Tax salience and the new Trump tariffs

That is the topic of my latest Bloomberg column.  Here is one excerpt:

…tariffs distort consumer decisions more than sales taxes do. It may well be true that consumers don’t notice tariffs as such. But they respond by buying less, lowering their well-being and also possibly lowering GDP and employment.

It gets worse yet. President Donald Trump’s tariffs typically are applied to intermediate goods coming from China, such as circuit boards and LCD screens. The end result is more expensive computers at the retail level. But most consumers see only the higher price for computers. They probably don’t know which intermediate goods Trump put the tariffs on, and for that matter many U.S. consumers probably don’t even know what circuit boards are, much less where they come from.

The end result is that the tariffs are somewhat invisible, or at least they are invisible as tariffs. It’s highly unlikely there will be mass protests against a 10 percent tariff on circuit boards. No one will get “circuit board tariff charge” bill in the mail, as they might with their property taxes, and unlike gasoline, people don’t buy computers very often.

Most generally, it can be said that the new Trump policy makes the high prices salient, but the underlying tariffs not very salient at all. This is the worst possible scenario. The higher prices will reduce consumption and output, yet the invisibility of the tariffs will limit voter pushback.

Do read the whole thing.

Comments

On an otherwise terrible, terrible, day online news, this was the best thing I read.

(We were just saying yesterday that some things at Costco seemed more expensive than they used to be. I wonder if that's this or just our imagination.)

Price of everything has gone up. Not all of it is Trumps fault but the one that are like the tariffs and rising healthcare premiums might give the Fed the reason it needs to hike rates. Trump will of course fight it and of course lose.

Prices at Costco are going up because I keep going back in line for the samples over and over again. I mean that's why they're there and somebody has to eat them.

A small price to pay for dismantling the Deep State.

LOL...yep.

Or whatever else can be thought of as the reason.

Don't forget the deficits which lately seem to grow faster under Republican presidents with Republican congresses. In other words, no, its is not a small price, it is rather large. Yuge deficits you might say.

So, to summarize the article:

Trump administration raises taxes in a way that's unlikely to generate public outrage.

To be clear, I don't agree with the Trump tariff policy. I don't disagree strongly either. But as far as arguments against it, this is pretty ineffective.

I think Tyler is saying that it is not just a tax, but one particularly risky in terms of snubbing retail sales.

I thought the chattering classes were all gung ho for consumption taxes, to stimulate saving and investment. Depressing retail sales would seem to fit the bill perfectly.

y81 - "I thought the chattering classes were all gung ho for consumption taxes"

Yes, unless they come from Trump, then they are against them.

Steven Pinker spent a lot of time of Jeffery Epstein’s plane.

As did Trump. He even had a little "issue" involving a 13 year old girl on the island. Maybe she didn't realize he was a star, and could do anything.

A minor comedy is the conservatives are good at spotting regressive taxes when they are offered by the other side.

On the other hand, today the word regressive is not to be heard.

In all the teeth gnashing about tariffs, I have seen precious little analysis of the following question: are Chinese exports unfairly subsidized, and if so therefore aren't USA retaliatory tariffs in fact not actually a restraint of free trade, but are in fact restoring the balance towards free trade?

I am not saying I trust Trump (or anyone else) on this. I am just noting the apparent absence of this analysis.

The main advantages China has are cheap labor and a complete willingness to destroy their environment.

I think all of Trumps hand waving about bad trade deals, and even the Mexican wall, have been distractions.

Or perhaps Trump, like a certain cohort of right-wingers, have been left with the only (bad) explanation which is for them politically correct.

It's not the American labor is expensive on a global basis, "it's the trade deals!"

The Chinese Communist Party provides free land and capital to favored industries.

Yes, exports are subsidized.

In theory tariffs could restore the true price or cost of Sino goods and thus would make the Ricardian model work better.

When did America's right-wing become apologists for the Chinese Communist Party?

America’s right-wing has always been apologists for big business and when the most important big business benefit from Chinese export domination they go to bat for it.

"are Chinese exports unfairly subsidized"

Trump has stated the primary reason the trade deals are unfair is that China routinely flouts Intellectual Property ownership.

