Rather than go through the details, at least at first, one must ask what the purpose of the proposed tariffs is supposed to be.
--If to raise revenue, a consumption tax is superior. We're actually close to that.
--If to punish allies, cool, if they don't retaliate.
--If to do industrial policy, subsidies are better, not that I'd want to.
--If to redistribute income, tax and transfer are better.
Now some details:
--A uniform tariff will take care of all the objections about taxing intermediate goods imports. This has been well understood since the 1960's.
--There are already special rules in place for re-exports, to allow repainting cars abroad or at home.
The big detail is not a detail. This sort of policy could usher in a breakdown in the international trading system. That will make everybody worse off. It's happened once before with Smoot-Hawley. It took the world thirty years to dig itself out of that hole, and another thirty to tile the walls of that hole.
The problem with the international trade system is that it hasn't been able to adequately take care of political distributional concerns. One must not counter this with misguided allocation policy. Attack externalities, here pecuniary externalities, at source.
Alas, a tariff is decidedly not a selective VAT. Instead, a tariff is a consumption tax, like a VAT, with some of the revenue going to producers rather than the government. The money going to the producers is what keeps the cheap imports out. We pay more for less.
Why does President-elect like tariffs? because he can impose them without Congress. What are the goals of his tariffs? To make foreign nations do what he has in mind ( on a given day). that‘s it!
You are exactly right. Trump operates very transparently. "Here's what I want you to do, if you don't do that I will personally break something of yours."
What is your view on tariffs as a cause of inflation? I dislike tariffs for many reasons, but I am not seeing how they are inflationary. They will cause an increase in relative prices (of the goods with tariffs) but that leaves less money to spend on other things, which would be dis/deflationary. The only way I see tariffs causing inflation is if other countries retaliate massively, causing a significant reduction in supply (and monetary policy doesn't respond by tightening). Any thoughts by John or other here are welcome.
The last post, "Inflation and the macroeconomy" goes through that. Yes, tariffs are a relative price level shock, not an inflation rate shock. Like corporate taxes.
Well, yes, but overall...let me tell you, living standards along the West Coast, Detroit and New York City are lower than in the 1960s, and everyone knows it.
If it cannot be quantified, then I will state it qualitatively....
It is less massively and obviously false for Detroit, but the aftermath of WWII made American supremacy in manufacturing generally then the anomaly, not the other way around.
interesting assertion. I'm 75 and grew up in Detroit. Hard to compare anything with pre-riot Detroit. The city is clearly worse overall, but some parts are fixed and developed. . Suburbs flourish. So what are you measuring? My grandmother's home, once quite good in an Italian neighborhood, is brick two-story with a second story that is a separate apartment (kitchen and bath). The house has a backyard, a basement, and a recessed front porch.
and you can buy it for $1,000. a total of $1,000 not to rent for $1,000 a month, buy it outright for $1,000, according to Zillow. I lived in that house until I was five years old.
It isn't the same. I don't see how you make any comparisons that make sense.
You can only claim that “the globalization story does not work for the employee classes of the developed world” if you willfully ignore that every employee is also a consumer.
Well, it’s still a free country and so you can make any claim you want. But those claims just have no credibility.
”A 20% across the board tariff sounds about right, higher for certain items.”
As JC, just took you through, an across the board tariff as high as you described would likely result in lower employment, not higher, since it is taxing intermediate goods the same way as consumption goods.
“ Why do young men make less today than in the 1960s, after adjustment for inflation?”
They do not. Your question implies something that isn’t true. Real after-tax incomes (and especially after-redistribution incomes) in fact have gone up - and quite substantially since the 60s.
The partial truth implicit in your question is that real cash compensation hasn’t gone up nearly as much (although it surely has gone up a lot since the 60s), because so much of compensation has come from the increased value of fringe benefits.
John -33 consecutive years of current account deficits... This is not free trade. What about Triffen? The dollar is the main reserve unit, and so it is not allowed to fall to reduce a current account deficit. imports are cheap and exporters are at a disadvantage. so the US is and has been behind the eight ball unabel to produce competitively.
