How well can markets adjust to trade wars?

That is the topic of my latest Bloomberg column, here is one bit:

By putting its European production in Europe, Harley is creating a similar tariff-neutralizing effect, reflecting the market’s ability to adjust to an ill-conceived policy. In turn, we can expect that some European producers will place new plants in the U.S. or expand the old ones.

Note that Harley already had plans to shrink its U.S. production, and it already was expanding into Brazil, Australia and India. So perhaps the result here isn’t so different from what might have happened anyway.


…if you’ve spent years painstakingly constructing one of these international supply chains, you’re not going to let a few tariffs on one part of the chain shut you down. Instead, you are likely to just eat the loss and move on, because there is so much total value at stake.

At the same time, very large tariffs and trade barriers now will have much higher costs, if they are capable of shutting down the entire supply chain and disrupting so many moving parts.

To be clear, trade wars are still a mistake, most of all when directed against one’s allies.  But it’s worth thinking more clearly about what the final costs might or might not be.

Another factor I only mentioned in passing is currency adjustment.  The dollar has been relatively strong this year.  One hypothesis (unconfirmed) is that prospective tariffs strengthen the dollar, but of course that it turns gives back some of the supposed gains on the export side.  And many of you already know the standard result that if a country subsidizes its exports and taxes its imports, the exchange rate adjusts to make the policy more or less neutral.  There are lots of moving pieces here, and it may in fact be hard for an under-informed government to even get the trade war it wants.


I don't blame you a bit, Tyler -- with the GDP soaring to heights that were completely unimaginable during the Obama years, what else can a Dem voter write about besides the forever-looming "trade war"?

The Dow gained an average 26% per year under Obama and Trump has failed to keep pace at 21%.

I'm pretty sure that most people don't consider a bounce back from a recession to be a net gain. Don't get me wrong, Obama had a pretty good track record with the economy, but so has Trump. The country has never been richer. We have historically low unemployment numbers. Inflation is low.

The numbers you guys are citing have very little to do with Obama or Trump.

Agreed, but it's certainly true that a President always benefits from good economic numbers. It's also certainly true that when the Left went crazy after Trump's election and declared that the economy would crater, they effectively gave the economic picture to Trump.

If the economy does crater then Trump will bear the blame, fair or not; if the economy does well Trump will get rewarded, fair or not.

Agree 100% with your last sentence, but not because of The Left (cue scary horror music). That's simply how it has always worked.

"but not because of The Left... That's simply how it has always worked."

True, but the Left could have easily claimed it was all an Obama legacy. However when Paul Krugman and others made comments like the following, they set the economic benchmark for the Trump administration.

"It really does now look like President Donald J. Trump, and markets are plunging. When might we expect them to recover? If the question is when markets will recover, a first-pass answer is never."

And in this case, they didn't just set the hurdle low, they dug into the ground and buried it.

You've got KDS. The Left (scary horror music) can claim all sorts of things. It's just pixels. Bottom line: presidents get undeserved blame and credit for the economy, and that has nothing to do with dumb comments from Krugman or anyone else.

Calculated Risk is a fine place to see a graphic clearly illustrating the difference between Obama and Trump - <a href=""

The article might be a bit too clearly written for you to appreciate, though -

Talk about insight - thinking about Trump supporters while typing a user name.

Soaring to unimaginable heights? What'd I miss???

Apparently, you missed the Obama years, as noted above.

If currency adjustment did all the work, there's not really any reason to drop tariffs, certainly don't waste decades creating a fragile global organization such as the WTO that can break easily. Tariffs are a form of tax and governments can use them to impoverish their citizens in different ways from the income, capital gains, payroll, VAT, GST, etc.

I've been thinking about this, and the biggest issue is that it might move individual industries more than, say, a broad-based VAT.

But so would a carbon tax or a pigovian tax.

Tyler, I don't doubt the conclusion of your article that the effects of the "Trade War" are likely to be small. But if the effects are relatively small, then perhaps the US should attempt to negotiate for Trade agreements that have a relatively equal impact on Americans as they have for out trading partners.

"since NAFTA was enacted in 1993, Mexico’s annual exports to the U.S. rose from $40 billion to $296 billion, and U.S. exports to Mexico jumped from $42 billion to $236 billion."

So on an overall basis, Mexico has netted $60 billion more than the US and the per capita basis is, far and away a lopsided affair.

Mexico: $2,339 per capita
US: $724 per capita

This illustrates the problem many people have with economic analysis, viewing only one side. Exports increased on both sides, great. Also great, consumers in the United States apparently got a better deal by IMPORTING. These aren't forced deals, you completely exclude consumer surplus.

