A Few Reflections on Tariff Week

There are, amidst the chaos, insights to be gleaned.

Like many of my econ sisters and brothers, I spent this week watching, thinking, and worrying about the Trump administration’s tariff policy. Their actions have been erratic, destructive, and highly unpopular, and yet unanswered questions remain and there are insights to be gleaned from this mess.

Here are some of those insights, in condensed format because it’s Saturday, starting with what I view as an important framing for an ongoing trade debate that began in the early 1990s with NAFTA.

Are you workers or consumers? Make up your mind!

It’s admittedly 40k feet up, but a useful way of understanding the evolution of the American trade debate is to ask who is at the center of the argument, workers or consumers? Before NAFTA, there wasn’t much debate. The thinking was that because the supply effects of expanded trade, especially with lower-wage countries, tend to benefit American shoppers, such expansions are always warranted.

But with NAFTA, the impact of such trade on domestic workers in tradeable sectors (and outside of those sectors, due to spillovers—see China Shock papers), and the communities in which they lived and worked, came to the fore. Worker-centered trade policy was born, based on the proposition that people aren’t only consumers; they’re also workers.

Suffice it to say, this new framing was a lot more popular with politicians and their constituents than with traditional trade economists, with notable exceptions (Dani Rodrik; the Economic Policy Institute, where I cut my teeth).

The correct and obvious answer is that people are both consumers and workers, and smart trade policy must therefore be both/and, which is easier said than done. But we wrote a lot about this enlightened middle path at Biden’s CEA, wherein we stressed the importance of robust trade flows with reliable trading partners, complemented by full employment labor market policies, blocking unfair trade (using, among other tools, targeted, not sweeping, tariffs!), and industrial policy that offsets inadequate domestic investment in key sectors, including clean energy and semiconductors. (The relevant links are at the end of this piece.)

Sticking with this frame, the problem with the current false populists is that they’ve flipped: people are workers, not consumers. So you get millionaires saying offensive things about weaning Americans off of cheap goods, and “we’re okay with that,” re sweeping tariffs impact on consumer prices.

Again, I know first hand that going from 40k frames to ground-level policies requires a lot of work. But I’m 100% confident that if you start from the fact that people are both workers and consumers, your chance of ending up with optimal trade policy is much enhanced.

Why is He Doing This?!

I did a bunch of media this week on the Trump tariffs (and the Trump Slump they’re driving) and the question of why they’re doing all of this lurching repeatedly came up. Probably the most generous answer is to take some Trump officials at their word that they want to move production that’s occurring in Can and Mex into the US, de-integrating the highly integrated North American production system, especially for vehicles. I think that’s a terrible idea, but I get that some of them disagree.

As we discussed on Chris Hayes last night, that won’t work—there’s no evidence sweeping tariffs will get you there, in part due to the unscrambling problem noted below. But I also doubt this is the President’s motivation.

For President Trump, I think you need to start with this statistic noted by Ana Swanson in the NY Times re relative trade flows.

Canada and Mexico both send about 80 percent of their exports to the United States, while only about a third of U.S. exports go to Canada and Mexico collectively.

In numerous comments, some vague, some less so, President Trump has revealed that he knows these shares and that he believes, correctly, that we could hurt them a lot more than they could hurt us. It just increasingly seems like it’s the “hurt” that matters here. Because we can hurt them, we should hurt them. Why we’d want to do so is somehow beside the point.

The Three Forces Tariffs Unleash

Elsie Peng from the Goldman Sachs Marco Research team recently released a smart analytic piece (paywall) on the economics of tariffs, wherein she focuses on the…

…three production-side channels through which tariff increases can affect US domestic industries. First, higher tariff rates will raise import prices, which may boost demand for domestically-produced goods…Second, higher tariff rates raise production costs for domestic producers that rely on imported inputs…Third, large-scale tariff increases may prompt foreign retaliation against US exports, which may weigh on foreign demand for US products.

The analysis then tries to measure and net out these impacts. The results show that effects 2+3 slightly > 1, though when Peng did the analysis, the Mex/Can tariffs were not in their baseline (GS recently added some version of them to their baseline case, leading to a significant markdown in their forecast).

My point here regards effect two, what I’ve often referred to as the futile attempt to unscramble the globalization omelet. It’s why Alcoa (the largest American aluminum producer) always wants an exemption from the tariff designed to protect it: as much as 45% of U.S. imports are intermediate inputs into domestic production. If the medicine you’re applying to help U.S. producers is hurting them, then maybe you need different, better targeted meds.

Read this OpEd

I thought this oped by PA Rep. Chris Deluzio captured many of the nuances I’ve tried to briefly outline above. The politics of the week can lead Trump admin opponents to conclude that any-and-all tariffs are ill-advised and negative for investors, producers, consumers. That’s true re sweeping tariffs and tariffs on close-knit partners, but it’s too sweeping a conclusion. Targeted tariffs have long been important, both economically and politically, whether on a narrow category that’s being dumped (rubber-tires, grade 4) or a domestic sector targeted by mercantilists intent on exporting overcapacity.

Deluzio also recognizes the “they-won’t-work” problem noted above: “Democrats should emphasize that tariffs alone will not create jobs or build new plants. They have to be paired with investments, tax incentives, and other industrial policies.”

Once again…the middle way.