There is no free trade, so no fear of upsetting that bandwagon. a chance to raise import costs on consumer goods - overdue and to spur some import-competing industries. Hard to help export industries.
I think the more important item is education. we need to improve education Something Demcoarts have negelected. DEI is an apology by democrats for promoting such poor education in the inrer cities. People are too important a resource to waste. So let's educate them for real not for pretend!!
Then we can take more advantage of tariffs - or nned them less.
John, you know you’re my favorite grump, but I also hope you’re considering many things will be occurring simultaneously…. I trust you’re not looking at the tariff question from a single-focus tunnel-vision perspective…. Trump is a master of creative chaos, so many changes will be occurring concurrently. A tough model to predict, eh? Still, keep watching. You often make sense out of the fog of war….
"Bank Indonesia's holdings of government bonds surge to 25%, sparking investor concerns over liquidity and inflation risks
On December 27, 2567, Bloomberg News reported that Investors are increasingly cautious about potential risks in Indonesia's bond market as Central Bank Indonesia (BI) increases its holdings of bonds to record levels.
Bank Indonesia currently holds about 25% of the country's outstanding bonds, up significantly from 5% before the COVID-19 pandemic. Amid the bank’s efforts to stabilize the rupiah and support the country’s economic growth,
As central banks around the world buy government bonds to manage yields and stimulate growth, BI's aggressive buying is aligning with the Bank of Japan (BOJ), significantly changing the dynamics of Japan's bond market and liquidity.
Ms. Asti Raniesari, Head of Multi-Asset Investment Team of PT BRI Manajemen Investasi BI's holdings of rupiah bonds are expected to rise to 30% of the country's outstanding debt as quantitative easing continues.
Raneesari added that BI should continue these projects to address challenges such as the weaker rupiah, deflationary pressures and sluggish economic growth.
BI has bought 461 trillion rupiah ($2.85 billion) worth of government bonds this year, bringing the bank's total bond holdings to a record high of 1,557 trillion rupiah.
In addition, Mr. Perry Warjiyo, BI Governor It plans to buy 150 trillion rupiah worth of bonds on the secondary market by 2568 as part of the bank's monetary policy.
The buying spree has reduced the spread between the yield on 10-year Indonesian Treasury bonds and the yield on the 10-year U.S. Treasury note to around 2.46% from a high of 2.77% on Dec. 6. However, demand for the bonds in the preliminary auction has fallen to a more than one-year low, a sign that investors are waning.
side Mr. Adra Wijasena, Senior Research Analyst at PT Shinhan Sekuritas Indonesia It warns that if BI increases its holding to 30% and remains there for an extended period, it could impact liquidity in the secondary market.
He also added that printing money to fund these bond purchases could also risk triggering inflation.
BI initially increased its bond purchases during the COVID-19 pandemic to support the state budget. While these extraordinary measures were important at the time, BI also bought bonds on the secondary market to maintain yields and support the rupiah amid the strength of the US dollar.
BI is also facing increasing pressure to increase its bond purchases as the government accelerates issuance to raise funds for economic stimulus and debt refinancing during the Covid period. Analysts and investors say BI is now facing a challenge in divesting its holdings, as it is complex to divest such holdings while maintaining stability and volatility in the bond market."
China's export dominance is the symptom, not the problem. Tarrifs would encourage americans to build a more robust and independent economy. This is a great insurance policy in case of war or other disasters. It also encourages policy makers to eliminate whatever market frictions make it hard for the US to produce stuff.
You're faith in dogma is a let down.
First, the "we can't tax something twice" faith is false. Municipalities tax property. It works. What is the problem? Income tax taxes the same dollars as they move around the economy. Why isn't that a problem?
Second, the "oh, we could never put tarrifs on basic goods" is misguided. We absolutely want to put tarrifs on basic goods. One of the main points of tarrifs is to force residents to make a stronger, more robust domestic economy. This may be less efficient, but it is a good insuranc emeasure in case of war and prevents political dependance.
