No. of Recommendations: 32
In these complicated times, sometimes it's nice to learn that some things have already been thought about and analyzed. One such thing is a theory in economics called the Lerner Symmetry Theorem. There are edge cases that it is not quite a perfect reflection of reality, but it is extremely well supported and robust, and has held up through thick and thin since its publication in 1936. It is interesting because it's one of those findings in macroeconomics that is completely counterintuitive, but true. (not always immediately, and with some caveats about the behaviour of the bosses of multinationals, but definitely true overall and in most specific circumstances).
It deals with what happens when a country applies tariffs to imported goods, a situation that has been in the news lately. And it compares that to the situation that the same country puts an export tax on its own exporters.
On the surface of things, you'd expect wildly different outcomes from those two things, but the theorem shows that they are identical in outcome in almost all real world situations. They both cause both imports
and exports to fall. They are equivalent, hence the name "symmetry" in the name of the theorem.
Take the case of a country that has lots of exports and lots of imports. The starting trade balance isn't particularly important. The country's economy is ticking along nicely, not in the middle of a depression, so utilization is pretty high.
Now, an import tariff is applied to some subset of goods coming into that country. Their local price rises, and the number of imports in that category falls. Local production of that item starts to rise. These are the effects that the tariff is supposed to create, and in that sense it works. However, in order to produce those goods, that new production can only be done by diverting resources (labour, land, materials) from the production of *other* things, which will include a lot of the goods that were until then being exported. Imports fall, but exports fall as well.
<DIGRESSION>
Plus, don't forget that the country was probably importing those things in the first place because it wasn't their comparative advantage. That new production is probably ill advised in terms of local and global wealth. This isn't important to the theorem, but it's an important reason why slashing trade makes people poorer. All wealth ultimately stems from the division of labour, which implicitly means trading with someone else. All wealth generation comes from trade, from local to interplanetary. Less trade, less wealth.
</DIGRESSION>
There is much more to understanding the theorem, but that's the key point. Import tariffs will emphatically NOT reduce a country's trade deficit in goods, any more than taxing that country's exports will, because they amount to the same thing. Both of them will crush both imports AND exports.
Recently, a think tank did an analysis of the recent US tariff proposals. (whatever was being proposed that week, I suppose). The disruption cascades through the world's trading countries, and the end point is a reduction in exports from China of -4.75% and a reduction in exports from the US of -16.98%, about $500bn/year. The reason that the US is hit hardest is because it's the only country proposing to reduce trade with all other countries.
Here's an article at the FT that got me to reading about this.
https://www.ft.com/content/a18ed1bd-3546-453a-bf11...Is any of that actionable? Well, don't expect the US trade deficit to shrink over time, which may itself have some policy consequences. More broadly, the logical thing to expect is a recession in all the rich countries, and a very lasting hit to the US economy at least as bad as what Brexit has done to the UK's economy.
Jim
