The US of A does not face given world prices. If it did, domestic residents would pay the tariff. But it does not face world prices that fall all the way by our tariff! How much foreigners pay of the tariff depends on how responsive their supply is to our tariffs. I've seen estimates that foreigners pay 10% of our tariff. There's even an "optimum tariff formula"! This has been understood since Robert Torrens articulated the optimal tariff theory in his 1824 work, Essays on the Production of Wealth.
The point is we have to export less to pay for those imports after foreign prices fall. The money flows adjust to the terms-of-trade change.
My big surprise has been that except for China no one has retaliated. If the rest of the world did, we'd be worse off for imposing the tariff, and the rest of the world would be better off than if they had not retaliated.
“My big surprise has been that except for China no one has retaliated. If the rest of the world did, we'd be worse off for imposing the tariff, and the rest of the world would be better off than if they had not retaliated.”
Clearly the main reason for this is that this is one of the things Trump got correct: these other countries all “need” us way more than we “need” them, and so on net they HAVE been getting “a better deal” relative to Americans from the current terms of trade.
Critiques the other elements of his tariff policy all you like - I too critique many parts - but he analyzed this part correctly. Had he used his leverage to then lower tariffs further on the countries that lowered their NTbs and tariffs, he would have done the world a great service.
It's not about need. It's about consistent policy interests. China did retaliate. The EU, whose trade policy is made by a consensus of god knows how many countries with different interests, did not. It could not. Other individual countries could likely not have moved the terms-of-trade in their own favor, so they rationally did nothing.
It seems we are agreeing (though you choose to “punt” in the EU).
The terms of trade in the world were more to the benefit of the interests of other countries than they were to the benefit of the U.S.
In the aftermath of WWII, this was imo not merely the “right” thing to do morally, but also the right thing to do for U.S. long-term self-interest.
Over the decades, and in particular over the last two decades, this has become less and less true.
And the burden of the less favorable terms of trade falls disproportionately on the working class, which is Trump’s base. So he decided to do something about it.
Again, I do NOT support Trump’s desire for ongoing higher tariffs on imports; I think those in aggregate do harm to all, including those who are his biggest supporters.
But getting other countries to lower their tariffs and NTBs, as he has done with at least some success, is beneficial to both American interests and the interest of the large majority of people in those other countries as well.
We don't agree. We each see the world in a way in which we can communicate.
The post war GATT/WTO frame work saw to it that each participating country's terms-of-trade were not hurt. [I will stop digging holes in my streets to the extent you stop digging holes in your streets.]
It also saw to it that special interests were not hurt too much to cause political uproar. What it did not recognize and deal with is that the special interests never, never were those who supported less skilled, or old skilled workers. These guys got left behind, long before China came onto the scene. China just made the domestic distributional issue virulent.
Trump recognized this, and has acted accordingly. He is trying to tilt the income distribution in the direction of his supporters.
A move away from free trade means there are winners and there are losers, but the losers lose more than the winners win. But the winners are Trump supporters.
Ok, but you are not taking my argument at face value, you are shifting it to suit yours.
We both agree Trump is playing to his base.
My point is that one of the things Trump has done is to get others to reduce their tariffs and their NTBs, and that this is good for all Americans and most foreigners (harming pretty much only foreign special interests).
You assert that imposing and maintaining tariffs helps Trump’s base in practice, but I assert the opposite.
You hand wave away the reality of NTBs on top of tariffs in these various other countries, and you half acknowledge, but then half ignore that the “middle ground” needle threading that we do agree was appropriate in the post-WWII 20th century now benefits foreign special interests bigly to the detriment of the interests of almost all Americans.
That was certainly an interesting way of shoehorning some tangential tribalist rant into a discussion that didn't warrant it. Making a claim about "partisans" at the same time is pretty funny, too.
If applied US tariffs raise the cost of goods and services paid by US citizens for imports (reducing competitiveness of the product), why are exporters NECESSARILY having to pay the extra costs by sending more exports? Exporting countries will sell to other markets, if available, where their UN-tariffed prices are more competitive, and/or demand within the importing countries will decline or they will buy elsewhere. What am I missing?
