I started to write a blog post critical of an article by Lawrence Solomon, in Canada’s Financial Post, titled “Remember Trump’s supposedly ‘lose-lose’ trade war? He’s winning, China’s losing.” (Financial Post, January 11, 2019.)
I thought he was making a basic mistake. I was wrong. It was my mistake. But you will see why the title above is not ideal, given the conclusion I’ve now come to.
Here’s what I wrote at first:
He’s half right.
China is losing. And Solomon gives the economic data to support that claim. We don’t even need to look at the data: the best the data can do is give us a better idea of the magnitude of the losses. But even without the data, we would expect a major exporter to lose when a major importer of its products imposes tariffs on its products. That’s basic economics. You don’t even have to understand international trade to understand this. All you have to understand is trade, period. Voluntary exchange benefits both parties. So when a government, whether the Chinese government or the U.S. government, taxes that trade, it makes both parties to the putative exchange worse off.
But notice what I just said: it makes both parties worse off. Who is the other party? American consumers.
I guess you could parse the title of Solomon’s piece and point out that he didn’t say that America is winning; all he said is that Trump is winning. But if you read the piece, you see that he clearly meant that America is winning. If you have any doubt, look at the last sentence of his article:
Contrary to the conventional wisdom, this trade war is anything but lose-lose. This one is a big win for the U.S.
So how does Solomon support that? How could it be that, in this case, tariffs actually help the U.S. economy? Solomon does a sleight of hand. He points to how well the U.S. economy is doing, giving correct data on the low unemployment rate and the increase in employment. That is good news. But it doesn’t address whether the Trump taxes on trade are helping the U.S. economy. It simply shows that despite those taxes, the economy is doing well.
And Solomon seems to know that. Otherwise, why would he write this?
While China’s demise and America’s rise can’t all or even mostly be attributed to Trump’s tariffs, the tariffs clearly hurt China’s economy more than America’s. For one thing, the “tax” that tariffs represent has mostly been paid by China. According to a recent policy brief from EconPol Europe, a network of researchers in the European Union, U.S. companies and consumers will pay only 4.5 per cent of the 25-per-cent tariffs on US$250 billion of Chinese goods, with the other 20.5 per cent falling on Chinese producers.
Hurting “China’s economy more than America’s” is not the same thing as helping America’s economy. Someone gives you and me an option. I get to destroy 20.5 cents of yours and in return I destroy 4.5 cents of mine. How much am I helped?
To be fair, I should point out that he does immediately add the following:
The EconPol report found that the Trump administration selected easily replaced products, forcing China’s exporters to cut selling prices to keep buyers. “Through its strategic choice of Chinese products, the U.S. government was not only able to minimize the negative effects on U.S. consumers and firms, but also to create substantial net welfare gains in the U.S.,” the authors determined, adding that the tariffs will accomplish Trump’s goals of lowering the trade deficit with China.
OK. Got it? That’s what I wrote. Then I thought I had better check the policy brief from EconPol Europe. I’m glad I did. It has changed my mind.
I hasten to add that it has not changed my mind about whether tariffs on China are a good idea. But it has changed my mind about whether Solomon can say that the United States is a net gainer from those tariffs.
I thought about losses to U.S. consumers versus gains to U.S. producers. It’s clear that the losses exceed the gains.
But what entity did I leave out? The U.S. government, which gets revenues from those tariffs.
Here’s the key paragraph of the study, Benedikt Zoller-Rydzek and Gabriel Felbermayr, “Who is Paying for the Trade War with China,” EconPol Policy Brief, November 11, 2018:
We compute the total economic effect of import tariffs as the sum of the red and green areas in Figure 1. This can be interpreted as the monetary value that Chinese firms and US consumers would be willing to (jointly) pay to avoid these tariffs. The aggregate welfare losses in China and the US are around USD 1.6 billion. Only about one third, or USD 522 million, of these losses are sustained by US consumers (green triangle in Figure (1), while the remainder falls to Chinese exporting firms. To evaluate the total welfare effects for US consumers and firms, we have to consider potential tariff revenues. Most of the tariff incidence falls on Chinese firms. It is their declining profit margins that would pay for a large share of the tariffs, i.e. the red rectangle in Figure 1. These tariff revenues can be used to compensate for the welfare losses of US consumers. In total, the tariff revenues of the tariffs introduced by President Trump amount to USD 22.5 billion, of which USD 18.9 billion are to be paid by Chinese firms. This implies net welfare gains of USD 18.4 billion for US consumers.