A flat tarrif on all goods imported is easy to keep track of, easy to enforce and comply with. If it's broad enough, the rate could be relatively low keeping good trade relations. It woud also eliminate selective tarrifs that corruptly protect some industries as the expense of others. An algorithmic tarrif-match law could be used to thwart a spiraling tarrif feed-back loop.
In the end, tarrifs make a lot of sense and the considerations you conjure are not. material.
You say "It doesn’t make sense to charge a tariff on a good that a US business will quickly re-export. Say a shop imports cars from Canada, paints them, then sends them back to Canada. It doesn’t make sense to charge a huge tariff on that imported car. Likewise, suppose a Canadian company buys US cars, paints them, and then sends them back to the US charging 10% more. You want to charge a tariff on the 10%, not the whole value of the US-made car."
Actually, it DOES make sense. The tarrif would encourage the US to develop a more independent economy, and eliminate these sort of shenanigans. Why move it to Canada just for painting? There's usually a legal arbitrage going on that isn't helpful for the economy. Charge the tarrif, and get rid of the regulatory hurdles.
Just an old retired sailor living in southern Arizona, it will be interesting to see how Mr. Trump's use of tariffs to force other countries to do his bidding work out.
Other than intermediate goods that are subject to supply management regulations in Canada, Canada imports U.S. origin goods at 0% tariff. Canada also lists the U.S. as a "most favoured nation" in Canada's tariff schedule.
Along comes the 2nd Trump administration and its threat to levy an across-the-board tariff rate of 25%. The ostensible purpose of the increase (from 0% import duties) to 25% import duties is to "encourage" the Canadian government to stop the traffic in fentynal across the U.S.'s open border with Canada, and to cause Canada to address the migrant crossings from Canada to the U.S. But, within a month of the first announcement of the across-the-board 25% tariff rate, Trump clarified the purpose of the 25% tariff rate is to bring Canada's economy to its knees so as to make the taking over of Canada possible without engaging in a shooting war.
These measures and threats and objectives are not susceptible to academic reasoning or analysis. Nor is it a fact that the U.S. subsidizes Canada via the trade deficit the U.S. has with Canada. Canada's trade surplus with the U.S. is entirely accounted for by the exports of crude oil and natural gas by Canada to the U.S. If Canada were able to find another outlet for its over production of oil and natural gas and it stopped exporting those resources to the U.S., the U.S. trade deficit with Canada would disappear and balanced trade would ensue.
On the question of tariff rates on re-exported intermediate goods, tariff regulations allow the re-exporter to claim back the import tax paid in the first instance on the re-exported goods. In this manner, the tariff regulations act just likely a value-added tax. There remain the administrative costs relating to claiming back the import duties on the re-exported goods, but it may be presumed that the business owners are earning a margin that exceeds those administrative costs. No need for a complicated value-added regulatory structure as imagined in John's scenario arises. Free trade, as is now the case between Canada and the U.S. facilitates the sort of trading patterns which see intermediate goods moving several times between the two economies in a fashion that lowers the cost of production of the final (retail) products in both countries.
Economists can study it, analyze it, and present papers on it, but it is up to the lowly business executive in accordance with Adam Smith's laws to make it a reality. Laissez faire gets you further along, as was well recognized by the Europeans before America ever was.
I hate to disagree, but I must.
Rather than go through the details, at least at first, one must ask what the purpose of the proposed tariffs is supposed to be.
--If to raise revenue, a consumption tax is superior. We're actually close to that.
--If to punish allies, cool, if they don't retaliate.
--If to do industrial policy, subsidies are better, not that I'd want to.
--If to redistribute income, tax and transfer are better.
Now some details:
--A uniform tariff will take care of all the objections about taxing intermediate goods imports. This has been well understood since the 1960's.
--There are already special rules in place for re-exports, to allow repainting cars abroad or at home.
The big detail is not a detail. This sort of policy could usher in a breakdown in the international trading system. That will make everybody worse off. It's happened once before with Smoot-Hawley. It took the world thirty years to dig itself out of that hole, and another thirty to tile the walls of that hole.
