A few weeks ago, President Trump surpassed his 500th day in office. That’s a good vantage point to appraise his economic policies to Make American Great Again.

Over at the Library of Economics and Liberty’s Econlog, I offer my assessment. It’s not good.

This may seem surprising, given current economic conditions. But economic policy isn’t merely about the current moment, but predominantly about improving economic conditions long-term. Aside from a couple of provisions in the December 2017 tax law, President Trump has done precious little in that regard and much to harm the economy long-term, from borrow-and-spend fiscal policy, to disastrous trade and immigration policies, to disinterest in serious regulatory reform, to his refusal to face the country’s dreary long-term fiscal challenges.

From my conclusion:

MAGAnomics appears to be little more than an impulsive dislike of free trade and immigration, a hazy desire for less regulation, disinterest in (or perhaps a lack courage to face) the nation’s long-term fiscal problems, and a desire to temporarily lower taxes without making the hard choices necessary to fiscally balance those cuts and make them enduring. In other words, MAGAnomics is a slogan supporting a few weak and many harmful initiatives, not a serious collection of policies thoughtfully designed to strengthen the nation’s economic health.

Take a look and see if you agree.

In a recent Philadelphia Inquirer opinion piece White House economic advisor Peter Navarro hailed the christening of a new transport ship in the nearby Philly Shipyard as evidence of the “United States commercial shipbuilding industry’s rebirth.” As is typical of Navarro’s pronouncements, the reality is almost the exact opposite. In fact, a closer examination of the ship’s construction reveals it to be symptomatic not of a rebirth, but of the industry’s long downward slide. Named after the late Senator Daniel K. Inouye of Hawaii, Navarro describes the 850-foot Aloha-class vessel as “massive” and notes that it is “the largest container ship ever built in the United States.” This, however, is somewhat akin to the tallest Liliputian. Although perhaps remarkble in a domestic context, by international standards the ship is a relative pipsqueak. Triple‑E class ships produced by Daewoo Shipbuilding & Marine Engineering for Maersk Line, for example, are over 1,300 feet in length. While the Inouye’s cargo capacity is listed at 3,600 TEUs (twenty-foot equivalent units, roughly equivalent to a standardized shipping container), the Triple‑E class can handle 18,000. The only thing truly massive about the Inouye is its cost. The price tag for this vessel and another Aloha-class ship also under construction at the Philly Shipyard is $418 million, or $209 million each. The Triple‑E vessels, purchased by Maersk Line, meanwhile, each cost $190 million. The South Korean-built ships, in other words, offer five times the cargo capacity for nearly $20 million dollars less. But the story gets worse. The Wall Street Journal reports that after the Philly Shipyard completes work on “two small ships”—a reference to the Inouye and its sister vessel—it has no more orders lined up. The shipyard is already laying off 20 percent of its workforce and the dearth of future work has prompted speculation of a possible shutdown. Sadly, the Philly Shipyard’s travails are hardly atypical of the U.S. shipbuilding industry, and even Navarro admits that the sector has seen its workforce decline from 180,000 in 1980 to 94,000 today. And yet we are to believe that the Inouye’s construction heralds the pangs of an alleged rebirth? At least credit the White House advisor for assigning proper blame for this sad state of affairs (which he misguidedly presents as credit). The Inouye, Navarro says, is in large part the result of a protectionist law called the Jones Act. He’s not wrong. Formally known as the Merchant Marine Act of 1920, the law mandates that ships transporting merchandise between two domestic ports be U.S.-built, U.S.-owned, U.S.-flagged, and U.S.-crewed. The result is that instead of purchasing cheaper foreign-built ships, Americans are faced with enormous prices for relatively small ships. The cost of transportation, in turn, is higher than what it would otherwise be while the number of Jones Act-compliant vessels has gone down, along with jobs for mariners and shipbuilders. Those ships that remain, meanwhile, are far older than the foreign counterparts—no surprise given the cost deterrent to buying new ships. While the Inouye is brand new, the average Jones Act containership is 30 years old. The international average is 11.5. Consistent with other protectionist misadventures, the Jones Act’s list of victims includes those it was meant to help. Rather than recommitting to the Jones Act and other failed forms of maritime protectionism as Navarro is so eager to do, the United States should instead be aggressively seeking this law’s repeal. An increasingly untenable status quo demands nothing less. Learn more about Cato’s Project on Jones Act Reform.

President Trump and his trade advisers are the most vocal in putting forward misguided views on the trade deficit, but, unfortunately, their position is a bipartisan one. Here’s something Congressman Brad Sherman of California said recently:

But Rep. Brad Sherman (D‑CA), ranking member of the House Foreign Affairs Asia and the Pacific subcommittee, told Inside U.S. Trade he would be “surprised if any [bilateral] deal is finalized in the next 12 months.” Sherman met with Gerrish late last week, he said.

