Trade, tradeoffs and the travails of governing

Reality bites

From my writing perspective, Trump brings plenty of positives, namely that he ensures I will always have something to potentially write about each week. It does come with at least one big downside though. Whatever I publish on Sunday can become partially or even entirely outdated by Monday. Sure enough, that happened over the week.

On Monday, Trump announced that he was putting his 145% tariff rate on China on pause for 90 days. The new tariff rate will be around 30% although for some items it will be much higher. China has also reduced the tariffs it imposed on US goods along with restrictions on the exporting of some rare earth minerals. We’ll see what happens between now and the next 83 or so days, but, regardless, a few things need to be kept in mind.

One is despite the 90 day tariff reduction, tariff rates are still higher than at any point in close to 80 years. That includes tariffs on China. What’s different is the level is much more tolerable and expectations have shifted so much that only imposing a 10% universal tariff looks reasonable. By that standard, the UK got a “good deal” last week even though it would have been considered atrocious a short while ago.

Another is the pause is not binding and more tariffs might be on the way. Trump came up with it and he can just as easily rip it up if he feels like it. Over the week, Trump said he would be setting new tariff rates for most countries within the next few weeks. Take that with whatever you will, but if it’s anything substantive it will likely mean higher tariffs all around.

A third is that there is a lot of uncertainty. The pause may last 90 days or it may not. The new tariff rates being set for most countries could be high or low or they may not happen. The pause on the Liberation Day tariffs could end in July. It could end sooner or later than that or it could be extended indefinitely. As long as Trump has the power to impose tariffs, a dark cloud of uncertainty will always be there. Good luck to anyone trying to do any kind of business planning.

Don’t let anyone tell you otherwise, Trump blinked on Monday. He first imposed a tariff rate of 145% a month ago and said it wouldn’t come down unless China fundamentally changed. Within a few weeks, he was saying 145% wasn’t sustainable and would come down, maybe to 80%. Then he reduced it to less than half that and effectively ended, at least temporarily, the halt on trade he created. The only change China made was reducing the retaliatory tariffs it had imposed.

The global trade order has not been remade. China did not concede anything. Trump has managed to tarnish the US’ reputation and embolden Xi in return for nothing. Whatever happens in negotiations over the next 90 days, China will know that Trump has little tolerance for domestic pushback and will quickly fold. China has limits on how much domestic disruption it can tolerate, but Xi can likely tolerate more of it than Trump.

Of course, that’s not how his cult worshippers see it. No matter what he does, it’s perfect. When he imposed tariffs, they said he was going to bring back manufacturing jobs here, he was playing three dimensional chess and was thinking long-term. As soon as he waived the white flag, they said it was him being a brilliant deal maker.

His cult worshippers love to point out that he got Qatar to commit to investing $1.2 trillion and Saudi Arabia to commit to investing $600 billion in the US. Sure, his excepting a $400 million jet for his own use from Qatar isn’t great, but look what he got done! Leaving aside the inconsistency of being against trade and welcoming more of it, those numbers are a joke.

Qatar has an annual GDP of a little more than $200 billion. Saudi Arabia’s annual GDP is a little over $1 trillion. The idea that a country is going to invest more than half the size of its economy anywhere, let alone almost six times, is on its face laughable. Maybe if you use a 1000 year timeline that could happen, but otherwise not a chance. If you hear anyone seriously touting those numbers what they’re telling you is you should never listen to them. Anyone dumb enough to believe that shouldn’t be trusted on any subject.

The stock market has been on a bit of wild ride over the last month. It’s mostly been surging since it plunged in the days after Liberation Day. It surged again when the 90 day pause was announced. So far, in economic data such as unemployment and inflation numbers, the tariffs have not had much of an effect and recession forecasts have been downgraded. Shouldn’t Trump get credit for that? Doesn’t that prove tariffs are good?

I will never predict where the economy is headed so don’t ask me about recession probabilities. As for the tariffs currently in effect, their effect on prices doesn’t happen right away. Business that made orders before the tariffs took effect haven’t yet had to pay them. Other businesses have absorbed the costs rather than raising prices, but that won’t go on forever. Wal-Mart announced over the week that it would be raising prices. I assume more business will soon do the same.

