Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. An earlier version appeared in The Hill.
The Trump Administration on May 29, nine days after having said that the China trade war was “on hold,” flipped the switch back to “on”. As of now, the White House again plans to move forward by June 15 with plans for 25% tariffs on $50 billion of imports from China. But the areas where Trump is pushing China the hardest are the ones that make the least sense.
To try to ascertain the Trump position on trade at any point in time is like trying to ascertain the position of a sub-atomic particle: it is better viewed as having a probabilistic distribution than as having a true position that could be discovered through sufficiently acute observation and analysis. That is, the “position” may not exist.
Even under normal circumstances it could be hard to keep track of a half-dozen or more different China trade issues running simultaneously. Some of the actions that are at stake have a basis in economic or political or legal logic, and some do not.
Let’s begin by noting that when the US goes against international institutions and agreements for example by imposing tariffs that violate the World Trade Organization (WTO) or other international agreements, aside from immediate negative economic effects, we give other countries good reason to mistrust the value of our word and to engage in similar behavior themselves. The calculus is that much worse because the US is the country that had the overwhelmingly dominant role in setting up such institutions as the WTO in the first place. And we did it because such international agreements and institutions are in our national interest.
Actions that make little logical sense
The least logical of the recurring Trump obsessions is the demand that China reduce the US bilateral trade deficit. The Chinese government has no policy levers that could reduce the bilateral balance by the mooted $100 or $200 billion. If it wanted to give Trump a superficial “win,” it could reduce the bilateral deficit some by buying more American natural gas or by routing smart phone exports through a third country like South Korea. But the economics would be illusory. There would be virtually no effect on the overall US trade deficit: We would sell the same natural gas to some other country if we didn’t sell it to them; and in reality those smart phones already get about 95% of their value added from South Korea, the US, and other countries anyway. Focusing on the bilateral balance as opposed to the overall trade balance is a waste of time. Regardless what happens with China, the overall US trade deficit will rise this year as a result of the Republican tax cut, enacted at a time when the economy is already producing at the limit of its capacity.
Similarly unmoored from both economic and legal logic are the tariffs that Trump has imposed on imports of steel and aluminum and threatens to impose on autos and other goods. With respect to legal criteria, the national security justification that he has invoked is flimsy in the extreme and will likely inspire other countries to retaliate. With respect to economic criteria, the beneficiaries in the steel industry, for example, are vastly outnumbered by those who will be hurt because they use steel as inputs (the auto industry), they consume the final products (all of us), or they produce export goods that will be hit by the repercussions (e.g., farmers). Extending the tariffs to autos themselves doesn’t help; that step would ignore how integrated auto production is across US borders.
Actions that could have a basis in logic
Much better-grounded are the US penalties legally imposed on the Chinese telecoms company ZTE for violating international sanctions against Iran and North Korea. But this is precisely the issue on which Trump seems most clearly to have let China off the hook.
In between the two extremes are some grievances that the US could reasonably pursue in negotiations with China if done intelligently. These include Intellectual Property Rights and a Chinese practice of requiring foreign firms who want to set up in China to share technology. But to pursue such areas effectively, the US should do it in cooperation with allies like Europe and under international agreements like the WTO and the Trans-Pacific Partnership. Trump has been doing the opposite.
Can the Trump approach be explained?
The Trump approach to China has been so inconsistent that observers have had to stretch to find explanations. Suggested explanations include allegations of quid pro quos for Trump family business, divisions between “nationalists” and “business” factions on his staff, the President’s tendency to be persuaded by whomever he last talked to, a desire to pre-empt Democratic protectionists, and an instinct to do the opposite of whatever Obama did.
It is easier to say what the Trump approach is not. It is not the deliberate or competent application of a coherent strategy informed by a clear set of American policy objectives, an understanding of the other side’s incentives, or an appreciation of the implications that impulsive tweets can have for the long-term global system or even for the next move in the short-term tactical game.
