Suppose you (the UK) are in a tariff-ridden world, getting butter from your former colony and current Commonwealth partner New Zealand, the global low cost producer. Then you (the UK) decide to join a customs union that encompasses Denmark, which produces butter at a lower cost than the UK, but higher than New Zealand. In plain words, the tariffs between UK and Denmark on butter go to zero, while those between UK and NZ remain.
Is the UK better or worse off?
Not the phrase used by the White House, but I think the essence of the statement. From ActionForex:
THE WHITE HOUSE – Office of the Press Secretary
FOR IMMEDIATE RELEASE – May 19, 2018Joint Statement of the United States and China Regarding Trade Consultations
Jim Tankersley/NYT discusses how hard it will be to reduce the $337 billion US-China gross trade deficit by $200 billion by increasing exports (as I point out in this post, our trade deficit in value added is probably about half the $337 billion).
The enormity of the task of cajoling the Chinese into buying $200 billion more is shown in Figure 1 (see the light blue arrow).
Figure 1: US exports to China (blue) and US imports from China (red), in billions of USD, SAAR. NBER defined recession dates shaded gray. Increasing exports to China by $200 billion over two years (light blue arrow); decrease imports from China by $200 billion over two years (pink arrow). Source: BEA/Census, NBER, author’s calculations.
A much simpler way to reduce the deficit; instead of browbeating the Chinese into buying $200 billion dollars more, just throw the US economy into a deep, deep recession, and reduce US imports from China (the pink arrow).
In Cheung, Chinn and Qian (Review of World Economics, 2015), we estimate the income elasticity of US imports from China is in the range of 2.6 to 3.4 (Table 3). $200 billion is about 0.40 of $506 billion (US imports from China). Assuming a high income elasticity of 3.4, all we need to do is reduce US GDP by 11.6% (about $2.32 trillion in for US nominal GDP of nearly $20 trillion in 2018Q1). Of course, this is ballpark, particularly because many things would not stay constant — the USD/CNY exchange rate would doubtless change, as would US exports to China. But you get the idea.
Now one could say this is a crazy idea; I say it’s no more crazy than building a wall with Mexico and forcing them to pay, banning all immigrants from s***hole countries, doubling Amazon’s shipping costs with the US postal service, collaborating with the Russians on cybersecurity, implementing a border adjustment tax, arming teachers to protect students, and a myriad of other Trump musings.
Economic policy uncertainty as measured by the Baker, Bloom and Davis index is elevated (again) due to trade policy.
Figure 1: US Economic Policy Uncertainty index (blue) and centered 7-day moving average (bold red). Source: policyuncertainty.com accessed 14 May 2018, and author’s calculations.
or, Mr. Trump is a wimp
President Xi of China, and I, are working together to give massive Chinese phone company, ZTE, a way to get back into business, fast. Too many jobs in China lost. Commerce Department has been instructed to get it done!
— Donald J. Trump (@realDonaldTrump) May 13, 2018
In this post I showed the negative impact on some US allies from tariffs on Chinese exports to the US, highlighting the importance of distinguishing between gross value and value added. Here is another graphical depiction of how tariffs on Chinese exports to the US are — in part — tariffs on US value added…
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. This is an extended version of a column that appeared at Project Syndicate on April 17th.
From The Hill:
President Trump on Thursday instructed top administration officials to explore re-entering the Trans-Pacific Partnership (TPP) — a trade pact he pulled the U.S. out of last year while calling it a “disaster.”
With this whipsaw of trade policy announcements, is it any wonder that economic policy uncertainty is rising? As measured by the Baker, Bloom and Davis index:
Figure 1: Daily EPU index as of April 12 (blue), and 7 day centered moving average (bold red). Source: policyuncertainty.com, and author’s calculations.
A longer term perspective on economic policy uncertainty is shown in this post.
And of course, most of us knew it wasn’t so horrible at all, back when we had a chance to influence the nature of TPP.
Update, 8:15PM Pacific 4/13: Reader Ed Hanson asserts that EPU is rising for most countries. I plot below the monthly indices; I honestly don’t see what he’s claiming.
Figure 2: Monthly EPU indices. Source: policyuncertainty.com.
I’ve seen the argument that China’s tariffs on soybeans will have no effect because the soybeans will be relabeled so that US soybeans go to Europe, and soybeans that previously went to Europe go to China, evading Chinese tariffs on US soybeans. John Cochrane makes this point. This seems to have surface appeal in a world where transport costs are zero, and there are no set-up costs to establishing new trading links. Still, I sensed that this conclusion must rest on some assumptions, including for instance infinitely elastic supply. I decided to investigate further.