Like he said in the China analogy, we instead just export 50 wheat for 100 cars. They don’t necessarily have to send more exports, but the point is that either way NX decreases.
If the states were independent nations with conflicting geopolitical agendas and monetary and fiscal sovereignty, they might make sense. Friedrich List spoke about classical economists utterly failing to understand the significance of the nation state as an economic unit over 150 years ago, and it appears some people still haven’t caught on.
Couldn’t the solution in terms of goods be that China sends only 100 cars still (50 for which they get paid, 50 which are free to the US govt). And as a result they buy only half the quantum of wheat from the US.
Only if the car manufacturer is fine taking a 50% cut in their revenue per car. Not many businesses have over 50% margins to continue making a profit cutting prices in half.
One point: China can also get the dollars by selling assets. Productive assets in particular. However, China severely restricts foreign ownership of productive assets, with limits around 5% (vs. generally open in the US). That, of course, reduces the demand for renminbi, keeping its price lower than otherwise. Buying companies for dollars was an important channel in exporting dollars to Europe post-WW2. The punchline: free trade also in assets.
"If you don’t want to send the Marines to Mexico to take some of their worker’s belongings, just why is doing the same thing by trade policy a good thing overall?"
C'mon John, how can you possibly purport to be unbiased when you make unsupported statements that smuggle in your conclusion?" Your subtext is: "doing something by trade policy is BAD", regardless of the actual facts on the ground. What if the workers in question were putting American workers out of jobs (not saying they are, but that is certainly a possibility). What if the employers of those workers were knowingly undercutting American manufacturers to drive them out of business, to be followed by monopolistic price gouging? Is it really the case that there are no conditions where changes in trade policy to benefit America vs the rest of the world is a good thing?
I'm absolutely certain that if the Biden administration had proposed tariff hikes, you and the rest of the mainstream media would be praising the policy on every street corner. If this is untrue in your particular case I sincerely apologize, but you must understand that there is overwhelming evidence that TDS is real and pervasive, whether or not you personally are suffering from the ailment. 'Elite' scientists who scream "follow the science!" while doing the exact opposite have severely devalued anything you or any other 'scientist' says. Maybe you should do an analysis of the past and ongoing economic costs to Americans of all the Obama and Biden administration anti-American trade policies have caused (if you dare - you might lose your cushy appointment when you get cancelled for 'pro American blasphemy').
While I'm not an Elite Economist like yourself and only have an earned Doctorate in engineering, I kinda like the idea of tariffs that rectify long-standing trade imbalances and - at least potentially - lead to removing some or all of Americans' income tax burden.
1. Doctor: "If you keep eating cyanide-laced food you will die young"
Patient: "But I really like this stuff"
Result: Either the patient stops eating poisonous stuff (i.e. 'rectifying the imbalance'), or they die young. If you were the patient, which would you prefer.
2.Well, if done well, the U.S. government might operate at a profit, thereby providing dividends instead of extorting taxes. There were NO income taxes for the first century of our nation, so clearly you CAN run a nation without them. Income taxes were collected for a few years during the Civil War. They were not imposed again until 1913. Why would you prefer income taxes over tariffs?
3. after 30 seconds with Grok:
American Tobacco Company, early 1900's.
American Sugar Refining Company 1889-Early 1900's
Standard Oil 1870-1890's
General Foods (Maxwell House coffee) 1970's
Bell System/AT&T - late 19th/early 20th century
China - mid 20th century to present. China has used essentially slave labor to dump goods into American with the specific strategy of wiping out American domestic fabrication industries, to the point where China has a clear monopoly in rare earths and high-tension transformer fabrication. If we were to get into a shooting war with China, the first indication would probably be the widespread destruction of power station transformers, and our whole country and all of its manufacturing capacity would go dark. If you don't think that is a problem, then you aren't thinking.
Other than that, I have no evidence. What evidence do you have that 'dumping' ISN'T a problem?
1) Okay, so you can’t explain why a long standing trade imbalance has to be rectified. Instead, you just say “it’s poison” and that’s it. Any actual substance? You know Cochrane has talked about trade balances multiple times, right?