China’s rise as a great power over the last three decades has had little to do with the terms of any international trade agreements that were made or could have been made. The bilateral trade issues currently under discussion could all be viewed as low-stakes. This is especially true when compared to some larger national security issues. We need China’s help with a newly nuclear North Korea more than we need it to give in to any of our on-again off-again trade demands, even those that might make some sense.
Think how bad it would be if President Trump applied to Kim Jong Un the same pattern of erratic alternation back and forth between inflammatory bluster and inexplicable concession that he has applied to China. Oh, wait…
This post written by Jeffrey Frankel.
Jeffrey
I will give you a simple direct and logical reason for Trump’s trade action with China. They are driven by Chinese trade talks. While China is reasonable in negotiations, and the process is moving toward a mutually satisfactory conclusion, Trump gives direction to the talks that this is good and the severe tariff measures will not be put into effect. Then China changes its reasonableness, and it is obvious that the talks will bog down with no resolution in sight. Trump then signals that such tactics are unacceptable, and the tariff sanctions are back on the immediate table. Perhaps, Jeffery, you have inside information from the trade talks and such is not the case. But without such information, which I do not believe you have, mine is the simplest explanation of the changes of policy. It is not inconsistent.
One small example of what China can do to reduce the trade deficit. Change its 25% tariff on US cars and match the US rate of 2.5%. I am certain there are there as blatant examples. Solves 200 billion, no, but one step at a time and the long journey can be accomplished.
Ed
Ed Hanson Your comment is yet another example of why people need to obtain some formal training in economics if they want to comment intelligently. Please note that you are imagining ways that Trump might address the bilateral trade deficit. As Prof. Frankel notes (and as I’ve pointed out many times), the bilateral trade balance is completely irrelevant to anything other than Trump’s ego. Please reread Prof. Frankel’s fifth paragraph.
Ed has mastered the KellyAnne Conway alternative facts technique!
The only explanation for Trump’s behavior that I find convincing is that he suffers from various addiction issues. For example, he’s addicted to the thrill of playing the role of a big time rock star wheeler dealer. In a sense it’s not unlike a gambling addiction. And addiction does run in his family. Trump himself is keenly aware of those tendencies, which is why he’s a tea-totaller. You see it with his craving to play rock star at political rallies. He needs a regular fix just as a heroin addict does. Saying “You’re FIRED” lights up his serotonin. And like a lot of addicts, he is completely capable of lying like a rug without even being aware of it because he’s completely detached from reality. And it seems that he’s getting worse with each month. So bad that he even wrote his own medical evaluation and passed it off as his doctor’s words. Something is deeply wrong with this man.
2slugbaits, you need to make up with Trump:
https://www.nzherald.co.nz/world/news/article.cfm?c_id=2&objectid=12062152
Wait – we thought you were the one dating Trump!
Trump, really has you folks buffaloed. Reaching for absurd explanations: “The only explanation for Trump’s behavior that I find convincing is that he suffers from various addiction issues.” is a sign of the condition. Relying on these kinds of explanations get you to making these statements after claiming Trump lies like a rug: ” he’s completely detached from reality. And it seems that he’s getting worse with each month. So bad that he even wrote his own medical evaluation and passed it off as his doctor’s words. ” There is something deeply wrong with you folks, because you just can not understand how he is being so successful. Your formal economics training is lacking when it does not help you folks understand the politics of this world in which we live.
CoRev Well, it seems I’m not the only one to come to that conclusion. Trump himself admitted that he’s driven by the need to be a rock star. See this:
https://www.msn.com/en-us/news/politics/this-1990-trump-quote-in-playboy-explains-today-perfectly/ar-AAy5dNP?ocid=spartandhp
Almost three decades ago now, Donald Trump explained his life and worldview this way: “The show is Trump, and it is sold-out performances everywhere.”
Bwahaha, 1990. Another desperately weak comment.
