The arguments for liberty are richer and belong to a deeper and more credible tradition than the authoritarians’ arguments. Nowhere perhaps is this more obvious than in the area of international trade. We can speak of the poverty of protectionism—even if, no doubt, many of the doctrine’s proponents have much of what hell is paved with. I cannot resist the temptation to quote a consistent authoritarian and defender of slavery before the Civil War, George Fitzhugh, who argued against liberty and free trade:
Admit liberty to be a good, and you leave no room to argue that free trade is an evil—because liberty is free trade.
A few days ago, one study of the impact of Chinese-import tariffs on American prices was praised by some protectionist tweeters. Published in November 2018 by a European think tank, the study purported to show that the American tariffs on China were, or would be, mostly paid by Chinese producers instead of by American consumers: Benedikt Zoller-Rydzek and Gabriel Felbermayr, “Who is Paying for the Trade War with China?”). The author estimate that America obtains “net welfare gains.” Studies that reach this conclusion are not frequent.
The tweeter who unearthed the study wrote:
Report from European economists with no axe to grind and no loyalty to the Anglophone paradigm show that 75% of the tax burden of tariffs on China is borne by Chinese firms.
The organization that published the study is the European Network for Economic and Fiscal Policy Research, an association of think tanks often close to European governments—as are most intellectual shops in Europe. But beware of dismissing the study as politically biased. We should try to judge ideas on their merits and, in any event, studies financed by big, far-away, inefficient governments are not necessarily more biased than those sponsored by private donators.
The estimates of Zoller-Rydzek and Felbermayr have little empirical content and, if I understand the study correctly, are based on an extreme model that assumes no American production of the tariffed goods and that these goods can be imported only from China (see Figure 1, p 3). It is a special case of the “optimal tariff” argument, which implicitly relies on omniscient government bureaucrats making complex calculations that are then faithfully incorporated in policies by benevolent-despot politicians.
The authors admitted that the tariffs will have no significant impact on the US trade deficit. They made other interesting observations:
In Figure 4 we show the distribution of US consumer price increases. While for most products the increases are only modest, some consumer good and intermediate input categories are hit hard, with price increases of over 20 percent in some cases. Low-income US households in particular will be affected by this increase, as they spend a considerable share of their income on (cheap) Chinese imports … This will lead to a stronger decline in real income for US low income households. …
As the trade conflict escalates, however, the US administration may not be able to restrict its selection to products with high import elasticities; and US welfare might decrease as more of the tariff incidence falls on US consumers. Moreover, China’s next countervailing duties will be chosen in a similar way, namely in a bid to shift the tariff burden onto US exporters.
A number of recent studies show that American consumers generally pay the full cost of the tariffs through higher prices, as would be expected in standard trade theory. See, for example, Pablo Fajgenbaum et al., “The Return to Protectionism,” NBER, March 2019; Mary Amiti et al., “The Impact of the 2018 Trade War on U.S. Prices and Welfare,” NBER, March 2019; and a short summary of these two studies in “U.S. Consumers Have Borne the Brunt of the Current Trade War,” The NBER Digest, May 2019. Amiti et al. also summarize their paper in a Liberty Street (Federal Reserve Bank of New York) article: “New China Tariffs Increase Costs to U.S. Households,” May 23, 2019. For a simple illustration of how tariffs work and typically translate into equivalent domestic price increases, see my EconLog post, “A Simple Illustration of Standard Trade Theory” (July 9, 2018).
The figure below, borrowed from the Amiti et al. NBER paper, shows the impact of the early 2018 washing machine tariff on the CPI index for major appliances. As the latter contains all major appliances, the impact on washing machines prices is of course higher. The authors present a lot of other data and analyses that confirm the impact of US tariffs on US domestic prices. They conclude:
We find that the U.S. tariffs were almost completely passed through into U.S. domestic prices, so that the entire incidence of the tariffs fell on domestic consumers and importers up to now, with no impact so far on the prices received by foreign exporters. We also find that U.S. producers responded to reduced import competition by raising their prices.