How much tariffs will contribute to inflation, I don’t know. They will raise prices, but I couldn’t tell you by how much or on what. The situation we’re in now is better than if every tariff announced on Liberation Day had gone into effect, but that doesn’t mean things will be great. What I do know is the tariffs already in effect will have a negative economic impact and won’t accomplish the goals its proponents like to tout, i.e., raise lots of revenue, bring back manufacturing jobs.

Regarding the stock market, it does what it does and the influence the president has on it is very limited. The last month though has been a bit of an exception. The stock market tanked when Liberation Day was announced and went back up each time tariffs were reduced or paused. I think I notice a pattern.

My guess is the reason the stock market has surged, beyond the immediate tariff relief, is those influencing its daily moves assume the tariffs won’t ever amount to much. In other words, the reason the stock market has done better since Liberation Day is because everyone thinks Trump is all talk and will cave. When he does Trumpy things, the stock market goes down. When he undoes the Trumpy things, then it goes up.

As for Trump waiving the white flag on China, he shouldn’t be praised for it. All he did was partially clean up a mess he made. You don’t get credit for doing that. If I came over to someone’s house, trashed the entire place and then cleaned up most of it I don’t think they would be impressed. If anyone disagrees, please invite me over to your house so we can test that hypothesis.

I’m not going to predict what happens with China after 90 days, but it wouldn’t be a surprise if Trump throws in the towel entirely. He wants to remake the global trade order, but only if everyone will immediately yield to him and roll out the red carpet. For all his bluster and playing a tough guy on TV, he’s really a wimp and is terrified of confrontation. It happens every time he starts a fight. He screams at the top of his lungs, makes all kinds of outlandish demands, says he’ll never back down, gets none of what he asks for and backs down.

Trade critics don’t have a better way

Beyond Trump and the immediate moment, the surrendering on China and pausing the Liberation Day tariffs illustrates a big problem critics of trade have. For all the criticisms of trade and globalization, none of those opposed to it have been able to demonstrate that they have a viable alternative. It’s easy to rail against trade and to blame it for every problem there is. It’s not easy to come up with an alternative that doesn’t have severe downsides.

People want to have good paying jobs, but they also want to have lower prices. It’s certainly not impossible to have both, but there can be a tradeoff and it’s something critics of trade don’t have an answer for. Trade isn’t perfect, but perfect doesn’t exist. The alternative to trade is not a utopia, it’s slow growth, lower living standards and higher prices.

I agree that trade with China has not gone according to plan. The US should be trying to move out production of items vital to national security from there. That doesn’t mean we shouldn’t trade with China at all. The fact is China has the second largest economy in the world and plays a big role on the world stage. The US and other countries can’t just tell it to drop dead and pretend it doesn’t exist.

For me, the reason I think trade with China has not gone well has nothing to do with economics. If that was all I was concerned with, I would support trading with China just like it was any other country. One of the big selling points of trading with China was that doing so would make its government more accountable and democratic. That has not happened at all.

Trade has made China much richer, but the CCP has only gotten stronger and more oppressive. For years now, it has been trying to export censorship to the world and that’s unacceptable.¹ On Earth 2, where China follows a similar path to Japan and South Korea, things are way better. In that world, trade with China is an unambiguously good thing even if it has some domestic downsides in the US and elsewhere. I wish it was different, but that is not the world we live in and so here we are.

China is trying to be the world’s number one power. I don’t want that to happen. Countering China is the biggest challenge the US and allied countries will face in the years and decades ahead. That is why I think the US should minimize if not eliminate the dependence of items like medicine and semiconductors on China. Those are way too important to have made in a country with a hostile government.

When it comes to most other items, though, I don’t mind if China is where they’re made. Items that aren’t vital to national security like toys can be made there. Trade with China is not going to be zero and it shouldn’t be. Like it or not, we live in a globalized economy. The US doesn’t make everything nor should it. Countries can have particular things they focus on and do well. People can romanticize and reminisce about the days of yore all they want, but that doesn’t change the fact that it’s not coming back.

It’s true there are parts of the US that are struggling. Many places that were once thriving have seen job losses and are now down on their luck. It’s understandable that people there want those jobs to come back. The problem is that is not going to happen in large part because most of those jobs don’t exist anywhere. No policy is going to make those jobs come back and any attempt at it will have serious negative consequences like what we’re seeing with tariffs.

