Some people benefit from tariffs. Some people are hurt.
Economist Jim Stodder explains the economics of it in this guest post.
French Pinot Noir: $29.99/bottle
My amicus brief to the Supreme Court on tariffs cited where I will be hurt by tariffs. A tariff on empty wine bottles increases my costs. That lowers the competitiveness of my Pinot Noir wine against its primary competition, red wines from France, Italy, and Spain. But, I might come out ahead in a tariff war if European wines faced tariffs of, say, 30 percent. My wine would be cheap by comparison. I could sell more wine, or could raise my prices 30 percent, or a little of each. Great!!!
Who would pay that tariff? U.S. wine drinkers. They wouldn't know they were putting money into my pocket; they would just know that Oregon Pinot Noir wines look like a better deal than European wines, while noticing that wine has become expensive. Maybe that is the policy goal: help out U.S. producers and raise money for the government with this hidden sales tax -- although at the cost of higher inflation.
How to get such a favorable tariff? Maybe U.S. wine producers need to send a delegation to the White House to present President Trump a chunk of gold in the shape of a wine bottle.
Jim Stodder is a college classmate. He left school for a while amid the anti-war disturbances of the era, then returned to complete college and then get his Ph.D. in economics from Yale. He taught international economics and securities regulation at Boston University.
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Guest Post by Jim Stodder
Who Gets Hurt Most by Tariffs?
This question has been asked thousands of times since Trump imposed them, but seldom answered correctly. The correct answer is the one you’d expect from a damned economist. So I’ll give it – “It depends.”
I’ll try to explain. Like any tax, tariffs fall hardest on those least able to avoid them – those with the fewest options to the thing being taxed. This means the side that is less price-sensitive, whether it’s buyers or sellers. (Economists say “price-inelastic,” but I’ll avoid the jargon.)
Think of a heroin buyer. It doesn’t matter what the price is, he needs his fix. The seller knows it, so he passes on 100 percent of any price rise. But a tariff can hurt sellers as well. Think of a farmer. Once his crop is in the ground, he’s got to take what the market gives – even if it means selling at a loss. Better to cover half the cost of your crop than to get nothing.
Consider two cases of supply and demand: On the left, the sellers (exporters) are less price-sensitive, so their supply curve is steeper. On the right the buyers (importers) are less price-sensitive so their demand curve is steeper. If supply or demand is completely insensitive, that curve is vertical. The tariff is absorbed with no change in quantity, and that side pays 100 percent of the tax.
Losses for each side can be measured and are shown by the colored areas above – pink for the buyers and green for the sellers. The rectangles show the share of the tariff bill each pays for the quantity they still buy or sell. Triangles show their losses from what they can no longer buy or sell – benefits they had before the tariff at the pre-tariff price, P*.
It’s exporters who are most screwed in the first graph, paying about 80 percent of the tariff and deadweight costs. Think of U.S. farmers now selling at a loss because China has retaliated with its own tariffs and global export prices have plummeted.
In the second graph it’s the importers who pay about two-thirds of the tariff costs. Think of American consumers buying hard-to-replace electronic components. It all depends on who’s least price-sensitive.
So much for the theory. What’s the actual evidence on price-sensitivity?
A December 15 speech by Stephen Miran, a governor of the U.S. Federal Reserve, cites a major study showing that for 70 percent of U.S. exports by value, U.S. exporters bear at least 70 percent of the total burden of tariffs imposed by the importing country. This means most U.S. suppliers are price-insensitive – they look like those exporters in the first graph.
It breaks better for U.S. importers. Another Federal Reserve study shows that U.S. price sensitivity on Chinese imports is very low in the short-run – especially for hard-to-replace goods like electronic components. But consumers will get more selective in a year or two, as they find substitutes. So U.S. consumers start out looking like the miserable importers in the second graph, but in a few years they shift more burden onto the Chinese companies.
I see three direct political impacts. Number one is that Trump’s tariffs really could hurt China more than the U.S. – just so long as China doesn’t retaliate! But of course, it has. Trump supporters say that since we buy more from China than they buy from us, damages to our exporters from their tariffs aren’t as big as the damage our tariffs are doing to their exporters. Maybe so, but try telling that to American farmers.
Number two is that the impact of Trump’s tariffs on consumer prices will be much larger in the short run – once they get finalized – than in a year down the line. This helps explain why Trump was eager to announce his “Liberation Day” tariffs right out of the gate. Now he’s "adjusting" them.
But even if one side of the market gets hurt more, remember that both sides always get hurt. In this, trade wars are like real ones. Don’t start one unless you think you can win it quickly. History shows such confidence is often wrong.