The problem with the international trade system is that it hasn't been able to adequately take care of political distributional concerns. One must not counter this with misguided allocation policy. Attack externalities, here pecuniary externalities, at source.
https://www.wsj.com/opinion/the-fed-cant-pin-inflation-on-trump-jerome-powell-politics-economy-003c0d6f
The Shadow Knows :)
I would gladly substitute a tariff (which is a selective VAT) for payroll taxes.
Alas, a tariff is decidedly not a selective VAT. Instead, a tariff is a consumption tax, like a VAT, with some of the revenue going to producers rather than the government. The money going to the producers is what keeps the cheap imports out. We pay more for less.
It's not exactly the same as a consumption tax, because the opportunity costs and the economic incentives of each are different.
Why does President-elect like tariffs? because he can impose them without Congress. What are the goals of his tariffs? To make foreign nations do what he has in mind ( on a given day). that‘s it!
You are exactly right. Trump operates very transparently. "Here's what I want you to do, if you don't do that I will personally break something of yours."
It's working now in Palestine.
What is your view on tariffs as a cause of inflation? I dislike tariffs for many reasons, but I am not seeing how they are inflationary. They will cause an increase in relative prices (of the goods with tariffs) but that leaves less money to spend on other things, which would be dis/deflationary. The only way I see tariffs causing inflation is if other countries retaliate massively, causing a significant reduction in supply (and monetary policy doesn't respond by tightening). Any thoughts by John or other here are welcome.
The last post, "Inflation and the macroeconomy" goes through that. Yes, tariffs are a relative price level shock, not an inflation rate shock. Like corporate taxes.
...and the dems will be claiming that tariffs drive inflation and corporate taxes cost no one a dime.
Fairtax.org for taxes...will help imports and exports.....
Verily, tax imports, fuels and property, and cut all taxes on wages.
The globalization story does not work for the employee classes of the developed world.
Is Detroit really a success story?
Why do young men make less today than in the 1960s, after adjustment for inflation?
A 20% across the board tariff sounds about right, higher for certain items.
The idea of adjusting a wage (or anything for that matter) for inflation over 60 years is silly.
Well, yes, but overall...let me tell you, living standards along the West Coast, Detroit and New York City are lower than in the 1960s, and everyone knows it.
If it cannot be quantified, then I will state it qualitatively....
Again, your claim is clearly false.
It is less massively and obviously false for Detroit, but the aftermath of WWII made American supremacy in manufacturing generally then the anomaly, not the other way around.
interesting assertion. I'm 75 and grew up in Detroit. Hard to compare anything with pre-riot Detroit. The city is clearly worse overall, but some parts are fixed and developed. . Suburbs flourish. So what are you measuring? My grandmother's home, once quite good in an Italian neighborhood, is brick two-story with a second story that is a separate apartment (kitchen and bath). The house has a backyard, a basement, and a recessed front porch.
and you can buy it for $1,000. a total of $1,000 not to rent for $1,000 a month, buy it outright for $1,000, according to Zillow. I lived in that house until I was five years old.
It isn't the same. I don't see how you make any comparisons that make sense.
'I'm an economist
You can only claim that “the globalization story does not work for the employee classes of the developed world” if you willfully ignore that every employee is also a consumer.
Well, it’s still a free country and so you can make any claim you want. But those claims just have no credibility.
”A 20% across the board tariff sounds about right, higher for certain items.”
As JC, just took you through, an across the board tariff as high as you described would likely result in lower employment, not higher, since it is taxing intermediate goods the same way as consumption goods.
“ Why do young men make less today than in the 1960s, after adjustment for inflation?”
They do not. Your question implies something that isn’t true. Real after-tax incomes (and especially after-redistribution incomes) in fact have gone up - and quite substantially since the 60s.
The partial truth implicit in your question is that real cash compensation hasn’t gone up nearly as much (although it surely has gone up a lot since the 60s), because so much of compensation has come from the increased value of fringe benefits.