“Look, we spent 50 years telling the world that the only moral and correct thing to do was to have the United States run an enormous trade deficit with the entire world,” he said. “Of course, they decided to agree. Getting them to change their minds is not something that we are doing all that effectively and it’s certainly not something that is easy.”

Asked if he was confident a bilateral deal would be initiated in the near future, Sherman said “no, definitely not.”

Gerrish, he said, “was getting my input, but my input is certainly if you are dealing with a managed economy there has to be stated goals for how large the trade deficit will be or whether it will be balanced trade,” he said. “And it’s good to have people focused on the trade deficit; whether they are going about it the right way is perhaps another story. But ignoring it is a short-term strategy.”

Asked which countries might be top contenders for a bilateral, Sherman said none, adding that the criteria USTR was using to determine candidates was based on countries that trade fairly.

The U.S. will “strike deals” only with countries “that will provide for balanced and fair trade, of which there are none that I’m aware of right now,” he said.

The notion that a trade deal should lead to “balanced trade” seems like it comes from a Cuba-Venezuela trade arrangement, in which oil is traded for doctors. In the free market world of trade agreements, by contrast, the parties agree not to a barter of goods and services, but rather to remove tariffs and other protectionist barriers. The resulting bilateral trade balance is something to be determined by the market. The new trade flows are probably worth studying for various academic reasons, but are not a measure of success or failure of the deal.

By contrast, Congressman Sherman seems to think that the negotiation is over the trade deficit itself: “there has to be stated goals for how large the trade deficit will be.” But that’s not how U.S. trade negotiations do work or should work. What we negotiate about is the level of tariffs and other barriers. (Ideally, both sides would agree to have no tariffs, although in practice it is often just a lowering of tariffs.)

There can be complications from trading with the “managed economies” that he refers to, but those can be dealt with in trade agreements through specific rules. For example, they can establish rules on how state-owned enterprises should behave. There were rules of this sort in the Trans Pacific Partnership, and it would be a good idea for someone to propose similar rules in an agreement with China. 

International rules to limit managed trade and constrain protectionism are a good idea. A (bipartisan) focus on bilateral trade deficits, by contrast, won’t address these fundamental issues, and is a big mistake.

Congressman Sherman’s comments did not surprise me, because I had a brief exchange with him on this very issue in a House Committee hearing last year on the impact of a US-UK trade agreement (starts at 1:12:28). He asked the following question and was looking for a short answer: “Would a deal with Britain that simply eliminated all tariffs be good or bad for reducing America’s trade deficit? … it’s possible that it can’t be estimated.” I knew I wouldn’t be able to have a real discussion with him in this setting on the value of trade deficits as a metric, but in answering I wanted to get the point out there that looking at trade deficits is a mistake, so I said: “I can’t estimate it but I also don’t think trade deficits are bad for the economy.” He responded by saying, “We lose 10,000 jobs for every billion dollars of trade deficits …”, but then quickly moved on.

We have spent a lot of time over the years rebutting the misunderstandings about trade deficits: See, e.g., here, here, here, and here. But clearly, there is still work to do. 

Alexandria Ocasio-Cortez, the recent winner of a Democratic primary for Congress in New York, argued that free-trade agreements (FTAs) have caused the number of refugees and asylum seekers to the United States to grow. This is a somewhat common claim among some critics of trade or FTAs in particular. 

To test this claim, we gathered a list of all the FTAs that the United States has signed and how many asylum seekers and refugees they sent to the United States since the year 2000. We combined all asylum seekers, affirmative and defensive, that were counted by the United Nation Human Rights Commission. Some asylum seekers from these countries are double or triple counted due to the oddities of the asylum system. We then added refugee admissions from the Department of Homeland Security. 

Next, we ran several regressions to see the relationship between having an FTA with the United States and the number of asylum seekers, refugees, or those two categories of humanitarian visas combined who arrive in the United States from those countries. The first regression was a difference-in-differences with two-way fixed effects. The second was a difference-in-differences regression with linear time trends. The third was a triple difference-in-differences with two-way fixed effects that also included asylum seekers, refugees, and humanitarian immigrants from Latin America specifically. To ensure proper statistical inference, we computed robust standard errors clustered at the country level to correct for country-level autocorrelation in these variables.

Our results are that there is no statistically significant change in the number of asylum seekers or refugees that countries send to the United States after they sign an FTA in any of the above regressions. We find very low within R‑squares for these models that suggest that the presence of FTAs has very little predictive power for within-country variability for the number of asylum seekers and refugees. In other words, FTAs don’t explain the flow of asylum seekers and refugees, and other variables that we did not include in our model do. 

