Why does the US tariff policy always jump back and forth?

“In the field of modern economics, tariffs have always been a negative 'topic'.As long as it exists, it distorts the market and reduces efficiency.”

——

“Aren’t tariffs essentially ‘tax increases’ on American companies?”

"When you came to power, you promised to cut taxes, but tariffs are not paid by foreign companies, but by domestic importers."

After emphasizing the benefits of "U.S. tariffs" countless times, the reporter's question still stumped White House spokeswoman Carolyn Levitt.

A few days after she was asked, last weekend, the U.S. Customs and Border Protection issued a notice on its official website late at night: the federal government has agreed to exempt electronic products such as smartphones, computers, and chips from "reciprocal tariffs"; the exempted products apply to electronic products entering the United States after April 5, and the "reciprocal tariffs" already paid can be refunded.

The stock prices of American companies such as Apple, Nvidia, and Microsoft rose sharply in response, and everything seemed to be predicted by the reporter-collecting tariffs is essentially raising taxes on American companies, which is bad news, and vice versa.

Back to the day of the question, Caroline complained to the reporter:

Caroline Levitt

leaf="">Now, it seems that someone else is regretting, and has been regretting it.

On Sunday, Trump announced that the suspension of tariffs was only a procedural measure, and that different, industry-specific tariffs would eventually be imposed on these technology products.

The "back and forth" policy jumps have caused chaos and confusion, but in the eyes of economists, such a situation is only a matter of time. From the beginning to the end, Trump and his team failed to learn the economics course of "tariffs" well, but tried to use it to "make America great again."

In the past few months, they often lamented: "Tariffs are a very important topic in the field of economics. Sometimes we have to 'thank' Trump for reviving this almost dead field with his own efforts."

In other words, to understand the logic behind the US government's tariff policy and the reasons for its repeated changes, we need to look deep into history and examine the evolution of tariffs and their role in different worldviews.

In today's article, let us pick up this "dead" research again, hoping to bring some inspiration to everyone.

Where do tariffs come from?

Since ancient times, there have been tariffs wherever there has been trade.

The historical evolution of tariffs can be roughly divided into three stages:

The "jurisdiction" era, the mercantilism era, and the multilateral trade era.

From a simple point of view, if the state is regarded as the subject, then the state allows other individuals, companies or foreign countries to conduct trade activities within its territory, and this permission from the state is not necessarily free, and often requires a price to be paid in exchange. This is the essence of tariffs.

In modern legal terms, tariffs first reflect the state's jurisdiction over territory and economic activities. In plain words, it means "I am the master of my own territory."

Therefore, since its birth, various means surrounding tariffs, including preferential treatment, tax increases, and even embargoes, have expressed certain political orientations at certain levels.

The first emperor in Chinese history to use tariffs to express his political attitude was Emperor Wen of the Han Dynasty, who was known as "the first benevolent monarch under the Three Dynasties". When the Han Dynasty was first established, it was not a unified dynasty as everyone imagines now.

At that time, the customs of the Spring and Autumn Period and the Warring States Period still existed. In the eyes of the people of the world, the Han Dynasty was the Han Dynasty, and the vassal states were vassal states. Although there was a hierarchy between the two, the latter was still a political entity with considerable independence.

Since it is an independent political entity, then "guan" is really important. Therefore, during the reign of Empress Dowager Lü and Emperor Hui of Han, the "Jinguan Order" was promulgated, requiring officials and civilians to carry valid documents when entering and leaving the customs, and strictly investigate smuggling, especially "national strategic assets" such as gold and horses, in order to prevent the power of the princes in Guandong from becoming too large.

"Now the princes have more power, so we build passes and prepare for them, just like the preparations for the six kingdoms in the Qin Dynasty."

Later, the court of the Han Dynasty generally recovered from the "Rebellion of Empress Lü", and Emperor Wen of Han also sat firmly on the throne, so he officially ordered "removing useless passes", allowing the territories directly under the Han Dynasty and other local princes to trade freely, which not only showed the emperor's "universal love and selflessness" from a political perspective, but also promoted economic exchanges between Guandong and Guanzhong, laying the foundation for the later "Wenjing's Governance".

Later, when Emperor Jing of Han succeeded to the throne and summarized the achievements of Emperor Wen of Han, the first point was: Tongguanliang is no different from a distant place.

