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Friday, March 23, 2018

The math of trade war

As I predicted, China responds in a measured and mostly symbolic manner, with 128 tariffs affecting less than 2 percent of US exports to China:
China is 'firing back' after US announces tariffs on steel and aluminum. The world's second-largest economy has responded to President Donald Trump's controversial trade tariffs.

China's commerce ministry proposed a list of 128 U.S. products as potential retaliation targets, according to a statement on its website posted Friday morning.

The U.S. goods, which had an import value of $3 billion in 2017, include wine, fresh fruit, dried fruit and nuts, steel pipes, modified ethanol, and ginseng, the ministry said. Those products could see a 15 percent duty, while a 25 percent tariff could be imposed on U.S. pork and recycled aluminium goods, according to the statement.

The statement did not go into greater detail. U.S. agricultural products, particularly soybeans, have been flagged as the biggest area of potential retaliation by Chinese President Xi Jinping's administration.
Just to keep it simple and understand the most extreme scenario, let's pretend that these tariffs will be enough to completely kill the US ability to export these goods to China. That is $3 billion removed from GDP that represents 1.7 percent of US exports to China and 0.00148 percent of total US exports. Against that, let's pretend that the US tariffs were sufficient to entirely shut down the Chinese ability to sell the $60 billion in goods that are affected by them in the USA.

The net means the US economy just grew by $57 billion. A bit more if the domestic goods are more expensive.

See how this works? And notice how the media never explains any of this, or even bothers to try to work out the price elasticity of the tariff-affected products.

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39 Comments:

Blogger Rocklea Marina March 23, 2018 6:18 AM  

China is targeting the farmer voter base. Smart on their part, as people like to identify with farmers and this will play well with the media.

Blogger Tatooine Sharpshooters' Club March 23, 2018 6:22 AM  

Fifteen percent doesn't seem very war-like, especially on items that will most likely be bought regardless of an increase. Of course, there will be wailing and teeth-gnashing about this "retaliation" by the usual suspects who can never get it through their rockheads that the "world's second largest economy" doesn't really have that much leverage in this situation.

The US is a net exporter of ginseng?

Blogger rumpole5 March 23, 2018 6:25 AM  

It would be nice to be able to buy roasted pecans again. The blasted Chinese have been buying them all for years

Blogger Daniel Paul Grech Pereira March 23, 2018 6:32 AM  

Pretty cool how that works. And surprising indeed that the media would report on it! I mean, would you want people to know the truth, or do you want to resist Drumpfffphk?

Blogger Lazarus March 23, 2018 6:48 AM  

The US is a net exporter of ginseng?

There are three types of ginseng. Ginseng plants belong only to the genus Panax. Korean ginseng (P. ginseng), South China ginseng (P. notoginseng), and American ginseng (P. quinquefolius).

They have different medicinal properties, so one can't be substituted for another.

Blogger Amy March 23, 2018 6:49 AM  

@2 Tatooine, wouldn’t surprise me.

Wild ginseng is prized by the Chinese. It requires a special permit to harvest it and has strict quotas on harvest amounts. People in Appalachia lucky enough to get a permit make a killing on ginseng.

Blogger LTHolder March 23, 2018 6:50 AM  

I for one look forward to cheaper “wine, fresh fruit, dried fruit and nuts... and pork”. My family eats a lot of those foodstuffs and if we’re not exporting them there, they’ll be cheaper here.

Blogger Brett baker March 23, 2018 6:59 AM  

Yes, of wild ginseng.

Blogger Brett baker March 23, 2018 7:00 AM  

Yes, of wild ginseng.

Blogger Duke Norfolk March 23, 2018 7:03 AM  

IANAE, so sincere question here.

Wouldn't the $60 bil (from ceased imports from China) come off of C and G, in some combination?

I'm really trying to noodle this as it just seems ridiculous. Am I missing something, or is it just evidence of how bad GDP is as a economic measure?

Blogger SciVo March 23, 2018 7:08 AM  

I'm trying to picture the Establishment's endgame here, and the best I can come up with is that they're high on their own supply. There is no strategic masterstroke waiting to be unleashed when the sky doesn't fall, because their education is so shallow and their braining so superficial that they honestly don't know any better, and maybe even don't care.

Blogger VD March 23, 2018 7:18 AM  

Wouldn't the $60 bil (from ceased imports from China) come off of C and G, in some combination?

Yes, but that assumes that people simply don't buy anything. Remember, GDP is dollar based, so if you buy a more expensive domestic replacement, GDP will actually increase. So, if you're complaining about goods being more expensive, you can't claim the imports are not being replaced.

I'm really trying to noodle this as it just seems ridiculous. Am I missing something, or is it just evidence of how bad GDP is as a economic measure?

What do you think I have been telling people about GDP for nearly 20 years? The amazing thing to me is to observe that only when people are forced to choose between two of their false beliefs do they seriously begin to question either of them.

Blogger Mr Traumaboyy March 23, 2018 7:19 AM  

Really have not been paying attention but I assume that the price of steel and aluminum will go up here in the US?