Figure 1 shows the number of asylum seekers from countries that have signed an FTA since 2000 in the five years before and after the agreement going into effect. Each line represents a different country. There is no relationship between signing an FTA and the number of asylum seekers.

Figure 1

Asylum Seekers within Five Years of Signing an FTA per Country

Source: United Nation Human Rights Commission

The refugee system is the other half of the humanitarian immigration system and it shows no change in the number of asylum seekers before and after the signing of FTAs (Figure 2). It’s worth noting that nations that send refugees to the United States send very few refugees and almost all of those sent in Figure 2 are Colombian.

Figure 2

Refugees within Five Years of Signing an FTA per Country

Source: Department of Homeland Security.

There are many potential explanations for changes in the number of asylum seekers and refugees coming to the United States. They range from changing conditions in other countries to alterations in American law or policy and everything in between—but let us set aside the notion that FTAs somehow force people to flee their home countries. 

President Trump and others who are mistakenly troubled by trade deficits with specific countries should at least get the facts straight. To fret about trade deficits in goods alone (ignoring services) is hopelessly old-fashioned in a world where the most exciting business and investment opportunities are typically in the service industries. U.S. businesses are famously outstanding in software and communications services, health and education services, food and lodging services, legal, financial, accounting and marketing services, and so on. Hollywood, Wall Street, Madison Avenue, Las Vegas and D.C.’s K‑Street lawyers have always been known for their services, not “making stuff.”

The table shows a rapidly growing U.S. trade surplus in services with many important economies and regions. The U.S. services surplus tripled from 2003 to 2017 with Canada and was 7‑times larger for the EU, 12-times larger for South Korea, 25-times larger for China. Rising trade surpluses in services have become large enough to more than offset the trade deficit in goods with some major trading partners – notably Canada. For all countries combined, of course, the surplus in services is not yet large enough to offset the familiar cyclical uptick in the trade deficit in goods (most imported goods are industrial components and materials). But it does not take much imagination or statistical expertise to envision an interesting trend in that direction.

Private services account for 69% of GDP, and 128.2 million jobs in June. In the Bureau of Economic Analysis industry accounts, private service industries “consist of utilities; wholesale trade; retail trade; transportation and warehousing; information; finance, insurance, real estate, rental, and leasing; professional and business services; educational services, health care, and social assistance; arts, entertainment, recreational, accommodation, and food services; and other services (except public administration).”

Goods-producing industries, by contrast, “consist of agriculture, forestry, fishing, and hunting; mining; construction; and manufacturing.” All of these goods-producing industries combined accounted for only 20.7 million jobs this June. That was fewer goods-producing jobs than in July 2000 (24.7 million) or August 1979 (25 million) or even May 1969 (22.9 million). In other words, all long-term U.S. job growth has been in service occupations, not in manufacturing, mining, construction, and agriculture.

The United States is predominantly a service economy. Many world-famous U.S. enterprises provide services all over the world – including entertainment, transportation, legal services, chain restaurants, advertising, accounting, medical tourism and college degrees. In fact, rising U.S. service exports accounted for a third of total exports from January through May, and the U.S. surplus in services shrunk the total deficit by 31%.

Yet when President Trump and his trade war generals talk excitedly about bilateral trade deficits, they invariably talk only about goods — never services. Commerce Secretary Wilbur Ross, for example, published “Free Trade Is a Two-Way Street” in The Wall Street Journal, writing only about “trade in goods” – as though a third of U.S. exports, most U.S. jobs and 69% of U.S. GDP is not worth mentioning.

A reporter for The​Bal​ance​.com (a financial website) inadvertently provided an excuse for widespread journalistic neglect of U.S. service exports by writing, “Please note that the Census provides trade data by country for goods only, not services.” That might have been a helpful warning if it was true. But Census does provide trade data for goods and services for most important countries, and for groups of countries such as the EU and OPEC.

Country trade data for goods and services are so commonly neglected, that I am going to post the data in several posts about various regions of the world, starting with Asia.

“Last year, we lost $500 billion on trade with China,” Trump said at a March 23 news conference. That was fake news. The correct number was $335.7 billion once we count the $40.2 billion U.S. surplus in services. And there’s no excuse for not counting services. But everyone also forgets that Hong Kong is part of China and has no tariffs against the rest of China or the U.S. or anyone else (neither does Singapore). It’s like a Chinese Free Trade Zone. Since Hong Kong ran a $35 billion trade deficit with the U.S. in 2017, that leaves the combined China/​Hong Kong net trade deficit with the U.S. at $300.6 billion – $200 billion less than the President claimed.

