Trump’s Tariff Gambit: A Political Win, an Economic Minefield for the Philippines

 

What the circus ringmaster really wants is an iron-clad mechanism – already being developed by his team – that unilaterally imposes whatever level of tariffs Trump may come up with on whatever excuse: could be to circumvent “current manipulation”, to counter a value-added tax, on “security grounds”, whatever. And to hell with international law. For all practical purposes, Trump is burying the WTO—Pepe Escobar  

In this issue

Trump’s Tariff Gambit: A Political Win, an Economic Minefield for the Philippines

I. Introduction: A Tariff with Two Faces

II. Trump’s Sweeping Tariffs: A Policy of Chaos: The Rise of Regime Uncertainty

III. U.S. Stock Market Meltdown Echoes the Smoot-Hawley Era and the Great Depression

IV. The Tariff’s Double-Edged Sword: For the Philippines, Relative Tariffs Represent a Political Win, But a Formidable Economic Challenge

V. Fallout from Tariffs: An Uncertain Future: Tariffs May Deter Investment in the Philippines

VI. Shaky Foundations: Why the Consumer Economy Isn’t Immune

VII. Financial Fragility: Historic Savings-Investment Gap, Record Debt, and Dollar Dependence

VIII. Intertemporal Impact or Short-to-Longer Term Impact on the Philippine Economy

IX. The US Dollar’s ‘Triffin Dilemma’: Global Risks and Philippine Challenges

X. Conclusion: Winnowing the Political Chaff from the Economic Wheat 

Trump’s Tariff Gambit: A Political Win, an Economic Minefield for the Philippines 

Will the Philippines benefit from Trump's sweeping tariff reforms? The realities of the existing economic and political structure suggest otherwise. 

I. Introduction: A Tariff with Two Faces

Figure 1

On April 9, 2025, the United States imposed a 17% tariff on Philippine goods—a lighter burden compared to Vietnam’s 46% or Cambodia’s 49%. The Philippines was listed among the 'worst' tariff offenders against the US. (Figure 1, upper table) 

At first glance, this appears to be a political victory, offering the Philippines a chance to attract investment and outshine its ASEAN neighbors in a global trade war. 

Some experts even argue that because the Philippines is a consumption-driven economy, it would be less affected by the ongoing trade war, potentially insulating it from the worst of the fallout.

However, a closer examination reveals a far more challenging reality.

The Philippines faces deep-seated vulnerabilities: a heavy reliance on trade (42% of its 2024 GDP), a chronic savings shortage that hampers investment, and global risks that could destabilize the U.S.’s dollar dominance.

As the Philippines navigates this turbulent landscape, its ability to transform this political advantage into economic gains hinges on addressing these structural weaknesses amidst an uncertain global economic horizon.

II. Trump’s Sweeping Tariffs: A Policy of Chaos: The Rise of Regime Uncertainty 

On April 3, 2025, President Trump declared a national emergency, citing the U.S.’s $1.2 trillion goods trade deficit in 2024 as a threat to national and economic security. This declaration, invoking the International Emergency Economic Powers Act (IEEPA), allowed the administration to impose reciprocal tariffs without Congressional approval, including a baseline 10% tariff on all countries. 

The Trump administration’s formula for these reciprocal tariffs—(trade deficit ÷ imports) ÷ 2—serves as a proxy for what they deem “unfair” trade practices.

This approach, however, oversimplifies the intricate politics of global merchandise trade. The U.S. trade deficit is not merely a result of unfair practices but a symptom of deeper structural dynamics, including the U.S. dollar’s role in the Triffin Dilemma, global easy money policies, various mercantilist practices by numerous nations and more.

The absurdity of using a one-size-fits-all metric like the trade deficit to define “unfair practices” is starkly illustrated by the Trump administration’s decision to impose tariffs on the remote Antarctic outpost of Heard and McDonald Islands. Inhabited primarily by penguins and seals, and unvisited by humans for nearly a decade, this territory faces tariffs despite a complete absence of economic activity.

Ironically, nations like Cuba, North Korea, Belarus, and Russia were exempted from these tariffs due to the absence of bilateral trade with the U.S., a result of existing sanctions. 

The Trump administration’s aggressive tariff regime has pushed U.S. effective tariff rates beyond those of the Smoot-Hawley era, a period infamous for exacerbating the Great Depression. (Figure 1, lower chart) 

As Cato’s Grabow, Lincicome and Handley recently wrote, "The result appears to be the highest US tariffs since 1909, already ten times the size of those in place before Trump took office and at an average rate exceeding even that imposed by the infamous Smoot-Hawley Act, which is widely blamed for prolonging the Great Depression."  (Cato, 2025) [bold added]        

This drastic policy shift—a potential abrupt reversal of globalization—introduces significant Regime Uncertainty (Higgs 1997), defined as the perceived lack of protection for property rights due to the unpredictability of government policies and institutional frameworks.

Regime uncertainty distorts economic calculations, obscuring the ‘hurdle rate’—the minimum return required to justify investment in viable projects.

Or it discourages investment by creating an opaque economic horizon where businesses cannot reliably predict future costs, revenues, or risks.