CoRev Addiction does run in his family. That’s a fact. And Trump has been admitted that this is why he doesn’t touch alcohol. Trump also lies. A lot. Just check with any of the various fact checkers. He lies so much that his rate of lying is expressed in high frequency terms; e.g., lies per day rather than lies per month or lies per year. And he did write his own medical evaluation, as his doctor confirmed.
There is something deeply wrong with you folks, because you just can not understand how he is being so successful.
I’m more worried about why he is successful with 40% of the electorate instead of just 4%. If you want to look for something deeply wrong, then start there. I think Trump’s success with his base says much more about that 40% than it does the remaining 60%. Why is that 40% sector so gullible? Why is that sector so uninformed? Is it a steady diet of Fox News? Is it latent racism and resentment? Is it a sense of older white conservatives losing relevance? And it’s not just the US. We’re seeing the same angry, anti-immigrant, authoritarian impulse in Britain and France and Austria and Hungary and Italy and Poland and even Germany.
2slugs, your first mistake is trying to explain trump with logic. he is an illogical person, so those rules do not apply. ever have any success using logic to get a three year old to do what you want? does not happen. you cannot use normal rules and methods to deal with trump, because he is an abnormal personality. and he knows this. look at his trade battles. he is willing to completely break the rules and norms, and he also understands most of the nations he is dealing with will follow those norms and simply complain he is not being fair. but he counts on the fact none most of them will be restrained by existing rules. so he knows their limits. significant advantage when negotiating. but sets a pretty bad example for what future norms will be once people catch on that rules need not be followed. like a three year old, he will hold his breath until you capitulate and allow him to breathe-because he knows you are afraid of killing him. immature and without formal logic.
2slugs, this has been my point all along: “I’m more worried about why he is successful with 40% of the electorate…” 40% and growing, and it’s not WHY but THAT his popularity is growing.
Since you can not find a clue, look at today’s Jobs Report. You might also reflect on my incomplete list of Trump’s achievements.
CoRev It’s a very strong jobs report. And it shows what some of us were arguing all through the Obama years; viz., that fiscal stimulus can be a very effective way to stimulate demand. You argued it wasn’t, remember? And it’s playing out almost exactly as CBO projected back in April. That should worry anyone who is not a myopic voter.
The problem is that using fiscal policy to stimulate demand when interest rates are at the ZLB is one thing. Using it to stimulate demand when interest rates are well above the ZLB and the economy is running near potential GDP is quite another thing. What worries me is that 40% of the electorate doesn’t understand this. Indeed, 40% of the electorate seem to think that we should reduce fiscal stimulus when the economy is weak and pump it up when the economy is already strong.
The Fed’s job is to take away the punchbowl once the party really gets going. If the Fed does its job, we should be seeing a rate hike in June:
https://www.cnbc.com/2018/06/01/super-strong-jobs-report-means-june-rate-hike-coming-and-fed-could-get-more-aggressive–.html
If the Fed doesn’t do it’s job, then Katie bar the door.
The higher interest rates are going to make it a lot more expensive to finance Trump’s deficits. The CBO estimated that the 10yr would not hit 3% until the 4th qtr of calendar year 2018. We’re still in the second quarter and the 10yr has been hovering around 3% already. The CBO report projected a temporary spike in real GDP in 2018 and then an equally steep fall thereafter (see Figure 1):
https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/53651-outlook.pdf
Also notice that CBO projected an average 3.8% unemployment rate and average monthly job gains of 211K for calendar year 2018.
(see Table 1).
If you’re a myopic voter things look great. If you care about the future you should be worried. Welcome back to the 1970s! Trump is following the same economic path that gave us stagflation 40 years ago.
2slugs, thanks for admitting it is a strong report. No, I do not remember: “You argued it wasn’t, remember? ” I do remembef that I disagreed with Obama’s stimulus. Remember. Which did prove to be correct. Compare Trump’s versus Obama’s results.
