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About those weird tariff numbers
Many people have already remarked on the bizarre variation in Trump tariff rates between one nation and another, and various reporters have discussed the "formula" that the Trump administration seems to have used to determine most of those rates. (Russia, North Korea, and Iran are mysteriously all at the 10% level.) It's not completely nonsensical: indeed, if there were a homework problem about tariffs in an Algebra I textbook written for twelve-year-olds who knew nothing about economics, this might be the answer in the back of the book.
Question 15: Your country annually sells $X worth of goods to the country next door, and buys $Y worth of goods from that country. If X < Y, this situation is called a "trade deficit". What level of tariffs would you need to impose on imports to make the trade deficit disappear?
Solution: let T be the tariff rate; the trade deficit is Y - X, the revenue from tariffs is T * Y, so equating the two and dividing both sides by Y, we get T = (Y-X)/Y.
Yes, it really is that simple and stupid.
For example, according to this Times article, the US bought $228M worth of goods from Lesotho last year, while selling it only $7M. (228-7)/228 = .97, so the formula suggests a tariff rate of 97% to balance things out. Trump says he's "being kind" to other countries by setting his tariff rates at only half this level, which is why he's imposing a tariff on Lesotho of "only" 50%. (The Times article also points out that the people of Lesotho don't buy much from the US, or from any country except South Africa, because most of them are desperately poor, and what they sell to the US is mostly diamonds, which can't be mined in the US because the US doesn't have naturally-occurring diamonds.)
Of course, there are lots of real-world issues that don't fit into this Algebra I question, most obviously
The Trump administration's formula acknowledges these -- sorta. It inserts two constant factors into the equation, one to represent what fraction of the tariff actually comes from Americans and one to represent how much imports decrease as a result of the tariff. In reality, it's not clear that either of those is actually a constant factor: both of them are likely to be superlinear, perhaps quadratic, in the size of the tariff. Anyway, it doesn't matter because whoever came up with the formula arbitrarily assigned one of them the value 4 and the other the value 1/4, so they cancel one another out and we can ignore both of them.
Another real-world issue that doesn't fit into the Algebra I question is how the other country will respond to your imposition of a tariff: will it reduce its own tariffs and trade barriers to get you to drop yours, will it increase its own tariffs and trade barriers in retaliation for you raising yours, etc.? Trump is usually very interested in forcing other people to bend to his will, but in this case he doesn't seem to care much what other countries do in response: he's going to take matters into his own hands and zero out all the trade deficits at the stroke of a pen.
A fourth real-world issue is the distinction between goods and services: for example, the US has a substantial trade deficit with the EU if you only look at goods, while it has a substantial trade surplus with the EU if you only look at services; combining the two, there's still a trade deficit, but much smaller than the goods-only deficit than the administration seems to have used.
Fifth, trade numbers between countries can fluctuate wildly from one year to the next: if one airliner or fighter-jet is delivered in December rather than January, that can make an appreciable difference. It would make more sense to use average figures over, say, five or ten years to do these computations.
And the elephant in the room: all of this is based simply on cash flows. The most common (populist) argument in favor of tariffs and trade barriers is that they'll encourage a particular domestic industry and its workers by protecting them from foreign competition. Of course, this effect only works if the tariffs are expected to stay in place for long enough (several years) for manufacturers to build factories and move their production, and long-term predictability isn't Trump's style. At the same time, a populist argument against tariffs and trade barriers, particularly on parts and raw materials, is that they'll hurt domestic industry and its workers by making their inputs more expensive, and they'll hurt consumers by making everything more expensive. These effects are more immediate than the positive effect on the protected industry, and they apply to every part of the domestic economy except the industry you're trying to protect. The formula takes no consideration of these effects (positive or negative) on domestic industry or consumers, only on how much cash is entering or leaving the country.
In the 17th and 18th centuries, the great nations of Europe made trade policy based on a theory called "mercantilism", which measured a nation's greatness by how much gold and silver were within its borders, so selling more and buying less from other countries is always good. Adam Smith pointed out in 1776, in Wealth of Nations, that this is bonkers: in reality trade benefits both parties (or they wouldn't have done it). If you have the choice among buying something cheaply from a neighbor, making it more expensively at home, or not having it at all, you and your people may be best off buying it from your neighbor (especially since this makes your neighbor cash-rich and more able to buy other things from you). A few decades later, David Ricardo elaborated on this with the "theory of comparative advantage": to oversimplify, if your country (for reasons of natural resources, expertise, etc.) can produce commodity A more efficiently than commodity B, while a neighboring country is better at producing commodity B than commodity A, both countries are better off if you produce A and trade it to your neighbor for B. And no real economist or trade-policy expert in over 200 years has believed in mercantilism.
But Trump does. He measures everything in cash, including America's "greatness", so his tariff policy treats tariffs purely as a source of cash revenue, with no concern for any other effects they might have. See today's XKCD for another illustration of how silly this is.
