Monday of this week marked the Day of the Seafarer, an occasion meant to recognize the critical role played by mariners in the global economy. American seafarers, however, increasingly find little to celebrate. A large source of their travails is the Jones Act. Signed into law 98 years ago this month, the law mandates that cargo transported between two domestic ports be carried on ships that are U.S.-built, U.S.-owned, U.S.-flagged, and U.S.-crewed. The harm caused by this law is well documented. By reducing competition from foreign shipping options and mandating the use of domestically built ships that are vastly more expensive than those constructed elsewhere, the Jones Act has raised transportation costs and served as a de facto tax on the economy. Too often overlooked is that the Jones Act has also presided over the decimation of the U.S. maritime sector, the very industry whose fortunes it was meant to promote (an age-old story in the annals of protectionism). The numbers speak for themselves. Since 2000 the number of oceangoing vessels of at least 1,000 tons which meet the Jones Act’s requirements has shrunk from 193 to 99. A mere three U.S. shipyards are capable of producing oceangoing vessels for commercial shipping, and one of them, the Philly Shipyard, is facing a possible shutdown. Europe, in contrast, has roughly 60 major shipyards capable of building vessels of at least 150 meters in length, while the United States has a total of seven such shipyards when those producing military vessels are included. Both the declining number of Jones Act ships and the struggles of the shipyards that build them are in large part explained by the vastly inflated cost of ships constructed in the United States. According to the Congressional Research Service, American-built coastal and feeder ships—the types of ships commonly used in domestic sea transport—cost between $190 and $250 million, whereas similar vessels constructed in a foreign shipyard cost about $30 million. One unsurprising consequence of such stratospheric costs is a reluctance on the part of domestic shipping firms to invest in new ships, with U.S. seafarers forced to work aboard vessels that are significantly older than those found in other countries. Excluding tankers (these vessels were subject to a requirement in the wake of the Exxon Valdez oil spill that they be double-hulled by 2015, thus encouraging the purchase of new ships and decreasing their average age), the Jones Act fleet averages 30 years of age—fully 11 years older than the average age of a ship in the merchant fleet of other developed countries. For context, the maximum economic life of a ship in the world market is typically 20 years. International comparisons of specific ship types are even more eye-opening. Jones Act containerships, for example, average more than 30 years old. The international average is 11.5. The only two bulk ships in the Jones Act fleet average 38 years old, while the international average is 8.8. General cargo ships average 34 years of age compared to an international average of 25.2. Struggling shipyards, a dwindling fleet of old ships, and fewer jobs are now the order of the day in the maritime sector. As Mark H. Buzby, head of the U.S. Maritime Administration, testified before Congress earlier this year, “over the last few decades, the U.S. maritime industry has suffered losses as companies, ships, and jobs moved overseas.” Also addressing members of Congress, one senior union official admitted that “the pool of licensed and unlicensed mariners has shrunk to a critical level.” This is not a new story. During Operations Desert Shield and Desert Storm, the United States was so desperate for civilian mariners to crew transport vessels that it enlisted the services of two octogenarians and one 92-year-old. Its search for ships was equally frantic, resulting in two requests to borrow a ship from the Soviet Union—and two rejections. Notably, during this conflict a much larger share of U.S. military equipment and supplies was carried by foreign-flagged vessels (26.6 percent) than U.S.-flagged commercial vessels (12.7 percent). Supporters of the Jones Act often claim the law is vital to assure a strong merchant marine capable of answering the country’s call in times of war or national emergency. Should the Jones Act be repealed, they warn that the maritime industry will enter a dangerous downward spiral. But the record clearly shows that their nightmare scenario, in fact, describes the status quo. It’s time for this law to go, or be significantly reformed. Toward that end the Cato Institute has unveiled its Project on Jones Act Reform, which will feature a series of policy papers exposing the fallacies and realities of this archaic law. This first of these policy analyses, The Jones Act: A Burden America Can No Longer Bear, is now available and provides an overview of the law, its history, and myriad shortcomings. More such policy analyses will follow both this year and next, along with other commentary pieces about this failed law, so be sure to check back for the latest updates. 

On Wednesday members of the Senate Finance Committee questioned Secretary of Commerce Wilbur Ross about the costs to American businesses of the administration’s tariffs. Ross was unsympathetic:

When Thune warned that the drop in soybean prices (caused by China’s retaliatory tariffs) was costing South Dakota soybean farmers hundreds of millions of dollars, Ross responded by saying he heard the price drop “has been exaggerated.”…

Ross told Sen. Mike Enzi (R‑Wyo.) that he’s heard the rising cost of newsprint for rural newspapers “is a very trivial thing,” and he told Sen. Benjamin L. Cardin (D‑Md.) that it’s tough luck if small businesses don’t have lawyers to apply for exemptions: “It’s not our fault if people file late.”

