Is there a brilliant ‘Art of the Deal’ strategy behind Trump’s tariff policy? It has been a big failure for the US so far, as attested to by the 7% fall in the US share market since inauguration day (see the chart below) and a 12% fall in consumer confidence from January to March, according to the Conference Board. The US has inflicted more harm on itself than its trading partners.
Theoretically, there is the possibility a large country like the US, as opposed to a small country like Australia, can impose an ‘optimal tariff’, as Nicholas Gruen and I explain in an article published in Crikey: Why Trump’s tariffs are better than you think — and much worse. We note:
“When large countries trade, they move prices. That means foreigners do effectively pay some of their tariffs.”
A member of Keynes’ Cambridge Circus, Richard Kahn, wrote the best and most lucid paper on the so-called optimal tariff, Tariffs and the Terms of Trade, published in 1947. Based on Kahn’s optimal tariff formula and plausible values for the parameters, an optimal tariff for the US could be around 20%. However, this calculation is based on a theoretical model without retaliatory tariffs or macroeconomic implications. The benefits of the terms of trade improvement can be quickly outweighed by the costs of retaliation and a global trade war, as well as the fact that tariffs increase the tax burden on American consumers and businesses and will have adverse macroeconomic impacts. Nicholas and I aren’t defending the Trump tariffs. Indeed, we’re supporters of free trade, as you would expect economists to be, but we are pointing out that the terms of trade impact must be considered when assessing the tariffs. Based on the fall in the S&P 500, American investors have judged that the adverse macroeconomic effects of tariffs will outweigh any possible terms-of-trade benefits.
Earlier this week, I spoke about Trump’s tariffs, the federal budget, and the Olympics with fellow Queenslanders Damian Coory and Dan Petrie on Damian’s The Other Side Unplugged show. You can watch the interview here:
I’ve included the time stamps below so you can jump to my remarks on the latest federal budget, the Olympics, and Trump’s tariffs, if you’re interested:
- Federal Budget Overview and Critique (0:00)
- Jim Chalmers’ Values-Based Capitalism (5:38)
- Structural Deficits and Bracket Creep (10:56)
- Government Spending and Debt Concerns (13:55)
- Olympic Games Plan for Brisbane (30:52)
- Trump’s Tariffs and Their Economic Impact (41:15)
- Alternatives to Promote Economic Growth (54:39)
- Final Thoughts and Future Directions (55:57)
This post has been cross-posted at Queensland Economy Watch. Please comment below or email Economics Explored host Gene Tunny at contact@economicsexplored.com.