For the love of God, people, stop viewing this exclusively through the prism of business. Consumers are unequivocally hurt by tariffs, and somehow no one talks about that. Symptomatic of the failure of basic economics in this administration, and the public at large.

" Consumers are unequivocally hurt by tariffs, and somehow no one talks about that. Symptomatic of the failure of basic economics in this administration, and the public at large."

Tariffs are just a tax. Increases in taxes always hurt the taxee. Trump lowered some Federal taxes earlier and is raising certain Federal taxes now.

It's not like tariffs are some horrible abomination. They're just a sales tax on imported goods. I'm not in favor of raising taxes casually, but I tend to favor a broad consumption tax over an income tax. And if the tariffs are temporary and result in a better trade situation with a larger GDP / capita for American's then I'm all for it.

A 25% sales tax.
Your just rationalizing support for the Trump administration now.

LOL, no, I'm just not buying into the hyperbole. It's still a tax. It's no better or worse than Obama's tax increases. Indeed, the net effect of Trump's Federal tax decreases and the tariff increases will almost certainly be less for your average full time working American tax payer than the Obama tax increases were. Granted, non-working American's will pay more under Trump than they did under Obama.

"It's no better or worse than Obama's tax increases."

I'm old enough to remember when conservatives and economists were on the same page, that broad and uniform taxes were the least destructive to the economy and to long term growth.

"that broad and uniform taxes were the least destructive to the economy and to long term growth."

Agreed, but politically there's no chance of replacing the current progressive income tax system with a flat VAT tax, even though it would be far better. In any any case, the tariffs would indeed be harmful if they become permanent. But no one wants them to be permanent. They are a brass knuckled negotiating tactic.

JW, It's a tax. And, the tax collector is not the government, but a private business--probably one owned by Carl Icahn, or one formerly owned by the Secretary of Commerce.

I suppose you could argue that businesses who collect will let it trickle down to the employees.

"JW, It's a tax. And, the tax collector is not the government, but a private business-"

No Bill, a tariff is a tax collected by the Federal Government.

"Also great, consumers in the United States apparently got a better deal by IMPORTING. These aren't forced deals, you completely exclude consumer surplus."

Well it is impossible to know what the consumer surplus is, so you have to exclude it in a conversation like this. It could be there is no consumer surplus and all reduced costs associated with an import went to shareholders, creditors, executive management, whatever.

No, it's definitely possible to approximate a change in CS. Leaving them out of the conversation leaves out approximately half of the value to society, and is therefore a huge problem.

"Well it is impossible to know what the consumer surplus is, "

No, it is easy to know. If the consumer buys from someone else than you, then you know they are getting better consumer surplus from the other vendor.

That's not how trade deficits work. Mexico didn't steal money from us due to a trade deficit. Also, you're weird accounting still shows a Pareto optimal outcome.

Here's some reading to get you started.

" Also, you're weird accounting still shows a Pareto optimal outcome."

Sigh ... no. What my accounting shows is a Pareto improvement. I think maybe you should do a little more reading and get back to me.

Trump is trying to negotiate for a further Pareto improvement. The calculus is far too difficult for anyone to know what the exact Pareto optimal outcome would be.

However, it seems pretty odd to claim that a 3 to 1 ratio in favor of Mexico is the absolutely best outcome anyone could ever achieve. Is there no chance we can't obtain an agreement resulting in a 2 to 1 ratio or 1 to 1 ratio ?

I don’t understand why we should look at this on a per capita basis.

Because that's a normalized value.

I still don’t get it.

If my sole proprietorship makes a deal with Apple to buy at least $100k worth of goods from Apple if Apple agrees to buy $100k worth of services from me, and things are more of less priced at market value and the goods and services are useful, is it a terrible deal for Apple because they are only selling pennies per owner whereas I’m selling $100k per owner?

I could be missing something here. Please tell me what it is.

In other words, not only is the US selling much less per capita. It’s also buying much less per capita. So isn’t it a wash?

The US-Mexico deficit is in reality a California + Michigan + Illinois + Florida + Georgia deficit with Mexico.

Before setting up new taxes it would be good to look at the specific causes of the trade deficit. Trade balance is the equivalent of using an sledgehammer to hammer a 1/2" nail.

