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Handwaving Freakoutery: Woke Tariffs - Wherein the United States suffers an outbreak of Critical Trade Theory
Also, what math educator Matt Parker calls "mathiness."
Math educator Matt Parker also made a video about the formula, criticizing it as "mathiness:" Superficial use of a mathematical formula to make something look well reasoned. He's not an economist, so he rightly didn't go very far with this criticism, but he cited a study on the effects of the 2018 trade war to show how complicated demand elasticity is, then pointed out that asterisks aren't even a "proper" multiplication symbol, they're just what's used on a qwerty keyboard. Is there any good economic analysis showing that ε is equal to the inverse of ϕ? If so, why isn't it being publicized by the WH? If not, why bother including them in the formula?
And what's the deal with "Critical Trade Theory?" Are trade deficits a good way to measure non-tariff trade barriers? If so, how? If not, why is the WH doing it?
The analogy to diversity and equity programs is a very good one. Tariffs are basically affirmative action for American companies to compete with foreign ones. Why we would want to compete with China in industries like textile manufacturing and lithium mining is beyond me, but it's clear that deviating from the natural order of things under free trade is going to lower the total efficiency of the market, in exchange for whatever intangible value we place in having American-made goods.
If only. If this were serious industrial policy it might have a glimmer of defensibility. Targeted tariffs combined with policies to enforce export discipline might make sense if you were really into having a manufacturing export-based economy. You're still making Americans poorer for the sake of your manufacturing fetish, but you can at least argue strategic reasons for it.
What we're getting is pretty much the opposite of that. The domestic economy is being categorically fenced off from foreign competition, there will be retaliatory tariffs, and American firms are going to be stuck trying to source everything domestically or paying an exorbitant markup to suppliers. The result is going to be less competitive producers subsisting off a captive market. American companies are not going to have to compete with foreign ones domestically, and they're certainly not going to be competing internationally.
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Being self sufficient is a goal in itself. Being reliant on other countries is a risk.
It creates good jobs in the US.
More smaller mines and processing plants in different countries is less risky than having a globally centralized industry.
Standing on your feet for 7 hours a day is not a great job. Everyone I know that did it came home and immediately got drunk or high or both, every day.
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It's technically true that Trump's 'retaliatory' tariffs aren't actually retaliatory, as most countries don't have tariffs on vast majority of US imports. However, there are other actual, tangible non-tariff trade barriers countries use, it's not just illusory 'Critical Trade Theory'.
Tariffs are considered archaic and stupid in our global WTO liberal free trade regime. But occasionally (or sometimes more than occasionally) states want to engage in protectionism. The way they get around this is by implementing non-tariffs trade barriers that have plausible deniability with other justifications. This is sometimes described as neo-mercantilism in academic literature. The European Union loves this, from geographical indicators to carbon border adjustment mechanism and other regulatory measures - all implemented for other goods, that just so happen to also protect their domestic industries as well (unintended side effect, of course). Though, the EU will sometimes resort to tariffs on short notice as well, such as to prevent Chinese state subsidised EVs flooding European markets - but that's justified as an anti-dumping measure - purely self defence.
And China bans imports of goods, out of deep concern for the safety of their citizens. They blocked imports of Australian rock lobster because of high levels of cadmium (no evidence ever confirmed) and periodic bans of imports of either Canadian or Australian canola over concerns of blackleg fungus contamination. Of course, China too used extortionate tariffs on Australian barley to protect themselves from Australian 'dumping' cheap barley in China. Damn, us pesky Australians! First we try to poison the Chinese with toxic lobster, then we try to destroy the domestic Chinese barley market! In a weird coincidence, concerns about cadmium disappeared the same time relations normalised with China post-COVID! What luck! And don't forget the China rare earths export ban and dispute in 2010-12, which was for the good of reducing pollution and conserving the resource. The fact it happened after a major maritime and diplomatic dispute with Japan is a coincidence, I'm sure.
For better or worse, Trump's approach is about as unsophisticated as you can get, just slapping tariffs on just about everyone and everything. See, in the enlightened WTO free trade order, you can't just put tariffs on things, that would break WTO rules and free trade principles! No, instead what you're meant to do is provide some really-justified-for-other-reasons non-tariff measure to block export or imports, and then spend the next 5 years rules-lawyering how it doesn't violate the 'international rule based order' after which time the outcome of the dispute doesn't even matter, if someone even bothers to challenge it, that is.
I don't really see how these can be perceived as equivalent or even comparable to tariff barriers. Tariffs explicitly privilege domestic goods, something like CBAM is precisely designed to ensure that on something like carbon emissions imported and domestic production is on exactly the same footing. Trying to explain origin rules or CBAM as neo-mercantilism is wild over-explanation - the former, for instance, really is just environmental policy, since if you want a carbon tax you really do need something like CBAM otherwise your emissions just get exported.