The authors, by the way, are following standard cost/benefit analysis principles plus using a national rather than international framework: adding up dollar gains and subtracting dollar losses, all for American residents.
Essentially what they have discovered is what in the economics literature is called an “optimal tariff.” It’s a tariff designed to make the residents of the country whose government is imposing it better off.
HT2 Janet Bufton.
READER COMMENTS
Benjamin Cole
Jan 16 2019 at 8:29pm
In general, taxes are a bad idea. So which taxes do the least harm?
Taxes on productive behavior, such as payroll or income taxes?
Or taxes on consumption, such as tariffs?
Yes, perhaps some capital goods should be exempt from tariffs. Other than that, I say lay the tariffs on thick and heavy, and lighten payroll taxes.
Matthias Goergens
Jan 17 2019 at 1:55am
Taxes on land rent do the least damage. Next up are those on behavior we’d want to discourage anyway.
Taxing consumption via tariffs is pretty inefficient. (But I see the argument that if you manage to tax foreigners you don’t care about, inefficiencies will be damned.)
Benjamin Cole
Jan 17 2019 at 1:42am
Add on:
•Add “http” to front to activate link•
://www.econpol.eu/sites/default/files/2018-11/EconPol_Policy_Brief_11_Zoller_Felbermayr_Tariffs.pdf
The study above in question is interesting in another light: The free-trade crowd usually accuses the Trump Administration of levying tariffs in reaction to domestic producers—that is, simple crony capitalism.
The study above says the Trump Administration shrewdly selected imports that were largely supply-inelastic—that is, China would eat the tariffs to keep the market.
The study also finds net welfare benefits of such tariffs to Americans. Americans do not lose less, they outright win.
I wonder if the study does not give Trump a little too much credit. That is, given huge and hyper-competitive global supply chains, the levying of import tariffs usually will be eaten by exporters, across the board. They can eat the tariffs, or lose market share.
Warren Buffett suggests as much when he advocates importers bid for the right to import to the US.
I iike free-trade theory. But when any social science theory is sacralized, it becomes a theology.
The US may be better off with import tariffs.
Mark Z
Jan 17 2019 at 2:06am
Does the Zoller-Rydzek and Gabriel Felbermayr paper take into account the effects of Chinese retaliatory tariffs on US consumption? They mention Chinese retaliation in their text once, but their figures all seem to refer to the effect of US import tariffs specifically. Or does “after the increase in US tariffs” also mean “after Chinese retaliatory tariffs” as well?
Also, by the administration’s owned standard of deferring to the stock market, 2018 was a worse year than 2017 or 2016 and we ought to conclude the tariffs aren’t so great, right?
David Henderson
Jan 17 2019 at 9:54am
As far as I can tell, it doesn’t. And in the literature on optimal tariffs–I’m thinking Jagdish Bhagwati in the 1960s–this is one of the damning criticisms of the whole idea of optimal tariffs. They typically assume no retaliation.
Jon Murphy
Jan 18 2019 at 11:16pm
@David-
That critique is even older. That goes back to the original argumentation. In Wealth of Nations, Smith anticipated something akin to an optimal tariff and one of his criticisms of it (and activist tariff policy in general) is the retalitory nature of governments. I’m quite sure Mill discussed it in his analysis of the tariff. I know Nassau hammers it home in his contemporary critique of Torrens.
Retaliation is a death knell for “optimal tariffs.” One of many.
Warren Platts
Jan 19 2019 at 1:44am
Jon, there is literally nowhere in Wealth of Nations where Adam Smith discusses terms of trade effects of tariffs.
And there is only one passage where he discusses retaliatory tariffs as an effort to get the foreign country to reduce its own tariffs. He concluded that if there is little or no chance that the retaliatory tariff will compel the foreign country to reduce their own tariffs, then there is no point in the retaliatory tariff.
Thus, if Smith’s advice were taken seriously on a worldwide basis, then advocates of an optimal tariff would not have to worry about retaliation!
