According to the leader of the free world, trade wars redound
to the glory of the aggressor. Donald Trump’s new 25% tariff on Chinese imports
will “bring in FAR MORE wealth to our Country than even a phenomenal deal of
the traditional kind…,” tweets the president of the United States. “Would be
wise for [the Chinese] to act now, but love collecting BIG TARIFFS!”
True, but Americans may not love paying them. Despite The Donald’s vim, tariffs may have no
lasting effect on the Yankee economy, aside from protecting high-cost
producers.
Check it out.
Tariffs discourage imports into the US and thus boost net exports – that
is, net sales by the US to the rest of the world, or exports minus imports. Europeans will buy US whirligigs by selling
euros for dollars. As demand for the
dollar rises, it will become more expensive in terms of euros, dissuading Europeans
from buying more US goods. Net exports
from the US will fall to their original level.
The tariff’s only accomplishment will be a costly dollar.
Of course, the tariff may affect production on US soil.
Americans may now buy a car from Detroit rather than from Beijing. On the other
hand, the tariff may also raise the cost of imported inputs, reducing US
production. Let us be kind to the
Trumpists and assume that the tariff raises US output on net, for a while
Spending on US goods will increase, so the US interest
rate will rise. For example, New York
families that want to buy homes may compete for bank loans by bidding up the
interest rate. This increases the value
of US assets that pay off at the new interest rate, so people around the world will
vie to buy them. Since they need dollars
for the purchases, they will sell foreign currency in exchange for bucks, the
foreign value of which appreciates. This
rise in the cost of a dollar cuts the demand for net US exports until we return
to the initial level of US output (gross domestic product, or GDP). Even with our kindness to Trumpists, the
tariff will not reshape the US economy.
In short, the tariff is just a price. It does not directly affect production in the
way that lathing machines do. Over time,
prices adjust until the US is again cranking out the amount of output that it
can sustain. This amount depends on the
number of workers and machines in the US, as well as on how they produce
(“technology,” if you will); it doesn’t depend on prices, which are
ephemeral. Yes, the tariff rises, which
spurs net exports. But then the exchange
rate – another price – appreciates, which reins net exports back in.
The tariff is just a sugar fix. Trump may be an addict; but most Americans
aren’t, as Mr. President may learn in November 2020. –Leon
Taylor tayloralmaty@gmail.com
Notes
This tale assumes that dollar prices don’t change
right away. This seems realistic:
According to a 1991 survey by US economist Alan Blinder, most US firms do not
change prices more often than once a year.
References
Felicia Sonmez. “Kudlow contradicts Trump on tariffs.”
Washington Post. May 13, 2019.
Washingtonpost.com
Good
reading
Alan S. Blinder.
Why are prices sticky?
Preliminary results from an interview study. National Bureau of Economic
Research Working Paper 3646.
Online. 1991.
N. Gregory Mankiw.
Macroeconomics. Eighth international edition. Worth Publishers and Palgrave Macmillan. 2013.