Although the first person to formally achieve great unification was Qin Shihuang, it was Emperor Wen of the Han Dynasty who really integrated the territories of the seven powers of the Warring States Period into a real economy.

When the world entered the Age of Discovery from the Classical Age, mercantilism was in vogue. It was the golden age for tariffs to play a role, which more reflected the naked competition and the scramble for wealth between countries.

The core idea of ​​mercantilism is that the total wealth of a country is fixed, mainly reflected in the amount of precious metals owned. As a result, international trade is regarded as a zero-sum game: the profit of one country must mean the loss of another country.

Under the guidance of this idea, the policy goal of each country is to "export as much goods as possible to earn gold and silver, and import as little goods as possible to prevent the outflow of gold and silver."

During this period, countries with nascent industries protected their own companies by imposing high tariffs on imported goods, reducing the attractiveness of imported goods; at the same time, they encouraged the export of their own goods, especially high value-added finished products, through tax rebates and subsidies.

The most adept among them was the colonial empire such as Britain, where tariffs were mainly used to ensure the interests of the mother country. For example, Britain's "Navigation Acts" stipulated that colonies could only trade with Britain, or that goods must be transferred through Britain and pay tariffs.

In the context of the Age of Exploration and mercantilism, tariffs changed from a tool to reflect jurisdiction to an important weapon in economic wars between countries.

Such a tariff policy was designed with precautions and calculations, and "free trade when strong, tariff barriers when weak" is exactly the portrayal of this era - because when strong, they want to export high value-added industrial products, so they naturally call for free trade, and when weak, in order to protect the country's backward industries, it is easier to stack tariff barriers.

This mercantilist view of tariffs has far-reaching influence, and its core protectionist ideas and the concept of viewing trade as a tool for national competition still reappear in various forms today.

Cargo ships at the West India Docks in London, UK

In the era of globalization and multilateral trade, tariffs seem to have become more "friendly". For example, many countries have special and more preferential unilateral tariff policies for developing countries - that is, "You can charge tariffs on my goods, but I will exempt you from taxes."

This policy expresses an attitude of helping latecomer countries and welcoming their goods to enter their own markets.

Of course, this unilateral exemption of tariffs for underdeveloped countries, especially those rich in raw materials, is actually a win-win strategy of "both public and private benefits".

Because underdeveloped countries often have relatively poor industrial capabilities, they can export relatively few final products, mostly raw materials, while countries with relatively strong industrial capabilities are good at processing raw materials and then exporting them.

Therefore, unilaterally exempting tariffs for underdeveloped countries is actually reducing the cost of local manufacturing, and is essentially a policy of supporting local manufacturing, which has become something that almost all industrial powers like to do.

But Trump seems to want to create a new use for tariffs.

Trump-style tariffs

In his eyes, tariffs are both a manifestation of jurisdiction - punishing foreign countries, and a source of income - increasing fiscal revenue.

But to explain the absurdity of this idea, we need to go back to the question asked by the White House reporter: Is tariff a tax increase on American companies?

From a procedural point of view, the tariffs are indeed paid by American importers. So in this sense, it is indeed a tax increase on American companies.

In fact, this touches on the ultimate proposition of "tariff" research - the fate of tariffs.

If American importers have low demand elasticity, that is, they are very dependent on the demand for a certain foreign product and cannot find a good substitute, then even if the price rises due to tariffs, they will still have to continue importing.

In this case, most of the cost of tariffs will be borne by importers, and it is likely that they will eventually pass it on to American consumers by raising the selling price.

In a New York store, "Made in China" clothing labels

At this point, the reporter's statement at the beginning of the article is closer to reality: tariffs are indeed like raising taxes on American companies and consumers.

On the other hand, if foreign exporters have low supply elasticity and are very dependent on the US market, it is difficult for them to sell their products elsewhere. In order to maintain their market share, they may be forced to lower their export prices and absorb part or even most of the tariff costs themselves.

In this case, tariffs are more like taxes on foreign companies.

In reality, tariffs are often borne by both importers and exporters. For example, in 2018, when the tariff policy came down, many Walmart suppliers received letters from Walmart, asking for a 10% drop in export prices, and everyone shared the impact of tariffs.