“Compare Trump’s versus Obama’s results.”
you and peaky have been raving about the strong economy under trump. why then is it necessary to add fiscal stimulus? of course that will heat up an already functioning economy. this is a really bad example for you, corev, to use as justification for your stimulus views. you are putting lighter fluid on an already lit fire. obama was putting lighter fluid on wet leaves, gathered by the conservative bush administration.
Trump’s position are both inconsistent and incredibly stupid. Frankel made that case overwhelmingly. Now if you have some other rational explanation – we await your “wisdom”.
How much of your daily time do you spend trying to figure out the female mind?? How much benefit have you ever gotten out of trying to understand the female mind?? [Ok, maybe some empathy from time to time helps, but in reality, what did empathy even get you??—I leave that as an “open question” to any individual to make out in their own mind]
Here’a bit of advice for everyone—the percentage of your daily time you feel is advantageous spent trying to make logic out of whatever words and behavior your gf, wife, or “female XYZ” does—dedicate that same exact amount of daily time to trying to make logic, rationalize, or predict Trump’s behavior. Your results from both said projects/efforts will be exactly the same.
https://www.youtube.com/watch?v=ML6oLuLecQ4
Moses,
First strive to understand yourself……..
Professors Frankel, Chinn, and Hamilton,
In this fine analysis and clear explanation, Prof. Frankel has skipped over what ought to be the first fact necessary to understand any of Donald Trump’s words, thoughts, and actions.
Donald Trump is ignorant.
Indeed, Trump has negative knowledge since he strongly believes falsehoods.
Bernard Leikind, that’s a very good description of the anti-Trumpers, who the fools and hateful believe. Trump has a different view and knows how to use leverage in negotiating.
“The United States will no longer turn a blind eye to unfair economic practices, including massive intellectual property theft, industrial subsidies, and pervasive state-led economic planning. These and other predatory behaviors are distorting the global markets and harming businesses and workers, not just in the U.S., but around the globe.”
https://www.whitehouse.gov/briefings-statements/remarks-president-trump-world-economic-forum/
Trade deficits aren’t necessarily bad. However, predatory trade practices reduce U.S. production and exports, along with reducing tax revenue.
If we’re near full employment, why are we creating so many jobs?:
A conservative estimate is there remains substantial slack in the labor market. Over the 10 year period 2008-17, we added an average of 78,000 jobs per month.
However, we needed up to 159,000 jobs per month to keep up with population growth, subtracting retirements, and adding discouraged workers (or those expected to re-enter the workforce, if the “recovery” wasn’t so weak).
The conservative estimate, based on 100,000 jobs per month over the 10 year period, means we needed 2.6 million more jobs through 2017. So, at least, an additional 2.6 million jobs, above the 100,000 per month, is needed in 2018 and beyond to reach full employment.
This year, in January, we added 239,000 jobs; in February, added 324,000 jobs; in March added 155,000 jobs; in April added 159,000 jobs; and in May added 223,000 jobs, all well above 100,000 per month. Wage pressure remains subdued.
https://www.google.com/amp/s/www.cnbc.com/amp/2018/06/01/nonfarm-payrolls-may-2018.html
This simple graph of the employment to population ratio shows that is lower than it was in September 2017:
https://fred.stlouisfed.org/series/EMRATION
PeakDishonesty is right about needing employment to grow relative to population. But his cherry picked disinformation cannot hide the fact that the opposite has occurred since September.
Team Trump is touting how the unemployment rate fell to 3.8% in May. Now I get the latest disinformation rant from PeakDishonesty. Of course if one checks with the BLS, it turns out the fall in the unemployment rate this year is due to a decline in the labor force participation rate:
https://fred.stlouisfed.org/series/CIVPART
Team Trump lies to us assuming we are too stupid to check the data. Is PeakDishonesty really this stooopid or is he a team player?
So Peaky – we do not know to check the data. So your serial dishonesty is always exposed.
Trump does have a different view – a really stooopid view. Sort of like your incessant intellectual garbage.
