Lamp of experience sheds light on tariffs
Donald Trump will have a powerful tool at his disposal when he debates Kamala Harris this week: experience.
When Trump came to office promising to tear up international agreements and impose tariffs, many critics were quick to say that he Trade war beginsEconomic forecasters on both the left and right have warned that President Trump's tariffs will hurt the U.S. economy and Raise consumer prices.
Eight years ago, these arguments were superficially plausible: it had been generations since the United States had deployed a robust trade strategy that included broad tariffs, rather than just applying spot tariffs to products that were being illegally dumped on the U.S. market. Tariff opponents didn't have much evidence to back up their claims, but it had been so long since trade tariffs had been used strategically that they were likely to be counterproductive. There wasn't much direct evidence from the other side of the pro-tariff camp..
Trump had economic theory on his side. Though it may not be obvious from the way many economists talk about tariffs, Standard economic theory supports Trump's claims Tariffs are often paid by countries that produce the exports that are the subject of the tax, not by countries that import the goods. Trade theory has long known that when a large country like the United States imposes tariffs, prices abroad tend to fall because exporting countries have no choice but to liquidate their surplus production.
Indeed, economists have long known that tariffs can significantly improve the terms of trade and actually lower the domestic prices of the imported goods that are subject to the tariff. Metzler's paradox It is named after economist Lloyd Metzler, who first wrote about the idea in 1949. Moreover, tariffs can also increase global production of the targeted goods by increasing investment incentives for domestic production, putting downward pressure on prices.
Price theory tells us that tariffs rarely raise prices for consumers. While many imagine that the price they pay at the register is an accumulation of input costs, the reality is nearly the opposite. Consumer demand determines the price of the final product, which in turn determines the price of the parts and labor that go into making that product. So when tariffs raise import costs, In a competitive economy, there is no realistic way for merchants to pass on costs..
If that's what economics teaches, why do so many economists argue that tariffs increase prices? There are two main reasons. Politics and social statusLike most of our profession and academia, economists are overwhelmingly to the left of Donald Trump. And they value their reputations among their peers, which requires them to criticize Trump. So they tend to be more vocal in their opposition to his policies than they should be. Notice, for example, how much less noise there has been about tariffs since Joe Biden became president and kept many of the tariffs in place. The tariffs were bad because they were Trump's tariffs.
The third reason is that many economists The Outdated Mental Model of Trump TariffsTariffs imposed to protect the market share of domestic monopolies are likely to make prices higher than they should be. But Trump's tariffs were not “protectionist” in that sense at all. They aimed to achieve more favorable trade terms for the United States, and the U.S. market that they aimed to “protect” from Chinese mercantilism is a competitive market, not one dominated by monopoly manufacturers.
The record is clear: tariffs do not increase consumer prices
According to the records, The tariff opponents were wrong When they said consumers would face higher prices, U.S. durable goods prices fell 2.1% from Trump's inauguration to the start of the pandemic in January 2020. If you include the pandemic and the subsequent price increases, durable goods prices rose 1.3%. That's not an annualized inflation rate, but a 1.3% increase over four years.
Here's how it works The Washington Post When reporting on the impact of tariffs in 2020, They finally admitted the tariff megeddon story was wrong:
Headlines last year claimed that President Trump's tariffs could hurt the typical American family. $1,000 extra per yearThis startling figure comes from a JPMorgan analysis that assumes the full cost of tariffs would be passed on to consumers, a theory commonly taught in introductory economics classes.
But that's not the case. Evidence so far suggests that most American companies are only passing on a small fraction of their increased costs to consumers — about $100 per household per year…
However, recent study A study by economists from Harvard, the University of Chicago and the Federal Reserve Bank of Boston went a step further, examining data from two major retailers on the prices of similar products that were subject to tariffs and those that weren't. The economists found “fairly modest” price differences, suggesting that US companies and retailers are bearing more costs and reducing profits.
The survey found that prices of affected items, including crockery, furniture, linens, toaster ovens, towels and umbrellas, increased by less than 1%, while prices of electrical appliances increased by just 1.4%.
Nearly every study that has looked at tariffs has found Almost no pass-through to retail prices Studies have found that some of the tariffs imposed by Trump, particularly the metals tariffs, were absorbed by exporting countries. Tariffs paid by importing countries were not passed on to consumers. A large-scale study of Trump's China tariffs in general has found no evidence of significant pass-through to consumers. Even studies that claim the tariffs were paid by Americans and not by China only show that the tariffs were paid by the business sector and not the household sector.
When Harris and the debate moderators argued that further tariffs would be a tax on consumers, Trump can point to his first term. To show that this did not happen, and by relying on experience rather than rhetoric, he would be echoing the words of American Founding Father Patrick Henry:
“I have but one lamp before my feet, and that is the lamp of experience; and I know no other way of judging the future than by the past,” Henry said in 1775.
