good dose of calm is recommended - combined with the strategy of striving for new regional agreements yourself (especially with China and India and last but not least with Mercosur, where the negotiations are already well advanced). The US should not be marginalized, but the EU should move forward without the US if necessary.
- In the area of customs policy, the principle of hope applies first of all, because it is anything but agreed that Trump can actually implement his plans by decree. If it does, retaliatory measures are strongly discouraged, as this would only unnecessarily increase the loss of prosperity on both sides of the Atlantic.
Overall, the EU should go its own way undeterred and not allow the new US president to impose the law of action on it by an irrational trade policy. How did Udo Lindenberg sing: "I do my thing - no matter what others are talking about."
- 1 J. N. Bhagwati: The Diminished Giant Syndrome: How Declinism Drives Trade Policy, in: Foreign Affairs, 72nd vol. (1993), H. 2, pp. 22-26.
- 2 Economist: The retreat of the global company, January 28, 2017.
President Trump and the problem of cooperation in international economic policy
Cooperation in international economic policy has not been in good shape for a long time. In trade policy, cooperation in the multilateral framework of the Doha Round in the World Trade Organization (WTO) has failed. Even regional free trade agreements, such as the European-Canadian Agreement (CETA) are on the brink, while the US-European Agreement TTIP and the Trans-Pacific Agreement (TTP) are being questioned by the Europeans and the new US government.1 The new US -Government has clearly tightened the tone and announced that it would tend to conclude trade agreements bilaterally in future and threatened to resolve trade disputes unilaterally outside the WTO's dispute settlement mechanism. She has also threatened to take action against the currency manipulation she has identified by China, Japan and Germany, and the Vice-Chair of the Financial Services Committee in the US Congress has asked the President of the Fed to stop negotiations on international cooperation within the framework of the To lead banking regulation and financial market stability.
The US's declared turning away from more nationalism and bilateralism in international economic policy has sparked fears that the world is facing a new wave of trade and currency conflicts and a departure from the US post-war order. While the risk of a radical change in policy cannot be dismissed out of hand, it remains to be seen what will actually be implemented by the contradicting statements.That's why I'm taking a longer-term perspective.
Has cooperation worked so far?
At the moment, comparisons are often made with the 1930s, in which the international trade and currency order of the post-war period finally collapsed and resulted in deep conflicts between trade and currency blocs.2 Accordingly, these experiences are seen as the background to the post-war era under the leadership of the USA Rules and institutions were created so as not to repeat these mistakes. Even during the war, plans began for a reorganization of the world on the basis of democracy, free trade, coordinated currency policy and development cooperation. While the World Bank and the International Monetary Fund (IMF) were implemented as planned, the planned International Trade Organization failed because of the USA. It was not until 1995 that the WTO was developed from the 1946 General Agreement on Tariffs and Trade (GATT)
However, the collaboration was less extensive and systematic than is often thought. Until the 1960s, the tariff reductions in the GATT were only minor, characterized by numerous exceptions and were often replaced by other forms of protection.4 The WTO also quickly reached its limits, as the negotiation rounds got stuck from the start and critical areas such as liberalization the agricultural markets did not move forward. Instead, the number of complaints negotiated before the WTO increased more and more, while many of the participating states increasingly opted for more extensive and regional trade agreements instead of global integration within the framework of the WTO
And cooperation on currency issues was also characterized from the start by conflicts over exchange rate levels and current account imbalances.6 This phase of tense cooperation with fixed exchange rates ended with a unilateral measure on the part of the USA. In 1971, President Nixon suspended the convertibility of the US dollar to gold and introduced an additional import tax of 10% on industrial goods. Neither was compatible with the rules of the Bretton Woods monetary system, nor with the rules of the GATT. The aim of the "import surcharge", which is also being talked about now, was to force Japan and Germany to appreciate their currencies. After lengthy negotiations, the “Smithonian Agreement” in August 1971 agreed to adjust the exchange rates before the Bretton Woods fixed rate system was officially ended in 1973.7
Even after 1973 there were only a few really successful attempts at international currency cooperation.8 In 1985, the Plaza Agreement agreed on a common policy of devaluing the US dollar against the yen and D-Mark, followed by this process two years later stop in the Louvre accord after the dollar depreciated by 40%. But here, too, it was not only the Reagan administration who took unilateral trade measures against imports from Japan, especially with the notorious “Voluntary Export Restrictions” 9. Overall, however, alongside the positive example of the Plaza and Louvre, macroeconomic cooperation worked less well. The “World Economic Summit” (later the G7) created in 1975 quickly lost its impact. While it was still possible to agree on joint fiscal measures to support the economy in Bonn in 1978, the following summit meetings were characterized by strong conflicts over global imbalances and the necessary adjustment measures. Once again, the US was urged to adopt a less expansionary policy, while the latter mainly called for greater expansion in Germany.
Finally, as a result of the global financial and economic crisis, the cooperation within the (short-term) G8 was expanded to include the most important industrialized and emerging countries in the G20 from 2008.10 Even though measures to secure financial stability were quickly agreed and at the G20 summit declared in November 2008 that it did not want to introduce any trade barriers to support domestic employment, this was not implemented. It is true that relatively few increases in tariffs are seen, but instead diverse and significant other interventions in free trade and discrimination against foreign companies and employees as well as subsidies for domestic companies
The conflicts in monetary policy are even clearer in this context. As early as 2010, the Brazilian Finance Minister Mantega spoke of the danger of currency wars and accused the USA and other industrialized countries of wanting to gain an advantage through expansionary monetary policy at the expense of the emerging countries. Indeed, every round of expansionary monetary policy in the US (2010 to 2011), Japan (2012 to 2013) or the euro zone (2014 to 2015) resulted in mutual accusations of the partners for manipulating their currencies.12 And although in 2013 the G7 did theirs Intent not to want to undertake currency interventions, the mutual accusations have not stopped. Some time ago, a law that has been in force since 1988 was tightened, which obliges the US Treasury to report to Congress every six months on countries that manipulate their currency. The allegations that members of the current administration raise against Germany and other countries are therefore not new, but neither can they be arbitrarily implemented. 13
When cooperation works
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