Source: Mary Amiti et al., “The Impact of the 2018 Trade War on U.S. Prices and Welfare,” NBER, March 2019
According to Amiti et al., the total annual cost to consumers of the tariffs imposed by the US government in 2018 (mainly on Chinese imports, but also on steel and aluminum) amounts to $414 per American household. This annual cost would double if the new envisioned tariffs on Chinese imports go ahead. For a “Deplorable”(the stylized supporter of President Trump) who earns the minimum wage, $414 more expenditure represents about one week of work.
Amiti et al.’s results suggest that the tariffs also reduced the variety of products on the American market. This would no doubt please Bernie Sanders, who claimed that there are too many sorts of deodorants and sneakers on the market. Donald Trump, on his side, proposed that parents hit by tariffs could simply buy fewer dolls for their daughters. The poverty of protectionism is confirmed again.
READER COMMENTS
Benjamin Cole
Jun 17 2019 at 9:05am
Well…
I do appreciate Pierre L’s way with words.
One study “purports to show” that US consumers are not hurt by Trump Administration tariffs on China.
But other studies “show” (not “purportedly”) that the tariffs undermine consumers.
We must “unearth” studies that find the Trump tariffs are a no-show for consumers (perhaps they are authored in the underworld by blackened hands holding soft coal), while the pro-China trade studies are (I assume) written in the daylight of Spring, using fresh dew colored by rose petals.
Yes, and one US slaver was against free trade (actually, most Southern slavers were “free-traders”—they wanted to export cotton to Great Britain, and import manufactures from same. The North wanted to force the South to buy domestic manufacture. I think Pierre L. needs a refresher course in US history).
In any event, the US macroeconomics profession has nearly made a fetish of being seen for “free trade,” despite the fact there probably is no such thing as “free,” “fair” or “foul” trade. Is trade free? That question is like asking an umpire to call “safe” or “out” at an NFL game (or an NHL game, for Pierre L.).
Really, amoral multinationals forming an alliance with the Communist Party of China is “free trade”?
Side note: Generally, when discussing macroeconomic policy, economists favor producers over consumers—that is, do not tax productive behavior, but rather tax consumers.
So…should trade policy favor domestic producers or consumers? Which group is more valuable in the long run?
Craig
Jun 17 2019 at 12:41pm
Yes, he is a good writer, Benjamin.
WalterCO
Jun 17 2019 at 2:17pm
In answer to your final question, trade policy should favor consumers, who are the only reason for trade to occur.
Jon Murphy
Jun 17 2019 at 3:01pm
Why should policy favor either? A neutral policy system along the lines of Adam Smith’s “liberal system” would be preferable to a policy system favoring either side.
Mark Brady
Jun 17 2019 at 8:13pm
“Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident that it would be absurd to attempt to prove it. But in the mercantile system the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.”
Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1776), Book IV, chapter 8.
dede
Jun 20 2019 at 10:18pm
Read the quote again. The fact that George Fitzhugh was a slaver is not really relevant in the argument (sometimes, people add flavour to their arguments because it is easier to pass on the message but dismissing the flavour to dismiss the argument is not sufficient).
Again, the quote says that you cannot believe liberty to be a good if you are against free-trade… (Not sure what he says “a good” rather than “good”, I suspect that XIXth century English was slightly different in style when using adjectives? – liberty is certainly not a good in today’s English language but certainly good for many readers here)
Warren Platts
Jun 17 2019 at 2:39pm
There are a lot of problems with that Amiti paper. E.g., their main result–virtually 100% passthrough of the cost of tariffs to consumers is apparently not statistically significant. If you look at their Column 1, Table 1, there are no asterisks indicating that it is significant, apparently implying that p > o.1.
But let’s assume that’s a typo. There still must be some big errors, because the numbers don’t add up. Δln(pm) = Δln(p) + Δln(m). Since Δln(p) ≈ 0, then Δln(pm) ≈ Δln(m), but they don’t. In fact if you back-calculate Δln(p) from Δln(pm) – Δln(m) using columns (5) & (3) respectively, you get a value of -6.466 – -6.026 = -0.44 implying in this case that there was only a 56% passthrough.
Since total tariff revenue was $12.3 billion (Table 2), then, using the back-calculated Δln(p), then there is actually a terms of trade gain of $12.3B x 0.44 = $5.4 billion.