Pgl, again you are trying too hard. “Team Trump is touting how the unemployment rate fell to 3.8% in May. … Of course if one checks with the BLS, it turns out the fall in the unemployment rate this year is due to a decline in the labor force participation rate:” and yet the rate is still 3.8%. Black unemployment is again at record highs. But, if your read 2slug’s angst and then apply pgl’s explanations we can see another isseu brewing for them, black employment and their growing acceptance of Trump’s promises being backed up.
Are you guys are getting tired of his wins, yet?
What part of the employment to population ratio do you not get? Same level as Sept. 2017. And even PeakExcuseMaker admits it should be higher. Below full employment and no progress since last summer.
Pgl , 😉
“The Trump approach to China has been so inconsistent that observers have had to stretch to find explanations. Suggested explanations include allegations of quid pro quos for Trump family business”.
I hope someone at the SEC is monitoring their stock trades. The on again and off again stuff is moving stocks. People with inside information on what Trump’s next tweet will be could make a killing. But this is clearly illegal.
it may be illegal, but trump has clearly staked a position that right and wrong, legal and illegal have no bearing on his actions. he will do what he wants. and feels he has the power to absolve himself and others if needed. as well as the power to persecute those who may challenge him. the behavior of a strongman dictator in the making. we have hacks on here who complain about crony capitalism. it is on full display with the trump administration. and all i hear is crickets from those hacks.
http://fortune.com/2018/05/29/ivanka-trump-clothing-brand-trademark-china/
The Ivanka Trump Brand Just Won a Boatload of New Trademarks in China
Did Samatha Bee comment on this?
Frankel raises a key point with his smart phone discussion. His link is an interesting read:
https://www.uscc.gov/sites/default/files/6.14.12Wei.pdf
I find the discussion about tariffs a bit amusing in the light of other discussions about taxes where the opponents of tariffs are proponents of increased taxes. After all, what is a tariff when you get right down to it? You and I don’t get the proceeds from tariffs; we pay the tariffs in higher prices. The money goes to the U.S. Treasury to be used as needed. It is nothing more than a consumption tax… a sales tax… a VAT. A tax by any other name.
Bruce Hall: This is the most nonsensical thing you have ever written. A tariff on is a tax on things produced abroad i.e., foreign items. A VAT is a tax on domestic value added. It’s hard to think of a situation wherein the two are equivalent.
Ugh! I’m beginning to think people should have to take an econ 101 prerequisite before being allowed to comment on this blog, just as you wouldn’t allow a student to take an intermediate macro class without having first mastered elementary econ.
Menzie,
I merely pointed out that the net effect is the same: higher prices and money to the U.S. treasury. Of course the mechanisms are different. Destruction by earthquake, volcano, hurricane… take your pick. The mechanisms are different; the results are the same.
The net effects are the same? Again – you dismiss distorting taxes thinking they are the same thing as broad based taxes. They are not as anyone who took freshman microeconomics would assuredly know. But apparently you do not. Which leads me to suggest you pay more attention to your preK teacher.
Bruce, you just compared trump to a natural disaster. Bravo.
Menzie, Bruce’s point was: “It is nothing more than a consumption tax…”. Are you denying that the tariff price pass through is not equivalent to a consumption tax? Wasn’t that you folk argument in earlier articles and comments?
Lord. A consumption tax is levied on all goods whether they are produced at home or abroad. CoRev fails to get this even when we explain it S-L-O-W-L-Y!
WTF? Distorting taxes are the same thing as broad based taxation. You sir just flunked Econ 101.
pgl, all taxes are “distorting”. Gasoline taxes are distorting to the lower income earners. Food taxes are distorting to the lower income earners. Property taxes are distorting to the middle income earners. Income taxes are distorting to the higher income earners.
Who among you doesn’t use steel or aluminum products? Perhaps the tariffs raise the cost of goods for only producers of those products. Do you suppose they will not pass on those taxes in a “broad-based” pricing way?
You mistake mechanism with impact.