Your depiction of Torrens, moreover, is backwards. Torrens was not arguing that in a world of universal free trade that a country could screw over its trading partners with optimal tariffs. That was never the point.
Rather, the starting point was the reality of a world filled with tariffs. In such a world, the one unilateral free trader will see welfare losses. This is about the most basic economic theory there is. As I said here before, both Irwin and McCloskey documented welfare losses when the United Kingdom instituted unilateral free trade.
When the USA first began instituting unilateral free trade, the welfare loss was considered a feature, not a bug. That was the whole point of the New International Economic Order. For geopolitical reasons, the USA figured it would be worth it to accept a loss (to be borne by the working class of course) in net national welfare in order to bring a few billion of the world’s poor out of abject poverty. The thinking was that such a world would be more stable and the the USA would benefit as a result.
Leaving aside China, which is using its gains from trade in order to prepare to fight a war with us, the plan pretty much worked. But let us be clear: the unilateral free trade was never intended to increase U.S. net welfare. That line is a recent invention.
Harry Hawk
Jan 19 2019 at 10:32pm
Exactly what I was thinking. Once all sides are considered only then the situtation be fully evaluated. This could include long term changes in trading relationships. The US embargo of Cuba benefitted Sugar producers in Haiti, Phillipines, Etc.
My hypothesis: a net increase of taxes (tariffs) has to put a drag on consumption, and has to be price inflationary
Jon Murphy
Jan 17 2019 at 7:18am
From the article:
This conclusion does not hold from the given data. First off, the net welfare gain for consumers depends, as the article also says, on the tax revenue being used to compensate consumers for the higher prices they now face, which is not what’s going on. Secondly, it assumes no transaction costs. Given there are government agents that need to be paid, taxes collected, etc., even if all the tax revenue were used to compensate consumers, after factoring in all the administration and transaction costs, the remaining tax revenue would not necessarily be sufficient to cover the losses. Third, there is also the assumption of no rent-seeking (eg, firms spending resources to try to get exemptions from the tariffs). Fifth, it assumes no response by the Chinese government, something which we know is not true. Sixth, they don’t look at the opposite side of the coin, Chinese imports. If the US is consuming fewer Chinese products, the Chinese are also consuming fewer US products (this would be true even if it weren’t for their increased tariffs). Indeed, this point goes to my first point: we’re seeing the government compensate US exporters for their losses but not US consumers.
This is a great theoretical paper, but it ignores a lot of real-world effects and their conclusion is a lot stronger than the data and the theory allow.
David Henderson
Jan 17 2019 at 9:57am
You’re absolutely right. I wasn’t saying that their conclusion is correct. My point is more limited: they actually may have found an example in the real world of an optimal tariff. As I said, I think of them as doing standard cost/benefit analysis from a nationalistic viewpoint: toting up the costs and benefits to American residents. But they absolutely overstepped by saying that it’s a gain to U.S. consumers. It’s not.
My surprise was that they actually may have found an optimal tariff.
Warren Platts
Jan 18 2019 at 4:52pm
1. That is absolutely not the case. Net welfare is simply the sum of three variables: (a) net change in consumer surplus; (b) net change in producer surplus; (c) net change in tax revenue. Period. Compensation has nothing to do with it.
2. Tariffs are about the easiest taxes to collect. The customs agent looks at the manifest and then looks up the tax rate and then computes the tax bill. Easy peasy. Krugman makes the exact same point. It is literally in your textbook you use. Look it up. The transaction costs of income taxes are MUCH MUCH higher.
3. Free traders are also rent seekers. Everyone is a rent seeker. People that say they are not rent seekers are the best rent seekers.
5. So what? They need our dollars worse than we need their cheap goods. Moreover, the Chinese response actually proves the same optimal tariff theory mentioned in the European paper: a 25% tariff on American soybeans apparently caused a 20% decline in soybean prices. So a $100 bushel became an $80 bushel. $80 X 1.25 = $100. American farmers ate the entire cost of the Chinese tariff. Not surprising. Once the crop is planted, the supply is highly inelastic.
6. Again, so what? You guys are the ones who keep saying that exports are a “cost” and should be avoided. After all, exports raise prices for home consumers. So if the prices for imports go up somewhat, the prices for exportables will go down. Prices for plastic toys will go up. Food and energy prices will go down. It will basically be a wash as far as consumers are concerned.