That reminded me of then-First Lady Hillary Clinton’s response in 1993 to a small businessman about how her health care plan might raise his costs:

“I can’t go out and save every undercapitalized entrepreneur in America.”

Seems like lots of Washington operators don’t care much about the burdens that taxes, regulations, mandates, tariffs, and other policies impose on small businesses and their employees.

President Trump set off another round of Twitter hyperventilation and financial market selling these past 18 hours with his latest threat to assess duties on another $200 billion of Chinese imports. What to make of this?

I see two (and only two) ways of looking at this. You can conclude that Trump is irrational, engaging in rhetoric and taking actions that are inconsistent with his goals, or you can see him as rational. You may not like his goals, but that doesn’t make him irrational. And he may be rational, but that doesn’t mean he’s not misguided. It seems to me, though, that if you think Trump’s irrational, then there’s not much use in trying to make heads or tails of the daily gyrations. There’s no basis, really, for offering much in the way of useful analysis of U.S. trade policy for the next couple of years.

I see Trump as rational, but deeply misguided. His unpredictability is risky and frustrating, but it’s also a staple of his governance. Unpredictability is the most predictable feature of this administration. But Trump’s goal is consistent and predictable. Trump’s goal is to cut deals that make him look Herculaean. The deals he most covets are those that cast him as fixing the trade problem with China and fixing the “worst trade deal ever negotiated,” NAFTA.

From the outset, Trump set his sights on “fixing” the U.S. bilateral trade deficit with China. Is that a worthwhile priority of trade policy? Absolutely not. But Trump is convinced that reducing the deficit is priority number one. He sees his high stakes engagement as worthwhile because he miscalculates the potential benefits and costs of his approach. I see the upside of Trump’s approach as offering potentially smallish benefits (getting China to do something that may benefit U.S. exporters), but the downside (a deleterious trade war that leaves the world in far worse shape) as severe and significant. My own approach would be far more risk-averse.

Trump wants the Chinese to buy more American goods and services. On its face, this is a reasonable desire for a U.S. president to have. But Trump wants the Chinese government to commit to purchasing more U.S. goods and services, somewhere in the neighborhood of $100 billion to $200 billion per year (which, of course, reinforces the fact that China’s economy is centrally directed, which is the basis for the legitimate problems in the economic relationship in the first place.) Threatened tariffs of 25 percent on $50 billion of imports from China, announced as result of a U.S. investigation into Chinese technology and IP practices, are Trump’s initial leverage in getting the Chinese to commit to more purchases. Beijing’s announced retaliation slightly negates that leverage, but then the administration cracked down on ZTE, the Chinese information and communications technology company that admittedly violated U.S. export control laws by selling certain products to Iran and North Korea, and was cut off from U.S. suppliers of semiconductors and other critical components.

The on-again-off-again-on-again sanctions seem to be conditioned on whether and to what extent Beijing commits to purchasing U.S. exports, and that decision now seems to be conditioned upon Trump granting a reprieve to ZTE. Trump has already given ZTE a reprieve on paper (with certain conditions and requirements), but Congress seems to have strenuous objections, and is considering an amendment to the defense authorization bill to prevent Trump’s reprieve from taking effect.

Trump’s latest threat to hit another $200 billion of Chinese products with tariffs is just as much a threat to Congress as it is to China. Either the Chinese will relent and agree to purchase U.S. stuff (without need of reinstating ZTE) and the tariffs will be called off or Congress, fearing (more than Beijing does) a trade war that will take down U.S. manufacturing and agricultural interests and their representative in Washington, will relent on its legislative push to block ZTE. Of course, relenting on ZTE while continuing to treat Canada, Mexico, the EU and other allies as national security threats (especially since that designation has resulted in those countries applying tariffs to U.S. agricultural and manfuacturing exports, too) isn’t going to sit well with Congress either. 

So, in order to fix these asymmetries and make Congress and U.S. allies whole (wholer, whole-ish): Congress abandons its legislation to block ZTE, which gets back in business (with conditions); the U.S.-China tariff war is called off; China signs purchasing orders for $100 billion to $200 billion of U.S. exports; the steel and aluminum tariffs on Canada, Mexico, and the EU are removed; and the NAFTA negotiations are restarted and concluded before the midterms. This gives Trump two major pyrrhic victories that will reinforce his greatness to his base.

Seems to me these are the only outcomes that could remotely explain (if not justify) the ride Trump is taking us on. I see it as misguided, but not irrational.

