National Post (Latest Edition) - - FINANCIAL POST - WIL­LIAM WAT­SON

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.



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