While it is worth keeping a record of these sorts of problems, the argument seems somewhat pointless. The goal of this move was to impose high tariffs and, probably, try to move towards autarky....
While it is worth keeping a record of these sorts of problems, the argument seems somewhat pointless. The goal of this move was to impose high tariffs and, probably, try to move towards autarky. The formula was almost certainly devised simply to create high tariffs. If they had used 1 instead of 0.25 for the parameter this article questions, resulting in low tariffs, they would likely have just added a factor of 4 somewhere to get back to high ones, with any justification, however flimsy.
Though in effect the formula for the tariff placed on the United States by another country is equal to the trade deficit divided by imports, the formula published by the Office of the US Trade Representative has two additional terms in the denominator that just so happen to cancel out: (1) the elasticity of import demand with respect to import prices, ε, and (2) the elasticity of import prices with respect to tariffs, φ.
The idea is that as tariffs rise, the change in the trade deficit will depend on the responsiveness of import demand to tariffs, which depends on how import demand responds to import prices and how import prices respond to tariffs. The Trump Administration assumes an elasticity of import demand with respect to import prices of four, and an elasticity of import prices with respect to tariffs of 0.25, the product of which is one and is the reason they cancel out in the Administration’s formula.
However, the elasticity of import prices with respect to tariffs should be about one (actually 0.945), not 0.25 as the Trump Administration states. Their mistake is that they base the elasticity on the response of retail prices to tariffs, as opposed to import prices as they should have done. The article they cite by Alberto Cavallo and his coauthors makes this distinction clear. The authors state that “tariffs [are] passed through almost fully to US import prices,” while finding “more mixed evidence regarding retail price increases.” It is inconsistent to multiply the elasticity of import demand with respect to import prices by the elasticity of retail prices with respect to tariffs.
Correcting the Trump Administration’s error would reduce the tariffs assumed to be applied by each country to the United States to about a fourth of their stated level, and as a result, cut the tariffs announced by President Trump on Wednesday by the same fraction, subject to the 10 percent tariff floor. As shown in Table 1, the tariff rate would not exceed 14 percent for any country. For all but a few countries, the tariff would be exactly 10 percent, the floor imposed by the Trump Administration.
@mycketforvirrad Can you please restore the "American Enterprise Institute" to the title? Changing "Trump tariff" to "Donald Trump US tariff" is awkward enough, but the fact that this dissent is...
@mycketforvirrad Can you please restore the "American Enterprise Institute" to the title? Changing "Trump tariff" to "Donald Trump US tariff" is awkward enough, but the fact that this dissent is coming from a well-known right-wing think tank is an important part of this story and not apparent from the listing unless you follow the link.
edit: You can switch it to "Conservative think tank:" if you think "American Enterprise Institute:" is too obscure. But it needs to be mentioned. This would be like if the Center for American Progress put out a statement openly questioning the logic and basic accuracy of a major Biden admin policy.
While it is worth keeping a record of these sorts of problems, the argument seems somewhat pointless. The goal of this move was to impose high tariffs and, probably, try to move towards autarky. The formula was almost certainly devised simply to create high tariffs. If they had used 1 instead of 0.25 for the parameter this article questions, resulting in low tariffs, they would likely have just added a factor of 4 somewhere to get back to high ones, with any justification, however flimsy.
@mycketforvirrad Can you please restore the "American Enterprise Institute" to the title? Changing "Trump tariff" to "Donald Trump US tariff" is awkward enough, but the fact that this dissent is coming from a well-known right-wing think tank is an important part of this story and not apparent from the listing unless you follow the link.
edit: You can switch it to "Conservative think tank:" if you think "American Enterprise Institute:" is too obscure. But it needs to be mentioned. This would be like if the Center for American Progress put out a statement openly questioning the logic and basic accuracy of a major Biden admin policy.
We don't include the website in the title as it was originally written, but I have amended it again to be included.
Thanks!