Economic theories are generally symmetrical. If more of X causes more of Y, then less of X causes less of Y. Thus I was confused by a recent story in Bloomberg:
Trump has gravitated toward the reciprocal tariff plan as a key part of his push to raise US levies overall. Trump has said it would apply to nations who generally have a higher average tariff rate than the US, which would raise its own tariff to match them.
“If they charge us, we charge them,” he said Sunday while speaking with reporters and confirming he planned to announce this week.
I am skeptical of the idea that reciprocal tariffs are a good idea in general. But if they are, I cannot imagine why they would be a good idea for trade with countries that have higher tariffs than the US, but not for trade with countries with lower tariffs than the US. Can someone explain this to me?
Let’s say I’m wrong and that reciprocal tariffs are a good idea. The argument would presumably be that this tool would encourage our trading partners to reduce their tariff rates on US exports. But if so, that argument is equally applicable to countries with lower tariffs than the US. Indeed if the policy were 100% effective, it could encourage countries to reduce their tariffs on US exports to zero, but only if induced to do so by the expectation that the US would follow suit.
On a related note, Elon Musk recently met with Indian Prime Minister Modi, and it was reported that he pressed India to reduce tariffs on Teslas and provide a license to Skylink. Trump was asked if Musk was acting as a US government official or as a private businessman. Trump indicated the latter.
Do you believe that Modi was likely to have assumed that the world’s richest man, who happens to be the second most powerful person in the Trump administration, was acting in a purely private capacity? If you were Modi, would that have been your assumption?
There has never been a complete separation of business and government in the US. But it’s also true that the two have never before been so deeply interrelated.
READER COMMENTS
David Henderson
Feb 14 2025 at 12:52pm
Good post.
Jose Pablo
Feb 14 2025 at 7:35pm
If they charge us, we charge them
When you examine the reasons why Trump and his supporters believe tariffs are a good idea, this statement makes no sense—since none of those reasons actually depend on the tariffs they impose on us.
Unfortunately, we may have to get used to logical nonsense.
Scott Sumner
Feb 15 2025 at 12:54pm
He doesn’t seem to realize that foreigners don’t pay the tariffs.
Thomas L Hutcheson
Feb 17 2025 at 6:41pm
I dare say he does not recognize that tariffs are a tax on exports and a subsidy to untariffed items. (I’ll bet even Oren Cass does not understand that. :))
I’ll go even farther out on a limb and suspect that he does not know that a fiscal deficit encourages a larger trade deficit. Heck, I’ll bet even the people in Congress that want to “extend” the 2017 “Tax Cuts for the Rich and Deficits Act” don’t know that.
Scott H.
Feb 14 2025 at 9:35pm
On a very related note, I always laugh when people call Trump dumb for his tariff stance, but then think it makes total sense for the tariffed nations to subsequently raise their tariffs on us.
I guess it just depends on whose stupidity we feel like calling out when we start writing.
Jon Murphy
Feb 15 2025 at 6:46am
Can you point out one such case? I can think of many Trump supporters who do the flip-flop (saying tariffs are bad but also good), but none that fit your description
Scott H.
Feb 16 2025 at 8:46am
Justin Trudeau and Claudia Sheinbaum both reacted to Trump’s announced tariffs by announcing retaliatory tariffs of their own. Not one article I’ve read about that suggested it was stupid.
Jon Murphy
Feb 16 2025 at 10:31am
Gotcha. Many economists (except maybe Trump’s) would consider that move foolish. I think part of the issue was that whole thing happened in just a few hours with Trump ultimately backing down.
Scott Sumner
Feb 15 2025 at 12:55pm
Good point.
FF99
Feb 17 2025 at 10:26am
Prisoner’s Dilemma
Thomas L Hutcheson
Feb 17 2025 at 6:51pm
Retaliatory tariffs are stupid only if done in ignorance of the self harm. If the cost to self is recognized, it can be rational to incur a cost to punish an aggressor. Were not the Chinese tariffs on soybeans instrumental in getting some Trunp1 tariffs on China removed?
John Hawkins
Feb 19 2025 at 9:50am
Most game theory studies on this show that some form of tit-for-tat (usually tit-for-tat-“with forgiveness”, so tit-for-tat with a willingness to be first mover in de-escalations) is optimal. It maintains a beneficial equilibrium. Basically exactly the thought experiment you’re playing around with.
Comments are closed.