But from an economic point of view, it doesn't matter who the tax is collected directly from. Because in the end, it is shared by both parties to the transaction. Who shares more and who shares less depends on the relative bargaining power of both parties, which is what economics calls the price elasticity of supply and demand. Simply put, whichever party is less sensitive to price changes, that is, less elastic, will have to bear a larger proportion of the tariff costs.

In this sense, it is inaccurate for Trump and his team to simply regard tariffs as a punishment on foreign countries or simply a means to increase their own fiscal revenue without considering the type of goods and the domestic and foreign industrial structure.

So-called "reciprocity"

Thus, Trump's "balanced trade" formula, derived from the wrong definition, became the object of ridicule in the academic community.

This formula, which looks extremely complicated to ordinary people, is designed to use tariff revenue to offset the trade deficit. That is, the money that the United States "loses" in the trade deficit must be recovered through increased tariff rates - thus reflecting "punishment" and "increased revenue".

The formula takes into account several things:

1. How much did you sell to me in total? This is the pure import amount, i.e., m_i. How much did I buy from you, i.e., x_i, i.e., the pure export amount.

2. How much do you owe me? This is the import deficit, which is equal to exports minus imports, i.e., x_i-m_i in the formula.

3. If the price goes up, how much less will I buy? This is called the elasticity of demand for imports, which indicates the sensitivity of import volume to price changes, i.e., ε. The Office of the United States Trade Representative sets this value at -4, which means that for every 1% increase in price, the import volume decreases by 4%.

4. How much price increase will the added tariffs cause? This is called the tariff pass-through elasticity, or ϕ, which is how much the price of imported goods will increase by for every 1% increase in tariffs. The value set is 0.25.

5.Δτ: The tariff rate increased to balance trade.

The specific algorithm is as follows:

1. Because of the increase in tariffs, the current import amount will also change, so what is the total import after the tariff increase?

——Demand elasticity×price pass-through elasticity×current total imports.

2. And the total import amount after this modification, multiplied by the tariff, is the revenue that the Trump administration expects to obtain through tariffs.

——Increased tariff rate×demand elasticity×price pass-through elasticity×current total imports.

Then the right side of the equal sign is given to "deficit".

3.Finally, Trump said that reciprocity should be considered, so only half of the tariff should be collected, which is equivalent to sharing the income brought by the trade deficit equally.

Naive formula

This calculation logic attempts to find a balance, one end of which is the trade deficit between the United States and another country, and the other end wants to balance the balance by adding tariffs.

But combined with reality, this calculation is actually meaningless.

First, it is incomprehensible to assume that all goods from all countries have fixed demand elasticity and import elasticity for exports to the United States.

Each country has its own unique exports. Some goods have very low demand elasticity. If you increase tariffs, the import volume will not decrease much. Then for American companies doing this kind of business, tariffs are a real tax increase.

In the tariff war from 2018 to 2019, most of the tariffs imposed by the United States were increased to American importers and consumers, not Chinese exporters. This is essentially a tax on the people of the country, especially affecting low- and middle-income families.

Trump announced tariffs in 2018

Secondly, tariffs may lead to exchange rate adjustments. Once the exporting country's currency depreciates, its export goods will become relatively cheaper when denominated in US dollars, which will partially offset the price increase effect brought about by the US tariffs.

Finally and more importantly, US trading partners are not robots that only react according to formulas. On the one hand, there will be retaliatory tariffs, by reducing US exports to them as punishment; on the other hand, trading partners may strategicallydirect the export of goods to other countries outside the United States.

When the United States imposes high tariffs on goods from China, Chinese exporters may seek to sell goods to Southeast Asia, Europe or other markets. At the same time, US importers may also shift their procurement sources from China to countries such as Vietnam and Mexico that are not affected or less affected by tariffs.

Ironically, in order to show the "authority" of its calculations, the US Trade Office deliberately displayed on its website that it cited several top economics journals to show that it had "evidence". However, the above rebuttal was made precisely by the authors of the articles they cited.

Conclusion

Throughout history, the role and significance of tariffs have been evolving.

Modern tariff policies can still serve specific strategic goals or express political positions, but their large-scale and indiscriminate use, especially when there is a lack of sufficient economic logic support and when chain reactions are ignored, often does more harm than good and will ultimately run counter to the original intention of the policy.