2) Tariffs are much more distortionary than income taxes. And US industries and consumers bear the taxes, so they are no less “extortion” than income taxes (and very leftist wording, interesting). Just because we did something in the first century in our nation doesn’t mean it’s optimal to do it now— developing countries use tariffs because it’s hard for them to collect income taxes well, not because it’s optimal. We know the opinion of every single economist on this.
3) So, dumping is a modern problem in a few industries by one country. It’s almost like we can have targeted tariffs and anti-dumping measures to take that into account (which we already did), versus broad based tariffs that hit every country (even the ones we used for “friendshoring”) and across a huge swath of goods. Every economist admits that national security can be taken into account, but of course idiots like you use it to motte and bailey your way into supporting destructive tariffs.
Please actually become educated in these issues, at least to the point where you can actually explain them (see #1). And maybe become educated to the person you’re commenting under, who is absolutely not an orthodox economist by any means and has problems with a ton of Biden and past Democrat policies. The only one with Trump Derangement Syndrome here is you, as you defend everything he does like a deranged person while normal people can criticize on both sides of the aisles (and have done their research).
I really forget how many terrible comments blogs like Cochrane’s and Sumner’s attract. Jesus
People like Trump don’t understand basic thermodynamics and basic economics. Money has zero real value. The reality is when you run a trade deficit people in other countries are providing you with real goods and services created with real inputs (labor and physical capital) in exchange for green coupons created out of thin air. It is like Tom Sawyer getting people to paint the fence. So the reality is that a trade deficit is ripping other countries off, they are doing real work and using real resources in exchange for green coupons with zero real value.
The only way you can make their green paper have zero value is by making every American citizen’s green paper have zero real value. That’s like saying why don’t you just run up your credit card and buy as much stuff as you can before declaring bankruptcy? Even if you don’t have to give it back, it isn’t a good idea. Moreover, while the green paper is ostensibly not that valuable in its own right, the “surplus consumption” available to the U.S. isn’t the most valuable thing either. What is more valuable is the productive capacity other countries develop in supplying our markets. Sure, this allows us to pursue our comparative advantage in producing porn, gambling apps, etc., but I am not so sure it is worth it.
Thank you for your comment. Where are you from? Currency does have real value, and capital flows, reserves, etc., have a lot to do with that. Please clarify how deficits are a rip - off. You should write a book on the subject.
I have been told by numerous highly educated people that Donald Trump is a great businessman. If that is the case why have hotels and casino businesses of his have declared bankruptcy six times between 1991 and 2009 due to its inability to meet required payments. Guess that's how Trump plays chess while everyone else is playing checkers
We shouldn't be trading with communist countries who can reduce prices at a whim. Also, tariffs are only part of the problem. The other is the "standards" problem.
If I might ask you something Dr. Cochrane: You don’t like a social safety net; you don’t like progressive taxation; I’m not even sure if you like spending on incredibly high social return public goods, like basic scientific and medical research. But do you really think we would be better off being like Putin‘s Russia in order to avoid those things? If not, then why are you supporting today’s Republican Party. Do you think they will be the first benign authoritarians in history, once they no longer need fear voters at all? Do you really think your economic libertarians will be able to control them, like the right thought they could control Hitler and his party?
Fortunately, the Soviet Union was never part of GATT.
Now that China is in the WTO with both the USA and China weaponizing trade chokepoints, how does the USA successfully manage a bifurcation of the WTO to overcome its dependence on China.
We can be more precise altogether.
The US of A does not face given world prices. If it did, domestic residents would pay the tariff. But it does not face world prices that fall all the way by our tariff! How much foreigners pay of the tariff depends on how responsive their supply is to our tariffs. I've seen estimates that foreigners pay 10% of our tariff. There's even an "optimum tariff formula"! This has been understood since Robert Torrens articulated the optimal tariff theory in his 1824 work, Essays on the Production of Wealth.
The point is we have to export less to pay for those imports after foreign prices fall. The money flows adjust to the terms-of-trade change.