Mark Z
Jan 18 2019 at 6:04pm
You’re wrong about 1. Tax revenue does not equate to increased consumer welfare. I think maybe you mean expenditure: that the revenue being collected is being spent somehow, which is increasing welfare . It is incorrect, however, to equate the government spending a dollar it raised from tariffs to a dollar spent by a consumer voluntarily in terms of welfare; the latter almost certainly increases welfare by less than the former. The government is liable to waste the additional revenue in a manner that is of maximum political benefit to the governing regime, rather than to maximize consumer welfare. As with fiscal multiplier, it is not sufficient that the measured dollars spent by the state exceed the measured cost to consumers; they must exceed it by more than the ‘wastage rate’ inherently associated with government spending.
That doesn’t mean the transaction costs are 0 or even negligible.
Familiarize yourself with the definition of ‘rent-seeking.
On #5: “They need our dollars worse than we need their cheap goods.” That’s debatable; and even if it’s true, that hasn’t prevented the Chinese government from retaliating, and thereby imposing costs on Americans. So either it’s not true, or the Chinese government cares more about appearances than the interests of its citizens, not unlike the American government.
On 6: So you don’t think we should export either? We should embrace autarky? And no, it’s not a wash. Exports may drive up domestic prices, but they increase revenue by an even greater amount; the very reason they’re being exported is because foreign prices are higher than domestic ones. This increase in domestic revenue allows for an increase in consumption greater in magnitude than the decline in consumption necessitated by the price increase. It does not all ‘net out.’
Warren Platts
Jan 18 2019 at 9:55pm
Let us be clear. When the authors of the European paper write of “net welfare gains of USD 18.4 billion for US consumers,” that is simply a bit of unfortunate editing on the part of persons for whom English is probably not their first language. In the context of the paper, it is apparent they are talking about national net welfare–not maximal consumer surplus. Immediately preceding that quote they write:
This is simply the standard tariff theory. In fact, US consumer surplus is reduced, but most of that is regained in increased producer surplus and tax revenue. The balance is a total efficiency (deadweight) loss of $1.6B, but only $0.5B of that is efficiency lost by US firms and consumers. Meanwhile, there is the huge terms of trade gain: that is the $18.9B in US tax revenue effectively paid by Chinese producers. National net welfare is the terms of trade gain minus the US deadweight losses: $18.9B – $0.5B = $18.4B. That is what they are talking about. Mr. Murphy above, at best, has merely pointed out a typo. A charitable reading is that the authors intended consumers qua US citizens, in which case they are exactly correct.
Jon Murphy
Jan 18 2019 at 10:49pm
Right. I was objecting to the conclusion which does not necessarily follow from their data. Indeed, the only way it can is if, as they note, the tax revenue is used to compensate the consumers, to my point.
This is an excellent point, Mark. The major problem with standard welfare analysis is that it treats a dollar as a dollar as a dollar, regardless of how it is spent. However, this is an example of what I like to call the “metric fallacy.” When introducing coercion and involuntary transaction into the mix, then what consumer surplus, producer surplus, and government revenue changes subtly but substantially. You are no longer measuring the same thing as in the free-market outcome. The dollar of government spending does not translate as a dollar of value added; that is merely assumed so in the model but in real life we know it is not the case (otherwise, why would coercion need occur? There is no market failure or common resource issues here). Value is subjective.
Thus, in a practical manner, one cannot call the optimal tariff, even if we assume its impossibly high necessary assumptions are met, welfare enhancing.
Warren Platts
Jan 19 2019 at 1:12am
Jon, you are completely missing the point. The conclusion is not that Trump’s tariffs result in net welfare gains for US consumers qua consumers-who-do-not-produce and/or consumers-who-do-not-pay-taxes. What they did was to simply apply the standard, “large-country”, if you will, model of tariffs, and concluded there was in your vocabulary, but not theirs, a national net welfare gain. Like I said, the paper would have benefitted from an American copy editor. However, if one simply gives the paper a charitable interpretation, there is no problem.
As for your criticism of net welfare calculations that “treats a dollar as a dollar as a dollar, regardless of how it is spent,” again, you are missing the point. The welfare enhancing effect of an optimal tariff is not how the tax money is spent, it is where the tax money comes from in the first place.
