Free Trade

Why Tariffs Might Be a Good Idea

Free trade is a good thing. Paul Krugman, who got a Nobel for being the biggest name in The New International Trade with its idea that economies of scale meant tariffs could benefit a country, wrote a good article on the importance of the basic ideas in economics, and one of his examples, I think, was that tariffs are still mostly a bad idea. The strongest reasons, though, are (1) government failure and the protection of special interests, and (2) that when retaliation happens, everyone is worse off.

If we put those aside (the big If for policy purposes), there are six reasons why tariffs can be a good idea:
1. They raise revenue like any tax, and collecting that tax has low transactions cost, something especially important for undeveloped countries.
2. If you are a "large country" (a term of art in international trade), then you have market power and the tariff will change the terms of trade in your favor. This is the standard, anciently known, reason, that economists don't like to talk about.
3. The New International Trade reason: you can use tariffs to capture a natural monopoly for your country in a particular industry such as airframe manufacturing or computer operating system software. This is a very special reason, and one easily abused by special interests.
4. The very old reason that autarky keeps the country safe from the threat of disruption during war or just from blackmail in peace because it isn't dependent on foreign countries.
5. A New New International Trade reason that I haven't heard before: that if you are a "small country", if you have some unusually high-productivity companies, they have market power, and you can maybe benefit by using export tariffs to magnify their market power. I need to work on this or look out to see if somebody else has worked it out.
6. The idea from my paper with Myatt that everybody has market power over their own demand. Even a "small country" is the only source of its particular demand for products, and so can benefit from import tariffs (as long as there is no retaliation).

I should develop this into an essay.

Biden Tariffs

From a Trinh thread: Biden put a 100% tariff on electrical vehicles from China in September 2024. And on lots of other things.

Anyway, most of the tariffs on Chinese goods are generally capital goods & some are now veering into consumer goods (apparel has 7.5% tariffs) & even medical gloves are now 100%.

So the tariff levels basically have basically been prohibitive (EV = 100% = prohibitive) and some zero to not so high. The trade-weighted tariff for Chinese goods is roughly 10.4% (according to our US economists).

What's the point here? Whether it's Biden or Trump, being a China hawk on trade is a bipartisan approach.

And many had hoped that Biden would put a floor on that deterioration but he had continued what Trump started, which is more curbs (tariffs + investment + sanctions) and also added extra layer of industrial policies (carrots to produce in the US & tariffs are sticks to buying from China).

Before I talk about the impact on the US/China/APAC trade, I want to talk about China responses since.

First, the CNY has depreciated about 15% since 2017 trade-war. Interest rates have only gone downward.

Second, China producer price index has been in decline in recent years.

Third, China has continued to subsidize supply-side growth, esp sectors targeted by the US, and not just high-end tech but expansion of energy sources.

Fourth, China has been trying to diversify out of the US (EU & rest of the world) to offset the inevitable decline in US market import through both diversifying investment & also market access.

Fifth, China has gotten closer with Russia, Iran etc.

Sixth, although already started, China started to also hedge its dependency on USD via alternative systems etc.