From the article: … This is a textbook explanation of comparative advantage, but I think it’s more accessible than most. For real-world situations, there will be other considerations as well....
From the article:
Many people think they understand why domestic prices rise with tariffs–domestic producers take advantage of reduced competition to jack up prices and increase their profits. The explanation seems cynical and sophisticated and its not entirely wrong but it misses deeper truths. Moreover, this “explanation” makes people think that an appropriate response to domestic firms raising prices is price controls and threats, which would make things worse. In fact, tariffs will increase domestic prices even in perfectly competitive industries. Let’s see why.
…
[T]he fundamental reason why trade is beneficial is that foreign producers are willing to send us wine in exchange for fewer resources than we would need to produce the wine ourselves. Put differently, we have two options: produce more wine domestically by diverting resources from olive oil and cheese, or produce more olive oil and cheese and trade some of it for foreign wine. The latter makes us wealthier when foreign producers have lower costs.
Tariffs reverse this logic. By pushing wine production back home, they force us to use more costly resources—to sacrifice more olive oil and cheese than necessary—to get the same wine. The result is a net loss of wealth.
Note that tariffs do not increase domestic production, they shift domestic production from one industry to another.
This is a textbook explanation of comparative advantage, but I think it’s more accessible than most. For real-world situations, there will be other considerations as well.
Edit: it’s useful to think about how this can go wrong. It’s all based on price comparisons making sense, so the low-cost producer actually does use fewer resources. This is roughly true: if alternative A costs much more than alternative B, it’s reasonable to assume that it probably does use more resources. But prices are only a rough indicator of things like environmental damage, because those costs aren’t always included.
Economists call this an externality. Taxes can be justifiable as a way of correcting prices to better reflect the true cost of things.
And that’s why trade becomes so political - we know that prices aren’t always right, and the question is what interventions are needed to make them closer to reality, versus “unfair” interventions like subsidies. A price can seem like a simple fact, a number that you can put in a spreadsheet. But prices are actually a constantly changing summary of a complicated mixture of opinion and speculation.
I think their analysis dramatically underestimates how low our industrial capacity is relative the resources we have at hand. Also, you can't say that tariffs do not increase domestic production...
I think their analysis dramatically underestimates how low our industrial capacity is relative the resources we have at hand. Also, you can't say that tariffs do not increase domestic production as if it's a law of economics (for one, much of the 19th/early 20th century would disagree with you). Tariffs in the short to medium term increase domestic production if the tariff is sufficient to make domestic products cheaper, and tariffs increase production in the long run if it's sufficient to make the large capital expenditures needed for competitive domestic manufacturing less risky. At the geopolitical level, it would also have the nice side effect of America having the incentive to push for free and fair labor across the developing world. Ultimately, I don't mind the direction the administration is taking with tariffs, but the devil will be in the details of their plan.
If we were discussing very limited tariffs in one targeted industry like cars or airplanes, you might have a point. Every country has limited production capacity (ignoring productivity growth), so...
If we were discussing very limited tariffs in one targeted industry like cars or airplanes, you might have a point. Every country has limited production capacity (ignoring productivity growth), so tariffs and industrial policy can shift production from one industry to another. This is why temporary tariffs may make sense in some fledgling industries or for national security industries.
The problem is everything has tariffs now. This includes intermediary goods which means all domestic manufacturing is now massively more expensive which is very bad for increased production capacity. Tariffing imported energy, steel, and minerals is horrible policy. Every serious school of economics, from the Marxists to the Reaganites, agrees that broad tariffs are awful and destroy countries.
"What protectionism teaches us, is to do to ourselves in time of peace what enemies seek to do to us in time of war."
– Henry George
Notably, interlinked global economies are the greatest power to enforce peace that exists, and the tariff announcement illustrates it perfectly: China, Japan and South Korea agreed to a unified...
Notably, interlinked global economies are the greatest power to enforce peace that exists, and the tariff announcement illustrates it perfectly: China, Japan and South Korea agreed to a unified front of retaliatory tariffs against the US. Despite centuries of on and off animosity, and even recent territorial disputes, they chose rational economic benefit and allied against the betrayal from a shared trade partner.