Figure 2

Measured as a trade policy uncertainty metric, regime uncertainty has rocketed to an all-time high, signaling a profound shift in the global economic landscape that could have far-reaching consequences for countries like the Philippines. (Figure 2) 

III. U.S. Stock Market Meltdown Echoes the Smoot-Hawley Era and the Great Depression 

It is hardly surprising that last week’s U.S. stock market meltdown—the largest two-day wipeout in history—serves as a stark symptom of these policy-induced uncertainties.

The regime uncertainty plaguing the economic horizon heightens the risk of profound economic weakness, disrupting supply chains, amplifying hurdles for capital flows and Foreign Direct Investment (FDI), magnifying credit delinquencies, and prompting path-dependent responses from central banks—involving "policy easing" to counteract economic slowdowns, which could also fuel inflation risks.

In combination, these factors raise the specter of a global recession or even a financial crisis.

Given the historic highs in global debt and leverage—amounting to $323 trillion as of Q3 2024, or 326% of global GDP, according to the Institute of International Finance—a stagflation-induced financial crisis could render the 2008 Global Financial Crisis a proverbial ‘walk in the park.’ 

Is history rhyming? 

David R. Breuhan offers a historical parallel: "The stock market collapse began on Oct. 28, 1929, as news spread that the Smoot Hawley Tariff Bill would become law. The front-page New York Times article read: ‘Leaders Insist Tariff Will Pass.’ Although the tariff bill didn’t become law until June 1930, its effects were felt eight months prior. Markets reacted immediately, as they discount future earnings. Most economists blame the gold standard for the crash, but this analysis misses the forward-looking nature of the human mind, which is the market itself. Markets need not wait for earnings to decrease due to imminent policies that will result in future losses. Hence the rapid nature of the crash. The use of leverage in the 1920s exacerbated the crash. Margin calls were made, further cascading the markets." (Breuhan, 2024) [bold added]

The parallels are striking. Today’s markets, burdened by high leverage and global debt, are reacting to the uncertainty of Trump’s tariff regime, much like they did to Smoot-Hawley nearly a century ago.

For the Philippines, this global financial instability could exacerbate the economic challenges posed by the tariff, as investors may grow wary of emerging markets amid a potential global downturn. 

IV. The Tariff’s Double-Edged Sword: For the Philippines, Relative Tariffs Represent a Political Win, But a Formidable Economic Challenge

Figure 3

A chart of U.S.-Philippines trade from 1985 to 2024 reveals a persistent trade deficit, peaking at $7 billion in 2022, underscoring the high stakes of this trade war for the Philippines. (Figure 3, upper window)

Trump’s reciprocal tariff exposes the country’s vulnerabilities: a heavy reliance on trade (42% of 2024 GDP), a savings shortage that stifles investment, and global risks that could upend the U.S.’s dollar dominance.

The 17% tariff on Philippine goods, part of President Trump’s strategy to shrink the $1.2 trillion U.S. trade deficit, appears to be a political win at first glance.

Compared to Vietnam’s 46% or Cambodia’s 49%, the Philippines seems to have dodged the worst of this trade war. Mainstream analysts have spun this as an opportunity: with a lower tariff, the Philippines could attract investors looking to shift supply chains away from pricier neighbors. 

Philippine Trade Secretary Cristina Roque even called it a chance to negotiate a sectoral free trade agreement with the U.S., potentially boosting market access. For a country eager to stand out in ASEAN, this lighter tariff feels like a rare edge.

But the economic reality paints a far more daunting picture. 

The Philippines faces formidable structural hurdles that could blunt this political advantage.  Here are some examples. 

1. Energy costs, for instance, are among the highest in the region at $0.20 per kWh—double Vietnam’s $0.10—making manufacturing less competitive (International Energy Agency, 2024). 

2. Regulatory complexity adds another layer of difficulty: the Philippines ranks 95th globally in the World Bank’s Ease of Doing Business Index, trailing Vietnam (70th) and Indonesia (73rd), with bureaucratic red tape often delaying investments. 

3. Human capital represents another significant hurdle. While the tariff matches Israel’s 17%, the Philippines lacks Israel’s robust R&D ecosystem to export high-tech goods like medical equipment, leaving it reliant on lower-value sectors such as electronics assembly and agriculture. 

Israel invests 6.3% of its 2023 GDP in R&D, one of the highest rates globally, compared to the Philippines’ meager 0.324%, limiting its ability to compete in advanced industries. 

These constraints mean that even a “favorable” tariff doesn’t automatically translate into economic gains—investors may still look elsewhere if the cost of doing business remains prohibitively high. 

The tariff’s silver lining hinges on the Philippines overcoming these challenges, but deeper vulnerabilities lurk beneath the surface. 

High trade exposure and financial-fiscal constraints threaten to turn this political win into an economic missed opportunity, as the country grapples with the fallout of a global trade war. 

V. Fallout from Tariffs: An Uncertain Future: Tariffs May Deter Investment in the Philippines 

The regime uncertainty introduced by Trump’s tariff policy creates an opaque economic horizon, deterring investments even in a country like the Philippines, which some argue is insulated due to its consumption-driven economy (72.5% of its 2024 real GDP). 

