Monday , December 17 2018
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What’s worse than tariffs?

Summary:
Quotas.This morning's Wall Street Journal "Trump postpones steel tariff decision.." starts optimisticPresident Donald Trump eased trade pressure on top U.S. allies Monday, giving the European Union and some nations outside the bloc more time to negotiate deals that would exempt them from U.S. steel and aluminum tariffs..But it turns out those "deals" are worse than the ...

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Quotas.

This morning's Wall Street Journal "Trump postpones steel tariff decision.." starts optimistic
President Donald Trump eased trade pressure on top U.S. allies Monday, giving the European Union and some nations outside the bloc more time to negotiate deals that would exempt them from U.S. steel and aluminum tariffs..
But it turns out those "deals" are worse than the original
The Trump administration is backing broad restrictions on the trade of metals to limit the direct and indirect effects of Chinese steel and aluminum production on the U.S. market. “In all of these negotiations, the administration is focused on quotas that will restrain imports, prevent transshipment, and protect the national security,” the White House said in a statement. 
Quotas are worse than tariffs. With a tariff, you can at least measure and limit the damage. Imported steel pays a tax, and then costs 25% more.  But you can import as much of the stuff as you need, and the damage is limited to a 25% price rise.

(On that word. Free traders should insist on "import tax" rather than "tariff" to remind taxophobic Republicans just what they are doing.)

With a quota, by contrast, the price difference can get as big as it wants and so the damage can grow unbounded. Moreover, it's harder to see -- you have to look at exchange-rate adjusted price indices which people can ignore as one more government statistic. When you pay 25%, you see it.


Finally, with an import tax, our perpetually cash-strapped government gets the revenue. With a quota, the lucky foreign firms that get to sell get the full price difference as profit. Changing a 25% tariff to a quota that results in the same amount of imports sends that 25% as a direct cash transfer from the U.S. Treasury to the foreign firms. It also empowers the foreign government to impose a little cartel among their producers to decide who gets the goodies.

The White House got one thing right -- "prevent transshipment." It has dawned on them that steel is a pretty homogenous commodity. But even that won't work unless every country agrees to quotas. Ah, "broad restrictions" here we come.

This trade salvo was excused initially as a bluff to force freer trade on China and good bilateral free trade deals around the world. This is the opposite -- a global managed trade in which governments collude to specify quantities that their pet industries may sell at large profits around the world.
South Korea...accepted limits on exports, often called “voluntary export restraints,” and won a long-term tariff exemption... the White House said Monday a final agreement had been reached.
They are also called illegal if domestic companies do it. Coordinated voluntary output restrictions are exactly what anti-trust law is supposed to prevent. And then the profits at least go to US firms not to Korean ones!
One sticking point is whether European allies will accept quotas on their metals exports, something they resisted, and which they said violated rules of the World Trade Organization.
Alas, the Europeans seem to be instead following us down this insane road. 
The European steel industry has already felt the fallout of U.S. tariffs. Big exporters to the U.S.—countries like Brazil, Turkey, Russia, South Korea, Egypt and China—have ramped up exports to the European market to avoid American trade barriers, dragging down prices for domestic producers.
Steel imports in the EU rose 300,000 metric tons to 2.9 million tons in the first quarter of 2018, versus the same period a year ago, according to Eurofer. The European Commission, the bloc’s antitrust regulator, is considering whether to impose safeguards to prevent a surge of imports.
The ultimate irony will be when anti-trust regulators get into the business of enforcing collusion, output reductions and higher prices.
John H. Cochrane
In real life I'm a Senior Fellow of the Hoover Institution at Stanford. I was formerly a professor at the University of Chicago Booth School of Business. I'm also an adjunct scholar of the Cato Institute. I'm not really grumpy by the way!

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