[[{“value”:”From a new and excellent post by the essential Noah Smith: There are actually two reasons that broad tariffs, like the ones Trump is proposing, have difficulty reducing trade deficits. The first reason is exchange rate adjustment. When you trade stuff internationally, you have to swap currencies. As anyone who has traveled overseas knows, to
The post Broad tariffs can be worse than targeted tariffs appeared first on Marginal REVOLUTION.”}]]
From a new and excellent post by the essential Noah Smith:
There are actually two reasons that broad tariffs, like the ones Trump is proposing, have difficulty reducing trade deficits.
The first reason is exchange rate adjustment.
When you trade stuff internationally, you have to swap currencies. As anyone who has traveled overseas knows, to buy Chinese goods, you need yuan.² So if you’re an American, you need to swap your dollars for yuan in order to buy stuff from China. The price at which dollars and yuan get swapped for each other is called the exchange rate.
When the U.S. puts tariffs on China, that reduces U.S. demand for Chinese goods. And that reduces U.S. demand for Chinese yuan, because when Americans don’t need to buy as much Chinese stuff, they don’t need as much yuan.
And when demand for yuan goes down, the price of yuan, in terms of dollars, goes down. This is just basic Econ 101, supply-and-demand stuff. The dollar appreciates in value and the yuan depreciates in value. This is called “exchange rate adjustment”.
Exchange rate adjustment partially cancels out the effect of the tariffs. When tariffs make the yuan get cheaper for Americans, that makes Chinese goods cheaper for American customers. And when tariffs make the dollar get more expensive for Chinese people, that makes American goods get more expensive for Chinese customers.
This doesn’t completely cancel out the effect of tariffs, but it partially cancels it out. It’s like if the government put taxes on pizza, pizza restaurants would cut their prices in response, in order to reduce the number of people who stop eating pizza.
Of course in the real world, there are more than just two currencies, and more than just two countries trading with each other. But if you look at the data, it’s not hard to see the impact of Trump’s tariffs on China in his first term…
And this is not even the only reason broad tariffs struggle to reduce trade imbalances! There’s at least one more. Broad tariffs also raise costs for American manufacturers, without increasing costs for Chinese manufacturers.
Here is the full post.
The post Broad tariffs can be worse than targeted tariffs appeared first on Marginal REVOLUTION.
Economics
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