However, this narrative overlooks the fundamental economic principle encapsulated in Say’s Law: "supply enables demand" (Newman 2025) or "production precedes consumption." (Shostak 2022) 

The 17% tariff directly threatens this dynamic by reducing demand for Philippine exports, which totaled $12.14 billion to the U.S. in 2024, accounting for 16.6% of total exports. (Figure 3, lower graph) 

Analysts estimate a direct annual loss of $1.6–1.89 billion, cutting income for workers in export sectors like electronics and agriculture, and thus curbing their spending power. 

Nota Bene: These estimates reflect only the direct impact, ignoring the epiphenomenon from complex feedback loops, such as secondary and the nth effects on supply chains, employment, and consumer confidence, which could amplify the economic toll. 

Government data further disproves the notion of immunity.

Figure 4

The share of goods exports and imports in 2024 GDP was 42% (13.8% exports, 28.1% imports), a significant exposure for a supposedly consumer-driven economy. This means trade disruptions hit hard, affecting both production (exports) and consumption (imports of goods like electronics and food). (Figure 4, topmost image) 

Excluded from this discussion are exports and imports of services. If included, exports and imports in real GDP would account for 64.2% of the 2024 GDP! (Figure 4, middle graph) 

AP Lerner (1936) highlighted the mutual dependence of exports and imports in trade economics. A decline in exports limits foreign exchange earnings, which in turn reduces the ability to finance imports. This creates a ripple effect, showcasing the interconnected nature of international trade. 

Even the service sector, a key income source through business process outsourcing (BPO, contributing 8.5% of 2024 GDP), isn’t safe. 

U.S. firms, facing their own tariff costs (e.g., 46% on Vietnam), might cut back on outsourcing to the Philippines, further denting income. 

The opaque economic horizon—marked by unclear earnings projections and obscured hurdle rates—adds to the reluctance to deploy investments. 

Businesses, unable to accurately forecast returns amidst this uncertainty, are likely to delay or cancel projects, from factory expansions to new market entries, exacerbating the Philippines’ economic challenges. 

VI. Shaky Foundations: Why the Consumer Economy Isn’t Immune 

The consumer economy narrative also ignores the role of debt. 

Household debt has skyrocketed to Php 2.15 trillion in 2024, up 24.26% from 2023, with credit card debt alone rising 29.65% year-on-year. But this borrowing isn’t free—high interest rates strain budgets, which comes on top of the loss of purchasing power from inflation. 

Consumer loans as a percentage of NGDP soared to a record 11.7%, while consumer loans relative to consumer NGDP also reached a historic high of 15.32% in 2024. 

In contrast to other developed economies, the Philippine banking sector’s low penetration levels have concentrated household debt growth within higher-income segments. This phenomenon heightens concentration risk, as financial stability becomes increasingly reliant on a limited, affluent demographic. 

Despite this debt-fueled spending, GDP growth slackened to 5.2% in the second half of 2024, down from 6.1% in the first half, while annual core CPI (excluding food and energy) fell from 6.6% in 2023 to 3% in 2024, signaling weak demand. 

Clearly, “free money” hasn’t spruced up the economy. 

Add to this the uncertainty facing export and import firms, which could lead to job losses, and a looming U.S. migration crackdown that threatens remittances—$38.34 billion in 2024, or 8.3% of 2024 GDP, with 40.6% from the U.S. (Figure 4, lowest pie chart) 

If Filipino workers in the U.S. face deportations, remittances could slash household spending, especially in rural areas. 

This could add to hunger rates—which according to SWS estimates—in Q1 2025 have nearly reached the 2020 pandemic historic highs. 

Far from immune, the Philippines’ consumer economy is on shaky ground, vulnerable to both domestic and global pressures. 

VII. Financial Fragility: Historic Savings-Investment Gap, Record Debt, and Dollar Dependence 

The Philippines’ economic challenges are compounded by a chronic savings-investment gap that severely limits its ability to adapt to the tariff. 

Domestic savings are a mere 9.3% of 2024 GDP, while investments stand at 23.7%, creating a staggering 14% gap that forces reliance on volatile foreign capital, such as remittances ($38 billion) and FDI ($8.9 billion in 2024). 

These inflows, however, are increasingly uncertain amid rising global trade tensions. 

This savings scarcity is primarily driven by fiscal pressures. Government spending has soared to 14.5% of GDP, fueled by post-COVID recovery efforts and infrastructure projects, pushing national debt to Php 16.05 trillion (60.72% of GDP) in 2024.

Figure 5

External debt grew 9.8% to USD 137.63 billion, surpassing the country’s gross international reserves (GIR) of USD 106.3 billion—a figure that includes external public sector borrowings deposited with the Bangko Sentral ng Pilipinas (BSP). (Figure 5, topmost diagram) 

The external debt service burden surged 15.6% year-on-year to a record USD 17.2 billion in 2024, pushing its ratio to GDP to the highest level since 2009.  (Figure 5, middle window) 

To finance this ballooning debt, the government borrows heavily, crowding out private investment. 

Banks, holding Php 5.54 trillion in government securities in 2024 (net claims on the central government), prioritize lending to the government while directing credit to riskier private sectors—consumers, real estate, and elite firms—rather than promoting finance to manufacturing or SMEs, which are crucial for adapting to the tariff through innovation or market diversification. 