Warren Buffet went so far, in a recent interview, as to refer to Trump's tariffs as an "act of war." On the whole world, no less.
Part of their plan is to use tariffs as a negotiating tool, so I suppose we'll see how successful that is and how much of that will backfire. Though even in intermediary goods, to some extent...
Part of their plan is to use tariffs as a negotiating tool, so I suppose we'll see how successful that is and how much of that will backfire. Though even in intermediary goods, to some extent we're capable of producing much more than we currently do. The start-up time will be significant, and the level of broad tariffs from the administration I agree are definitely not tenable in the short or medium term if this is not just for negotiation.
You have to remember, they tariffed penguins. One of his explicitly stated goals is replacing the IRS with tariffs. They're a regressive sales tax, and he doesn't even seem to know that tariffs...
You have to remember, they tariffed penguins. One of his explicitly stated goals is replacing the IRS with tariffs. They're a regressive sales tax, and he doesn't even seem to know that tariffs are actually paid by Americans.
Trump has no clue what a trade deficit is or why it's actually beneficial. For example, if the US buys $5 billion of fertilizer from Zimbabwe then uses it to produce $600 billion of crops, that'd be an extraordinarily beneficial trade relationship which Trump just destroyed. This isn't even a hypothetical, the US imported $6 billion in potash fertilizer in 2022 to power America's agriculture industry...which is now getting crushed by tariffs.
Trump isn't some mastermind trying to negotiate better deals. He applied "reciprocal" tariffs based on a made-up formula with serious errors and no grounding in economic facts. The very deals he's breaking with Canada and Mexico were negotiated by him during his last term. Even Israel is in "complete shock" because they already removed all trade barriers with the US to try to appease Trump!
Trade deficits are awesome actually. Other countries send us finished goods made of rare metals, steel, etc. in exchange for, like, excel spreadsheets with requirements.
Trade deficits are awesome actually. Other countries send us finished goods made of rare metals, steel, etc. in exchange for, like, excel spreadsheets with requirements.
I interpreted the formula has Trump wanting to hit China with a disproportionate tariff while making it seem objective and non-escalatory. That is, they decided where they wanted the tariff rate...
I interpreted the formula has Trump wanting to hit China with a disproportionate tariff while making it seem objective and non-escalatory. That is, they decided where they wanted the tariff rate to be and retroactively found a formula that roughly fit that for America's largest trading partners. Though, maybe I'm giving them way too much credit?
Sadly, they seem to have literally just asked ChatGPT what to do. Funnily enough, ChatGPT follows up its answer with basically: "Please don't actually do this. It's a terrible idea." I understand...
Sadly, they seem to have literally just asked ChatGPT what to do. Funnily enough, ChatGPT follows up its answer with basically: "Please don't actually do this. It's a terrible idea."
I understand where you're coming from. Usually it makes sense to assume people are semi-rational actors, but Trump's administration is full of idiots making terrible decisions that are awful for everyone. The last time tariff rates were this high, we got the Great Depression.
Using it as a negotiation tool instead of an ideological policy makes it worse, though. The capital expenditures and the 10-ish years it would take (by some estimates I've read) to build out...
Using it as a negotiation tool instead of an ideological policy makes it worse, though. The capital expenditures and the 10-ish years it would take (by some estimates I've read) to build out domestic production capacity fall apart if the tariffs get lifted in, say, 1-3 years or via the next administration and we're competing again with cheap foreign goods.
It's why you haven't seen a bunch of rapturous announcements from US companies about expanding domestic manufacturing--they're playing it close to the vest so they don't get holding the bag if Trump walks everything back, which he is well known to do. It could literally happen next week, next year, next administration, or never, and that's too much of a black box right now for anyone to take the risk, especially when you factor in the higher cost of intermediary goods to facilitate that production in the meantime.
Yes, international trade is very complicated. The article isn't a serious analysis of what's going right now with the US. It's explaining the textbook definition of comparative advantage for...
Yes, international trade is very complicated. The article isn't a serious analysis of what's going right now with the US. It's explaining the textbook definition of comparative advantage for people who don't know it.
It's better to think of it as "a thing that often happens" rather than like a law of physics.