There is lots of talk from the Trump administration these days about how the U.S. is getting cheated on trade. In this context, they have done some cherry-picking of the data to emphasize high foreign tariffs, while conveniently ignoring high U.S. tariffs. For example, Trump will mention a 270% Canadian tariff on dairy products, without mentioning U.S. tariffs of up to 187% on sour cream. Or White House trade adviser Peter Navarro will mention EU auto tariffs of 10% and argue that those are much higher than the 2.5% tariffs for car imports to the U.S, but he won’t mention the 25% U.S. tariff on truck imports. 

So what’s the reality of tariff levels? The cherry-picking approach emphasizes particular products where tariffs are high, and as can be seen in the examples above there are still a few of these “tariff peaks,” including some imposed by the U.S. But with so much variation on tariffs by product, an average tariff level is more informative. Unfortunately, it can be difficult to get an accurate picture of this (as discussed here). Here’s a sampling of a few countries and the EU (explanations to follow): 

As you can see, the table has three categories of average tariffs. That’s because measuring tariff levels is not that easy and there are several different methodologies. The “simple average” in the first column takes all of the tariff levels set out in a country’s tariff schedules and averages them. But that figure can be misleading. For example, with some products, there might not be much trade even without a tariff in place, so counting a high tariff in the average is misleading.

The second and third columns — the first from the World Bank, and the second from the WTO and two other organizations, using different methodologies — look at tariffs applied on actually traded goods. But that can be misleading too, because a 100% tariff might eliminate all trade, and therefore a high, trade-retricting tariff would not show up in the figures.

The best approach I can see here is to provide both kinds of figures, which is what I’ve done in the table. Taking all of these tariff figures into account, it can be hard to come up with a precise ranking, but you can see that New Zealand and Australia are the low tariff leaders. The U.S., EU, Canada, Japan, and Switzerland come next, clustered closely together. Mexico has tariffs that are a bit higher. Then come China and Brazil with even higher tariffs.

One important point to note is that these are the generally applied tariffs, but some of these countries have FTAs with each other, under which special lower tariffs apply (the World Bank averages are the only ones that take into account lower FTA tariffs). For the U.S., that means NAFTA, under which almost all tariffs (dairy and peanuts, among others, excepted) are zero; the U.S. — Australia FTA; and various other FTAs.

The lower FTA tariffs lead to an important point. If you are on the Trump administration trade team, and you think foreign tariffs are too high, the solution is to negotiate trade agreements that lower them (in both directions). So far, unfortunately, that has not been their focus.

Former White House economist Gary Cohn expressed concerns yesterday that Trump’s tariffs would erode the benefits from tax reform. Since the on-again-off-again 25 percent tariffs on imports from China are—as of 3:23pm, Friday, June 15, 2018—“on again,” let me share this back-of-the-envelope analysis that shows why Cohn’s concerns are justified.

Certainly, the additional profits expected from the reduction in corporate rates from 35 to 21 percent could be entirely wiped out for the manufacturing sector. In 2017, according to Census Bureau data, the pre-tax profits of the U.S. manufacturing sector were $691 billion. At 35 percent, the taxes on paper would be $242 billion. At 21 percent, the average tax bill is $145 billion. So, roughly speaking, the reduction in rates is estimated to be worth about $97 billion in terms of 2017 profits.

Well, in 2017, the value of U.S. goods imports was $2.33 trillion. Commerce Department data show that half of that value was comprised of intermediate goods (raw materials, production inputs, capital equipment)—the purchases of producers, not households. In other words, approximately $1.17 trillion of imports are U.S. costs of production.

If a tariff of, say, 10 percent were imposed on these imports, the cost of production for manufacturers would rise, roughly speaking, by $117 billion. That’s a $117 billion reduction in profits. Meanwhile, assuming foreign governments responded in kind and hit U.S. exports with 10 percent tariffs, manufacturing revenues also would take a hit. U.S. exports of manufactured goods in 2017 amounted to $1.24 trillion. Again, roughly speaking, that 10 percent tariff would reduce U.S. manufacturing revenues by $124 billion. That, too, reduces profits.

The combined effect of the increased costs and reduced revenues comes to a $241 billion reduction in profits (a 35 percent reduction in manufacturing’s 2017 pre-tax profits). So, ceteris paribus, a 10 percent across-the-board tariff would reduce the U.S. manufacturing sector’s profits by about 35 percent. With that kind of “downturn” in profitability, from where would the resources come to make capital investments, build new production facilities and R&D centers, and to offer new employment opportunities?