Blogger Anno Ruse March 23, 2018 7:41 AM  

A great non-story for CNN would be that Trump is "furious" after learning that wine is included because Trump Winery. This trade war... just got personal.

Blogger SciVo March 23, 2018 7:58 AM  

Mr Traumaboyy wrote:Really have not been paying attention but I assume that the price of steel and aluminum will go up here in the US?

The extremes are:
1. No one is willing to pay more, so neither prices nor production rise, and consumption drops by the amount we were importing.
2. No one is willing to produce more or consume less, so prices rise exactly to the tariff point and import tonnage remains the same.

The likely result is somewhere inbetween, with prices not rising that much due to a combination of some Americans consuming less, others producing more, and foreign producers eating some of the tariff to compete.

The precise point depends on the cost structures of the various producers, since they will still be in competition with each other, and on the cost sensitivity of the various consumers.

Good businessmen are highly sensitive to market signals, so the consumers of steel and aluminum are likely to freak out on the assumption that they can't raise their own prices (because if they could then they already would); but all their competitors will face the same cost increase (more or less) at the same time (more or less), so they will probably actually end up passing it on.

Blogger Lazarus March 23, 2018 8:02 AM  

What do you think I have been telling people about GDP for nearly 20 years?

Simon Kuznets was the architect of GDP measure, and he told congress The welfare of a nation can scarcely be inferred from a measurement of national income as defined by the GDP.

Sage advise which they promptly ignored, for now they had a shiny new bauble with which they could sedate the seething masses .

Blogger Peaceful Poster March 23, 2018 8:06 AM  

If I weren't so bearish longer term on the US stock mkt, I'd say this is a buying opportunity.

Maybe a short term buy.

Not Facebook, though!

Blogger JK March 23, 2018 8:24 AM  

Vox, doesn't the math only work if the tarrifed goods are then purchased from US producers? And since some countries are exempted doesn't that just gift the trade to them?

Blogger VD March 23, 2018 8:30 AM  

Vox, doesn't the math only work if the tarrifed goods are then purchased from US producers?

The math only works in the US favor. The only question is how much.

Blogger Avalanche March 23, 2018 8:34 AM  

Gee, China left off their list the melamine in baby food and pet food -- what? No more poisonings?! And all that lead in jewelry and vitamins? Huh.

Blogger Duke Norfolk March 23, 2018 9:11 AM  

VD wrote:Yes, but that assumes that people simply don't buy anything. Remember, GDP is dollar based, so if you buy a more expensive domestic replacement, GDP will actually increase.

Yeah, and I suppose that if they didn't buy anything that "I" would go up instead. Thus same effect; is that correct?

Of course it's all such a dynamic system that it's hard to know what would result. But that's inherent to the whole exercise of economics.

Thx Vox.

Blogger dvdivx March 23, 2018 9:26 AM  

A high tariff on wild ginseng and other wild plants is a good thing. They should make the tariff 100% or more. Illegal harvesting is wiping out the species. Of course the media will never point out a trade battle saves wild life or endangered plant life.

Blogger Sherman Broder March 23, 2018 9:40 AM  

"The net means the US economy just grew by $57 billion. A bit more if the domestic goods are more expensive."

Am I better off because the economy is growing or because domestic goods are more expensive?

Blogger seeingsights March 23, 2018 9:43 AM  

On a related note: the DJIA and SPY are thus far up today. People blamed the tariff war for the stock market going down yesterday.
These news headlines are statistical noise.
My indicators are signaling that the stock market will be higher three months from now
When the market reaches a new high this year, I expect that the usual purveyors of economic doom and gloom will not bring up then what they are saying now.

Blogger SB Wright March 23, 2018 10:16 AM  

"See how this works? And notice how the media never explains any of this, or even bothers to try to work out the price elasticity of the tariff-affected products."

The price elasticity is an important point, generally overlooked in any tax or tariff discussion. IIRC calculating it the Econ 101 way uses algebra, while the more accurate calculus method is used in more advanced courses. It's very basic calculus, something you'd learn in the first few weeks of a Calc I course, I think. What percentage of reporters or representatives took calculus? Not that it should matter: even without being able to derive the numbers yourself, understanding a non-linear rate of change is something most people can grasp if clearly explained. Looking forward to Vox giving a short, lucid explanation of elasticity in one of his future videos that I can shamelessly borrow from.

Blogger DJ | AMDG March 23, 2018 10:18 AM  

I’m not sure what to make of it tbh. I don’t think it’s a Dem vs Reb thing, but I don’t recall the media making such a big deal out of the subsidy tariffs and protections Obama advocated for, specifically for Rx drugs.

Blogger Lance E March 23, 2018 11:07 AM  

On the one hand, I am thrilled at the possibility of soy being taxed. On the other hand, I am worried that in the short term, all of the excess supply would get dumped into the American market and, like what happened with corn, literally everything will be made of soy (even more so than today). And to compensate for their lost profits, they'll demand even more subsidies, which the swamp Republicans will happily give them.

Tariffs are a winning move for U.S. industrialization, but you never truly win with the swamp.

