Do consumer interests shape trade policy?

Alas, it seems not, or so it is reported by Timm Betz and Amy Pond:

Why are some countries more open to trade than others? Prominent explanations emphasize differences in the influence of voters as consumers. Consumers benefit from lower prices. Because governments in democracies are more responsive to voters, they should implement lower tariffs. We develop and evaluate an implication of this line of argument. If lower tariffs are a response to consumer interests, lower tariffs should be concentrated on products most relevant to consumers. Using data on consumption shares across product categories, we report evidence that consumer interests do not account for lower tariffs. Governments place higher tariffs on goods with higher consumption shares, and we find no evidence that this relationship attenuates under more democratic institutions. There may be a variety of reasons why more democratic states are engaged in higher levels of international trade. A larger concern for consumer interests, however, is likely not among them.

Via the excellent Kevin Lewis.


So they basically rediscovered the "dispersed cost, concentrated benefit" maxim of political economy.

I think it's the democracy part that makes this different from the standard maxim. Political scientists think democracies are more responsive to dispersed actors (the mass public) - the paper shows that in the case of consumers, democratic leaders are not more responsive. "Products that are consumed more heavily are associated with higher tariff rates under democratic institutions. Similarly, even when democratic institutions result in lower tariff rates, the effect is confined to products with small consumption shares and a small share of overall consumption. For products that make up a large fraction of consumption, democratic institutions are associated with higher tariff rates."

If there is one thing I believe from economic theory it is that free markets enhance welfare. Free trade is a prime example of that, rather than an exception. Absent revenue concerns, and especially balance of tax burden, tariffs should be zero. Of course when you are taxing the internal economy in various ways, zero tariff can become a perverse incentive. At the margin it becomes a way to avoid tax, and thus disadvantage domestic producers.

Given the low cost of computation, I would say it is time for a comprehensive VAT, with balancing (rather than punitive) border adjustment.

It seems the least distortionary way to collect the necessary revenue in a free market.

The opposite result would have been surprising actually. Dispersed costs and concentrated benefits.

High demand goods are less sensitive to price. Smart phones, for example. Smart phones are not subject to Trump's tariffs on Chinese made goods. I assume that was a concession to Apple. But what if American consumers switch to smart phones made by and for China firms such as Huawei. Would Trump impose tariffs on those phones? Currently, Huawei phones are not subject to tariffs, but any U.S. company that does business with Huawei is ineligible for U.S. subsidies, effectively keeping Huawei phones out of the U.S. smart phone market. The justification for this is that Huawei is considered a security threat. Maybe it is a security threat, but most definitely its phones are a competitive threat. [Chinese made smart phones are cheaper and have features that are not readily available here, such as dual SIM cards, a common feature for phones used by the Chinese.]

I assume Karen Gillan will play Dr. Pond in the movie version of the paper. :-)

Nobody wants to jump in and defend the trade war? Or the idea that any dollar of trade deficit is a dollar "lost?"

One more sign that the populism is busted.

I can't defend "any dollar of trade deficit is a dollar "lost?"

Trade is a subset of foreign policy though, so it can't always be analyzed only on its economic merits.

Trade should not be considered first and foremost "foreign policy." It is first and foremost a market, between free participants in the US and overseas. We love negotiations between free parties, we rebel at slave labor, etc.

America should have no place for "trade deals" negotiated by heads of state .. other than to clear the decks for those free participants themselves.

By the way, on the trade "loss" ..

And yet more developed world democracies have mostly free trade policies. In the US, all Presidents since JFK,except Trump, both largely supported free trade but still found some small thing to restrict on trade in their term. So this paper seems to be finding lots of small trees with "Dispersed costs and concentrated benefits" when most tariffs are low in market economies.

Maybe because most economies have free trade that there more conversations against it with politics.

Right. The US aggregate number isn't too high, 2.79(*), but it is ragged. Very different for cotton, rayon, finished towels or t-shirts.

And who knows, maybe current shenanigans are enough to move that number for 2018.

* -

Yep, that's a hell of a trade war we got going on.

Your guys and your magic chronology. You think a 2017 trade war should affect 2016 numbers?

Fair enough. I didn't see that. It'll be interesting what 2018 turns out to be.

Reading Don Boudreaux

I laugh at his obsession for ignoring the many distortions that government impose on domestic production for many reasons --foreign trade being low in a long list.

"If lower tariffs are a response to consumer interests, lower tariffs should be concentrated on products most relevant to consumers."

These goods would be shelter, food, transportation, protective clothing, health care.

Things that are very local.

Imported "food" has always been a luxury good, going back thousands of years, only by easily seen, and taxed, trade.

Same with imported clothing. Clothing has gone from durable good investment to luxury style consumption good, but the price structure is high consumer price, low import cost. The capital, the training of cutters and sewing machine operators, and the hardware, are extremely mobil following the latest gvernment trade promotion tariff exemption, ie, the next nation favored for US weapons exports.

Raw material imports have been a matter of state, and state power. While Trump reflexively sees tariffs as a way to control money flowing out of the country, he never sees the costly imported raw materials: fossil fuels, which is biggest contributor to US trade deficits. Trump could eliminate much if not all trade deficits by simply placing a $50 a barrel tariff on imported oil, or starting at $10 a barrel and promising to raise it by $10 every year the US consumes more than it produces. A credible threat of $50 a barrel tariff would increase US production, and cut consumption, so net oil imports would go to zero with very little increase in mean US oil prices, but a decline in global prices. US oil processing profits would increase from restrictions in capacity to process imports not destined to generate exports, eg, importing low grade heavy and sour crude to export #2 oil while exporting equal light sweet crude and NGLs, producing high value and profits from the best refining capital in the world.

Using Trump trade standards, the US is "dumping" light crude and NGLS on the global market, "harming" nations like Venezuela and other failed oil producing states. US EPA standards forced excessive investment in refininng capital, similar to the way China has forced excessive investment in high tech manufacturing and rare earth mining and refining. The US being the single largest market for refined oil products means high product standards in the US creates aa high trade barrier.

So, the US protects the oil industry refining profits while keeping tariffs low on excessive imports killing US jobs, and consumer refined oil prices high.

Similarly, the US keeps tariffs low while subsidizing cotton growing to generate profits for high tech weaving and thread production which by trade agreement is exported to the favored nations doing the clothing production for consumption in the US, then exported at low tariffs to nations where clothing is a durable capital asset.

Note, a few nations have tried to impose tariffs or prohibition on used clothing, mostly from the US, to protect jobs. Exporting used clothing is critical to US clothing importers to increase US clothing consumption. I still wear clothing bought used at Goodwill two decades ago, as a non-follower of fashion. And boomer child of depression era parents, getting new school pants for Christmas as "the big gift". Even today, I wear clothing that is very worn, remembering who gave it to me for Christmas more than a decade, or two, or three, ago. Low tariffs on US imported clothing is based on clothing consumption very contrary to individual "American traditional values".

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