Bruce Hall I don’t think you understand what pgl means by “distorting.” Try this:
https://en.wikipedia.org/wiki/Deadweight_loss
Almost all taxes are distorting in some way, but some are more distorting than others. VATs create relatively little deadweight loss. Tariffs create a lot of deadweight loss.
And deadweight loss distortion doesn’t have anything to do with low income earners. Deadweight loss is a loss in economic efficiency that does not accrue to anyone (rich or poor) as an offsetting gain. It’s a pure loss for everyone regardless of income.
And you mistake “impact” and “incidence”. Learn the difference:
https://en.wikipedia.org/wiki/Tax_incidence
Pay particular attention to this quote from the link: The key concept is that the tax incidence or tax burden does not depend on where the revenue is collected, but on the price elasticity of demand and price elasticity of supply.
2slug, I appreciate the non-snarky response.
Let’s suppose, just for discussion sake, that I wish to buy a $30,000 car. The sales tax might be 6% or $1,800. I expect that and make allowance for it. Now, let’s further suppose that the government in all its wisdom has passed a VAT and my $30,000 car is now $35,000. I may decide to bite the bullet and pay more for the car I wanted or I may have decided I will only spend $30,000 plus the sales tax and buy something else or I may decide to see if I can catch a bargain later.
Now, supposed instead of a VAT, the government places a tariff on the materials and components imported for the car. My $30,000 car is now $35,000. I am left with the same decisions that I would have made under a VAT. The reality is that the tax incidence or tax burden does not depend on where the revenue is collected, but on the price elasticity of demand and price elasticity of supply.
From a consumer’s perspective, there is no difference between a VAT or a tariff in this hypothetical. From the federal and state governments’ perspectives, it’s all the same. From a vehicle manufacturer’s perspective, the tariff and the VAT both result in lost sales. Of course, in reality, the producers can shift sources from imports to domestically produced materials and components and sell the vehicle for $32,500. In this case, the importer loses, the domestic suppliers win, the vehicle manufacturer and the consumers may or may not be affected enough to materially impact sales.
So, I go back to my point: a tax is a tax is a tax because, regardless of the mechanism, the impact (effect… result) is the same at the point of purchase. There may be changes to the supply chain, but that’s really opaque in the purchase decision. The consumer doesn’t really care one iota if the price of a product is inflated because of a VAT (taxes based on the various stages of production) or tariffs (taxes imposed on imported materials or products).
All taxes tend to decrease economic activity for a product or service. Just use cigarettes as an example. The main difference between tariffs and VATs is scope. Tariffs are far more restricted … more targeted… in affecting pricing. $50 billion in tariffs would not have the same suppressing power as, say, 15% of a $20 trillion GDP. Yeah, I know income taxes would have to be reduced, but VATs are more regressive so while they may be great for the government, they might not be so good for a large segment of the population who don’t pay any net income taxes. Of course, then we get into a whole new game of rebating VATs.
I’d say they guy on the street would not be too concerned about “deadweight” loss distortion.
Bruce Hall: A sales tax will for instance have incidence on the consumer vs. producer depending on the elasticities of supply and demand. A tariff will have an incidence on domestic producers and consumers vs. foreign producers depending on the relative export supply and import demand elasticities. The net effect on domestic welfare from a sales tax can be small or large depending on Harberger triangles. The net effect on domestic welfare from a tariff will depend on the relative sizes of the two economies. I can go on and on and on regarding the differences between the two taxation modes.
Geez.
Menzie, I think we are not disagreeing regarding who gets affected by different types of taxation (per my hypothetical), but that any taxation increases the cost of a product and, ultimately, the consumer will make decisions based on the price of the product versus his resources. The sales tax may not affect the producer, but it is baked into the purchase decision by the consumer. Naturally, the tax is ignored for small purchases, just as the effect of a tariff would be ignored for small value purchases.