My big surprise has been that except for China no one has retaliated. If the rest of the world did, we'd be worse off for imposing the tariff, and the rest of the world would be better off than if they had not retaliated.
That's why we have [had] a WTO.
“My big surprise has been that except for China no one has retaliated. If the rest of the world did, we'd be worse off for imposing the tariff, and the rest of the world would be better off than if they had not retaliated.”
Clearly the main reason for this is that this is one of the things Trump got correct: these other countries all “need” us way more than we “need” them, and so on net they HAVE been getting “a better deal” relative to Americans from the current terms of trade.
Critiques the other elements of his tariff policy all you like - I too critique many parts - but he analyzed this part correctly. Had he used his leverage to then lower tariffs further on the countries that lowered their NTbs and tariffs, he would have done the world a great service.
It's not about need. It's about consistent policy interests. China did retaliate. The EU, whose trade policy is made by a consensus of god knows how many countries with different interests, did not. It could not. Other individual countries could likely not have moved the terms-of-trade in their own favor, so they rationally did nothing.
It seems we are agreeing (though you choose to “punt” in the EU).
The terms of trade in the world were more to the benefit of the interests of other countries than they were to the benefit of the U.S.
In the aftermath of WWII, this was imo not merely the “right” thing to do morally, but also the right thing to do for U.S. long-term self-interest.
Over the decades, and in particular over the last two decades, this has become less and less true.
And the burden of the less favorable terms of trade falls disproportionately on the working class, which is Trump’s base. So he decided to do something about it.
Again, I do NOT support Trump’s desire for ongoing higher tariffs on imports; I think those in aggregate do harm to all, including those who are his biggest supporters.
But getting other countries to lower their tariffs and NTBs, as he has done with at least some success, is beneficial to both American interests and the interest of the large majority of people in those other countries as well.
We don't agree. We each see the world in a way in which we can communicate.
The post war GATT/WTO frame work saw to it that each participating country's terms-of-trade were not hurt. [I will stop digging holes in my streets to the extent you stop digging holes in your streets.]
It also saw to it that special interests were not hurt too much to cause political uproar. What it did not recognize and deal with is that the special interests never, never were those who supported less skilled, or old skilled workers. These guys got left behind, long before China came onto the scene. China just made the domestic distributional issue virulent.
Trump recognized this, and has acted accordingly. He is trying to tilt the income distribution in the direction of his supporters.
A move away from free trade means there are winners and there are losers, but the losers lose more than the winners win. But the winners are Trump supporters.
Ok, but you are not taking my argument at face value, you are shifting it to suit yours.
We both agree Trump is playing to his base.
My point is that one of the things Trump has done is to get others to reduce their tariffs and their NTBs, and that this is good for all Americans and most foreigners (harming pretty much only foreign special interests).
You assert that imposing and maintaining tariffs helps Trump’s base in practice, but I assert the opposite.
You hand wave away the reality of NTBs on top of tariffs in these various other countries, and you half acknowledge, but then half ignore that the “middle ground” needle threading that we do agree was appropriate in the post-WWII 20th century now benefits foreign special interests bigly to the detriment of the interests of almost all Americans.
I guess we don't agree after all.
I've gotten a taste recently for "It works both ways." Too many partisans act otherwise.
Trump I's executive powers were dangerous, Biden's were glorious, and Trump II's are dangerous again. Or was it the other way around?
Our tariffs are fantastic. Theirs are predatory.
It's only fair to force our environmental and labor laws on other countries. It's evil non-trade barriers when they do it.
That was certainly an interesting way of shoehorning some tangential tribalist rant into a discussion that didn't warrant it. Making a claim about "partisans" at the same time is pretty funny, too.
Your substantive objections are duly noted. Where do I send the refund?
I’m not sure I understand…
If applied US tariffs raise the cost of goods and services paid by US citizens for imports (reducing competitiveness of the product), why are exporters NECESSARILY having to pay the extra costs by sending more exports? Exporting countries will sell to other markets, if available, where their UN-tariffed prices are more competitive, and/or demand within the importing countries will decline or they will buy elsewhere. What am I missing?