I'd go further: this stub of an explanation is only trying to show that trade is a far more complicated thing than most talking heads like to pretend. It's not even trying to actually explain a...
I'd go further: this stub of an explanation is only trying to show that trade is a far more complicated thing than most talking heads like to pretend. It's not even trying to actually explain a real-world scenario, just show how tariffs don't automagically generate new industrial capacity for free. It does that pretty well, IMO.
Precisely because the 19th and early-20th centuries saw massive concurrent and largely unrelated expansions to industrial capacity. Between electrification, motorization, refrigeration, shipping...
... much of the 19th/early 20th century would disagree with you.
Precisely because the 19th and early-20th centuries saw massive concurrent and largely unrelated expansions to industrial capacity. Between electrification, motorization, refrigeration, shipping and a million other factors, taking the explosion of industry in the 19th/20th as anything but an exception to the rule seems a little disingenuous.
This hasn’t really been successful anywhere it’s been tried and this exact policy is one of the main reasons India failed to industrialize for a half century after independence while the rest of...
Tariffs in the short to medium term increase domestic production if the tariff is sufficient to make domestic products cheaper, and tariffs increase production in the long run if it's sufficient to make the large capital expenditures needed for competitive domestic manufacturing less risky.
This hasn’t really been successful anywhere it’s been tried and this exact policy is one of the main reasons India failed to industrialize for a half century after independence while the rest of the Asian tiger economies did. It’s also why Argentina lagged behind the US in development. It only works if you are extremely targeted about what industry you want to foster and protect. If you just try to do blanket import substitution it results in poor quality control and lowered output because there is no competition. If barriers to entry are a problem, it’s usually a lot more effective to float the capital up front to clear them so the fledgling industry can rapidly develop to be competitive with whatever the state of the art globally is. If you give it a guaranteed domestic market that’s safe from competition they never have to and, like India, you just crank out the same shitty Ambassador car year after year after year after year.
If Korea sheltered Hyundai and Kia that heavily they’d have never had to up their game from being unreliable shitboxes to approach being on par with where the Japanese makers are.
I’m not a fan of the tariffs, but Korea quite famously did shelter their automobile industry incredibly heavily for a long time to incentivize the creation of a domestic car manufacturing...
If Korea sheltered Hyundai and Kia that heavily they’d have never had to up their game from being unreliable shitboxes to approach being on par with where the Japanese makers are.
I’m not a fan of the tariffs, but Korea quite famously did shelter their automobile industry incredibly heavily for a long time to incentivize the creation of a domestic car manufacturing capacity. They (obviously) loosened up over time and Korean companies have had to become more competitive, but they arguably wouldn’t exist at all without those earlier policies.
The thing is though, they actually focused on selling those cars in larger foreign markets where they had to compete with everything the global market had to offer. That’s the key element that...
The thing is though, they actually focused on selling those cars in larger foreign markets where they had to compete with everything the global market had to offer. That’s the key element that forces them to compete hard to improve productivity and processes. Without that, you end up like India.
This sounds like Soviet Russia. They broke themselves against the Iron Curtain while trying to keep up with the US. The US is bound to do the same, attempting to keep up with China. We have to get...
This sounds like Soviet Russia. They broke themselves against the Iron Curtain while trying to keep up with the US.
The US is bound to do the same, attempting to keep up with China.
We have to get this crazy motherfucker out of office or, at least, neutered him.
This isn't even measuring the other harms that are happening with the way trump is doing the tariffs. At minimum, he's destroying markets for American exports. Not only because of counter tariffs,...
This isn't even measuring the other harms that are happening with the way trump is doing the tariffs. At minimum, he's destroying markets for American exports. Not only because of counter tariffs, but there is going to be significant boycotting of American goods for years.
They keep going back and forth on the reasons for them: It's to raise revenue. It's to bring manufacturing back to the US. It's an emergency to stop drug smuggling. It's a negotiating tool.
However, there is a principle at work here called “No backsies.” Once you’ve said you might negotiate the tariffs, nobody is going to believe you when you change your mind and say you’ll never negotiate.
