TRADE IS BIGLY COMPLEX, DONALD.
The C. D. Howe Institute has just published a research note by Dan Ciuriak and Jingliang Xiao on the effects of the Trump aluminum and steel tariffs on the U.S., Canada and the rest of the world. It would be interesting to know if President Donald Trump received a similarly detailed economic analysis before going ahead with his tariffs.
Ciuriak is a former deputy chief economist at Canada’s Department of Foreign Affairs and International Trade and Xiao is a research associate with Ciuriak Consulting. They use a standard “computable general equilibrium” model of international trade to run their simulations. In this economic context “standard” means “lots of other people use it, it makes conventional assumptions about how economic actors respond to price changes, and we sure hope it’s right.”
I’ve never been much of a modeller myself. One, it’s very hard work and, two, reality is so complex it seems unlikely you’ll ever get it right. On the other hand, there’s no better way to learn just how complex reality is (paging Mr. Trump) than to work through a modelling exercise like the tariff simulations Ciuriak and Xiao perform.
What are their results?
Higher tariffs on steel and aluminum imports do block imports to the U.S., which is proper, since that presumably is their goal. The overall reduction is more than US$24 billion. We have the biggest share of that — the hottest place in hell, as it were — at US$7.3 billion. China’s hit is the second biggest, at US$2.7 billion. Japan, Korea and Mexico lose roughly US$3 billion combined. “Rest of World,” the nonenumerated countries, face a total hit of just over US$9 billion.
Out of context, US$24 billion sounds big. It would be more than one per cent of our GDP. But U.S. firstquarter GDP was US$19.957 trillion, of which US$24 billion — though keeping track of all the zeros can give you a headache — is only a bit over one-tenth of one per cent. True, the munitions fired on the Polish border Sept. 1, 1939, represented a similarly tiny percentage of all the exploding that took place over the ensuing six years, so the fact the trade bombardment is small now is not especially relevant if it eventually causes all hell to break loose in world markets. But it is small now.
An administration fixated on the U.S. trade balance won’t be pleased to learn that its own tariffs will also reduce U.S. exports of steel and aluminum by US$6 billion. Why sell to foreigners at lower prices, some U.S. producers will conclude, when fellow Americans now have no choice but to pay more?
That’s true even before foreigners close their markets with retaliatory tariffs, which this study doesn’t look at.
There’s also the interesting trade-deficit twist that U.S. tariffs help foreigners selling goods into the U.S. that include lots of aluminum and steel. The tariffs also hamstring U.S. exporters of such goods by forcing them to over-price key inputs by 10 to 25 per cent. The net hit to the U.S. trade balance from both increased foreign imports and reduced U.S. exports of such goods is over US$12 billion. There’s also a loss of US$4 billion as U.S. consumers simply move away from such goods — because their prices go up — and toward others.
Overall, U.S. output does increase, but by only US$1.5 billion, which is ridiculously small. And real U.S. economic welfare actually falls by about US$6 billion, reflecting the fact that the tariffs damage the very efficient North American value chain. Because of the inefficiency both real wages and employment also fall, albeit marginally, employment by 6,000 in Canada and 22,000 in the U.S.
If the goal is to hurt foreigners, on the grounds they have been ripping off the U.S. for too many administrations now, the policy doesn’t work. Economic welfare actually goes up in Japan, China and the EU. Not by much — an increase of US$6 billion for the three countries combined — but it goes up. Why is that? The steel and aluminum the U.S. no longer takes ends up lowering prices on world markets, which helps foreign industries that use them intensively.
In sum, even before retaliation U.S. output rises only microscopically while U.S. well-being actually falls. Canada and Mexico, the other two NAFTA partners, also take a small, albeit proportionally somewhat-larger hit. And the rest of the world actually benefits.
Maybe actual reality doesn’t matter when your policy philosophy comes from reality TV. It’s also possible the model is wrong, of course. But the key intuition it provides — that economies are complex — suggests both that you shouldn’t wield them like a sledgehammer and that, even if your goal isn’t mayhem, they will defy even the best-intentioned planning, guiding and regulating.
IF THE GOAL IS TO HURT FOREIGNERS, HIS TARIFF POLICY DOESN’T WORK.