I get it. Everybody gets that the government is bloated and needs to be trimmed down. It is inefficient. But that is not the point.
Let us stipulate to the libertarian canard that all government (except that required to protect the property rights of the elite class, of course) should be eliminated, and that all taxation is theft.
In that case, the optimal tariff is STILL welfare enhancing at the national level because a dollar stolen from a Chinese is a dollar that does not have to be stolen from an American. It does not matter how inefficiently or efficiently the tax dollar is spent on government services. The fact remains that those government services are paid for by non-Americans. Therefore, the optimal tariff is necessarily welfare enhancing.
Hazel Meade
Jan 17 2019 at 10:09am
It’s like in the iterated prisoner’s dilemma – if you defect more than the other player, you win! (Even if you both would have gotten more points by cooperating.)
Neil S
Jan 17 2019 at 10:58am
Can Trump’s tariffs not be thought of as a move in a tit for tat strategy?
Rob Rawlings
Jan 17 2019 at 2:03pm
‘Essentially what they have discovered is what in the economics literature is called an “optimal tariff.” It’s a tariff designed to make the residents of the country whose government is imposing it better off.’
I’m a bit surprised this would be seen as such a rare thing. For any good with an elastic demand a tariff will fall more heavily on the producer, and it seems likely in such a situation that the revenue raised from the tariffs would exceed the losses to the consumer in the export market
Whether the optimistically of the tariff could be maintained beyond the short term is another matter as exporters would take steps that would tend to decreased exports and increase prices. This would reduce tariff revenue and increase consumer surplus loss and this might reverse the optimality.
Jon Murphy
Jan 17 2019 at 3:38pm
The rarity comes from the fact that the conditions you need to actually make it work are virtually impossible to come across. Even this case isn’t clear cut the tariffs are optimal (see my response above)
Rob Rawlings
Jan 17 2019 at 4:17pm
I agree with your comment above – particularly your point about likely retaliation. I am definitely anti-tariff !
I just meant that with relatively elastic goods it isn’t much of a stretch to imagine the revenue raised from the tariff will often exceed the consumer loss.
Jon Murphy
Jan 18 2019 at 10:55pm
Indeed it’s possible to imagine it. As a practical matter, however, it’s virtually impossible.
Rob rawlings
Jan 19 2019 at 1:02pm
I see no reason to think it would not be quite common – whether the revenue raised is used to alleviate the consumer loss, and how long before retaliation wipes out any net revenue benefit is another matter.
Jon Murphy
Jan 19 2019 at 3:51pm
If I may quote Adam Smith: “They whom we call politicians are not the most remarkable men in the world for probity and punctuality” (Lectures on Jurisprudence).
Tariffs are usually guided by some other consideration other than welfare enhancement: political reasoning, retaliation, lobbying, etc. Politicians tend to be guided by momentary affairs of state rather than principles. Indeed, I am a little less optimistic than Dave is here; I’m thinking they stumbled into this rather than actually calculated these tariffs.
Warren Platts
Jan 19 2019 at 6:44pm
Optimal tariffs–defined as when the terms of trade gains exceed national deadweight losses, thus boosting net welfare–are ubiquitous. Any time the price to the consumer does not go up by the full amount of the tariff, that mathematically entails that the price offered by the foreign producer goes down, and a terms of trade gain is thus realized. Jon Murphy is apparently thinking that the so-called “small-country” tariff model is the general case. But it is not: the small country model is a special case of the so-called large country model. (I say so-called because recent research has documented small countries extracting terms of trade gains through tariffs.) The small county model requires that the foreign supply is perfectly elastic–a condition that is almost never encountered in the real world.
Note that VATs generate even more terms of trade gains than do ordinary tariffs just because domestic production does not replace the imports to the same degree as in ordinary tariffs. No doubt that explains the surging popularity of VATs among countries all over the world: it is the main beggar-thy-neighbor policy allowed under WTO rules.
As for whether the tax revenue should be used to compensate consumers, to the extent they pay taxes, those taxes could be reduced, or the fiscal deficit could be reduced.