That doesn’t mean those places are hopeless. As I wrote about recently, high-skilled immigration could be a boon for struggling areas. We can make it easier to build housing in places that are prosperous so more people can live there and more people can work in good paying construction jobs. We can make it easier to build all kinds of energy infrastructure all over the country, which will create those same kinds of jobs and lower prices. Those three things alone will do far more to help people and struggling places than any protectionist measure will.

Politically, selling all that is tougher than promising to bring back manufacturing jobs. Trying to explain it takes time and can’t be boiled down to one sentence. It also has the disadvantage of not playing to nostalgia. People don’t know what the future will look like, but they do know what the past was like and wanting to bring it back is a strong force. Still, the reality is the past is the past and it’s not coming back.

When the rubber hits the road and you drive over nails

During the week, we finally got to see actual legislation introduced in the House as it pertains to the Republican plan to extend the 2017 tax cuts. What was put out is a rough draft and I’m sure it will undergo plenty of revisions. We’ll see what the ultimate product is, but what was introduced is, unsurprisingly, bad on many levels.

Before getting into what’s bad, it’s worth noting that it’s not as bad as what was being pushed for in 2017 and not nearly as bad as anything Paul Ryan pushed for in 2011. The most consequential item in the House legislation is the reduction in Medicaid spending. It’s estimated to result in close to 8.6 million people losing their insurance. In 2017, the number of people who would have lost insurance if the Republican plan had passed was almost three times that number.

Leading up to the House legislation being introduced, there had been an intraparty fight over Medicaid and it looks like the more moderate faction mostly won. It does not reduce the federal government’s share of how much it contributes to finance Medicaid. The way the program is financed is the federal government mostly pays for it, but states chip in as well. That percentage can vary widely, but the minimum amount the federal government contributes is 50%. Reducing its contribution would force states to spend more on Medicaid, which they can’t afford and so people would be kicked off of it.

Another bad idea not in the House legislation is imposing per capita caps on how much the federal government will spend in each state. The House legislation does not include converting Medicaid into a block grant. It also does not cut back on or eliminate the Affordable Care Act Medicaid expansion 90% federal payment rate. All of those ideas, if implemented, would mean drastic reductions in Medicaid spending and millions losing their insurance.

Republicans have made gains among working-class voters over the years and their moderating on safety net programs is both a cause and effect of it. By opposing cuts to Medicare and Social Security, Trump disarmed Democrats of a weapon they had used against Republicans in the past with great success. During his first term, Medicaid didn’t get the same kind of treatment, but things are different now.

Since the attempt to repeal the ACA failed in 2017, Medicaid has been expanded in nine more states. Today, 40 states plus DC have expanded it. That includes plenty of red states with Republican voters who now benefit from it.² With many of their own voters now dependent on Medicaid, Republican hostility towards it has softened and it even has defenders. It’s not just a program for poor city dwellers in blue states. It’s a lifeline for hospitals in rural areas across the country and covers more than 20% of Americans.

Despite that, the House legislation seeks to impose work requirements³ to be eligible for it. It’s not as bad as some of the ideas I just mentioned, but it’s still very bad. It may sound reasonable, but imposing work requirements for Medicaid is not at all a good idea. The reason it is considered a money saver is because it’s assumed it will lead to a reduction in Medicaid enrollees. You might think those are people who will start working and have insurance from their new job, but you would be wrong.

The idea that there are millions of able-bodied adults out there who would be working, but are not because they get Medicaid is false. If you stop to think about it, it doesn’t make much sense. Medicaid is an insurer. It doesn’t give people cash. If an enrollee needs medical care it will pay for some or all of their expenses. It won’t pay for any other expenses like utilities, transportation, rent, etc. Anyone looking to avoid having to work by enrolling in Medicaid is going to be disappointed.

Work requirements are really just paperwork requirements. It will subject enrollees to more bureaucracy and complexity. The reason work requirements will cause the number of enrollees to go down is because some will get frustrated by having to deal with that and will just give up and not enroll. For many of those advocating for work requirements, that is a feature, not a bug. If they can’t directly kick people off Medicaid by slashing its budget, they will do it indirectly by putting up barriers to enrollment.