"The Trump administration initiated these tariffs after concluding an investigation into some of China’s most controversial trade practices. The US’s new trade barriers are designed to penalize China for doing things like forcing foreign businesses to hand over their most prized technology to Chinese companies — many of which are state-owned — in exchange for access to their market."

I love how JWatts picks one of the many things Trump has said, and sort of reorganizes it in a jiu-jitsu, so that Trump is following the JWatts plan.

But maybe that's the skill you need to stick with Trump in these difficult times.

I posted a quote from an article on the subject. It's not the "JWatts plan" moron. Indeed, the quote is from Vox.

"The US-China trade war, explained in under 500 words"

https://www.vox.com/world/2018/7/6/17542482/china-trump-trade-war-tariffs

Every informed reader here already knows the game you played.

You ignored the many, many, times Trump demanded that the trade gap itself be closed, in order to pretend this is about what is really a peripheral issue.

https://www.cnbc.com/2018/05/22/trumps-demand-that-china-cut-its-us-trade-deficit-is-impossible.html

Maybe this is standard Trumpist CYA at this point.

They know the trade deficit is actually growing, they know the campaign promises to bring back jobs cannot be met, so they move the goalposts to some fuzzy technology thing which they can declare as a winner.

"Every informed reader here already knows the game you played. ..Maybe this is standard Trumpist CYA at this point."

I replied to a comment with a short descriptive sentence followed by a direct quote and somehow you ascribe all these bizarre motives to my comment.

I made this statement:

"Trump has stated the primary reason the trade deals are unfair is that China routinely flouts Intellectual Property ownership."

All the rest that you are inferring is the voices in your head.

Exactly. You claim the intellectual property is the primary reason for this trade War.

Not even Donald Trump thinks that.

You really need to work on your fundamental reading skills.

Trump says a lot of shit, seemingly at random. Sometimes it's IP, sometime it's the trade deficit. All he knows is that imports are BAD, m'kay?

Oh, I don't disagree with that statement. anonymous just hears voices in his head when I post what the official administration response is. In his mind, me posting what the administration says is the equivalent to an impassioned defense of Trump.

For instance, this was Trump's tweet yesterday:

"Tariffs have put the U.S. in a very strong bargaining position, with Billions of Dollars, and Jobs, flowing into our Country - and yet cost increases have thus far been almost unnoticeable. If countries will not make fair deals with us, they will be “Tariffed!”"

Dollars and jobs, those are his stated purpose.

Trump is definitely inelegant and speaks to the lowest common denominator. But his complaint that China "cheats on trade" is itself a very vague claim, so a lot can plausibly fit under that rubric. For instance, China insisted on being admitted into the WTO under rules suited to developing nations; meanwhile, at the time, China was well on the path of heavy industrialization and clearly would not simply be "developing" the way that term is traditionally understood within a decade. Since then, they have resisted losing the "developing" label, because it gives them advantages vis-a-vis Europe, North America, Japan, and South Korea by using rules that were tailored for the Middle East, SE Asia, and Latin American economies. Of course, from the Chinese perspective, they're still "developing" because they're not even at the level of South Korea yet.

But that's why China and Trump are made for each other. They both know how to cynically exploit semantics, and fill in the details later after they have made their move.

What a bizarre argument. You'd almost think the man is an utter fool.

The tariffs are putting enormous pressure on China by reducing imports of their goods, but at the same time the price increases which are having such a potent effect on the volume of Chinese imports are not even noticeable.

This is beyond belief. Note that Trump also seems to think the revenue generated by the tariffs is coming out of Chinese pockets, not American ones.

How can anyone think this man should be President?

Theres a real simply reason why Trump should be President - because he was elected.

So, you were all of the Trans Pacific Partnership, then, huh? Cause improving enforcement of copyright laws that was a major motivation behind it. Now, we're in a situation where China just keeps stealing IP and our stuff is more expensive. Good one! Thanks, Donnie!

Except China wasn't party to the TPP, so IP enforcement under the TPP would have done little to address that. IP enforcement under TPP would, though, have helped American pharmaceutical companies protect their patents and biologics in poor SE Asian countries where the drugs are off-patent and would have helped Hollywood and the major fashion brands crack down on copyright piracy and brand trademark infringement, so there is that at least.