It's trivial (conceptually, if not practically) to structure your non-tariff trade barriers, such as the CBAM, to favour domestic producers over foreign imports - e.g. calculating emissions of imports in a unfavourable way. Indeed, the CBAM has been accused of doing just that. It also inherently favours domestic European goods due to the lower transport emissions and the fact the Europeans are trying to develop green industries. The Europeans of course argue this is simply a green policy, and this is merely leveling the playing field in the name of the environment. Maybe this true - but the fact it favours domestic industry must surely be a nice bonus.
This I agree would be a non-tariff barrier to the extent that it happens.
Well this I think is silly. On this basis any taxation which is not very broad-based is a non-tariff barrier. If the British raise their alcohol duty on spirits faster than beer is this discriminating against American whisky-makers and French cognac producers in favour of domestic breweries, assuming Britain is more competitive in beer production than spirits?
Taxation which hit imports much harder than domestic products is indeed a non-tariff barrier. For example, if a country which does not have a domestic car industry puts a VAT specifically on cars, it is effectively a tariff.
Or to name another famous European case, if a union of countries that do not have a domestic tech industry demands data to be handled in specific ways or face an absurdly huge fine (or 5% of global revenue, whichever is higher).
The Europeans naturally claim it's about data privacy, but the fact of the matter is that unless you do business everywhere the European way, you face the massive tax. Naturally, European startup companies will have no problem doing things the European way, and as such the GDPR is effectively a tariff.
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But the US also engages in obvious neomercantilism, and engaged before Trump, too. I mean, what the heck else was the whole TikTok ban affair? This would be a better argument if there was a lack of parity in such measures, but I don't see such a lack of parity existing.
I have assumed the TikTok ban was at least in part retaliation for China's bans of Western tech companies, delayed until they had one worth banning. Which still fits the definition but feels different as a policy choice because we can say we didn't start it
The tiktok ban talk also increased in earnest after notable Democratic-aligned media reported it was favoring Trump during the 2024 elections. Particularly after Trump's formal emergence on the platform surpassed the Biden campaign's results.
Now, correlation does not imply causation...
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Yes, that's my point. That there's a right way to do not-protectionism in the liberal trade rules based order. Trump's doing in protectionism with his tariffs the wrong way (to a extreme degree, I might add).
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The geographical indicator row is not primarily a protectionist one - the EU is demanding that other countries protect geographical names so that (for example) American winemakers can't call their Champagne-style sparkling wines "Champagne" in the US domestic market. The GI row is analogous to IP rows which end up as a bargaining chip in trade negotiations.
This sounds exactly backwards to me, though maybe I missed something. As far as I know the EU doesn't give a flying fuck what you call sparkling wine in the US, it just won't let you sell it as "champagne" in Europe. Though you're right it's not particularly protectionist, or if it is, it's regional protectionism, because European sparkling-wine producers are subject to the same rules (you can't make sparkling wine in Spain, or even other regions of France, and call it "champagne").
You are correct, it's protecting EU domestic markets from foreign 'similar' products from using the geographical indicators (although the EU has occasionally managed to extend that protection to other markets). So Australian sparkling white wine can't use the name 'champagne' in European markets. This was a major sticking point during fairly recent Australia-EU Free Trade Agreement negotiations (Australia is a major agricultural exporter), particularly around products like feta, parmesan, prosecco, and was instrumental in the collapse of negotiations along with other agriculture protectionist policies. Now, one might think it's fair for the Europeans to do this to protect their cultural culinary heritage - I wouldn't disagree. But it does still provide a non-tariff trade barrier (i.e. is a protectionist policy) against potentially more competitive imports.
Even if domestic producers are subject to the same requirements? It's not as if a wine-producer from Ireland, or even Normandy, could make a sparkling wine and call it champagne.
Sure, it blocks intra-EU competition, but the EU is effectively acting as a cabal here - Franch gets champagne, Greece gets feta, Italy gets prosecco and so on. They agree to not interfere with each other in exchange dor working together to impose the restrictions on the rest of the world.
I find it difficult to see how this is different to literally any regulation though. It's not as if any product is prevented from entering the EU under these rules, it's just a question of how it's marketed. It's as much consumer protection as producer protection - when someone sees 'champagne' they expect it be from Champagne (and not just because of expectations created by the regulations). After all the EU does enforce non-EU names - Celyon tea, Sussex wine, Mongolian Cashmere etc. etc.
