Trade Basics
Follow the money past the initial recipient. Look past the money to the underlying goods and services. A recent trade items bring these adages back to mind.
Stephen Miran attracted a lot of attention with calculations that foreigners pay for tariffs. President Trump talks frequently about making foreigners pay for things. I also attended an interesting talk at which the speaker bemoaned China’s supposedly “predatory” trade practices.
The immediate criticism of Miran was over whether, indeed, foreigners bear the burden of tariffs. I think that misses the point. Suppose for the sake of argument that they do, 100%. Where do foreigners get the money to pay the tariffs? There is only one way to get the money—sell more things to the US!
Look past the money. Suppose China sends us 100 cars, and we send them 100 tons of wheat. We put in a tariff: For every car that China sells in the US, they have to give one car to the US government. China has to send us 200 cars in return for 100 tons of wheat. Or, we only export 50 tons of wheat to get the 100 cars. Either way, imports rise, exports fall. I’m not sure this is the outcome that trade warriors want!
The President has a businessman’s instinct for getting other people to pay more for your products, or just flat out send you money. But if foreigners send US dollars, where do they get the dollars? By sending us goods and services. If they send us Euros, what do we do with them? Buy European goods and services.
Look past the money. The only way foreigners can pay us, in the end, is to put things on boats and send them over.
It’s interesting that trade warrior’s intuition gets that being paid is good, but not that receiving goods is what being paid is all about.
I heard “predatory” trade practices a few times last week. The most interesting: The speaker acknowledged a question stating that colonialism was “predatory:” The UK forced China and India (so goes the claim) to put things on boats and send them to England. In the next sentence, the speaker claimed that allowing China to enter the WTO was the worst policy mistake of our generation, because of China’s “predatory” trade practices. China puts things on boats, and sends them to us, at artificially low prices, i.e. in return for goods of lesser value. Make up your mind, say I! Either colonial extraction was a great favor by England to China and India, by inducing China and India to develop export industries, or the exact same act is a favor to us not to them.
There’s lots more to trade. Even if Miran’s “optimal tariff” argument is right, and foreigners do pay us, and acknowledging that means they put stuff on boats or trucks and send it to us, is that good? Is the US position in the world to use our “market power” including military force, to get the rest of the world to put things on boats and send them to us for free (at the margin)? 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?
Anyway, it’s always helps to ask where the money goes for a few steps, and to look past the money and figure out what a policy means in terms of underlying real goods and services.
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.
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.