Like he said in the China analogy, we instead just export 50 wheat for 100 cars. They don’t necessarily have to send more exports, but the point is that either way NX decreases.
If tariffs made sense we would impose them between US states, or why not counties and neighborhoods. Complete economic illiteracy.
If the states were independent nations with conflicting geopolitical agendas and monetary and fiscal sovereignty, they might make sense. Friedrich List spoke about classical economists utterly failing to understand the significance of the nation state as an economic unit over 150 years ago, and it appears some people still haven’t caught on.
Couldn’t the solution in terms of goods be that China sends only 100 cars still (50 for which they get paid, 50 which are free to the US govt). And as a result they buy only half the quantum of wheat from the US.
Only if the car manufacturer is fine taking a 50% cut in their revenue per car. Not many businesses have over 50% margins to continue making a profit cutting prices in half.
V insightful - thank you, John.
One point: China can also get the dollars by selling assets. Productive assets in particular. However, China severely restricts foreign ownership of productive assets, with limits around 5% (vs. generally open in the US). That, of course, reduces the demand for renminbi, keeping its price lower than otherwise. Buying companies for dollars was an important channel in exporting dollars to Europe post-WW2. The punchline: free trade also in assets.
"If you don’t want to send the Marines to Mexico to take some of their worker’s belongings, just why is doing the same thing by trade policy a good thing overall?"
C'mon John, how can you possibly purport to be unbiased when you make unsupported statements that smuggle in your conclusion?" Your subtext is: "doing something by trade policy is BAD", regardless of the actual facts on the ground. What if the workers in question were putting American workers out of jobs (not saying they are, but that is certainly a possibility). What if the employers of those workers were knowingly undercutting American manufacturers to drive them out of business, to be followed by monopolistic price gouging? Is it really the case that there are no conditions where changes in trade policy to benefit America vs the rest of the world is a good thing?
I'm absolutely certain that if the Biden administration had proposed tariff hikes, you and the rest of the mainstream media would be praising the policy on every street corner. If this is untrue in your particular case I sincerely apologize, but you must understand that there is overwhelming evidence that TDS is real and pervasive, whether or not you personally are suffering from the ailment. 'Elite' scientists who scream "follow the science!" while doing the exact opposite have severely devalued anything you or any other 'scientist' says. Maybe you should do an analysis of the past and ongoing economic costs to Americans of all the Obama and Biden administration anti-American trade policies have caused (if you dare - you might lose your cushy appointment when you get cancelled for 'pro American blasphemy').
While I'm not an Elite Economist like yourself and only have an earned Doctorate in engineering, I kinda like the idea of tariffs that rectify long-standing trade imbalances and - at least potentially - lead to removing some or all of Americans' income tax burden.
You don't remember Obama's tire tariffs?
1) Why does a long-standing trade imbalance have to be “rectified”?
2) Why would we prefer tariffs over income taxes?
3) What evidence do you have to show that dumping is a real problem faced by American manufacturers?
1. Doctor: "If you keep eating cyanide-laced food you will die young"
Patient: "But I really like this stuff"
Result: Either the patient stops eating poisonous stuff (i.e. 'rectifying the imbalance'), or they die young. If you were the patient, which would you prefer.
2.Well, if done well, the U.S. government might operate at a profit, thereby providing dividends instead of extorting taxes. There were NO income taxes for the first century of our nation, so clearly you CAN run a nation without them. Income taxes were collected for a few years during the Civil War. They were not imposed again until 1913. Why would you prefer income taxes over tariffs?
3. after 30 seconds with Grok:
American Tobacco Company, early 1900's.
American Sugar Refining Company 1889-Early 1900's
Standard Oil 1870-1890's
General Foods (Maxwell House coffee) 1970's
Bell System/AT&T - late 19th/early 20th century
China - mid 20th century to present. China has used essentially slave labor to dump goods into American with the specific strategy of wiping out American domestic fabrication industries, to the point where China has a clear monopoly in rare earths and high-tension transformer fabrication. If we were to get into a shooting war with China, the first indication would probably be the widespread destruction of power station transformers, and our whole country and all of its manufacturing capacity would go dark. If you don't think that is a problem, then you aren't thinking.