Meanwhile, their estimate of a deadweight loss of $6.9 billion is arguably overstated. The estimate of the deadweight loss is proportional to β in their unnumbered formula on page 12. That number in turn comes from their column (5) in Table 1, i.e., β = 6.466. But as they admit on their page 14, their column (5) number doesn’t take into account the effect of substitution of targeted countries and products with untargeted ones. Once they control for this effect, they get 3.757 in their Column 6. Thus, we can re-estimate the deadweight loss, taking into account this factor, as 3.757/6.466 x $6.9B = $4 billion.
Now, the standard national net welfare calculation is terms of trade gain – deadweight loss. Thus using the revised figures, $5.4B – $4B = $1.4B net welfare gain!
This just goes to show how squishy all this data is, and you can make it say just about whatever you want. Clearly, these guys have an axe to grind–which is unsurprising: it is hard to find an American economist who is not a free trade true believer. Even the ones who admit to qualms, like Autor or Rodrik offer only milquetoast nostrums. Thus, the European study discussed by Pierre is rather more credible tbqh.
Then there are the things ignored by Amiti et al. In their Figure 3, the price level for imports not targeted by the tariffs rolled over and declined, apparently because of the tariff. This is easy to explain: production shifted from China to places like Vietnam where their production costs are even lower (the substitution effect). The effect is relatively small, but since the amount of untargeted imports is vastly larger than targeted imports, the absolute effect must be huge, but Amiti et al. don’t try to estimate its effect. This drop in prices, however, must have offset entirely any price increases detected by Amiti et al., because there is about zero discernable effect on the overall inflation rate because of Trump’s tariffs. That’s the bottom line: for the average Deplorable, prices at Walmart are the same on average.
And against all that, you have to figure the gains in manufacturing jobs. In 2018, the year of the tariffs, we added 273,000 manufacturing jobs, but in 2017, we only added 191,000 jobs. Thus, applying the diff-in-diff logic, we can attribute 191,000 jobs in 2018 to Trump’s tax cuts & deregulation, and the residual of 82,000 jobs to Trump’s tariffs. Since the average output per manufacturing worker is about $186,000, then we can calculate that these added jobs apparently due to the tariffs contributed an extra $15.3 billion to the GDP.
Moreover, that $15.3 billion should be considered net, because it is highly debatable that USA is at full employment, despite the low official unemployment rate: overall employment rate is still way below pre-Great Recession levels, so the additional jobs are not being poached from the service sector, but are coming out of the ranks of people who are not working. Thus, even assuming Amiti’s estimate of a deadweight loss of $6.9B, that is still outweighed by the gains in the manufacturing sector.
At the end of the day, it is pretty clear that the early predictions of economic disaster because of Trump’s tariffs have simply not come true.
Moreover, people need to realize there is a lot more at stake than mere economic efficiency, given Uighur concentration camps, the organ “donations” taken from living prisoners, destruction of Christian churches and icons, South China Sea invasion, Tibet occupation, continued threats against Taiwan, Hong Kong oppression, fentanyl exports that you know must have government sanction that have killed more Americans than were killed by the combined German and Japanese forces during World War II, and the fact that China is rearming to fight a major hot war against the United States: these are all reasons to disengage economically with China. In that context, unfair subsidies and IP theft are the least of our worries–or at least ought to be…
Pierre Lemieux
Jul 29 2019 at 11:33am
Sorry for the delay. I think you don’t interpret correctly the coefficient (-.003). It indicates indeed that there is no significant impact of tariffs on PRICES RECEIVED BY FOREIGN PRODUCERS, meaning that the passthrough is 100%.
Benjamin Cole
Jun 18 2019 at 6:29am
Another point of view.
There are intelligent well-informed people with varying opinions. I am just a wag…but macroeconomic theology does get a a bit trying…
See below!
Principles of industrial policy – VoxEU The ‘Asian miracles’ and their industrial policies are often considered as statistical accidents that cannot be replicated. The column argues that we can learn more about sustained growth from these miracles than from the large pool of failures, and that industrial policy is instrumental in achieving sustained growth. Successful policy uses state intervention for early entry into sophisticated sectors, strong export orientation, and fierce competition with strict accountability.
Pierre Lemieux
Jun 21 2019 at 12:47am
Note that most (or the essential) of trade theory is microeconomics, not macroeconomics. Indeed, most of trade theory had been developed (over a century and a half) before macroeconomics was invented by Keynes.
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