Not only through deposits, banks have been net borrowers of public savings via the capital markets. In 2024, the banking system’s bills and bonds payable swelled 30.9%, from Php 1.28 trillion in 2023 to Php 1.671 trillion. 

Meanwhile, non-bank sectors, competing for the same scarce savings, also face high interest rates, creating a significant roadblock to investment. 

High fiscal spending also fuels inflation. The Philippine CPI posted 6% in 2023, above the central bank’s 2–4% target. This acts as an inflation tax, eroding household savings as rising costs (e.g., food prices up 20%) force families to spend rather than save. 

Though the CPI dropped to 3.2% in 2024, the fiscal deficit remains near pandemic highs, exacerbating financial pressures.

With banks, the government, and businesses all vying for limited funds, the Philippines struggles to finance the reforms needed to turn the tariff’s political edge into economic gains, such as the CREATE MORE Act’s incentives to lower energy costs and attract investors.

Moreover, uncertainties from the tariffs put at risk the rising systemic leverage (total bank lending + public debt), which rose 11.13% year-on-year in 2024 to Php 29.960 trillion—accounting for 113% of 2024 NGDP! (Figure 5, lowest graph) 

Worse, potential weakness (or a recession) in GDP could spike the fiscal deficit, necessitating more debt, including external financing, which further strains the demand for foreign exchange. 

The Philippines’ dependence on dollars for its external debt and imports makes it particularly vulnerable to global shifts in dollar availability, a risk amplified by the tariff’s broader implications. 

VIII. Intertemporal Impact or Short-to-Longer Term Impact on the Philippine Economy 

The tariff’s impact on the Philippines unfolds over time, with distinct short-term and long-term effects. 

In the short term (0–2 years), the estimated $1.6–1.89 billion export loss, combined with a potential remittance drop, should add pressure on the peso (already at 57.845 in 2024), translating to higher inflation and squeezing consumers. 

Job losses in export sectors like electronics and agriculture, coupled with credit constraints from the savings gap, limit the government’s ability to cushion the blow. GDP growth, already down to 5.2% in the second half of 2024, could dip further, missing the government’s 6–8% target for 2025. 

Over the longer term (3–10+ years), there’s potential for growth if the Philippines leverages reforms like the CREATE MORE Act, which offers power cost deductions and tax breaks to attract investment. 

However, all these take time, effort, and funding, which—unless there is clarity in the economic horizon—could offset whatever gains might occur.

Figure 6 

Philippine trade balance has struggled even in anticipation of the passage of the CREATE Act. (Figure 6, topmost image)

The BSP’s USDPHP implicit cap or ‘soft peg regime’—which subsidizes the USD—has played a significant role, contributing to surging imports and external debt (previously discussed here). This policy, while stabilizing the peso in the short term, exacerbates the trade deficit and increases reliance on foreign capital, making long-term growth more challenging. 

The savings gap and fiscal pressures make this a steep climb. Without domestic capital, the Philippines remains vulnerable to global capital flow disruptions, which could derail its long-term economic prospects. 

The interplay of these factors underscores the need for a strategic, holistic, and sustained approach to economic reform—one that tackles both immediate challenges and structural weaknesses. 

However, given the tendency of popular politics to prioritize the short term, this vision may seem far-fetched. 

IX. The US Dollar’s ‘Triffin Dilemma’: Global Risks and Philippine Challenges 

These disruptions tie into broader global risks, starting with the Triffin Dilemma. 

The Triffin Dilemma, named after economist Robert Triffin, highlights a fundamental conflict in the U.S.’s role as the issuer of the world’s reserve currency. To supply the world with enough dollars to meet global demand, the U.S. must run current account deficits. 

The Triffin Dilemma arises because running persistent deficits to supply dollars undermines confidence in the dollar’s value over time. If deficits grow too large, foreign holders may doubt the U.S.’s ability to manage its debt (U.S. national debt was $34.4 trillion in 2024, or 121.85% of GDP), potentially leading to a shift away from the dollar as the reserve currency. (Figure 6, middle graph)

Conversely, if the U.S. reduces its deficits (e.g., through tariffs), it restricts the global supply of dollars, which can disrupt trade and financial markets, also eroding the dollar’s dominance. 

The U.S. dollar’s role as the world’s reserve currency (58% of global reserves) relies on constant U.S. trade deficits to supply dollars globally. (Figure 6, lowest chart)

The U.S.’s $1.2 trillion deficit in 2024 does just that, supporting its “exorbitant privilege” to borrow cheaply and fund military power. 

But tariffs, by aiming to shrink this deficit, reduce the dollar supply, risking the dollar’s dominance. If countries shift to alternatives like the Chinese yuan (2.2% of reserves) or euro (20%), the U.S. faces higher borrowing costs, potentially curbing military spending ($842 billion in 2024), while the Philippines struggles to access dollars for its USD 191.994 billion external debt and trade deficit in 2024. This could weaken the peso further, raising costs and inflation. 

Meanwhile, if other nations like China or the EU liberalize trade in response, alternative markets could emerge. 