Indeed, precisely two hours and 17 minutes after insisting that his policies would never change, Trump returned to Truth Social to announce excitedly that the policies were going to change: “Just had a very productive call with To Lam, General Secretary of the Communist Party of Vietnam, who told me that Vietnam wants to cut their Tariffs down to ZERO if they are able to make an agreement with the U.S. I thanked him on behalf of our Country, and said I look forward to a meeting in the near future.”
A problem with Trump (and there are countless problems with him) is that he's either an evil mastermind or a complete dumbass, and all seem to be true at once. He appears to be trying to take over the world in the most incompetent way possible. It's true that he may have some feigned incompetence to throw people off, but at the same time he constantly does things that undermine his stated goals.
At least we know he is incredibly reckless.
Viz. "The most incompetent way possible", his fatal flaw (among a legion of flaws) seems to be that he thinks everyone in a leadership position thinks exactly the way he does. And few if any do,...
Viz. "The most incompetent way possible", his fatal flaw (among a legion of flaws) seems to be that he thinks everyone in a leadership position thinks exactly the way he does. And few if any do, because they're not fools who have bankrupted everything they've ever touched. Also worth noting that those other populations don't see the US as the "shining light upon the hill" that everyone in the US seems to believe as a matter of national identity. Just something they have to deal with.
As a result, we risk no one being cowed and seeing these retaliatory tariffs is a measure of that, which they might not back down from even if we do. Which weakens the "negotiation" posture.
Trump wins either way. He gets economic vassal states that will bend the knee to prevent the crash of their export-based economies. Or he does so much damage to the U.S. economy that he can...
Trump wins either way. He gets economic vassal states that will bend the knee to prevent the crash of their export-based economies. Or he does so much damage to the U.S. economy that he can declare a real emergency and get even more power. In his ideal world, both.
Another possible scenario is that he does enough damage to cause a recession, but the main effect is that the Republicans become very unpopular. (Sort of like Liz Truss.)
Another possible scenario is that he does enough damage to cause a recession, but the main effect is that the Republicans become very unpopular. (Sort of like Liz Truss.)
Seems unlikely. Knowing several fervent Trump supporters, who have been voting Republican for as long as I can remember (I'm 40. This is my family), this won't change their mind. It'll somehow all...
Seems unlikely.
Knowing several fervent Trump supporters, who have been voting Republican for as long as I can remember (I'm 40. This is my family), this won't change their mind.
It'll somehow all be someone else's fault (Democrats, China, Whatever).
It feels like that's all that's left. At least, if not true believers, then spineless sycophants. I've been hoping for almost 10 years now that this next thing will break the spell, will be the...
It feels like that's all that's left. At least, if not true believers, then spineless sycophants.
I've been hoping for almost 10 years now that this next thing will break the spell, will be the end, but nothing seems to change.
From the article:
…
This is a textbook explanation of comparative advantage, but I think it’s more accessible than most. For real-world situations, there will be other considerations as well.
Edit: it’s useful to think about how this can go wrong. It’s all based on price comparisons making sense, so the low-cost producer actually does use fewer resources. This is roughly true: if alternative A costs much more than alternative B, it’s reasonable to assume that it probably does use more resources. But prices are only a rough indicator of things like environmental damage, because those costs aren’t always included.
Economists call this an externality. Taxes can be justifiable as a way of correcting prices to better reflect the true cost of things.
And that’s why trade becomes so political - we know that prices aren’t always right, and the question is what interventions are needed to make them closer to reality, versus “unfair” interventions like subsidies. A price can seem like a simple fact, a number that you can put in a spreadsheet. But prices are actually a constantly changing summary of a complicated mixture of opinion and speculation.
I think their analysis dramatically underestimates how low our industrial capacity is relative the resources we have at hand. Also, you can't say that tariffs do not increase domestic production as if it's a law of economics (for one, much of the 19th/early 20th century would disagree with you). Tariffs in the short to medium term increase domestic production if the tariff is sufficient to make domestic products cheaper, and tariffs increase production in the long run if it's sufficient to make the large capital expenditures needed for competitive domestic manufacturing less risky. At the geopolitical level, it would also have the nice side effect of America having the incentive to push for free and fair labor across the developing world. Ultimately, I don't mind the direction the administration is taking with tariffs, but the devil will be in the details of their plan.