So based on an economic theory that was thoroughly discredited 250 years ago, by ignoring everything we know about the behavior of actual human beings, companies, and nations, and by measuring only one year's exchange of physical goods for cash rather than any broader measures, he's come up with a policy that serves only to demonstrate his ability to tank the national and world economies and cause mass suffering.
Question 15: Your country annually sells $X worth of goods to the country next door, and buys $Y worth of goods from that country. If X < Y, this situation is called a "trade deficit". What level of tariffs would you need to impose on imports to make the trade deficit disappear?
Solution: let T be the tariff rate; the trade deficit is Y - X, the revenue from tariffs is T * Y, so equating the two and dividing both sides by Y, we get T = (Y-X)/Y.
Yes, it really is that simple and stupid.
For example, according to this Times article, the US bought $228M worth of goods from Lesotho last year, while selling it only $7M. (228-7)/228 = .97, so the formula suggests a tariff rate of 97% to balance things out. Trump says he's "being kind" to other countries by setting his tariff rates at only half this level, which is why he's imposing a tariff on Lesotho of "only" 50%. (The Times article also points out that the people of Lesotho don't buy much from the US, or from any country except South Africa, because most of them are desperately poor, and what they sell to the US is mostly diamonds, which can't be mined in the US because the US doesn't have naturally-occurring diamonds.)
Of course, there are lots of real-world issues that don't fit into this Algebra I question, most obviously
- how much of the tariff is actually paid by importers, retailers, and customers in this country rather than by the other country
- how much the tariff's existence changes the levels of imports and exports.
The Trump administration's formula acknowledges these -- sorta. It inserts two constant factors into the equation, one to represent what fraction of the tariff actually comes from Americans and one to represent how much imports decrease as a result of the tariff. In reality, it's not clear that either of those is actually a constant factor: both of them are likely to be superlinear, perhaps quadratic, in the size of the tariff. Anyway, it doesn't matter because whoever came up with the formula arbitrarily assigned one of them the value 4 and the other the value 1/4, so they cancel one another out and we can ignore both of them.
Another real-world issue that doesn't fit into the Algebra I question is how the other country will respond to your imposition of a tariff: will it reduce its own tariffs and trade barriers to get you to drop yours, will it increase its own tariffs and trade barriers in retaliation for you raising yours, etc.? Trump is usually very interested in forcing other people to bend to his will, but in this case he doesn't seem to care much what other countries do in response: he's going to take matters into his own hands and zero out all the trade deficits at the stroke of a pen.
A fourth real-world issue is the distinction between goods and services: for example, the US has a substantial trade deficit with the EU if you only look at goods, while it has a substantial trade surplus with the EU if you only look at services; combining the two, there's still a trade deficit, but much smaller than the goods-only deficit than the administration seems to have used.
Fifth, trade numbers between countries can fluctuate wildly from one year to the next: if one airliner or fighter-jet is delivered in December rather than January, that can make an appreciable difference. It would make more sense to use average figures over, say, five or ten years to do these computations.
And the elephant in the room: all of this is based simply on cash flows. The most common (populist) argument in favor of tariffs and trade barriers is that they'll encourage a particular domestic industry and its workers by protecting them from foreign competition. Of course, this effect only works if the tariffs are expected to stay in place for long enough (several years) for manufacturers to build factories and move their production, and long-term predictability isn't Trump's style. At the same time, a populist argument against tariffs and trade barriers, particularly on parts and raw materials, is that they'll hurt domestic industry and its workers by making their inputs more expensive, and they'll hurt consumers by making everything more expensive. These effects are more immediate than the positive effect on the protected industry, and they apply to every part of the domestic economy except the industry you're trying to protect. The formula takes no consideration of these effects (positive or negative) on domestic industry or consumers, only on how much cash is entering or leaving the country.
In the 17th and 18th centuries, the great nations of Europe made trade policy based on a theory called "mercantilism", which measured a nation's greatness by how much gold and silver were within its borders, so selling more and buying less from other countries is always good. Adam Smith pointed out in 1776, in Wealth of Nations, that this is bonkers: in reality trade benefits both parties (or they wouldn't have done it). If you have the choice among buying something cheaply from a neighbor, making it more expensively at home, or not having it at all, you and your people may be best off buying it from your neighbor (especially since this makes your neighbor cash-rich and more able to buy other things from you). A few decades later, David Ricardo elaborated on this with the "theory of comparative advantage": to oversimplify, if your country (for reasons of natural resources, expertise, etc.) can produce commodity A more efficiently than commodity B, while a neighboring country is better at producing commodity B than commodity A, both countries are better off if you produce A and trade it to your neighbor for B. And no real economist or trade-policy expert in over 200 years has believed in mercantilism.
But Trump does. He measures everything in cash, including America's "greatness", so his tariff policy treats tariffs purely as a source of cash revenue, with no concern for any other effects they might have. See today's XKCD for another illustration of how silly this is.
So based on an economic theory that was thoroughly discredited 250 years ago, by ignoring everything we know about the behavior of actual human beings, companies, and nations, and by measuring only one year's exchange of physical goods for cash rather than any broader measures, he's come up with a policy that serves only to demonstrate his ability to tank the national and world economies and cause mass suffering.