John -33 consecutive years of current account deficits... This is not free trade. What about Triffen? The dollar is the main reserve unit, and so it is not allowed to fall to reduce a current account deficit. imports are cheap and exporters are at a disadvantage. so the US is and has been behind the eight ball unabel to produce competitively.
There is no free trade, so no fear of upsetting that bandwagon. a chance to raise import costs on consumer goods - overdue and to spur some import-competing industries. Hard to help export industries.
I think the more important item is education. we need to improve education Something Demcoarts have negelected. DEI is an apology by democrats for promoting such poor education in the inrer cities. People are too important a resource to waste. So let's educate them for real not for pretend!!
Then we can take more advantage of tariffs - or nned them less.
by the way great session at the AEA wiht Justin
John, you know you’re my favorite grump, but I also hope you’re considering many things will be occurring simultaneously…. I trust you’re not looking at the tariff question from a single-focus tunnel-vision perspective…. Trump is a master of creative chaos, so many changes will be occurring concurrently. A tough model to predict, eh? Still, keep watching. You often make sense out of the fog of war….
OT, but someday I hope for a post by John Cochrane on this topic.
Some central banks have built up large balance sheets, including Bank Indonesia.
But inflation in Indonesia is now running at 1.6% or so.
Do a central bank owning government debt re-assure government bondholders that the debt level is not too high?
https://moneyandbanking.co.th/en/2024/147797/
"Bank Indonesia's holdings of government bonds surge to 25%, sparking investor concerns over liquidity and inflation risks
On December 27, 2567, Bloomberg News reported that Investors are increasingly cautious about potential risks in Indonesia's bond market as Central Bank Indonesia (BI) increases its holdings of bonds to record levels.
Bank Indonesia currently holds about 25% of the country's outstanding bonds, up significantly from 5% before the COVID-19 pandemic. Amid the bank’s efforts to stabilize the rupiah and support the country’s economic growth,
As central banks around the world buy government bonds to manage yields and stimulate growth, BI's aggressive buying is aligning with the Bank of Japan (BOJ), significantly changing the dynamics of Japan's bond market and liquidity.
Ms. Asti Raniesari, Head of Multi-Asset Investment Team of PT BRI Manajemen Investasi BI's holdings of rupiah bonds are expected to rise to 30% of the country's outstanding debt as quantitative easing continues.
Raneesari added that BI should continue these projects to address challenges such as the weaker rupiah, deflationary pressures and sluggish economic growth.
BI has bought 461 trillion rupiah ($2.85 billion) worth of government bonds this year, bringing the bank's total bond holdings to a record high of 1,557 trillion rupiah.
In addition, Mr. Perry Warjiyo, BI Governor It plans to buy 150 trillion rupiah worth of bonds on the secondary market by 2568 as part of the bank's monetary policy.
The buying spree has reduced the spread between the yield on 10-year Indonesian Treasury bonds and the yield on the 10-year U.S. Treasury note to around 2.46% from a high of 2.77% on Dec. 6. However, demand for the bonds in the preliminary auction has fallen to a more than one-year low, a sign that investors are waning.
side Mr. Adra Wijasena, Senior Research Analyst at PT Shinhan Sekuritas Indonesia It warns that if BI increases its holding to 30% and remains there for an extended period, it could impact liquidity in the secondary market.
He also added that printing money to fund these bond purchases could also risk triggering inflation.
BI initially increased its bond purchases during the COVID-19 pandemic to support the state budget. While these extraordinary measures were important at the time, BI also bought bonds on the secondary market to maintain yields and support the rupiah amid the strength of the US dollar.
BI is also facing increasing pressure to increase its bond purchases as the government accelerates issuance to raise funds for economic stimulus and debt refinancing during the Covid period. Analysts and investors say BI is now facing a challenge in divesting its holdings, as it is complex to divest such holdings while maintaining stability and volatility in the bond market."
Pushing down its own currency works as a tax on the whole screw, not on the value added of the screw.
China's export dominance is the symptom, not the problem. Tarrifs would encourage americans to build a more robust and independent economy. This is a great insurance policy in case of war or other disasters. It also encourages policy makers to eliminate whatever market frictions make it hard for the US to produce stuff.
