Political Economy of Protectionism - a short illustration

[The Minsky Moment]

To start - an article about one of Trump's possible picks for Commerce: http://nypost.com/2016/11/19/possible-commerce-head-ross-knows-how-to-deal-with-china/

Back in 2002, with the US steel industry in tatters, Ross agreed to buy the assets of bankrupt steel maker LTV Corp. . . .His team asked [then-Commerce Secretary] Donald Evans if there would be more protectionist measures and he said absolutely," said the source of Ross and his colleagues.

Less than a month after Ross bought LTV, President George W. Bush imposed tariffs on imported steel that raised the prices about 20 percent — arguably saving the distressed steel industry in the United States.

The move, of course, angered many US manufacturers that purchased steel. . .

Ross made a fortune.

His firm sold International Steel Group in 2005 to Lakshmi Mittal for $4.5 billion — half in cash and half in stock — pocketing a profit of more than 12 ¹/₂ times its investment, according to media reports at the time.

#diverttheswamp

Making investments in distressed private equity is risky but can be very lucrative.  By definition, the value (purchase cost) of equity in a distressed company is very low.  Of course there is a risk it goes to zero.  But if there is a turnaround, there can be enormous gains.  It's a game where you can control your downside loss and buy cheap options and huge gains.

Now in the normal course executing a turnaround takes lots of work.  Unless of course, you have a fine friend in Uncle Sam who helps you tilt the field.

Those steel tariffs helped the industry and in the short run some steelworkers probably kept their jobs for a few more years.  But the real winners here were the equity investors who literally made billions for doing nothing except a little lobbying.  Trade protectionism at its essence is a rent seekers game and the big winners are always the big players. 

THen there are the costs.  Tariffs are a tax, so the cost of steel goes up.  And who gets hurt by that?  All the companies that buy steel - i.e. the car companies, the construction industry, heavy manufacturing - plus their workers, and the people that buy those products in the form of cars, apartments, plane trips etc.  But those costs are harder to see and add up precisely, so they get ignored politically.

But it doesn't end there.  In the short run, Detroit is screwed and has to pay more for steel.  But next model cycle, they start using less steel and using more aluminum.  And where is aluminium manufactured?  Why, China of course.  So America loses out again.  Manufacturers use less steel, demand for US steel output declines.  And pretty soon we are back where we started, the US steel industry on the ropes again.

And what is the proposed solution?  Why more tariffs of course.  Wash, rinse, repeat. 

Cui bono?  People like Trump or like the people who voted for him? 

[Jacob]

Seems like whatever coterie of oligarchs coalesce around Trump - including the younger Trumps - are set to make a lot of money.

[Zanza]

When you read how many billionaires are considered and interviewed for jobs in the administration, you have to expect more of these cases in the future.

[CountDeMoney]

Just imagine the bullet we dodged keeping Corrupt Hilary and the Clinton Foundation out of there, though.  I mean, whew.

[MadImmortalMan]

Seems like whatever coterie of oligarchs coalesce around Trump - including the younger Trumps - are set to make a lot of money.

If we know this, how do we invest? Might as well get some coattail money. 

[The Minsky Moment]

Oil and gas services is a good start.  Already up but probably not probably fully priced in yet.

[derspiess]

Just imagine the bullet we dodged keeping Corrupt Hilary and the Clinton Foundation out of there, though.  I mean, whew.

[CountDeMoney]

MAH PRETTY

[The Minsky Moment]

Guy in the OP is the pick for Commerce

[Admiral Yi]

Can't do any damage there.