The Philippines might redirect exports to China (which posted a $992 billion surplus in 2024) or leverage the EU-Philippines FTA, but this risks geopolitical tensions with the U.S., its key ally, especially amid West Philippine Sea disputes. 

An “iron curtain” in trade, investments, and capital flows looms as a worst-case scenario, further isolating the Philippines from the global capital needed to bridge its savings gap. The potential erosion of the U.S.’s military presence in the Indo-Pacific, due to financial constraints, could also embolden China, complicating the Philippines’ strategic position. 

X. Conclusion: Winnowing the Political Chaff from the Economic Wheat

While the 17% U.S. tariff on Philippine goods seems to offer a political edge, the economic reality tells a different story.

The regime uncertainty from Trump’s bold tariff regime exposes internal fragility brought about by high trade exposure, a savings-investment gap, and fiscal-financial constraints.

The consumer economy isn’t immune, as export losses, rising debt, and remittance risks threaten investments and spending power.

Global risks, like the erosion of the U.S.’s dollar privilege through the Triffin Dilemma, could further limit the Philippines’ adaptability.

Over the long term, reforms like the CREATE MORE Act could unlock growth, but only if the Philippine government acts swiftly to boost savings by further liberalizing the economy, reforming exchange rate policies, and supporting these efforts with a material reduction in fiscal spending.

Trump’s tariff is a wake-up call: though the drastically shifting tides of geopolitics translate to the need for flexible policymaking ideally, the sunk cost of the incumbent economic structure operating under existing policies hinders this process.

‘Resistance to change’ that works against vested interest groups—such as entrenched political and business elites who benefit from the status quo—will likely pose a significant obstacle too.

As such, drastic changes in the economic and financial climate raise the risk of a recession or a crisis, particularly given the Philippines’ high systemic leverage and dependence on foreign capital.

The next step may be to throw a prayer that Trump eases his hardline stance, offering a reprieve that could buy the Philippines time to adapt to this new global reality. 

___

References 

Colin Grabow, Scott Lincicome, and Kyle Handley, More About Trump’s Sham “Reciprocal” Tariffs, April 3, 2025 Cato Institute 

Robert Higgs, Regime Uncertainty, 1997 Independent.org 

David R. Breuhan A Brief History of Tariffs and Stock Market Crises November 4, 2024, Mises.org 

Frank Shostak, Government “Stimulus” Schemes Fail Because Demand Does Not Create Supply, July 26, 2022, Mises.org 

Jonathan Newman, Opposing the Keynesian Illusion: Spending Does Not Drive the Economy, January 21, 2025 

A. P. Lerner, The Symmetry between Import and Export Taxes, 1936 Wiley jstor.org 

Has the Decline of the US Steel Industry been about Wages?

The following has not been meant to be a blog post, but a reply to a dear "mercantilist" friend who stubbornly insists that the US Steel industry’s decline has been solely due to "high" wages which require the "inflation" or the Keynesian "money illusion".

Since I am not an expert of the steel industry, I based the following from a variety of studies to debunk such “fallacy of a single cause” political absurdity

I am posting this to share with others, as well as, for my personal reference too. 

The idea that the steel industry has been primarily about high wages is simply not a reality.

The Peterson Institute of International Economics suggested that long years of government interventionism has prompted for the declining competitiveness of the industry

Interventionism in History:

Steel trade has been in turmoil since the late 1960s. Without exaggeration, more Washington trade lawyers work on steel disputes than any other trade issue. To recap the trade saga:

-In 1968, US steel producers filed a series of countervailing duty cases against subsidized European steel- makers. These cases led to “voluntary restraint agreements” that were terminated when the global steel market recovered in 1974.

-In 1977, US steel producers filed a series of antidumping cases primarily aimed at Japanese steel firms. These cases led to a system of minimum reference prices for steel imports, known as the “trigger price mechanism” (TPM). The TPM system was soon extended to European steel.

-In 1974 and 1979, at both the launch and the ratification of the Tokyo Round of multilateral trade negotiations, the US antidumping law was amended (at the insistence of the steel industry and to conform with the Tokyo Round Antidumping Code), making it easier for domestic producers to prevail in antidumping cases.

-In 1982, dissatisfied with the workings of the TPM system, US steel producers filed many antidumping and counter- vailing duty cases. These were resolved by new voluntary restraint agreements, which lasted until 1992.

-In the mid-1980s, trade remedy cases were filed against “new” exporters, such as Brazil and Korea. Most of these cases resulted in high antidumping and countervailing duty penalties.

-In 1989, the United States launched an effort to negotiate a Multilateral Steel Agreement designed to abolish subsidies. The negotiations failed and were ultimately abandoned in 1997.

-In 1992, when the voluntary restraint agreements expired, a new set of trade remedy cases were filed. Many of the resulting penalty duties remain in effect today.

-In March 1999, the House of Representatives passed H.R. 975, Congressman Peter Visclosky’s (D-IN) steel quota bill, 289 to 141. After a spirited debate, bill was defeated in the Senate. The current round of steel trade initiatives essentially renews the 1999 debate.