Take Apple. Please. Tariffs imposed on China may make your next purchase of a smart phone more expensive. Would Apple consider moving production of the i-phone to the U.S.? Foxconn (the China company that makes i-phones for Apple at its giant plant in Shenzhen) has already announced that it plans to open a plant in Wisconsin, though not to make i-phones (a "display-making" factory, whatever that is). Besides losing the supply chain in Asia, if Apple moves production to the U.S. Apple would lose much of its ability to shift income to tax havens. Recall that Apple avoids tens of billions in U.S. taxes through creative tax avoidance schemes, schemes that work best when Apple's products are produced outside of the U.S. Wouldn't it be rich if Trump's tariffs resulted in companies like Apple paying more in U.S. taxes. I'm not hopeful, but it's a pleasant thought.

is this a spaceships to mars-type fascinating?

...because we all know that Washington DC would do all sorts of wonderful things with more of Apple's earnings.

'and it may in fact be hard for an under-informed government to even get the trade war it wants'

Are you saying trade wars aren't easy? Well, just watch and see what a very stable genius does, then let us know how it turned out.

It must be difficult to learn how to creep appropriately in the Trump era - our president does not endorse your perspective at all, and neither does his base of supporters.

Shouldn't this also discuss HD's increasing cost of goods? How will steel, aluminum, etc., tariffs increase costs and reduce demand?

Reading a little more, the steel an aluminum tariffs should add about $300 to a car, so much less for a motorcycle. Of course this is assuming that full imported vehicle tariffs don't come on, with like $5,800 per vehicle and really messing with the market.

Of course, Trump's tariffs will hurt many U.S. companies since they depend on inputs made by companies outside the U.S. that will be subject to tariffs, making the inputs more costly to the U.S. companies. Indeed, the tariffs may actually reduce output and employment in the U.S.! When Trump was promoting the corporate income tax cut, he claimed U.S. companies would use the additional cash flow to make investments in the U.S. When it was pointed out that the companies might instead just distribute the additional cash flow to shareholders, Trump responded that the shareholders would make the investments. When it was pointed out that many of those shareholders are foreigners . . . . I may be old, but I am aware that the global economy is interconnected to such an extent that it's impossible to punish one set of participants in the global economy without inadvertently punishing all of them including those intended to be favored not punished. Here's what's scary: the bond market is sending warnings that a recession is coming, and when it does, the trade war, having already begun, will likely be raised to a much higher level, greatly increasing the risk that a mild recession will turn into another great depression.

cato rest in peace.

confessions of a commercial photographer:

"To be clear, trade wars are still a mistake, most of all when directed against one’s allies."

Umm... - am I mistaken, but does military alliances have any real effect on trade relations? As far as my econ knowledge goes that's absolutely not the case - especially seeing how little the puny European countries spend on defense (which is actually a rightful criticism from Trump). But since TTIP failed I think it's safe to say that any form of trade alliance between the US and the EU is very limited - if at all existent.
By the way Harley manufactures unbelievably crap motorcycles.

Harley manufactures an image.

'By the way Harley manufactures unbelievably crap motorcycles.'

Not really? That was certainly true a few decades ago, no question, however a modern Harley is fine for what it is.

However, if you think over-priced heavy motorcycles unable to comfortably go above 120 kph / 75 miles an hour are crap, it is a defensible position. Nonetheless, compared to a generation ago, Harley builds more reliable motorcycles, with few concessions to making those machines particularly current in terms of technology. Nostalgia is part image, but it is also something that can be real - there is a reason people still love the old VW air cooled boxer motors, even if technology has moved on.

I still believe air cooled engines are the way to go. Though that's not the reason I called Harley crap, but the build quality. It's not up to current standards - even if the design is satisfactory.
A few years back a custom exhaust manufacturer invited us to factory visit and they showed us the weldments in their exhaust, a japanese bike (I think GSX-R) and a Harley. No wonders, that their exhaust was top-notch, with finely polished seams and excellent surface qualiy (you couldn't even tell it was welded). The japanese one was visibly far worse, but still could operate on a daily basis. But the Harley was something awful - like something a total beginner welded. It could work on a chopper, but if you'd put on a sportbike revving at 10k RPMs it would just fall down. And based on other's stories thats the general problem with Harleys.
So moving to Europe may not be simply a trade-war related decision, but they also want to get better manufacturing technology.

trade wars are still a mistake, ... But

I'm not in favor of raising taxes casually, but

Lot of people sound like they are trying to rationalize supporting something for reasons of expediency.

How about you all take a good hard look at what your wiggling yourselves around into defending?

+1. It's comical to read. The followers morph and mutate like jello into whatever form is required in service to the cause.

I have opinions, but always vote for the candidate my Koch benefactors support.

