Econbrowser analysis of current economic conditions and policy storing electricity in water

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.

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).

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.

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.

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.