If we were discussing very limited tariffs in one targeted industry like cars or airplanes, you might have a point. Every country has limited production capacity (ignoring productivity growth), so tariffs and industrial policy can shift production from one industry to another. This is why temporary tariffs may make sense in some fledgling industries or for national security industries.
The problem is everything has tariffs now. This includes intermediary goods which means all domestic manufacturing is now massively more expensive which is very bad for increased production capacity. Tariffing imported energy, steel, and minerals is horrible policy. Every serious school of economics, from the Marxists to the Reaganites, agrees that broad tariffs are awful and destroy countries.
Notably, interlinked global economies are the greatest power to enforce peace that exists, and the tariff announcement illustrates it perfectly: China, Japan and South Korea agreed to a unified front of retaliatory tariffs against the US. Despite centuries of on and off animosity, and even recent territorial disputes, they chose rational economic benefit and allied against the betrayal from a shared trade partner.
Warren Buffet went so far, in a recent interview, as to refer to Trump's tariffs as an "act of war." On the whole world, no less.
Part of their plan is to use tariffs as a negotiating tool, so I suppose we'll see how successful that is and how much of that will backfire. Though even in intermediary goods, to some extent we're capable of producing much more than we currently do. The start-up time will be significant, and the level of broad tariffs from the administration I agree are definitely not tenable in the short or medium term if this is not just for negotiation.
You have to remember, they tariffed penguins. One of his explicitly stated goals is replacing the IRS with tariffs. They're a regressive sales tax, and he doesn't even seem to know that tariffs are actually paid by Americans.
Trump has no clue what a trade deficit is or why it's actually beneficial. For example, if the US buys $5 billion of fertilizer from Zimbabwe then uses it to produce $600 billion of crops, that'd be an extraordinarily beneficial trade relationship which Trump just destroyed. This isn't even a hypothetical, the US imported $6 billion in potash fertilizer in 2022 to power America's agriculture industry...which is now getting crushed by tariffs.
Trump isn't some mastermind trying to negotiate better deals. He applied "reciprocal" tariffs based on a made-up formula with serious errors and no grounding in economic facts. The very deals he's breaking with Canada and Mexico were negotiated by him during his last term. Even Israel is in "complete shock" because they already removed all trade barriers with the US to try to appease Trump!
Trade deficits are awesome actually. Other countries send us finished goods made of rare metals, steel, etc. in exchange for, like, excel spreadsheets with requirements.
I interpreted the formula has Trump wanting to hit China with a disproportionate tariff while making it seem objective and non-escalatory. That is, they decided where they wanted the tariff rate to be and retroactively found a formula that roughly fit that for America's largest trading partners. Though, maybe I'm giving them way too much credit?
Sadly, they seem to have literally just asked ChatGPT what to do. Funnily enough, ChatGPT follows up its answer with basically: "Please don't actually do this. It's a terrible idea."
I understand where you're coming from. Usually it makes sense to assume people are semi-rational actors, but Trump's administration is full of idiots making terrible decisions that are awful for everyone. The last time tariff rates were this high, we got the Great Depression.
Using it as a negotiation tool instead of an ideological policy makes it worse, though. The capital expenditures and the 10-ish years it would take (by some estimates I've read) to build out domestic production capacity fall apart if the tariffs get lifted in, say, 1-3 years or via the next administration and we're competing again with cheap foreign goods.
It's why you haven't seen a bunch of rapturous announcements from US companies about expanding domestic manufacturing--they're playing it close to the vest so they don't get holding the bag if Trump walks everything back, which he is well known to do. It could literally happen next week, next year, next administration, or never, and that's too much of a black box right now for anyone to take the risk, especially when you factor in the higher cost of intermediary goods to facilitate that production in the meantime.
Yes, international trade is very complicated. The article isn't a serious analysis of what's going right now with the US. It's explaining the textbook definition of comparative advantage for people who don't know it.
It's better to think of it as "a thing that often happens" rather than like a law of physics.
I'd go further: this stub of an explanation is only trying to show that trade is a far more complicated thing than most talking heads like to pretend. It's not even trying to actually explain a real-world scenario, just show how tariffs don't automagically generate new industrial capacity for free. It does that pretty well, IMO.