President Trump might nonetheless claim “we lost” $300 billion in trade with China last year, except getting $300 billion in desirable industrial and consumer goods from China was a U.S. gain, not a loss. Why else would we have bought the goods?

The benefit from trade comes from imports. Exports are the cost.

Foreigners don’t sell us goods because they’re collecting dollars as a hobby. U.S. dollars can ultimately be spent only on U.S. goods, services and assets, and they are frequently used to buy U.S. services and assets rather than goods.

If people in counties like Japan, India or China find better and safer investment opportunities in U.S. tech stocks and small caps than in their own local markets, then they have an incentive to sell us something to get the dollars to invest here. I long ago dubbed that “The Investment Opportunity Theory of Trade.” Foreigners bidding-up the value of U.S. equity or property is not American “borrowing.” And contrary to Mr. Trump it’s a win-win deal – not a loss.

This news report from the Washington Post is a striking example of the absurd costs of complex tariff systems:

Brand-new Ford Transit Connect vans, made in Spain, are dropped off at U.S. ports several times a month. First, they pass through customs — and then workers hired by the automaker start to rip the vehicles apart. The rear seats are plucked out. The seat belts in back go, too. Sometimes, the rear side windows are covered with painted plates. Any holes left in the floor are patched over. 

Why? Because there’s a 25 percent tariff on imported pickup trucks and work vans, but only a 2.5 percent tariff on passenger vans. So even with all the extra effort of building a passenger-quality van, and then dismantling it, it’s still cheaper to do that than to pay a substantial tax on the import. 

The story is also a reminder of how bad policies can linger for decades. In the early 1960s Europeans increased their purchases of American chicken. European governments responded by imposing tariffs on chicken imported from the United States. In retaliation, President Lyndon B. Johnson imposed a 25 percent tariff — known as the “chicken tax” — on potato starch, dextrin, brandy, and light trucks. Tariffs on the other products were eventually lifted, but the high tax on light trucks remains. Thus the counterproductive construction and destruction. And by the way, this is no secret; the Wall Street Journal wrote about Ford’s practice in 2009.

The Post goes on to report:

Tariff engineering has a long history.

In the 1880s, the Supreme Court ruled it was acceptable for a sugar importer to intentionally darken refined sugar with molasses to lower the grade and secure a lower duty. Three decades later, the court took up the case of a company accused of trying to evade a 60 percent duty on strung pearls by instead shipping loose pearls with holes pre-drilled for stringing. Those faced only a 10 percent duty.…

For example, some athletic shoes, such as Converse All-Stars, come with just enough fuzzy cloth on the rubber soles to qualify them as lower-duty slippers. In the early 1980s, the United States imposed a tariff on motorcycles with engines larger than 700 cubic centimeters in a bid to protect U.S.-based Harley-Davidson, so Japanese companies turned to making 699-cubic-centimeter motorcycles instead.

[See https://​www​.cato​.org/​p​u​b​l​i​c​a​t​i​o​n​s​/​p​o​l​i​c​y​-​a​n​a​l​y​s​i​s​/​t​a​k​i​n​g​-​a​m​e​r​i​c​a​-​r​i​d​e​-​p​o​l​i​t​i​c​s​-​m​o​t​o​r​c​y​c​l​e​-​t​a​riffs]

Sugar import quotas also create opportunities for gaming the system, which the government tries to block. In 1985, the Wall Street Journal and then the New York Times reported that the Reagan administration had slapped emergency quotas on “edible preparations” such as jams, candies, and glazes—and even imported frozen pizzas from Israel—lest American companies import such products for the purpose of extracting the sugar from them. Apparently it might have been cheaper to import pizzas, squeeze the tiny amount of sugar out of them, and throw away the rest of the pizza than to buy sugar at U.S. producers’ protected prices.

A U.S. tariff is a tax on the American people. That’s easy to see. American consumers and businesses are forced to pay higher prices for the goods they want to buy. What is not so obvious is all the deadweight loss such obstacles to trade create. Businesses and consumers may have to shift their purchases to a less-preferred domestic alternative. And as the reports above indicate, companies sometimes go to great lengths to get around the obstacles created by tariffs, quotas, and other barriers to trade. Just think of all that wasted labor and material involved in getting a Ford passenger van from a Spanish factor to an eager American consumer. This is pure waste, waste that literally makes America poorer. In the case of the chicken tax, the waste is related to a 1963 executive order that’s never been rescinded. The sugar quotas benefit a highly concentrated, politically effective industry and impose costs on far more businesses.

Tariffs impose costs on Americans. We should be reducing and eliminating them, not expanding them.