I would include IP theft in with justification for trade retaliation in the context I asked the question.

But seems to me that the IP horse has WAY since left the barn. And that US firms willingly played along with it - including back when they could have done something about it - presumably in a Faustian exchange for lower labor cost.

Right. I think it was about 10 years ago that we caught wind of China running around inside major corporate data systems stealing formulas and blueprints.

Too bad we didn't have better data security then, but I don't see how a tariffs fixes it now.

They have incorporated all of thst fairly and unfairly gained technical knowledge, and are now using it as a base for their own advanced research.

if Trump wanted to be forward-thinking he would actually be stimulating research and development in the United States so that we can stay ahead in the future.

Trump is an idiot, and hired the one economist in the world who doesn’t understand that trade deficits are caused by differences in savings rates.

As much as hacking a problem, it’s irrelevant to the discussion.

To operate in China one must form a joint venture with a Chinese company, share intellectual property/trade secrets, and typically open a plant/office in country. There are a myriad of ways China closes its markets to the world.

Of course, starting and then escalating a trade war is a stupid strategy to address these issues. But I don’t see how many of his actions follow chains of logic.

No. The Faustian bargain was to be able to sell goods in a market of over 1 billion consumers, in one of the fastest growing economies in the world.

It’s not “you can’t manufacture here unless...!”

It’s “you can’t sell here unless...”

I think the deal was for both factories and access. And having moved the manufacturing over there, and transferred the IP, we'll see exactly what sort of access US firms end up with, relative to the promise.

The huge market is an obvious attraction, but the gutting of labor costs by several multiples was surely plenty attractive all by itself.

It's a good question actually, walk through the aisles at Walmart and wonder how much of that crap will Chinese people actually buy.

Why should we care if the imports are subsidized? I love it when other taxpayers subsidize me. Canadian subsidized lumber? Thank you Canada for making my home renovations cheaper!

I get the concern when we're dealing with industries that might be of a vital national security interest, but that doesn't seem to be the threat here. I also get concerns about major disruptions to jobs, but the economy is constantly in flux, regardless of which country decides to force its citizens to help us pay for our stuff.

"Hand-waving" the jobs impact away is a little cavalier.

Subsidized lumber is well and good, but you do need income to purchase it.

Extend this far enough and at some point your state will have the capacity to produce nothing much but IOUs. That may be a challenge for the state if The Other decides they don't want any more bits of paper, having used your demand and investment to build their industrial base. (The Other being an ideological ethnic nationalist Marxist single party authoritarian with world hegemonic ambitions may increase the risk of this). This could imaginably also be a challenge for you personally, esp. if you're employed in the IOU printing industry, or a downstream complementary services job (cooking meals for IOU printers, driving around the cooks of IOU printers, etc).

and if so therefore aren't USA retaliatory tariffs in fact not actually a restraint of free trade, but are in fact restoring the balance towards free trade

Yes, in precisely the same way that price controls on gasoline in response to the unfairness of the OPEC cartel would make the market more free!
You see, TRUE freedom amounts to correcting for all of the unfairness imposed upon us by other people.

I am not sure what your point is. But my OP was channeling someone else's argument anyway, so It's probably not worth pursuing.

"...U.S. consumers probably don’t even know what circuit boards are..."

This is true and actually a far bigger issue than taxes, Trump, retail prices, or potential trade wars. There is a giant cohort of our population that quite literally think their computer and phone works because it's filled with white-people-space-magic.

Very true, I'm reading a book now by biologist Jerry Coyne that points out 40% of people don't agree that humans developed from earlier species of animals. The figure in most of Europe is only 20%, but Coyne points out the recent trend in the UK and Germany is to follow more the USA trend, and now, in those countries, the percentages of people that don't believe in evolution are matching US levels. Keep in mind Europe is not as religious as the USA, so you cannot say these guys are Baptists who don't believe in evolution due to their faith.

Bonus trivia: Coyne is a determinist of the incompatibilistic variety, which insofar as I can tell means he believes in no free will. A sort of atheist Calvinist if you will.