Precisely because the 19th and early-20th centuries saw massive concurrent and largely unrelated expansions to industrial capacity. Between electrification, motorization, refrigeration, shipping and a million other factors, taking the explosion of industry in the 19th/20th as anything but an exception to the rule seems a little disingenuous.
Sure, technology played a role, but the point can be illustrated by comparing American and European industry over that time period.
This hasn’t really been successful anywhere it’s been tried and this exact policy is one of the main reasons India failed to industrialize for a half century after independence while the rest of the Asian tiger economies did. It’s also why Argentina lagged behind the US in development. It only works if you are extremely targeted about what industry you want to foster and protect. If you just try to do blanket import substitution it results in poor quality control and lowered output because there is no competition. If barriers to entry are a problem, it’s usually a lot more effective to float the capital up front to clear them so the fledgling industry can rapidly develop to be competitive with whatever the state of the art globally is. If you give it a guaranteed domestic market that’s safe from competition they never have to and, like India, you just crank out the same shitty Ambassador car year after year after year after year.
If Korea sheltered Hyundai and Kia that heavily they’d have never had to up their game from being unreliable shitboxes to approach being on par with where the Japanese makers are.
I’m not a fan of the tariffs, but Korea quite famously did shelter their automobile industry incredibly heavily for a long time to incentivize the creation of a domestic car manufacturing capacity. They (obviously) loosened up over time and Korean companies have had to become more competitive, but they arguably wouldn’t exist at all without those earlier policies.
The thing is though, they actually focused on selling those cars in larger foreign markets where they had to compete with everything the global market had to offer. That’s the key element that forces them to compete hard to improve productivity and processes. Without that, you end up like India.
This sounds like Soviet Russia. They broke themselves against the Iron Curtain while trying to keep up with the US.
The US is bound to do the same, attempting to keep up with China.
We have to get this crazy motherfucker out of office or, at least, neutered him.
This isn't even measuring the other harms that are happening with the way trump is doing the tariffs. At minimum, he's destroying markets for American exports. Not only because of counter tariffs, but there is going to be significant boycotting of American goods for years.
They keep going back and forth on the reasons for them: It's to raise revenue. It's to bring manufacturing back to the US. It's an emergency to stop drug smuggling. It's a negotiating tool.
Let's pick that one. It's a negotiating tool.
Trump Has Already Botched His Own Bad Tariff Plan
A problem with Trump (and there are countless problems with him) is that he's either an evil mastermind or a complete dumbass, and all seem to be true at once. He appears to be trying to take over the world in the most incompetent way possible. It's true that he may have some feigned incompetence to throw people off, but at the same time he constantly does things that undermine his stated goals.
At least we know he is incredibly reckless.
Viz. "The most incompetent way possible", his fatal flaw (among a legion of flaws) seems to be that he thinks everyone in a leadership position thinks exactly the way he does. And few if any do, because they're not fools who have bankrupted everything they've ever touched. Also worth noting that those other populations don't see the US as the "shining light upon the hill" that everyone in the US seems to believe as a matter of national identity. Just something they have to deal with.
As a result, we risk no one being cowed and seeing these retaliatory tariffs is a measure of that, which they might not back down from even if we do. Which weakens the "negotiation" posture.
Trump wins either way. He gets economic vassal states that will bend the knee to prevent the crash of their export-based economies. Or he does so much damage to the U.S. economy that he can declare a real emergency and get even more power. In his ideal world, both.
Another possible scenario is that he does enough damage to cause a recession, but the main effect is that the Republicans become very unpopular. (Sort of like Liz Truss.)
Seems unlikely.
Knowing several fervent Trump supporters, who have been voting Republican for as long as I can remember (I'm 40. This is my family), this won't change their mind.
It'll somehow all be someone else's fault (Democrats, China, Whatever).
It’s true that there are a lot of die hards. They need more than just the true believers to hold onto Congress, though.
It feels like that's all that's left. At least, if not true believers, then spineless sycophants.
I've been hoping for almost 10 years now that this next thing will break the spell, will be the end, but nothing seems to change.
They may not change their mind.
But a recession would turn the elections into a blood bath for Republicans.
It happened in 2008.
I sure hope so.