Category Archives: Trade Policy

EconoFact: “What is the National Security Rationale for Steel, Aluminum and Automobile Protection?”

From EconoFact, an update:

The Trump administration has implemented a number of trade related measures purportedly on the basis of national security. First, it invoked the seldom-used provision of the trade law to investigate whether imposing import restrictions for steel and aluminum is justified by national security reasons. The Commerce Department’s investigation concluded that imports of both metals pose a national security risk and subsequently the administration applied tariffs and quotas to both products. In a new investigation, the Commerce Department has started looking into whether imports of cars or automobile parts could impair U.S. national security.

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What Will Policy Uncertainty Be Tomorrow?

Below is reported Economic Policy Uncertainty through 5/31/2018, reflecting newspaper accounts through 5/30.


Figure 1: US Economic Policy Uncertainty index (blue) and centered 7-day moving average (bold red). Source: policyuncertainty.com accessed 31 May 2018, and author’s calculations.

As of 2PM EST, Dow down 1%, VIX up 6.69%.

Guest Contribution: “The Exposure of U.S. Manufacturing Industries to Exchange Rates”

Today, we’re fortunate to have Willem Thorbecke, Senior Fellow at Japan’s Research Institute of Economy, Trade and Industry (RIETI) as a guest contributor. The views expressed represent those of the author himself, and do not necessarily represent those of RIETI, or any other institutions the author is affiliated with.

On March 8th President Trump announced 10 percent tariffs on aluminum imports and 25 percent tariffs on steel imports. On April 2nd China retaliated by announcing tariffs of up to 25 percent on imports of pork, soybeans, and other products. The European Union is also considering retaliatory tariffs. This tit-for-tat conflict spawns uncertainty, raises prices of key inputs for downstream industries, forces companies to engage in time-consuming appeals to the government, and risks making American products toxic to hundreds of millions of nationalistic Chinese consumers. It is no wonder that Deardorff and Stern (1997) said that using tariffs to correct distortions is like performing acupuncture with a fork.

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Things I Never Thought I’d Have to Explain on Econbrowser: Trade Creation/Trade Diversion

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?

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How to Reduce the US-China Trade Deficit by $200 Billion: A Modest Proposal

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.