Why so much trade turmoil? One reason is persistent overcapacity in the global steel industry abetted by widespread market distortions. Persistent overcapacity has translated into cyclically falling prices and industry losses in every business slowdown. Another reason is the combination of rapid productivity growth and slow demand growth. Wheat farmers and steel workers share two traits: both have greatly increased their output per worker-year and both face sluggish demand for their products. The result is a painful secular decline in employment. These forces—in an effort to cushion the domestic steel industry—have provoked a series of rearguard trade actions.

The Unintended Effects from Peterson

Market Distortions

In a normal industry, prolonged operating losses will weed out weak firms. Ideally, steel firms with the highest costs would be the first to close. But the real world is far from ideal. Many plants have closed and steel employment has plummeted. In the United States alone, over the last three years, 18 steel firms went bankrupt and about 23,500 workers lost their jobs. However, it is not production costs but rather market distortions that often determine the global “exit order” of struggling firms. Moreover, these distortions prolong the agony of failing firms by stretching the duration of depressed prices for the whole industry.

One such distortion is cartel practices—private arrangements that enable some steel producers to maintain high prices in their home markets and sell abroad at low prices. Another distortion is public subsidies used to cover huge fixed costs (debt burdens, pension benefits, etc.). The United States is not the worst sinner when it comes to market distortions, but it is hardly free of guilt. Federal guarantee programs totaling several billion dollars have absorbed the pension responsibilities of some bankrupt steel firms and staved off bankruptcy for others.

As a result of these distortions, the least efficient firms are not necessarily the first to close their doors and the industry as a whole sheds its excess capacity at a very slow pace.

Same observation from Cuts International

No different from the Heritage Foundation

The overproduction of steel is due to government intervention in the marketplace. Steel producers, left to themselves, have an incentive to produce only what consumers demand. Otherwise, they would be adding needless costs to their operations. When government intervenes and offers subsidies or other protections, normal market incentives are altered. Government subsidies thus may encourage a steel firm to produce more steel even if it exceeds consumer demand.

Subsidies are a common practice in the steel industry, both around the world and in the United States. For example, the American Iron and Steel Institute reports that between 1980 and 1992, foreign steel manufacturers received over $100 billion in subsidies. In the United States, the steel industry was the beneficiary of more than $1 billion in federal loan guarantees in 2001. When an industry produces more than consumers demand, the surplus puts downward pressure on the price of the product and makes it difficult for firms to earn a profit. As recently as January 10, 2002, even though the price of hot-rolled steel was rising, it was still being sold below cost.

Homegrown problems are another reason why the U.S. steel industry is suffering. Prior to 1968, the year the steel industry began receiving government protection from foreign competition, average compensation in the industry was roughly equal to the average in the manufacturing sector. Today, the average total compensation for the steel industry is $37.91 per hour--56 percent higher than the average compensation in the manufacturing sector. One of the principal reasons for this high average compensation is that the steel industry's very strong unions, without the threat of foreign competition, are able to negotiate high compensation packages for employees.

Harvard School’s Crimson Staff who wrote against the Bush era Protectionist tariff resonates

In defending the administration’s decision, U.S. Trade Representative Robert B. Zoellick said, “The global steel industry has been rife with government intervention, subsidies and protection,” and explained that the American response served to counter the protectionism of other governments. In order to equalize trade opportunities, the administration should not raise America’s trade barriers, but rather continue to break down the barriers of other countries. American tariffs will only lead to retaliatory tariffs, which will weaken the international free market economy and possibly lead to a trade war.

Failure to adapt with technological changes has also been a factor:

From the US Bureau of Labor and Statistics Technology and its effect on labor in the steel industry

Advancement in a technology led to productivity boom that led to a decline in employment

Again from the BLS:

From Multinational Monitor.org or “Fifteen Years of Neglect Have Left the Industry in Crisis - And Thousands of Workers Without Hope”

Since the early 1970s, when Japan became the world's leading steel producer, the industry has followed a policy of disinvesting in low-profit operations and diversification into oil and other industries. U.S. Steel has led the way: once the nation's largest industrial corporation, its share of the market has dropped from 75 percent in 1906 to around 20 percent today; and its major mills at Gary, Indiana, and Fairfield, Alabama were constructed at the turn of the century.

Instead of rebuilding, the industry has relied on outdated technology. According to Ira C. Magaziner and Robert B. Reich in their recent book Minding America's Business, the industry "made small, incremental investments to obtain `cheap' capacity rather than make the larger, more aggressive, and riskier investments that could have led to superior productivity.

A 1986 MIT paper analysis the significance of technology

This paper exemplifies a techno-economic-strategic analysis in which key characteristics of technologies are first analyzed, economic consequences are then derived, and strategic implications are followed. Additionally, it demonstrates how technological innovations coupled with critical fixities of a firm can partially explain the entry, exit, and performance of firms in the U.S. steel industry. Because of the reluctance of existing firms to switch to new technologies, entrants using these new technologies entered the low carbon steel market and earned an extra profit. The existing integrated firms would rather have suffered accounting losses than replace their obsolete equipment as long as the cash flow remained positive.

