Wednesday, 12 March 2025

"The Trump administration, citing our own work, proposes a 'benchmark' for an optimal tariff. We think this is a very bad idea."

"The Trump administration ... [is] citing our own work, propos[ing] 20% as a 'benchmark' for the US optimal tariff. We think this is a very bad idea. ...

"The 'optimal tariff argument' builds on the idea that countries have market power, and so can benefit from exercising it. ...

"As a matter of academic debate, it is certainly interesting to understand why, in the absence of any international rules and institutions, a country may have incentives to exploit its market power by being protectionist. As a matter of actual policy, however, such considerations provide a misleading picture of what the overall impact of US tariffs would be. The reason is foreign retaliation.

"The optimal tariff argument assumes that when foreigners face higher trade barriers in the United States, they sit idle, get poorer, and do not impose their own tariffs on US goods. This won't happen. ...

"[T]he new Trump administration ... view[s] tariffs as a game of chicken. ... The game of chicken, however, is the wrong metaphor to think about trade wars.

"Trade wars are best viewed as a prisoner's dilemma. Instead of staying silent, prisoners are always tempted to testify against their partner in crime in exchange for a more lenient sentence. By doing so, however, they all end up in prison for longer. Similarly, because each country has some market power to exploit, they have incentives to raise trade barriers, regardless of what the other countries do. The problem is that, when they all do so, none of them succeed in making their imports cheaper and they all end up being poorer. ...

"The world trading system that emerged after World War II was designed precisely to keep countries' beggar-thy-neighbour impulses in check and avoid repeating the trade wars from the 1930s. It allowed countries to sustain trade cooperation for decades. ...

"Pursuing a policy of raising tariffs would most likely lead to a new global trade war. Its consequences, unfortunately, are not hard to predict. It would mean less trade and, most importantly, less international cooperation on the big issues of the day: war, poverty, and climate change."
~ Andrés Rodríguez-Clare and Arnaud Costinot from their post ''A very bad idea': Two economists respond to White House citing them on 20% tariffs'

2 comments:

MarkT said...

I want to know though, what’s the optimal amount of retardation? Have some of the pro Trump commenters here achieved it?

Richard McGrath said...

Will the tariffs be inflation-indexed?