Other than that, I have no evidence. What evidence do you have that 'dumping' ISN'T a problem?
1) Okay, so you can’t explain why a long standing trade imbalance has to be rectified. Instead, you just say “it’s poison” and that’s it. Any actual substance? You know Cochrane has talked about trade balances multiple times, right?
2) Tariffs are much more distortionary than income taxes. And US industries and consumers bear the taxes, so they are no less “extortion” than income taxes (and very leftist wording, interesting). Just because we did something in the first century in our nation doesn’t mean it’s optimal to do it now— developing countries use tariffs because it’s hard for them to collect income taxes well, not because it’s optimal. We know the opinion of every single economist on this.
3) So, dumping is a modern problem in a few industries by one country. It’s almost like we can have targeted tariffs and anti-dumping measures to take that into account (which we already did), versus broad based tariffs that hit every country (even the ones we used for “friendshoring”) and across a huge swath of goods. Every economist admits that national security can be taken into account, but of course idiots like you use it to motte and bailey your way into supporting destructive tariffs.
Please actually become educated in these issues, at least to the point where you can actually explain them (see #1). And maybe become educated to the person you’re commenting under, who is absolutely not an orthodox economist by any means and has problems with a ton of Biden and past Democrat policies. The only one with Trump Derangement Syndrome here is you, as you defend everything he does like a deranged person while normal people can criticize on both sides of the aisles (and have done their research).
I really forget how many terrible comments blogs like Cochrane’s and Sumner’s attract. Jesus
https://michaelpettis858496.substack.com/p/whose-government-should-intervene?r=1z5qli&utm_medium=ios
https://player.captivate.fm/episode/ffc56082-94a9-469d-9d89-f69803853ab8
People like Trump don’t understand basic thermodynamics and basic economics. Money has zero real value. The reality is when you run a trade deficit people in other countries are providing you with real goods and services created with real inputs (labor and physical capital) in exchange for green coupons created out of thin air. It is like Tom Sawyer getting people to paint the fence. So the reality is that a trade deficit is ripping other countries off, they are doing real work and using real resources in exchange for green coupons with zero real value.
The only way you can make their green paper have zero value is by making every American citizen’s green paper have zero real value. That’s like saying why don’t you just run up your credit card and buy as much stuff as you can before declaring bankruptcy? Even if you don’t have to give it back, it isn’t a good idea. Moreover, while the green paper is ostensibly not that valuable in its own right, the “surplus consumption” available to the U.S. isn’t the most valuable thing either. What is more valuable is the productive capacity other countries develop in supplying our markets. Sure, this allows us to pursue our comparative advantage in producing porn, gambling apps, etc., but I am not so sure it is worth it.
Sir :
Thank you for your comment. Where are you from? Currency does have real value, and capital flows, reserves, etc., have a lot to do with that. Please clarify how deficits are a rip - off. You should write a book on the subject.
I have been told by numerous highly educated people that Donald Trump is a great businessman. If that is the case why have hotels and casino businesses of his have declared bankruptcy six times between 1991 and 2009 due to its inability to meet required payments. Guess that's how Trump plays chess while everyone else is playing checkers
We shouldn't be trading with communist countries who can reduce prices at a whim. Also, tariffs are only part of the problem. The other is the "standards" problem.
If I might ask you something Dr. Cochrane: You don’t like a social safety net; you don’t like progressive taxation; I’m not even sure if you like spending on incredibly high social return public goods, like basic scientific and medical research. But do you really think we would be better off being like Putin‘s Russia in order to avoid those things? If not, then why are you supporting today’s Republican Party. Do you think they will be the first benign authoritarians in history, once they no longer need fear voters at all? Do you really think your economic libertarians will be able to control them, like the right thought they could control Hitler and his party?
Fortunately, the Soviet Union was never part of GATT.
Now that China is in the WTO with both the USA and China weaponizing trade chokepoints, how does the USA successfully manage a bifurcation of the WTO to overcome its dependence on China.
Is there a better approach than tariffs?
". . . les tarifs," etc, and related narrative : Don't do it.