From a 2012 Princeton Paper by Allan Collard-Wexler and Jan De Loecker Reallocation and Technology: Evidence from the U.S. Steel Industry

There is extensive evidence that large gains in productivity can be attributed to reallocation of resources towards more productive plants. This paper shows the role of technology and competition in the reallocation process for the American Steel industry. We provide direct evidence that technological change can itself bring about a process of resource reallocation over a long period of time and lead to substantial productivity growth for the industry as a whole. More specifically, we find that the introduction of a new production technology spurred productivity growth through two channels.

First, the entry of minimills lead to a slow but steady drop in the market share of the incumbent technology, the vertically integrated producers. As minimills were 11 percent more productive, this movement of market share between technologies is responsible for a third of productivity growth in the industry.

Second, while the new technology started out with a 25 percent productivity premium, by the end of the sample, minimills and vertically integrated producers are very similar in terms of efficiency. This catching-up process of the incumbents came about from a large within reallocation of resources among vertically integrated plants. On the other hand, minimills productivity grew moderately, and almost entirely because of a common shift in the production frontier.

As as consequence of productivity growth, prices for steel products fell rapidly, though at different rates for those products which minimills could produce, versus those they could not. Markups decreased substantially, reflecting that prices fell more rapidly than production costs. This indicates increased competition for U.S. steel producers, which further drove increases in productivity.

The Economist went against Bush steel tariffs and cited the puffed up high costs from labor union privileges of “legacy liabilities”

Tariffs fail to address the real problem—high costs, including “legacy liabilities” in health-care and pension benefits. Many companies will fold anyway. When they do, putting workers out of a job and rendering those promised benefits null, the tariffs will only make the victims, as consumers, even worse off than they would have been

Failure to address inefficiencies through bankruptcy laws are another:

From Cato’s Dan Ikenson’s How Subsidies and Protectionism Weaken the U.S. Steel Industry

Some say that industry consolidation is necessary, but that significant legacy costs are preventing mergers and acquisitions. That may be true, but consolidation is not the only alternative for eliminating inefficient capacity. Attrition works too. Attrition works if the inefficient firms are liquidated in bankruptcy, and their assets are auctioned to the highest bidders.

The largest obstacles to attrition are subsidy programs like the Emergency Steel Loan Guarantee Program, unrealistic unions seeking to prevent shutdowns, and the U.S. trade remedy laws. Inefficient operations need to be retired, and this can be accomplished only if market signals are not distorted by these interferences.

When an operation is inefficient and losing money, access to investment naturally dwindles. Attempts to mitigate this outcome perpetuate the root problem. Although its expansion is being considered under different legislation pending in Congress, the Emergency Steel Loan Guarantee program should be abolished

The Living Economics says in Blocked Exit that a combination of the above have prompted for the decline in competitiveness of the US Steel Industry

In a mature industry with a saturated market such as steel, demand comes largely from replacement of existing products and normal growth. Generally, existing capacity that was inherited from the phase of explosive growth is much more than is necessary for current demand. Ideally, market competition should eliminate higher-cost producers in favor of lower-cost producers. However, all steel-producing countries have tried to preserve their production capacity regardless of cost efficiency considerations. In the U.S., for example, many factors have helped to delay consolidation of its steel industry:

First, U.S. bankruptcy laws have unnecessarily delayed the steel industry consolidation process. Although 28 U.S. steel companies have filed for bankruptcy since 1997, including the nation's third and fourth largest, not many have actually gone out of business altogether. Chapter 11-bankruptcy protection often keeps the incumbent creditors at bay while allowing the bankrupt companies to receive new loans to continue production.

In addition, the huge retiree benefit liabilities of weak companies have deterred potential acquisition by stronger companies. In an extraordinary bid to salvage the industry, USX-U.S. Steel Group proposed buying its troubled competitors Bethlehem Steel Corp., National Steel Corp. and Wheeling-Pittsburgh Corp. in early December 2001. But the $13 billion retiree healthcare and pension liabilities of the acquisition targets have stalled the consolidation process.

Even weak steel companies may have out-sized political clout. The industry remains big in swing states of presidential elections such as Pennsylvania, Ohio and West Virginia, where a good portion of 600,000 retired steelworkers live. It is understandable that these states want to preserve the steel companies and their suppliers that provide local and state taxes and jobs.

The idea that high wages alone has been the culprit for the dearth of competitiveness that merits either protection or inflation as a solution has simply been unfounded and wishful thinking, bereft of reality.

This of course, has raised by the great dean of Austrian school of economics, Murray N. Rothbard, who dismissed the impact of inflation and other forms of protectionism to solve what is a politically engendered problem.

On inflationsim…

And every week at his Philadelphia salon, the venerable economist Henry C. Carey, son of Matthew and himself an ironmaster, instructed the Pennsylvania power elite at his "Carey Vespers," why they should favor fiat money and a depreciating greenback as well as a protective tariff on iron and steel. Carey showed the assembled Republican bigwigs, ironmasters, and propagandists, that expected future inflation is discounted far earlier in the foreign exchange market than in domestic sales, so that the dollar will weaken faster in foreign exchange markets under inflation than it will lose in purchasing power at home. So long as the inflation continues, then, the dollar depreciation will act like a second "tariff," encouraging exports as well as discouraging imports.