2slug was comparing tariffs to VATs, not sales taxes, so I used the European level of VAT versus tariffs to argue that a $5,000 tax is considerable regardless of how it was implemented. Now, if the tariff is for raw materials rather than finished goods, it does impact the domestic producer of, say, automobiles. Unless there is a corresponding tariff on an imported finished vehicle, the domestic producer gets screwed because the cost of production is higher due to the tariff. It’s a clumsy approach to taxation to apply a tariff to raw materials, but can be effective (re: pickup trucks exported to the U.S.) for finished products. As an aside, tariffs (and non-tariff obstacles) on foreign vehicles also have worked exceedingly well for producers in Japan, Korea, and China. The cost is borne by the domestic consumers (who might buy foreign vehicles… China has a 25% tariff on imported vehicles).
Regardless, it’s the consumer that ultimately pays the tax and must make the purchase decision. Some taxes are just more obvious and less targeted than others. Certainly, the best approach for the government to raise taxes on consumption is a sales tax or VAT, but it is also the most visible and apt to meet with the greatest resistance. It’s also the most regressive form of taxation as it applies equally to all purchases regardless of the purchaser’s income (but it does allow the government to have another bureaucracy to rebate those taxes based on income). Tariffs are costly to consumers; sales taxes are costly to consumers; VATs are costly to consumers.
So, do you prefer earthquakes, volcanoes, or hurricanes?
And I thought CoRev was being slow. There are all sorts of impacts of tariffs v. broad based taxes. And they are not the same. If you do not know that there is an economics class at your community college. Take it.
It is likely too narrow to say Trump follows only his own self interest. He also favors the interests of those associated with him, be it at the expense of the country. He favors bribery while also signalling he wants larger ones. It is just others see through this and can target his allies for them. His stronger allies will position themselves to benefit from the changes and swings, while his weaker allies, opposition, and country will pay the price. Just think of him as the mafia boss he flatters himself to be.
I think landing the presidency puts trump in the realm of greatest powers(also global powers), giving him a real and present shot at achieving eternal unsurpassed glory and greatness of his wildest fantasy, in human history. What we are seeing are just the great funs Trump is having now, though with utter lack of finesse.
“Now, supposed instead of a VAT, the government places a tariff on the materials and components imported for the car. My $30,000 car is now $35,000. I am left with the same decisions that I would have made under a VAT.”
Maybe we should teach Bruce about the “effective rate of production”. I think he refuses to realize there are two cars. Put a 10% tariff on a BMW and its price goes from $30K to $33K. But he could buy a GM for $30K. Oh wait Trump is imposing a 25% tariff on intermediate goods and if they are 40% of the price then the price of the GM has also increased to $33K.
But wait Trump changed his mind on the 25% tariff on intermediate goods. Now if Bruce is still too stupid that he has the choice of buying the GM for $30K, then why do we even bother trying to explain this to him?
Somewhere deep down in Bruce’s latest may lie a truism:
“2slug was comparing tariffs to VATs, not sales taxes, so I used the European level of VAT versus tariffs to argue that a $5,000 tax is considerable regardless of how it was implemented.”
In a competitive market the incidence of a sales tax does not depend on whether it is levied on the producer or the consumer. Economists get that. But Bruce has changed his tune. A VAT is still non-distorting whereas tariffs are. Why? Take Bruce’s shopping for a car. He has the choice of buying a BMW v. a GM. A tariff on BMWs is not a tax on GMs. Sales or VAT taxes would hit both. So for some crucial issues, it cannot be said that a tariff is the same thing.
I do wish Bruce would stop as he has confused himself thoroughly. If he has a point to make – could he sit and think how best to convey it without embarrassing himself so much.
“It is nothing more than a consumption tax”. No – a tariff is a LOT more than a mere consumption tax. Yes the consumer pays the tax in either case but why on earth would any sane person say “it is nothing more”. Better writing next time Bruce!
pgl, you are very good at picking out one sentence from a larger thread.
It was that specific sentence that Menzie originally commented on. Like I said – write more carefully.