This raises point number three. Come what may, there is one party that always benefits from tariffs – Donald Trump himself. Not for what tariffs do for the country, but what they do for him. Countries are busy courting, and in many cases bribing, Trump to get tariffs lowered. (If they buy Trump Coins, that bribe is hard to trace. They can still show him the receipts.) Never mind other people’s losses. For Trump, tariff is “the most beautiful word to me in the dictionary.”
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The last paragraph explains it for me with it benefits Trump, as that’s all that matters.
ReplyDeleteTariffs, can't live with them, can't live without them.
ReplyDeleteYes, they are a tool that all governments seem to use.
Take a product like the Apple iPhone, iPad, or even a MacBook.
One can login to Apple's Stores throughout the world and see the list price of essentially the same product in each one of those countries. It varies a lot.
Apple has a transfer price between its manufacturers and warehouses and its many subsidiaries through the world. Each one of those country's Apple subsidiaries knows what the US SRP is. Each subsidiary adjusts the local SRP based on the transfer price, import duties, and profit margin wanted for that country.
I experienced the same and learned a lot with my own company's prices set by my company's subsidiaries in Europe and Asia.
Sure, some sellers may buy in one country, to sell a product to users in other countries. There may be duties and tariffs to deal with.
In my own travels, I have purchased a product in a foreign country to bring back with me when I returned to the US. Of course, I had to be aware of import duties upon my return.
To me, tariffs (and duties) are ok. I just need to be aware of the pricing throughout the world
Don't forget, most countries do impose tariffs and duties for imports into their country. Sometimes to event discourage those imports to protect local sources.
Just look at the commodity prices of raw materials. One worldwide cost, but different prices and costs for each country due to transportation costs, duties, and tariffs. And local profit margin.
Similarly, look at the price of gasoline in each state of the US. West Coast prices are much higher than other states, as OR, WA, and CA add on additional local taxes in addition to transportation costs from refineries
To M2inFLA: Yes, tariffs are as common as sin, but this doesn’t make either one harmless. And happily, unlike sin, tariffs have been getting less common for 50 years – up until Trump. Indeed, global tariff rates had fallen so far that an expert like economist Paul Krugman could lament, one hopes ironically, that his chosen field would soon be irrelevant. Trump has shown that he needn’t have worried.
ReplyDeleteThat era of falling tariffs and increased international trade led to unprecedented growth in world GDP, led by poor nations like India and China. There have also been, to be sure, rising strains and inequalities from globalization. But despite what Trump says, tariffs are seldom the best way to address these.
M2inFLA is also right that prices of a good can differ around the world, and this is not always due to tariffs. There are relatively few goods, like oil, that are both so widely consumed and non-perishable that they trade internationally at (almost) a single world price. As global trade grows, price differences diminish, precisely because traders like M2inFLA will buy more where stuff is cheap and sell more where it is dear.
But as opposed to price differences caused by regional supply and demand, differences caused by tariffs create market inefficiencies, total losses greater than tariff revenue. Economists call these “Dead-Weight Losses” since no one benefits – neither exporters, importers, nor government.
Also, brisk trade makes countries less likely to fight. The joke used to be that China would never bomb the US because they might hit a Walmart. That joke doesn’t land so well anymore. Rising trade tensions now make war more likely. And the web of corruption Trump is spinning around trade will not make our trade partners more friendly.
I'll react to some responses not on this blog. I think it's beyond question that China is kicking US ass in the industries of the future. Something like 90% of solar panel, 80% of EV, 60% of wind turbine, and 99% of advanced battery manufacturing. (For this 99%, see article in today's NYT.)
ReplyDeletePlus, in the race to build up electrical capacity for AI data centers, Trump is now slowing the cheapest and most rapidly improving energy sources we have -- wind and especially solar power.
So we're ceding the energy of the future to China, which will be powering the world. And in so doing, we're making it ever less likely that we will hold onto our current lead in AI. Great strategy, Don!
Now all these things would be happening even if we had never touched tariffs. But Trump's new tariffs -- especially on our most trusted economic AND military allies -- make us much less likely to mount a credible race to even begin catching up with China on energy or to stay ahead on AI. We need the scale and expertise that can only be achieved by a multilateral democratic nations' response to China. Again, great job, Don.
In a few years, Americans will see our craven support of Trump as giving into a bully who showed typical bully cowardice. Trump has acted tough by beating up on smaller and overwhelmingly friendly nations while signalling US weakness and ceding power to our two principal rivals, Russia and China. His "Donroe" Doctrine to deport migrants to El Salvador and bomb little boats out of Venezuela is actually a strategic retreat from the main threats to US security.
This is not just a critique of Trump. It is more importantly, a recognition of our own fears and delusions as US citizens. We would never have elected this grotesque bully and coward if we were not so afraid to face our own weaknesses. We must see the world as it really is, and do what we need to do to protect our own country and the safety of the world.
Very well said.
Delete