Washington Insider -- Monday

Ignoring Services in Trump's Trade Arguments

Here’s a quick monitor of Washington farm and trade policy issues from DTN’s well-placed observer.

US Chamber Of Commerce Warns Against Tariffs on China

Tariffs being mulled by the Trump administration against China on intellectual property issues are opposed by the U.S. Chamber of Commerce, and would amount to a "tax" on U.S. consumers, according to President and CEO Thomas Donohue. “The administration is right to focus on the negative economic impact of China’s industrial policies and unfair trade practices," Donohue said, "but the U.S. Chamber would strongly disagree with a decision to impose sweeping tariffs.

Simply put, tariffs are damaging taxes on American consumers." Tariffs on $30 billion in Chinese goods would "wipe out over a third of the savings American families received from the doubling of the standard deduction in tax reform. If the tariffs reach $60 billion, which has been rumored, the impact would be even more devastating." Further, the situation could result in a damaging trade war "with serious consequences for U.S. economic growth and job creation. The livelihood of America’s consumers, businesses, farmers, and ranchers are at risk if the administration proceeds with this plan."

Donohue called on the administration to not take the tariff route, but work with businesses to resolve the "real and justifiable concerns raised by Chinese trade practices.”

Trump Steel, Aluminum Tariff Impacts Surface in Senate Infrastructure Hearing

Questions regarding the impact of new steel and aluminum tariffs on various sectors of the economy were fielded to Commerce Secretary Wilbur Ross during testimony at a Senate Commerce Committee hearing on infrastructure March 14.

Ross was questioned about what the Trump administration's thinks are likely trade retaliatory moves by U.S. trading partners following the imposition of tariffs on metal imports. He responded that there had been “very lively discussion of the potential for retaliatory tactics” that “went on for hours.” Still, he acknowledged there are challenges when trying to model what the impact of retaliatory tariffs applied to certain goods would on the overall U.S. economy.

Ross singled out the proposal made by the European Commission that could affect $3.5 billion worth of U.S. exports. That amount, he observed, is “two-tenths of one percent” of U.S. gross domestic product (GDP). Even so, sales of the affected products in the EU is not likely “go to zero in any event," he added.

“So, the problem is using retaliatory tactics in the broad-brush sense doesn't really get you anywhere,” Ross said. “We have to see—we'll be hearing soon enough, as the thing evolves, what kinds of retaliation people might have in mind, and whether or not they have the authority to do it.”

Washington Insider: Ignoring Services in Trump's Trade Arguments

The press made a big deal recently over President Donald Trump's claim that he lied to the Canadians about the U.S. trade deficit with Canada. However, little by little, the media seems to be beginning to realize that the administration is sometimes not so much mischaracterizing simply ignoring significant parts of trade. For years, reports of trade imbalances have focused on part of the U.S. trade profile. Now a few reports are broadening their view, at least some of the time.

For example, the New York Times said recently that “you probably work in the service sector. This seems like a safe assertion, as 84% of private-sector jobs in the United States are in services.” In fact, goods jobs like logging, mining, construction and manufacturing account for only 20.5 million jobs last month, in a nation with 148 million total positions.”

So, the Times argues that it is likely that “you and 105 million fellow service workers — a very broad category that includes retail clerks, truck drivers, architects, bankers, doctors and more — may largely have been ignored as the administration considers the trade economy and “your economic fate.”

The most recent reason to question the way trade policies are being designed came after the President’s repeated recent assertion that the United States maintains a trade deficit with Canada — a claim contradicted by United States government data, the Times says. Trump’s spokeswoman, Sarah Huckabee Sanders, said in a Twitter message that numbers showing a trade deficit with the country “reflect trade in goods.” In other words, it’s true the United States runs a trade deficit with Canada as long as you don’t include service industries — the industries that account for the vast majority of jobs.

In fact, the president “has made this mental leap many times, most notably by referring to the nation’s $800 billion trade deficit with the rest of the world.” That number refers only to trade in goods, not counting the United States’ healthy surplus in services trade.

The Times asserts that this practice risks trade negotiators following the president’s lead and focusing entirely on obtaining more advantageous treatment for American goods-producing industries—a strategy that “could come at the cost of concessions that damage industries that employ far more people.”

Then, the Times digs into the question of what are these “service-related jobs and exports” that help put the United States’ trade relationships somewhat more in balance?

The biggest is travel, which accounted for $204 billion last year. This is an area that the president should know well. When a Canadian couple stays in a Trump hotel in New York, the money they spend counts as a U.S. service export.

The next biggest category is “charges for the use of intellectual property,” a category that includes foreigners who pay to watch movies or music made in the United States, as well as licenses of patents and trademarks.

Other big ones include financial services, insurance, telecommunications and information technology, and a wide range of engineering and other consulting services.

If you have a mental model in which the only valuable jobs involve making steel or mining coal, it’s easy to lose sight of some of the middle-income jobs that are more common in the 21st-century service economy, among other things. Examples include the blackjack dealer in a Las Vegas casino, the nurse at a hospital renowned for its cancer treatments, the audio technician on a movie set, the engineer who advises companies worldwide on the best way to extract oil—and many more.

NYT says that the share of global spending that went toward services rather than goods rose from 50% in 1970 to 80% in 2015 and cites a recent paper by the Federal Reserve. Those service-producing jobs are more the economic present than most types of goods-producing jobs. And all signs point to that being increasingly true in the future.

Of course, the specific profile of total trade is well known—and, the administration is planning trade actions against China for some of its companies’ theft of American firms’ intellectual property. However, it might be reassuring “if the president himself acknowledged more readily that there’s more to a modern economy than making physical stuff,” the Times says.

However, it admits that “some of these categories are a little arbitrary.” For example, a worker in a Campbell’s Soup factory works in manufacturing and when that soup is shipped to Canada it counts as an export of goods. If that same worker instead made soup in a restaurant that sold it to a Canadian tourist, it would become a service export instead.

But for that great majority of people who work in service industries, it might be reassuring if the president himself acknowledged more readily that there’s more to a modern economy than making physical stuff, NYT opines.

In fact, the overall concept of “trade balance” that is used widely by the administration to evaluate trading relationships is considered misleading by many economists, especially when it excludes important categories. For example, the imposition of tariffs on steel and aluminum seems to be much more complex than when it was initially considered, and the secondary impacts from “retaliation policies” have not yet begun to appear. Clearly, the trade policy debate is much more complex than some officials assumed, and it demands much more scrutiny from producers as the new rules are implemented, Washington Insider believes.

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