…as well as other nonsensical interventionists excuses:

The arguments of the steel industry differed from one century to the next. In the 19th century, their favorite was the "infant industry argument": how can a new, young, weak, struggling "infant" industry as in the United States, possibly compete with the well-established mature, and strong iron industry in England without a few years, at least, of protection until the steel baby was strong enough to stand on its two feet?

Of course, "infancy" for protectionists never ends, and the "temporary" period of support stretched on forever. By the post-World War II era, in fact, the steel propagandists, switching their phony biological metaphors, were using what amounted to a "senescent industry argument": that the American steel industry was old and creaky, stuck with old equipment, and that they needed a "breathing space" of a few years to retool and rejuvenate.

One argument is as fallacious as the other. In reality, protection is a subsidy for the inefficient and tends to perpetuate and aggravate the inefficiency, be the industry young, mature, or "old." A protective tariff or quota provides a shelter for inefficiency and mismanagement to multiply, and for the excessive bidding up of costs and pandering to steel unions. The result is a perpetually uncompetitive industry. In fact, the American steel industry has always been laggard and sluggish in adopting technological innovation--be it the 19th-century Bessemer process, or the 20th-century oxygenation process. Only exposure to competition can make a firm or an industry competitive.

So there you have it, so while wages may have been a factor, it has been miniscule compared to the myriad political interventionism (subsidies, protection, inflation and etc…), the dearth bankruptcy laws, trade unions, and other political influences (lrentseeking, cartels etc…) which have prevented the US steel industry from adjusting to market forces, as evidenced by the failure to embrace technological advances.

Yet the proposed solution of more interventionism will only wound up in worsening of the current status.

For protectionists, the story has always been the same; address the symptoms and not the disease with the more of the same prescription that led to the disease.

Other references:

-Stefanie Lenway, Randall Morck and Bernard Yeung Rent Seeking, Protectionism and Innovation in the American Steel Industry

-ITA.doc.gov The U.S. Steel Import Crisis Global Steel Trade: Structural Problems and Future Solutions

-Wikipedia.org History of the steel industry (1850-1970)

World Economic Trend: Mercantilism or Globalization?

To paraphrase a recent comment I received from a mercantilist: Because of the US dollar standard, mercantilism have been more prevalent today.

It is easy to dismiss such an argument as post hoc fallacy since two distinctive variables have been made to function as causally related. Nevertheless let us see from a few charts and graphs whether this claim has validity, even if we exclude the role of the US dollar.

To rephrase the issue: Has the world economic trend been more about mercantilism or globalization?

According to Google’s Public Data World merchandise trade as % of GDP has ballooned from a little less than 20% in 1960s to about nearly half of the world's economy today.

Even trade balance of services, again from Google Public Data, based on OECD economies volume has leapt sixfold since 1996.

Above is the breakdown of global trade per sector in 2010 (World Trade Organization)

Add to the current dynamic the dominance of intra-region trade

One major reason for the surge in global trading activities has been due to major moves to LIBERALIZE trade via substantial reductions tariffs which came from Regional Trade Agreement (RTA), Multilateral Trade Negotiations (MTN) and or even unilateralism (WTO)

Bilateral investment treaties peaked in 1995 but the effects of these are still being felt today through massive growth in cross border investments

While there have been some protectionist pressures as consequence to the financial crisis of 2008, generally speaking trade liberalization has been minimally affected.

From IMF Finance 

The number of new protectionist actions peaked in the first quarter of 2009 and bottomed in the third quarter of 2010. However, recent GTA data suggest that protectionist measures are increasing again; protectionist actions in the third quarter of 2011 alone were as high as in the worst periods of 2009 (Evenett, 2011).

The Group of 20 (G20) advanced and emerging economies account for most of the trade measures, most of which did not involve tariffs, imposed since 2008. There has been no significant increase in the overall use of tariffs or temporary trade barriers, such as antidumping measures, aimed at assisting local firms injured by import competition (Bown, 2011). Such measures affected only about 2 percent of world trade (Kee, Neagu, and Nicita, 2010; WTO, 2011). The trend of gradual tariff liberalization observed since the mid-1990s has not been affected

The World Trade Organization (WTO) notes of the recent increases in Non-Tariff Measures (NTM). But these have been based on technical barriers to trade (TBT) regarding standards for manufactured goods and sanitary and phytosanitary (SPS) or measures concerning food safety and animal/plant health, and partly domestic regulation in services which have hardly been about restricting competition.

From the WTO,

“I think it is a good time for the WTO to have a closer look at non-tariff measures (NTMs)”, said WTO Director-General Pascal Lamy, at the launch of the Report. “A clear trend has emerged in which NTMs are less about shielding producers from import competition and more about the attainment of a broad range of public policy objectives. The new NTMs, typically SPS and TBT measures but also domestic regulation in services, address concerns over health, safety, environmental quality and other social imperatives. The challenge is to manage a wider set of policy preferences without undermining those preferences or allowing them to become competitiveness concerns that unnecessarily frustrate trade.”

The above trends seems quite clear. Globalization has been the dominant theme of the world economy over the past decades, regardless or in spite of the role of the US dollar.

Now of course, events of the past may not extrapolate to the future. 

Bottom line: The religion of politics makes many people see fantasies as self constructed reality.