"atheist Calvinist".....bet they're real fun at parties.

"they respond by buying less, lowering their well-being and also possibly lowering GDP"

Is this a bad thing?

An interesting point by Hoover. If people respond by buying less but saving more, then it's a good thing. But the smaller consumer surplus and the larger producer surplus means that more wealth will be had in corporations, presumably multinationals that can outsource anywhere in the world quickly (and hence avoid tariffs). Since the USA only imports/exports toughly 15% or so of GDP, compared to the much higher ratio in Germany (50%), Netherlands (85%) and China (20%) (but not Japan, strangely enough), I predict the Trump tariffs will be much ado about nothing, not unlike BrExit and even less traumatic. They should hurt China a bit more than the USA suffers, and so, if you believe in geopolitics, arguably will weaken the communist state there a bit. So net net, Trump's tariffs might actually be a small plus.

Brexit is a coming financial crisis. So it is much to do about much.

US equities are up 4.5% since tariffs were first announced in January.

10-year breakeven inflation has remained flat (was at 2.06%, currently 2.10%).

So far markets don't seem to think that tariffs will matter much for the US.

Yes, stocks are up about 5%, but EPS are up more than 10%. The market P/E is actually lower now than when tariffs were announced. Of course, the P/E on trailing earnings is actually lower than when Trump won the election.

I have seen virtually no analysis of how the end game of this trade war plays ou t. Unless you believe that either Trump or the Chinese will completely cave at some point the most likely scenario is that we end up with higher prices and inflation and lower demand while the Fed decided to fight the higher prices with higher interest rates. Can anyone give me a rational end game that doesn''t end up this way.

Remember, if import prices are up domestic producers are unlikely to invest in new capacity unless they have some assurance that the higher prices will be sustained. If they think the tariffs will be lifted and prices will revert back to the pre-tariff level they will not invest in new facilities.

God forbid some entitled yuppies may have to pay ten percent of a fraction more for their computers and iPods ...

How many circuit boards are there in a Ford F150?

So God forbid yuppies must have to pay ten percent of a fraction more on their new car. Maybe it is time to America build things again. We built the Hoover Dam. We built Saturn V. Maybe we can build circuit boards if our government deal with Red China predatory trade practices. We are tired of coastal elites dismissing the plight of the common man, the forgotten man.

If something plugs into the wall or has a battery then it has a circuit board and electronics in it that are impacted by the tariffs. Oh and every business will have costs go up (cost of replacement computers for employees, servers/computing that almost every company relies on even if they don't know it because they outsource to Amazon, Google, Microsoft)

Gain, a tenth on a fraction of the total original cost of the product. How petty someone has ro be to complain about that when the twin deficits are hurting Americans?

Shorter Tyler: "Trump is doing something that is not going to cause any public outrage, and I hate that. I'm here to generate some."

Ya think?

https://www.cnbc.com/2018/08/23/voters-oppose-trumps-tariffs-in-pennsylvania-texas-and-illinois-nbc-newsmarist-polls.html

I take it all back. Forgot to take my meds this morning.

The just shows results, and the links in the article to the poll just go to other similar CNBC articles. I'd like to know the wording of the tariff question. If it is neutral, e.g., "Do you approve or disapprove of international tariffs?" that would tell us something. If it is a setup, e.g. "Many experts argue that the Trump tariffs will damage the economy. Do you agree or disagree?" That would tell us something else. But the most revelatory question might be "Define tariff."

as anonymous has noted, China's main export is cheap labor. If US slaps a tariff on that cheap labor making it more expensive, wouldn't other countries labor markets then become more competitive? like Mexico?

Whats that? Trump is negotiating a new trade deal with Mexico?

China is not the only player out there, I'm sure other countries would love a crack at the US's enormous consumer market.

Guys, the point of globalized production chains is to support the American consumer market and its debt expansion. Without that, everything built since WWII unwinds. US consumers can't afford the product, the product is lessoned, creating less exporting, the exporters buy less US debt on the short end, creating treasury distortions and the double whammy comes as the service sector cools off majorly, created a recession also in..........goods.