Let’s apply this ball park estimate to the actual situation on the ground. The tariffs Trump has already imposed or announced (steel and China tech products—leaving out aluminum, washers, and solar panels) subject $100 billion of imports to tariffs of 25 percent. The retaliation so far announced (by China, Canada, Mexico, and the EU) is commensurate—it will be approximately 25 percent on $100 billion of U.S. exports. So, at the moment, $200 billion of U.S. trade is in the crosshairs.

But a new Trump investigation into the national security implications of auto and auto parts imports could add another $600 billion of trade to the mix—$300 billion of imports hit with 25 percent duties and $300 billion of retaliation. The president wants to get the investigation completed before the election in November, so we could be up to $800 billion of U.S. trade by year’s end. (That’s 20 percent of all U.S. goods trade, by the way.) 

So, 25 percent duties assessed on $800 billion of trade, approximately half of which would be U.S. manufacturing inputs and U.S. manufactured exports comes out to a combined $100 billion hit on the sector’s profits (25 percent of $400 billion). That eclipses the $97 billion gain from the corporate rate reduction.

While this is all bad news for the economy, I wonder whether the tax-reform advocates who held their noses and excused Trump’s trade transgressions because tax reform would make everything right will start to speak out. Paging Larry Kudlow, Steve Moore, and Art Laffer.

Many of you are probably suffering from tariff fatigue right now. Every day, there is a new tariff in the news. Tariffs on Canada, tariffs on the EU, tariffs on China; tariffs on industrial products, tariffs on agricultural products; retaliatory tariffs by Canada, the EU and China; tariffs in effect today, tariffs going into effect soon. It’s hard to keep track of it all.

The latest is the announcement from USTR today of U.S. tariffs to be imposed on $34 billion of Chinese imports on July 6:

The Office of the United States Trade Representative (USTR) today released a list of products imported from China that will be subject to additional tariffs as part of the U.S. response to China’s unfair trade practices related to the forced transfer of American technology and intellectual property. 

On May 29, 2018, President Trump stated that USTR shall announce by June 15 the imposition of an additional duty of 25 percent on approximately $50 billion worth of Chinese imports containing industrially significant technologies, including those related to China’s “Made in China 2025” industrial policy. Today’s action comes after an exhaustive Section 301 investigation in which USTR found that China’s acts, policies and practices related to technology transfer, intellectual property, and innovation are unreasonable and discriminatory, and burden U.S. commerce. 

…

The list of products issued today covers 1,102 separate U.S. tariff lines valued at approximately $50 billion in 2018 trade values. This list was compiled based on extensive interagency analysis and a thorough examination of comments and testimony from interested parties. It generally focuses on products from industrial sectors that contribute to or benefit from the “Made in China 2025” industrial policy, which include industries such as aerospace, information and communications technology, robotics, industrial machinery, new materials, and automobiles. The list does not include goods commonly purchased by American consumers such as cellular telephones or televisions.

This list of products consists of two sets of U.S tariff lines. The first set contains 818 lines of the original 1,333 lines that were included on the proposed list published on April 6. These lines cover approximately $34 billion worth of imports from China. USTR has determined to impose an additional duty of 25 percent on these 818 product lines after having sought and received views from the public and advice from the appropriate trade advisory committees. Customs and Border Protection will begin to collect the additional duties on July 6, 2018.

The second set contains 284 proposed tariff lines identified by the interagency Section 301 Committee as benefiting from Chinese industrial policies, including the “Made in China 2025” industrial policy. These 284 lines, which cover approximately $16 billion worth of imports from China, will undergo further review in a public notice and comment process, including a public hearing. After completion of this process, USTR will issue a final determination on the products from this list that would be subject to the additional duties.

Trying to divine the Trump administration’s true intent with regard to all of its various tariffs is a challenge. One view is that the administration is just negotiating, and it believes it can get the best deal by threatening tariffs, as this will cause our trading partners to offer more in the negotiations. In this view, a threat of duties to be imposed on July 6 is supposed to induce China to make more significant concessions in the ongoing negotiations that have been taking place on the various trade practices noted by USTR above.

There’s not much evidence that negotiating trade agreements in this way is effective, especially with a larger economy like China. In fact, it may make a successful negotiation more difficult. Other countries have their own politics to deal with, and no foreign leader wants to look weak by caving it to American pressure.

Another possibility is that the administration thinks it is good policy for the U.S. to impose tariffs, and while they may talk about negotiations, their real objective is to have higher tariffs. They know others will retaliate, but they think the U.S. wins on balance, maybe in part because they think manufacturing is more important than anything else, and the U.S. tariffs tend to be on manufactured products and related inputs, whereas the foreign tariffs are often on agricultural products.

