Who really pays for commercial tariffs

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Customs and trade tariffs

T-shirt economy and trade tariffs

Some may wonder about the "how-you-me-so-me-you" in the trade conflict instigated by the US president. Really threatens a trade war and have the stock exchanges compared to. Is that why the previous year's high has been corrected downwards by 8%?

The economic Nobel laureate Krugman wrote in the New York Times (April 4th, 2018) maliciously: "One good answer is, that’s a stupid question". When discussing the stock market, one should always keep the following three rules in mind: 1.) the stock market is not the economy, 2.) the stock market is not the economy and 3.) the stock market is not the economy. The movements of stock markets could have a variety of reasons or none at all.

Another interpretation of the trade war issue would be the signal effect that the new leadership of the USA is denying the advantages of international value chains based on the division of labor and is thus acting irresponsibly, so to speak. Even if the overheated rhetoric resulted in a global trade war, conventional estimates of economic costs would not come close to 10%, or even 6% of GDP. Negative effects, yes, but nothing earth-shattering.

The cost of protectionism does not consist in the trade tariffs per se. International trade relies on comparative advantages: a country should specialize in what it can do best (most efficiently). Protectionism means that countries no longer produce what they can do best in relative terms, but also what they are less good at. Without a doubt, developed countries can also sew T-shirts instead of importing them from Bangladesh. With a high degree of probability - due to a higher penetration of capital goods in industry - even more T-shirts would be produced per person hour worked. However, the productivity advantage of highly developed economies would be much higher in other activities, for example in the production of high-quality machines for making clothes. The efficiency gains of the trading partners are highest when both produce what they can do best in relative terms.

The diagram on the T-shirt shows the classic representation (source: Mankiw, Principles of Economics) of the advantages of international trade. An import duty increases the price of, for example, imported steel by the additional amount of the duty. Domestic producers - who normally compete with foreign suppliers of imported steel, can sell their steel at the world market price plus this duty; an import duty on steel increases the price above world market price. Domestic producers are encouraged to increase their steel production (from QS1 to QS2). At the same time, an import duty increases the price that domestic buyers have to pay. As a result, consumers will reduce consumption (from QC1 to QC2).

The economic loss corresponds to the two red areas ('societal loss'). The higher prices lead to an expansion of the domestic supply, with - owing to the higher prices - at the same time reduced demand (due to the higher prices).

The following graphic shows the share of the manufacturing industry in the total labor market ex agriculture. The reduction from just under 40% in the final phase of World War II to below 10% today should give food for thought.

Turning back the wheel of (economic) history is an illusion

The election promises of the incumbent president are behind the trade tariff discussion that has been started. In contrast to the democratic challenger, he has realized that there is a large number of (resigned / frustrated) voters in the USA who are among the losers in global competition and have been largely ignored by previous politics. For example, we pointed out in an earlier blog that 50% of US households had not seen any progress in their real wages for 30 years (sic!). Thanks to the omnipresent media, this forgotten half of the workforce knows only too well how great the progress of the other half was during this time.

Perhaps it could be that the trade tariff discussion is essentially a threatening gesture, especially to get the Chinese (with USD 530 billion exports to the USA) to lower their market entry barriers (tariffs, tariffs and much more) in order for the USA (with USD 190 billion exports to China) gets higher sales opportunities. At least that is how one could interpret the recent public suggestions by Chinese Prime Minister Li Keqiang.

Trade tariffs are not suitable for reversing structural economic changes. Entrepreneurs in industries that produce, sell and earn more at home thanks to the tariffs and the associated border protection will be happy and benefit. The workers left behind by society from, for example, the Rustbelt, the oldest and largest industrial region in the northeastern United States, will hardly benefit from it. In particular, which is unfortunately to be assumed if nothing changes in the distribution of income and wealth in the USA. It is difficult for us Europeans to understand where the strong support for the incumbent president comes from. It could well be that the workers in the USA will be (a little) worse off economically with the tariffs, but they will feel better because their president is fighting for them.

As long as the healthy business orientation of the Americans, which is symbolically depicted on the T-shirt, continues and it becomes even more obvious that everyone loses in trade wars, the soup of the trade tariffs will probably be eaten less hot than spooned.