'How about you all take a good hard look at what your wiggling yourselves around into defending?'

You do know that this pattern of Prof. Cowen is at least 3 decades old, right? The only difference now is that when it might actually make a difference to take a principled position, regardless of perceived cost, people like Prof. Cowen are unable to do so, after long years of avoiding doing just that.

"And many of you already know the standard result that if a country subsidizes its exports and taxes its imports, the exchange rate adjusts to make the policy more or less neutral."

Any pointers to a paper where this hypothesis has been rigorously tested in the real world? Also any pointers to others who have duplicated the testing and found the hypothesized result would be valuable too. Thanks!

Just another "standard" result about... um... the neutrality of policy on free exchange, and ... er... neutrality of USD FX rate.

What is interesting about the current Trade Wars is that 1) it is an unregulated exercise of executive power, with risks of using it to support political contributors or niche constituents; and 2) how it differs from US Trade law.

So, previously those persons complaining about unfair competition and sales below cost would petition the Commerce Department, and would have to prove sales below costs (or in state run economies allocated costs that included other subsidies)

Today's battles are not fought on that battlefield or according to those rules, probably because the products being sold are not below the foreign producers costs. We seem to be fighting on the battleground defined as "National Security" which is within the purview of the Executive who can make a finding that there is damage to a particular industry which needs to be protected for national security reasons.

Trade rules exist to prevent domestic interest groups on either side from using tariffs to benefit themselves. They do this by requiring a firm to prove that its foreign rivals price is below its costs. Relative to the 80's and into the 90's their have been relatively few trade cases based on sales below cost. Domestic industries have access to those trade rules and administrative proceedings, but the facts would make it difficult to prove or support a challenge.

So, what we have instead are Trade Wars untethered by facts and supported by claims of national security, which kick off a reaction, and to that a counter reaction, making it more important, if you are a business, to have friends in the executive branch who will either protect you or take a free jab at a rival as part of a retaliatory blow.

Do you want rules based trade, or trade based on closeness and a relationship with the Executive Branch. One approach is potentially corruptible and the other is not.

So, the cost may or may not be to the economy but to our political system as well because you will have to have a friend in government to give you protection or go after a foreign rival when rules based trade would not have you need to do so.

The fall of an Empire!

Ever notice how the flower of our great economic professoriate consistently advocates for US submission on every topic? Completely ignore the behavior of the rest of the world, mandate acquiescence for the US. Its almost if he is a mullah in disguise. Why have we never heard a US economist pontificate on the ill effect of high tariffs maintained by other countries? Maybe because Iran, Ethiopia, India, etc have very health growth rates and very high tariff rates. The US rates are very low and the US is the largest importer in the world and yet all they can say is bend over and take it US workers, you inferior Trump-voting scum.

"Its almost if he is a mullah in disguise."
But not the good kind of mullah, the kind America supported in Afeghanistan, right?

Wait, Iran has a "very health(y) growth rate"?

I'm sure the Iranian people demonstrating in the streets would be astounded to hear that!

Why have we never heard a US economist pontificate on the ill effect of high tariffs maintained by other countries?

Because the ill effects of those tariffs fall mainly on people in other countries.

except in the US where earnings have been falling for working men:

Earnings have not fallen. The median wage has fallen in real terms. There's a difference between median and average (mean). It means the income distribution has shifted so that the median is lower - there is a fatter bottom to the distribution in other words.

And when we're talking about real wages over such times scales, well, It's really diffficult to say whether those people are really worse off.

having a hard time seeing ill effects.
Average international tariff burden imposed by -

Barbados: 14.2%
Cameroon: 14.6%
China: 3.5%
Ethiopia: 14%
India: 13%
Iran: 28%
Mexico: 6.7%

Yet all have healthy growth trends:

Edgar, Some countries use tariffs just as we use income taxes--to raise revenue. Some of the countries on your list are not significant exporters, nor do they have domestic industries to protect. Don't get me wrong--tariffs are not wise--but often they are the most efficient way to collect what amounts to a sales tax at the point of entry.

The opposite is true in other countries. But you need to me more sophisticated, and quit worry about Barbados, Cameroon and Ethiopia, some of the highest on your list.

Yes, you are correct. Just caught up in trying to make a point I suppose. So lets look at Germany, which is certainly not suffering ill effects, yet even Europeans recognize is by no means a free trading country:

I agree that America may yet become as wealthy as China under Trump.

It's still not clear what's trying to be accomplished for me. I think the argument that it "might not hurt that much" is convincing. But it's still not obvious what it helps. Who can help me with that?

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