Blogger bob kek mando - ( I love the smell of Autism on the internet. It smells like ... victoREEEEEEEEE ) March 23, 2018 11:51 AM  

VD
And notice how the media never explains any of this, or even bothers to try to work out the price elasticity of the tariff-affected products.



not only do they "never explain" any of it, they pretend that it's hideously complex and impossible to understand.

then you show them the GDP formula and they're all like, "WTF? How can something that childishly simple be used to say anything meaningful about something as complex as the Economy?"

i showed the GDP formula to my engineer friend this weekend. that was pretty much his reaction. this is a guy who was doing diff.calc since high school.


i have taken a cursory look at the "official" numbers; while much of the 'GDP Economic growth' since 1980 is Inflation, that is not the entirety of increase. i'm pretty sure that by the time you factor Debt growth and increases in .Gov spending, you'd have eliminated it though.

Blogger RobertT March 23, 2018 12:15 PM  

This is also a very good analysis. KISS.

Blogger arende15 March 23, 2018 12:30 PM  

http://www.econlib.org/library/Bastiat/basEss13.html

Blogger Duke Norfolk March 23, 2018 12:37 PM  

Lance E wrote:On the one hand, I am thrilled at the possibility of soy being taxed. On the other hand, I am worried that in the short term, all of the excess supply would get dumped into the American market

Heh, I even had the notion that we should subsidize soy for them in order to weaken them in the long term. Biological warfare of a sort.

Blogger VFM #7634 March 23, 2018 12:46 PM  

"Am I better off because the economy is growing or because domestic goods are more expensive?"

Both. Buying more expensive domestic goods indirectly gives your business more business, as the domestic workers spend their earnings. Whereas with cheap imports, you're throwing your money down a hole and unlikely to get it back in any form.

Blogger bob kek mando - ( I love the smell of Autism on the internet. It smells like ... victoREEEEEEEEE ) March 23, 2018 1:59 PM  

32. VFM #7634 March 23, 2018 12:46 PM
as the domestic workers spend their earnings.



assuming that the 'domestic' workers aren't turd world illegal aliens who are exporting their wages back to Central / South America.


as a fer instance, it appears that every Walmart is involved in this:
https://secure.moneygram.com/

Blogger Sherman Broder March 23, 2018 3:30 PM  

VFM #7634 wrote:Buying more expensive domestic goods indirectly gives your business more business, as the domestic workers spend their earnings. Whereas with cheap imports, you're throwing your money down a hole and unlikely to get it back in any form.

Buy high, sell high...Hmmm. I was in business for 20 years and that strategy never worked for me.

Blogger Blastman March 23, 2018 4:02 PM  

i have taken a cursory look at the "official" numbers; while much of the 'GDP Economic growth' since 1980 is Inflation, that is not the entirety of increase. i'm pretty sure that by the time you factor Debt growth and increases in .Gov spending, you'd have eliminated it though.

That's the real kicker -- Gov. spending being included in GDP.

Government: Let's borrow $500 billion dollars more his year and spend it on Gov programs.

At end of year …

Government: Wow … our GDP grew by $500 billion more this year. We rocking it, economy is really growing.

That would be like a family borrowing $10,000 on a credit card one month, spending it on all kinds of things -- new clothes, washing machine, microwave, and then thinking how well they are off because they were spending so much money.

And if that wasn't enough, the government worker that receives that borrowed money as his pay goes and spends some of his money on stuff coming from China thereby increasing the GDP of China using money the US is now in debt for. At least if he was buying more American built products it would be churning the money in the US economy.

Blogger Snidely Whiplash March 23, 2018 4:36 PM  

Blastman wrote:That would be like a family borrowing $10,000 on a credit card one month, spending it on all kinds of things -- new clothes, washing machine, microwave, and then thinking how well they are off because they were spending so much money.


As discussed before, GDP measures only the flow of money. It is of interest mostly to the class that siphons off a percentage of every transaction (government and finance), and is in no wise a measure of the health or growth of the economy.

Blogger Dirk Manly March 23, 2018 4:50 PM  

@10

Remember this about GDP... it includes Government Spending, therefore, all else being equal, increased Government Spending --> Larger GDP.

Even if the government is spending paying one group of people to dig ditches and another group of people to fill in those ditches with the dirt dug out by the first group.

Likewise, if I mow your lawn for $20, and you mow my lawn for $20, the GDP just grew by $40, compared to if each of us mowed our own lawn.

Gross National Product (which measures productivity) is a pretty good measure of an economy (it measures productivity).

GDP is like determining the soundness and value of your car by the number of soap bubbles on it when you wash it in the driveway.

Blogger Dirk Manly March 23, 2018 5:01 PM  

@23

"Am I better off because the economy is growing or because domestic goods are more expensive?"

You're better off because as a percentage of company revenue, the percentages are shifting FROM Wall Street and TO the-man-on-the-street.

Blogger jdgalt March 25, 2018 2:08 PM  

So Americans who don't work in the tariffed industries will be paying American producers some higher price for the goods we now get from China for $57b, while those who now produce the $3b of goods exported to China have to find other, less-well-paying work. A few Americans gain jobs at the expense of other Americans and the total pie shrinks, but we're supposed to view the change as an improvement? VD, you've just committed Bastiat's broken-window fallacy.

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