As for retaliation wiping out the gains, (a) for a country that is running a majorly large, chronic trade deficit, there is simply no way for the retaliation to wipe out the gains–it is mathematically impossible–the surplus countries would lose; and (b) going back to Robert Torrens original argument, in a world of tariffs and VATs, a country might as well leave its tariffs in place because if they are lowered, and the ROW does not reciprocate (and they never do) then the lowering of tariffs merely invites welfare losses. Better to be in the Nash equilibrium rather than the chump equilibrium where everybody else has defected leaving you holding the bag.
Warren Platts
Jan 18 2019 at 5:00pm
An outrageous mere assertion for which you have zero evidence! The theory is there, and longstanding. And all you have to do is read the newspapers to see the theory working in empirical action. A 25% EU tariff on Harley-Davidson motorcycles: H-D said they would not pass the cost on to their European consumers. That mathematically entails they are eating the entire cost of the tariff by reducing their margins. Therefore, the cost of the EU tariff is not costing EU consumers one single euro..
Mark Z
Jan 18 2019 at 6:20pm
It’s pretty amusing that you pick that example. HD did indeed say that, in the near term, they won’t raise prices in Europe because of the negative effect it’d have on their market there.
Instead, they said they “will be implementing a plan to shift production of motorcycles for EU destinations from the US to international facilities” and “consolidating some of its manufacturing locations.” There go some more American jobs. Is that what you call a successful tariff? If a company can’t pass on the cost of the tariff to consumers, that doesn’t mean they’re just going to reduce their profit margins. They can also cut back or relocate production. Ultimately, they can go out of business too. Given that H-D’s stock prices took a big hit from this, it’s not surprising they plan to relocate much of their manufacturing rather than try to ‘eat the cost.’
https://markets.businessinsider.com/news/stocks/harley-davidson-tariffs-from-europe-cause-tremendous-cost-increase-2018-6-1027314740
Jon Murphy
Jan 18 2019 at 10:58pm
Which, ironically, according to the theory means Europe is made worse off because of the tariffs even figuring Harley-Davidson’s relocation (the relocation means there is no tariff revenue coming in to offset the losses to consumers).
Warren Platts
Jan 19 2019 at 1:23am
Jon, if the foreign producer is eating 100% of the cost of a tariff, there is literally no cost to the home consumer. So if H-D moves its production to Thailand or wherever (and this was in the works for over a year before the EU tariffs were announced, so that anybody who says the relocation is because of the EU tariffs are being utterly disingenuous) the cost to the EU consumer is the same either way: it is zero.
Mark Z
Jan 21 2019 at 2:16am
“Jon, if the foreign producer is eating 100% of the cost of a tariff, there is literally no cost to the home consumer.”
First of all, if the cost is being absorbed by the producer in the tariff-imposing country, that is certainly relevant to the merits of imposing tariffs. American consumers are made worse off when they lose their jobs, no?
Second, European consumers only suffer zero cost to the extent that the tariff completely fails and the company simply moves production abroad while keeping prices the same, in which case the tariff imposing country absorbs all of the cost. If the company reduces production (as possibly suggested by HD saying they’d also consolidate factories in the US) then fewer goods get sold, which makes consumers worse off.
You can’t have it both ways. Either the tariff “works” for the tariff-imposing country and companies raise prices on foreign consumers or reduce their margins to absorb the cost (the former usually invites retaliation, the latter reduces profits and increases risk of future downsizing or bankruptcy), or the company obviates the tariff by moving production abroad, in which case the tariff-imposing country loses the company’s jobs, tax, revenue, etc.
Benjamin Cole
Jan 17 2019 at 11:07pm
You are forgetting the supply side. The supply side maybe inelastic, that is, the suppliers will be willing to eat the tariff. This evidently describes Chinese exports to the US
Benjamin Cole
Jan 17 2019 at 11:34pm
Also, remember that comparative advantages in the Far East are usually creations of government. The Communist Party of China is willing to increase comparative advantages of its companies in order to maintain market share.
That is, China will endow manufacturers with more free land, free capital or greater operating subsidies.
The IHS Markit review of China’s flat-panel display industry is worth reviewing in this regard.
Seppo
Jan 17 2019 at 2:29pm
If we suppose that US taxes a “strategically” chosen product category where demand is highly price elastic and this leads to Chinese exporter cutting prices, I think it is us, Europeans, who gain most, since the price reductions for sure can be felt in my wallet.