This implies that the answer would be for everyone else to prohibit any product (imported or otherwise) to display a restriction geographic name.
After all, it's just a question of how it's marketed. Prohibiting French wine-makers from labeling it Champagne isn't a trade barrier?
After a while, those names will just be gone -- who in the US would know what Parmesan is if you can't actually name anything in the store it.
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The question is what do those names actually mean to consumers. At least here in Australia, names like 'feta' are fully genericised - they don't have to come from a particular region in Greece. This is true for a lot of names, though the EU has taken great pains to reverse this.
When a consumer goes to buy feta, what exactly are they looking for? If two products are virtually identicial, taste the same, same texture, but one happens to be made in Australia and one in Greece, do most consumers actually care? Do they just want a lower price (I'm sure some foodies will claim there are subtle but irreducible differences).
At what point does a name become genericised to the point of referring to a type of product, rather that than referring to the geographical origin of a product? Danish pastries certainly aren't just made in Denmark.
It is a legitimate criticism to say that a consumer might be looking for feta and not care if it's from either Australia or Greece, but EU geographical indicators hide Australia 'feta' from consumers as a potential option, and this constitutes protectionism.
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But France can, and only France can, and thus it remains a form of European protectionism even if it privileges part of the EU over others.
'Everyone is under the same restriction that they can only use [brand recognition name] if you produce from my market' is simultaneously a 'same' requirement and not-same impact. Which is why 'same' requirements for all is a common form of contract corruption- you write requirements into a contract that you know only certain favored applicants will be able to reasonably meet, and thus you have the 'same requirements for everyone' and can dismiss accusations of systemic bias.
Not France, only Champagne can.
I dunno, think what you want about the regulation, I heard a few cases of it backfiring against those it was supposedly meant to protect, but I don't see it as fundamentally different from expecting other countries to respect trademark regulations. Or is it protectionism that China can't flood the US market with "Apple" products that were produced by companies who weren't authorized by Apple to do so?
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Ok but the arrangement applies to non-EU foods too. Looking at the UK protected name list (which is largely carried over from the EU regs, which I can't find in such an easily accessible form), there are 771 protected names for American products and regions (almost exactly the same as the number of French protected names by the way) - why would anyone do this if it were pure protection? It's more a question of false advertising. If you call your whisky a bourbon or your sparkling wine a champagne it comes with obvious expectations. After all there is no barrier to the importation of the product, it's just a question of what you sell it as when it's here. Nobody is preventing anyone from selling American sparkling wine.
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I mean, I just feel like... every regulation, including fraud and food safety, is a protectionist policy against potentially more competitive imports, isn't it? If you have too much arsenic in the imported orange juice or whatever, then if the customer would usually not notice this immediately and correct course, then the restriction on selling the orange juice is, from a pure market perspective, a trade barrier against competition. I think at some line, and arguably "champagne from Australia" is across that line, you have to say "no, fraud is not legitimate competition actually."
To a degree, yes, you're correct, it's just then which regulations or protections are generally considered legitimate, and don't hinder the 'spirit' of free trade. Although with health and safety regulation specifically is that they're competing on an even playing field in that specific market with domestic goods - this isn't the case with all (most) non-tariff trade barriers, which often put additional burdens on imported goods that domestic goods don't have to meet, or are structured in such a way to make it far easier for domestic goods to meet the requirements.
That's a good metric!
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This is only true if/because they're likely to be reversed quickly. If we kept these tariffs, including the 100% on China, on for six months, they'd be worse than the covid lockdowns.
One thing about the lockdowns was that they were always supposed to be temporary. Yes, the temporariness was stretched for a far longer period than originally intended, as mocked with endless "two more weeks to stop the spread" memery, but still, the official line at every point was that this was a temporary period of exception and at some point things would return to, if not the previous normal then at least something resembling normalcy. OTOH with these tariffs Trump's communications indicate that they're meant to last in some form for as long as Trumpism stays in power with even no-deficit countries getting a basic 10% rate.
The markets are still priced like they expect some capitulation from Trump eventually. The alternative is still unthinkable.
Was just thinking yesterday that the one partial saving grace for Trump admin vis-a-vis the market reaction is precisely that all of this is so retarded; if it was just a smidgen less retarded then there would be a greater chance that the markets would price the possibility that he's for real, but this is retarded enough that it becomes easier for this to think that this level of retardation can't possibly continue for long.
There is a point at which enough GOP reps vote with 2/3 majority in the house to reassert power over tariffs in a veto-proof way, but I do think it’s further away than the markets seem to think.