If your goal is to increase the supply of available workers, kicking people off Medicaid won’t do that. If your goal is to reduce people enrolled in Medicaid because you think it’s bad, work requirements will do that, as the experience of Arkansas has shown. Gains among working-class voters notwithstanding, a vast majority of congressional Republicans believe Medicaid and other safety net programs are bad and should be cut if not eliminated.

While there are more moderate Republicans in Congress who want to go easy on Medicaid cuts, the more hardline ones want to go in the opposite direction. The House legislation was voted down in committee yesterday because a few hardliners think it doesn’t cut enough. That is the tension among Republicans and is something we will see play out plenty in the House and Senate over the coming weeks and months.

The tension between those two wings always exists, but in 2017 Republicans had a big enough House majority that they could ignore their more moderate members. They could be given a pass to vote “no” and it would still get through. That’s not the case today.

Republicans have a 220-213 majority in the House. On a party-line vote, if everyone shows up, they can only lose three votes. The more moderate wing of their party is much bigger than three and so is the hardline wing. This is a problem I wrote about back in December and it was easy to see coming.

Part of why the House legislation is less ambitious than previous efforts is because they simply don’t have the numbers needed to go big. They don’t have the votes to repeal the ACA and/or dismantle Medicaid. While most of those in the politics business focused on the presidential election results, downballot elections mattered a lot, too. I wrote about the latter a good bit. On that score, Republicans didn’t have such a great night and it’s coming back to haunt them.

Beyond Medicaid, the House legislation has other bad things in it. If passed as is, it would effectively repeal the Inflation Reduction Act. That would be a death knell to new kinds of emerging technologies like smaller nuclear reactors and geothermal. For all Trump’s talk about how he wants a nuclear renaissance, what the House put forward is the exact opposite. My guess is that provision will be taken out or revised significantly as it is already facing pushback.

From a fiscal responsibility standpoint, the House legislation is disastrous. If passed as is, it would add anywhere from $4-6 trillion to the national debt over the next decade. The spending cuts it includes are nowhere near enough to offset the extension of existing tax cuts, the enactment of new ones and the increases in spending on defense and immigration enforcement. We already have fairly high interest rates and the federal government has to dedicate a large part of its budget towards interest payments. We should not be making that worse.

Enacting the House legislation or anything like it will send signals that the US doesn’t take its fiscal situation seriously. That will probably mean higher interest rates and/or inflation. I don’t think the US will have an experience like the UK did in 2022, but a hostile bond market reaction with all kinds of negative economic effects is not out of the question.

The House has a self-imposed deadline of passing something by Memorial Day, but it doesn’t matter. Congress misses deadlines all the time and nobody notices. Before it can pass the House, there will be more give-and-take and we’ll see what happens. The hardliners will demand something draconian and because they live in solidly red districts they won’t lose their next election because of it. The more moderate members are the ones in a pickle as many if not most of them come from swing districts. In the worst case scenario for them, they’ll wind up voting for something toxic that has no chance of becoming law because the Senate changes it.

It’s not out of the realm of possibility that, because of their narrow majority, Republicans aren’t able to pass anything on their own. I doubt that will happen, but it would be fun to watch them implode. In that case, Republicans will have to work with Democrats to come up with something. If nothing passes at all then a whole bunch of tax cuts will expire. Nobody wants that to happen even though it would be best from a fiscal responsibility standpoint.

The most likely result, I think, is something does pass Congress on a party-line vote even if it does little other than extend the 2017 tax cuts. Trump will pressure Republicans to get in line and they likely will. That’s especially true in the House where they only serve two-year terms and have to worry about primary challengers. Whatever the final product is, the hardliners and more moderate Republicans will vote for it no matter how much they don’t want to.

1. By the way, Trump supporting China hawks, why aren’t you all up in arms over his refusal to enforce the TikTok ban? You all keep insisting he’s going to be tough on China and that’s about the lowest hanging fruit there is and requires little effort on his part. Biden did the hard work for him.

2. It’s not just red states that benefit from Medicaid. Plenty of red congressional districts benefit from it, too. Rural areas in almost every state tend to have a higher percentage of residents enrolled in Medicaid compared to urban and suburban areas.

3. The House legislation makes the work requirements go into effect in 2029. Conveniently, that just so happens to be after Trump will have left office. The hardliners are mad about it and want work requirements to go into effect right away.