Obviously on the long run this reduces the specialisation across the globe and slows global economic growth, which hurts me as well, but in the short run I can just buy affected stuff for cheaper, at least until Chinese producers adjust to this new world of higher average tariffs.
If you increase your tariffs enough but just against China, I will start importing this stuff to Europe and re-selling it to US avoiding the tariff and making nice amount of money with this artificial arbitrage.
Maniel
Jan 17 2019 at 7:45pm
Prof. Henderson,
Like you, I have negative views on tariffs. However, I do admit that there may be some winners to be found amid the devastation.
“Aid, not trade”: for those who favor sending taxpayer money to our farmers, rather than having them export our precious American-made products and being rewarded for their productivity, this is adding up to a big win.
A strong public sector: for those who favor extracting money from the private sector for use by our Federal government as they see fit (aid to farmers?), how progressive can you get?
Restraining consumption: for those who understand the power of taxation to reduce demand, what better way to lean against conspicuous consumption (cars, washing machines, and of course, those noisy motorcycles), than to jack up basic materials costs.
To me, loving tariffs is a lot like rejoicing that your house burned down, because it needed repairs. Sigh!
Warren Platts
Jan 18 2019 at 5:26pm
Sir: honest question: Why would you find that surprising? The theory of optimal tariffs goes back at least to Robert Torrens and J.S. Mill in the early 1840s. Henry Clay was aware of the same effect at the same time.
Torrens’ argument was not really an argument for beggar-thy-neighbor trade policies. His was an argument against unilateral free trade. The unilateral free trader would see the price of imports increase once the tariffs were lifted, and it would thus take more exports to pay for the same quantity of imports.
Britain of course did not follow Torrens’ advice to the parliament, and instituted unilateral free trade with the repeal of the Corn Laws. And as predicted, there was a net welfare loss that was empirically documented by Irwin and McCloskey–of all people; McCloskey complimented the English as “magnanimous Albion”, as if they were doing a favor to the ROW.
Indeed, optimal tariff theory is interwoven with the WTO rules that allow developing countries to retain high tariffs while developed countries like the USA are supposed to reduce or eliminate theirs. It goes back to the UN paper on how to create a “New International Economic Order”. Developing countries would expand their manufacturing sector; developed countries (i.e., the USA) would give preferential access to their markets.
Originally, unilateral free trade was a geopolitical ploy–not a selfish economic means to improve national net welfare. The very idea that unilateral free trade would improve U.S. national net welfare is a recent invention–propaganda, really–for which there is about zero theoretical or empirical support.
David Henderson
Jan 18 2019 at 6:10pm
You wrote:
Sir: honest question: Why would you find that surprising? The theory of optimal tariffs goes back at least to Robert Torrens and J.S. Mill in the early 1840s. Henry Clay was aware of the same effect at the same time.
I know the theory. My answer is not that the theoretical case for an optimal tariff is surprising but that the U.S. government found a set of them and acted to impose such tariffs.
You wrote:
The unilateral free trader would see the price of imports increase once the tariffs were lifted, and it would thus take more exports to pay for the same quantity of imports.
My answer: Yes, the price net of tariffs would increase if tariffs were cut and if the elasticity of supply were less than infinite, but that’s not enough to say that cutting tariffs would make us worse off. Whether we’re worse off depends on elasticities.
Warren Platts
Jan 18 2019 at 10:10pm
Heh! Perhaps we should give Navarro some credit where credit is due! Before we pat him on the back too much, however, according to one IMF paper, the overall U.S. demand elasticity is probably on the order of -1.5, whereas the ROW’s export supply elasticity is about 0.83, entailing if you do the math, we should expect, in general, that roughly 2/3 of all tariff tax incidence will be borne by foreign producers.
Given that we are importing over $2 trillion, we could raise a boatload of tariff revenue, on the order of $500 billion, of which at least $300 billion would essentially be free tax money paid by foreign producers. Some people say that in order to eliminate the trade deficit we need to eliminate the fiscal deficit; well, some strong revenue-raising tariffs would help kill those two birds with one stone.
Mark Z
Jan 21 2019 at 2:21am
A tactic whose success depends, ironically, on all our trading partners following the opposite tactic and engaging in unilateral free trade with the us. How likely is that? Let’s ask China…
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