The problem with Trump and Democrats who have whined about "trade" for years is, US manufacturing of goods has been fading since the 1920's when the industrial revolution ended and led to a large credit event. When that ended manufacturers even by the late 20's started going under and the consolidation started and was enhanced by the great depression. Most of the growth between 1875-1925 in domestic manufacturing was like the Techie start ups of the late 20th century. Everything since WWII has been the slow steady expansion of the service industry and of course corporations created globalized production systems(that go well beyond China) run by dollars to pump up American spending and by over spill, debt, especially after the cold war ended.

If you want national self-sufficiency, you will need central planning of the public goods and consumers who are 'reared' to want less. Which is what they "really" remember like in the 60's when stuff like Pop was a treat you only had once in awhile, but tasted far far better than the watered down mass created pops of today. It means McDonalds will have to close half their total US stores. Less choices for consumers. For Eco-terrorists, Classical Marxists, Certain religious movements, Preppers/Survivalists, cultural conservatives this is what they want. A wide range of people are sick of the consumer society that pump up corporate profits and are immoral. Lets live with less, owning what we make with as much as we can(Lucky the US has such a nice trade partner up north to fill in those material "shortages" the US has, right Drumpf?), living healthier and pushing the boundries of human existence can be enough. For a lot of people, it would be like stopping drugs cold turkey. I can see a ugly backlash.

"If you want national self-sufficiency" says Rage, but why is this important? It's not. What is important is that the world invests in things that are important, not in importing 15 different brands of cheap flip-flops, hand soap, luxury cars and the like from China, Germany, Japan to the USA. Remember, the Solow equation says that savings rates world wide should be about 50% rather than the 5-20% they are now. This will make the world less rotten, as in solve the energy crisis, stop global warming, cure cancer, autonomous cars, and the like. It's not about autarky or even more 'consumer choice' but increasing total factor productivity and solving hard problems via smart investing. You don't get that with today's system. You get that by saving more (Google Solow equation, optimal savings rate). And we need better patents and more inventors, but I digress.

Tax salience would also apply to corporate taxation, no?

And of course, appeasing China would always be an important consideration in the low-upper body strength mentality.

And of course there is no consideration of any benefits of tariffs, I suppose because everybody knows that tax revenues are only good when you get them by stifling the domestic economy.

Its tempting to think such a vapid analysis is indicative of the failure of the field of economics generally to deal with complexity. It may be. But Michael Bloomberg has thrown his hat in the 2020 presidential race so this piece may also just be early campaign advertising. Bloomberg seems to be from the aggressive kow-towing school of foriegn policy and so it really be no surprise that he would have his minions taking China's side. No doubt by currying favor early, Bloomberg will be assured a nice position in the coming Chinese Empire.

I would advise running a lot of investigative pieces where we dig into rising prices on things like computers to identify the effects of the tariffs on prices. Many people may not be paying much attention, but some people do read the news and articles which connect prices rises seen by consumers to the costs of components will be noticed. Also large effects on the economy will also be noticed such as slowdowns in industry due to higher costs of inputs.
It might not be obvious if you leave it up to consumers to just happen to notice the effects, but there are lots of things you can do to draw people's attention to those effects.

Yawn. Hazel is beating her pet hobby horse again, rising inflation due to protectionism. Read my comment above to Rage about the Solow equation and the optimal savings rate. Arguably protectionism will raise savings higher. We don't need cheaper flip-flops from China anymore. The world does not need more factories to build yet more injection molded plastics to build such goods. We (and the world) need flying cars, fusion, cancer cures, etc etc etc.

Bonus trivia: here in the Philippines, the only time I wear long pants and shoes is when I get my visa stamp renewed at the PH immigration office, where it's required. Otherwise it's shorts and flip-flops.

We'll get more flying cars, fusion, and cancer cures if we're not wasting money on Made in the USA injection molded plastics.

Exactly, so the Trump tariffs against these plastic goods will not hurt society much.

Bonus trivia: one word, 'plastics' was good advice...in the 1960s, less so now where it's clogging up the planet.