If this is the adminstration’s intent, the economy may be in for a bumpy ride. The quantity of the imports subject to all of the Trump administration’s various tariffs is getting large (and may get much larger soon if they impose tariffs on auto imports), and the negative impact on the economy may, as Gary Cohn has acknowledged, become apparent once all the tariffs are in effect (the tariffs could even erase the gains from tax reform).

Things are looking pretty bleak right now for U.S. trade policy. Congress could and should step in here, but that does not look likely at the moment. Retaliation by U.S. trading partners might get the administration’s intention, but as noted, the administration may see all the additional tariffs as a win. In the end, the costs of all this to the U.S. economy will become apparent. In the meantime, all Americans will pay a price for whatever it is the administration thinks it is doing.

Some people are skeptical of taking specific statements President Trump makes too seriously/​literally, and I can understand why. Nevertheless, in the midst of mostly aggressive trade rhetoric, every now and then he calls for more trade liberalization. This is from Trump’s Saturday press conference at the G7 meeting:

Q Mr. President, you said that this was a positive meeting, but from the outside, it seemed quite contentious. Did you get any indication from your interlocutors that they were going to make any concessions to you? And I believe that you raised the idea of a tariff-free G7. Is that —

THE PRESIDENT: I did. Oh, I did. That’s the way it should be. No tariffs, no barriers. That’s the way it should be.

Q How did it go down?

THE PRESIDENT: And no subsidies. I even said no tariffs. In other words, let’s say Canada — where we have tremendous tariffs — the United States pays tremendous tariffs on dairy. As an example, 270 percent. Nobody knows that. We pay nothing. We don’t want to pay anything. Why should we pay?

We have to — ultimately, that’s what you want. You want a tariff-free, you want no barriers, and you want no subsidies, because you have some cases where countries are subsidizing industries, and that’s not fair. So you go tariff-free, you go barrier-free, you go subsidy-free. That’s the way you learned at the Wharton School of Finance. I mean, that would be the ultimate thing. Now, whether or not that works — but I did suggest it, and people were — I guess, they got to go back to the drawing and check it out, right?

…

In fact, Larry Kudlow is a great expert on this, and he’s a total free trader. But even Larry has seen the ravages of what they’ve done with their tariffs. Would you like to say something, Larry, very quickly? It might be interesting.

MR. KUDLOW: One interesting point, in terms of the G7 group meeting — I don’t know if they were surprised with President Trump’s free-trade proclamation, but they certainly listened to it and we had lengthy discussions about that. As the President said, reduce these barriers. In fact, go to zero. Zero tariffs. Zero non-tariff barriers. Zero subsidies.

It’s hard to know what to make of this “free-trade proclamation,” because reducing trade barriers is what many other countries have been promoting, and Trump keeps resisting. That’s what TPP was, and that’s what NAFTA is. So how is everyone supposed to react to his call for such broad trade liberalization? One possible reaction, which may or may not be productive, is that the other G7 leaders should accept his proposal, publicly endorse it, and suggest a date to begin negotiations. 

The Canadians can do this in the context of the NAFTA talks. The EU could propose new transatlantic trade talks. Japan could remind Trump about the TPP, or agree to bilateral talks. (And everyone seems to accept that subsidies have to be negotiated multilaterally, so maybe the better idea is to propose that this all be done at the WTO, rather than through bilateral talks.)

Unfortunately, I don’t think there is much hope of convincing Trump and his trade team that their view of trade deficits is misguided (we can line up a thousand economists to explain why it is misguided, but it won’t change their minds). However, I can imagine that talk of specific tariffs, barriers, and subsidies could be helpful here. Those do exist and are a problem. Trump may genuinely believe there is an imbalance, with Canadian, EU and Japanese tariffs, trade barriers, and subsidies far outweighing U.S. ones. A negotiation would be an opportunity to show him the reality. When he points to Canadian agriculture tariffs, the Canadians can point to U.S. agriculture subsidies. When he points to European auto tariffs, the Europeans can point to U.S. truck tariffs. And then they can keep going down the list: Buy America procurement policies, the Jones Act, barriers to trade in legal and medical services, anti-dumping abuses, etc.

Now, I’m not saying there is a great chance of success on any of this. Most likely, the best we could hope for is that these talks go about the same as other talks, with a little progress on a few tariffs, trade barriers, and subsidies. That’s the nature of these things. But Trump just called for going “tariff-free,” “barrier-free,” and “subsidy-free,” and it seems to me that taking him up on this may be better than the alternative, which right now looks like it could be escalating tit-for-tat tariffs.