You're faith in dogma is a let down.
First, the "we can't tax something twice" faith is false. Municipalities tax property. It works. What is the problem? Income tax taxes the same dollars as they move around the economy. Why isn't that a problem?
Second, the "oh, we could never put tarrifs on basic goods" is misguided. We absolutely want to put tarrifs on basic goods. One of the main points of tarrifs is to force residents to make a stronger, more robust domestic economy. This may be less efficient, but it is a good insuranc emeasure in case of war and prevents political dependance.
A flat tarrif on all goods imported is easy to keep track of, easy to enforce and comply with. If it's broad enough, the rate could be relatively low keeping good trade relations. It woud also eliminate selective tarrifs that corruptly protect some industries as the expense of others. An algorithmic tarrif-match law could be used to thwart a spiraling tarrif feed-back loop.
In the end, tarrifs make a lot of sense and the considerations you conjure are not. material.
You say "It doesn’t make sense to charge a tariff on a good that a US business will quickly re-export. Say a shop imports cars from Canada, paints them, then sends them back to Canada. It doesn’t make sense to charge a huge tariff on that imported car. Likewise, suppose a Canadian company buys US cars, paints them, and then sends them back to the US charging 10% more. You want to charge a tariff on the 10%, not the whole value of the US-made car."
Actually, it DOES make sense. The tarrif would encourage the US to develop a more independent economy, and eliminate these sort of shenanigans. Why move it to Canada just for painting? There's usually a legal arbitrage going on that isn't helpful for the economy. Charge the tarrif, and get rid of the regulatory hurdles.
Just an old retired sailor living in southern Arizona, it will be interesting to see how Mr. Trump's use of tariffs to force other countries to do his bidding work out.
Maybe goods shouldn't go back and forth across borders. That's a lot of carbon emissions. Cargo ships burn the nastiest grade fuel oil.
Tariffs will reduce global warming
Other than intermediate goods that are subject to supply management regulations in Canada, Canada imports U.S. origin goods at 0% tariff. Canada also lists the U.S. as a "most favoured nation" in Canada's tariff schedule.
Along comes the 2nd Trump administration and its threat to levy an across-the-board tariff rate of 25%. The ostensible purpose of the increase (from 0% import duties) to 25% import duties is to "encourage" the Canadian government to stop the traffic in fentynal across the U.S.'s open border with Canada, and to cause Canada to address the migrant crossings from Canada to the U.S. But, within a month of the first announcement of the across-the-board 25% tariff rate, Trump clarified the purpose of the 25% tariff rate is to bring Canada's economy to its knees so as to make the taking over of Canada possible without engaging in a shooting war.
These measures and threats and objectives are not susceptible to academic reasoning or analysis. Nor is it a fact that the U.S. subsidizes Canada via the trade deficit the U.S. has with Canada. Canada's trade surplus with the U.S. is entirely accounted for by the exports of crude oil and natural gas by Canada to the U.S. If Canada were able to find another outlet for its over production of oil and natural gas and it stopped exporting those resources to the U.S., the U.S. trade deficit with Canada would disappear and balanced trade would ensue.
On the question of tariff rates on re-exported intermediate goods, tariff regulations allow the re-exporter to claim back the import tax paid in the first instance on the re-exported goods. In this manner, the tariff regulations act just likely a value-added tax. There remain the administrative costs relating to claiming back the import duties on the re-exported goods, but it may be presumed that the business owners are earning a margin that exceeds those administrative costs. No need for a complicated value-added regulatory structure as imagined in John's scenario arises. Free trade, as is now the case between Canada and the U.S. facilitates the sort of trading patterns which see intermediate goods moving several times between the two economies in a fashion that lowers the cost of production of the final (retail) products in both countries.
Economists can study it, analyze it, and present papers on it, but it is up to the lowly business executive in accordance with Adam Smith's laws to make it a reality. Laissez faire gets you further along, as was well recognized by the Europeans before America ever was.