"unlike gasoline, people don’t buy computers very often"

Sure they do even if they don't realized it. Those circuit boards/embedded computers go into phones, cameras, vehicles, appliances, toys, TVs, etc. Chances are if it plugs into the wall or has a battery, it has a circuit board. And even if people don't make the connection on their own, they'll notice when prices on these things all go up.

Why are some economists, like Tyler and some of the other GMU econ professors, often pro-consumption tax but anti-tariff - don't many of the elements that make the consumption tax efficient also apply to tariffs?

And isn't the lack of salience of the tariffs a sign that it is an efficiently designed tax? If consumers just pay that extra cost without batting an eye, then there is a reduction in consumer surplus, but no immediate distortion to capital allocation decisions, as the consumer is still buying the product.

There probably is a level of tariff that is high enough to produce decent revenues, and support transfers to the unemployed, but which is not too high and does not produce economic contraction.

I would guess the right number would be 5 or 10 percent import duty are all goods, evenly, from all sources.

My gut says 25% is too high, especially when it is targeted at "enemy" products and not uniform across suppliers.

China is an authoritarian state. It regular imprisons large numbers of people for little more than holding forbidden opinions. Its environmental record is one of the few things that can make its human rights record good. Making it more expensive to fund such a state is not exactly high on my list of moral repugnancies.

In contrast BDS hopes to stifle the ~$200 billion in international trade that occurs with Israel. Unlike with the US tariffs, this would not merely result in higher prices for Israeli goods, but a complete loss of their ability to trade. Why, exactly, have economists not been noting the impact of this sort of boycott?

Morally, we all seemed to be fine with tossing around sanctions like candy that are vastly more deleterious. So the act itself is not beyond the pale.

In terms of the economics, frankly I just view this as an iterated prisoner's dilemma. China has played more than a few "defects" covering things I care about. Trump is playing "defect" back. Whether or not his motives are pure, I am hopeful that the long term outcome is everyone playing defect less. After all, playing cooperate regardless is much more deleterious long term than incurring some losses up front to establish that everyone may play some version of tit-for-tat.

It almost certainly won't work under Trump. And it may not work for a long time. But establishing a credible threat that America can and will stomach this sort of price is valuable in its own right.

"China is an authoritarian state. It regular imprisons large numbers of people for little more than holding forbidden opinions. "

And was its human rights record better before China integrated with the world economy and became wealthier? I seem to remember that before Deng, China had episodes like 'The Great Leap Forward' and 'The Cultural Revolution' during which, in the former case, tens of millions died. Wouldn't it be fair to say that China's human right record, while bad in some respects, is night and day better than it was pre 1990?

But also--your argument is that tariffs should be imposed as sanctions for China's human rights record? Is this how we do sanctions now -- not through measures debated and approved by Congress but by executive order from an imperial president? Sounds a lot like how such things might be done in Xi's China, no?

Is it me or did you potentially miss the broader picture i.e., China is a bad actor in South China Sea and human rights; possibly also corporate espionage and government cyber attacks. If that's the case wouldn't there be an argument for the tarrifs being a way of sanctioning bad behavior? Serious question b/c I don't know but I don't see the effect on prices as the best / intimately comprehensive point of view.

If you want to sanction China for those other things, then the U.S. should work with allies in the region to impose coordinated sanctions that might target President Pooh Bear and his regime more directly, but President Trump isn't much interested in that.

If free-marketeers care so much about American consumers, would they not be on daily diatribes against domestic property zoning?

Has anyone looked at rents along the West Coast?

Do you ever bother to read MR posts on the topic?

In the Land of the Free and the Home of the Brave the economic misconceptions of a real estate mogul/reality TV star determine what I can buy and how much I must pay for it. Makes perfect sense.

Tyler reporting from London, 1942:

"Last night witnessed more horrific destruction raining down on us from the Luftwaffe again, and you might think the correct response would be to build planes and bombs of our own and retaliate, but you'd be WRONG! Shifting our resources to useless munitions would reduce the efficiency of our economy and actually increase prices for customers. Moreover, the destruction of Nazi factories by our bombs would reduce their comparative advantage and increase prices for consumers even further! The only economically rational thing to do is rebuild and hope they don't bomb us again. Let's hope Churchill isn't as bellicose as his rhetoric would suggest."

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