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The premise must be that it's not really possible to calculate 'average' tariff levels, or the counterfactual amount of trade reduced by tariffs, as people were discussing here in a thread a few days ago. So they're just agnostically looking at the trade deficit level, and saying, if we have free floating exchange rates as the supposed global order post-bretton woods, this is supposed to (roughly) balance out naturally over time to equilibrate everyone's imports and exports. When a country sells more to the US than it buys from the US, that should push up their currency's value and push down the dollar, until the exports/imports from each are competitive with each other again.
If that trade balance doesn't (roughly) happen, it must be because the net-exporting country is devaluing their own currency against that of the net-importer country, by earning/buying the other currency and sitting on it. The positive ways of describing this are like "switzerland is fortifying their stockpile of foreign reserves as part of their monetary policy plan", or more neutrally "china is adjusting their target USD peg". The negative description would be "currency manipulation", which is what the trump team wrote in fine print on their big mathy chart that's being goofed on. Foreign holdings (may be a better chart somewhere) of USD reserves & treasuries is not the naive gut explanation "peasants lending money to the US", it's rather them buying & saving in our currency which happens to push on the exchange rate and make their exports more competitive in the US.
At the macro level, in 'real' terms of trade: your pile of goods & services that your country gets to enjoy are everything your domestic economy can create, plus everything you can import, minus anything you have to export. Exports are a real cost, where your country takes time/effort/materials to make something that someone else gets to enjoy. So we should all hope to be so lucky that anyone targets our country for their currency devaluing, allowing us to import more without paying for it with real exports. But that's at the macro national level. There are real losers on the micro level, like anyone trying to run an export business (who doesn't care at all who they sell their products to). Exporters can be very powerful & politically dominant in other countries, and maybe that's where we find Trump now, influenced by manufacturing business leaders (or trying to court/help their workers). Then there are also other potential motivations for going against the obvious economic benefit of maximizing import value, like the intangible value of maintaining a national manufacturing capability.
Why would this happen? And why does this require price effects, demand elasticity, and asterisks in the formula?
Why must it be currency devaluation, rather than comparative advantage? Geography is a non-tariff trade barrier between the USA and UK that the USA and Canada lack, but we trade different types of goods to each country, because the geographic commonalities between the USA and Canada also reduce geography-based comparative advantage.
I don't think it does. The substack you linked posited that trump's team are smooth-brains because they canceled out those potential elasticity terms, and are literally just setting tariffs based on the pure trade deficit.
Well the currency saving aspect is what makes it not really a truly free floating exchange rate (whether their intentions are to manipulate or not). It can be a bit messier in the real world, but the pure logical premise of a floating exchange rate is that if one side is exporting more than the other, then their currency is going to appreciate (more buy-pressure on their currency in the foreign exchange market and more sell-pressure on the net-importing country's currency). And eventually that prices their exports out of competitiveness, and/or makes the import-country's exports such a value that they start to out-compete, until the imbalance disappears.
Just googling for a basic source, here's an old paper from 1982 that explains the logic & evidence pretty well:
I would think it to be impossible to run sustained trade surpluses against another country, without simultaneously saving in their foreign currency. But I'd be interested if I'm wrong in that.
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Certainly bilateral (pairwise) aren’t, otherwise you end up with the triangle problem (A sells to B, B sells to C, C sells to A, everyone concludes they are getting screwed). Even overall trade differences aren’t useful because of off-trade movements. The US receives tons if money licensing IP that doesn’t show up in trade. If anything, Marvel licensing Hulk undie production in Bangladesh for sale in Australia ought to count twice in our favor instead of zero times.
It might be easier at this point to just enumerate tariffs or other trade barriers. They exist, free traders have been chipping away at them for ages. That seems more honest.
Are you sure that's not classified in the accounting as an export? There are tons of "invisible trade" services that are properly tracked as exports, like local tourism.
IP licensing shows up as capital income, not as a services export. So it counts to the current account balance, but not the goods and services balance.
This doesn't matter politically because almost nobody talks about the goods and services balance - economists talk about the current account, and non-economists talk about the goods-only balance.
Because of corporate tax avoidance, it also doesn't matter in practice. A lot of what is in reality services exports (such as Facebook ad revenue in Europe) shows up in the US balance of payments accounts as IP licensing transactions between subsidiaries of the same US companies in different jurisdictions.
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It is counted in service exports but services were not included in Trump's formula, only goods trade.
God it's even more retarded than I imagined.
Coca Cola licenses their brand and recipe to Mexico. I buy a delicious Mexican Coke, but we only count it one way.
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I'm not sure why the US' dominating posture in trade IP keeps being cited as Marvel-branded underwear and not, like, biologics. Pharma is much pointier from a trade partner's perspective.
Yes, but less poignant
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