Copy of AFF Sentinel V21 #36-Trade Theory Evolves
- Steve Dittmer
- Jul 22
- 6 min read
Statistics Show Type of Market Is Important Factor
Steve Dittmer | AFF Sentinel
Colorado Springs, CO
Originally sent to subscribers 09/12/24
Edi. Note 1-Us old fogies remember where we were when it was announced that JFK was shot. We all remember where we were when the second plane hit the Twin Towers. Let us never forget how vulnerable even ordinary citizens are when we don't pay enough attention to national security, ignore the evil in true enemies and ensure we have a strong economy to provide strong military capabilities. Our liberty and freedom makes us strong -- and makes us vulnerable. Remember those who perished leading a free American life and remember and thank those who rescued people and those who sent to war to defend us.
Edi. Note 2-In our last column, we noted that Speaker Johnson was planning on introducing a government funding bill that called for a six-month Continuing Resolution to allow a new Congress and president to set the FY '24-'25 budget. It also had the SAVE Act attached. The latter included language requiring everyone registering to vote in a federal election to present "documentary proof" of citizenship. Johnson has delayed bringing the bill because of opposition within the Republican party. If you support the CR and the SAVE Act for election integrity, it will take pressure from voters on Congressional members to get the bill considered, much less passed. There is some additional opposition based on concerns about the military budget and reluctance to extend the current budget's high spending levels in general
Lies, damn lies and statistics…plus exaggerations.
The first part of that quote goes back to 1892 (Balfour) and we’ve added the last to describe much current political discourse. Things really haven’t changed much in 5,000 years, much less 125 or so.
Former President Trump’s reciprocal trade musings have been trumpeted by his opposition as a ten percent tax on everything and “raising taxes” on the middle class.
What he and his advisors have discussed is not a tariff on everything imported. It should be obvious to anyone who follows trade at all that any new tariffs wouldn’t be on goods from countries we have a free trade agreement with.
Trump did not like the big trade agreements with dozens or hundreds of countries as members because he felt the U.S. gave up too much control that way. He also did not like the way China had been allowed to join the WTO and flout its rules. He preferred to have agreements with individual countries as trading partners, to tailor agreements to trade flows and the needs of each country.
What Trump and the economists he often listens to have talked about is using tariffs, or the threat of tariffs, on countries who put tariffs, non-tariff trade barriers or restricted access to their markets for our goods. We think Trump and former USTR Robert Lighthizer wanted -- and mostly used them -- as tools to get concessions and access. In most cases, they should be short-term or threats, to negotiating tactic for fair access both directions.
Long-term economic theory is that while free trade provides a wider array of goods and services to a nation’s citizens at more competitive prices, tariffs on imported goods can raise prices to consumers and provide protection for domestic providers. They served as a somewhat hidden tax on consumers.
Does that theory hold up under modern conditions, under faster communications, more fluid internet information and a country that provides a huge, affluent market for the world’s output?
John Carney of the Breitbart Business Digest shared some information based on the more recent Trump administration tariff data that put a new light on tariffs in today’s global marketplace. The forces of competition on prices and the imperative for countries to export into the large, rich American market puts downward pressure on prices to our consumers. Importers absorb some of the cost of tariffs but in turn, there is pressure on input costs for the exporter because it is competition, and what consumers will pay (demand), that sets prices.
The particulars regarding an industry can differ and affect how a tariff affects consumer prices. A domestic industry with a near-monopolistic dominant or very few players can raise prices if a protective tariff is enacted. But if the industry is competitive and tariffs like Trump’s are placed on goods from a state-run, state-subsidized system like China, the tariff tends to even the playing field.
Just as the beef industry salivated for years at the prospect of accessing the huge Chinese market, exporters tend to bend when it comes to our market and the benefits to selling here. Carney said trade theory has held that for large markets, tariffs tend to drive down prices from foreign exporters that have no other choice to sell excess production.
Consumers can actually benefit by a tariff on foreign goods improving the terms of trade enough to actually drive down the prices of domestic goods. It’s called the Metzler Paradox, posited in 1949.
This next factor is something cattlemen can appreciate more than the average citizen. Carney said most people think that the prices they pay are an accumulation of the cost of their inputs. As cattlemen know, in fact the entire beef production chain knows, consumer demand relative to supply determines the final price. That final price then dictates the prices of components and inputs.
At least for comparable products. For grain-fed beef, worldwide, there is no real competition for U.S. and Canadian beef, which is why, once they get exposed to it, foreign consumers can be willing to pay more for it than domestically produced beef.
So when a tariff raises the cost of imports, in a competitive economy, there’s no real way for merchants to pass on the cost.
So if that’s the modern economic theory, why did many economists claim that imposing tariffs would raise prices?
Carney said it was politics and social status. Like “a huge swathe of our professional and academic classes, economists are overwhelmingly to the left of Donald Trump.” To not lose prestige with their peers, they must criticize Trump. They yelled vociferously when it was Trump but said little when President Biden kept tariffs in place. The original tariffs were bad because they were Trump’s tariffs, Carney said.
Maybe it’s because the beef production chain deals with reality every day and sees the working parts, that it seems our economists deal with data and facts without trying to color them in some political ideology. The average citizen/consumer/voter doesn’t observe most of the working parts and is unlikely to dispute the findings of vaunted Ivy League economists.
Unfortunately, the Federal Reserve is rife with hundreds of Ivy League economists, which apparently goes a long way to explaining why their econometric models can’t explain what happened, what is happening and what will happen. Too much Keynesian influence.
By now, you’re likely getting the drift that some economists were using an outdated model of tariffs’ effects. But as mentioned above, it makes a difference what kind of a market one’s dealing with. A tariff imposed to protect a domestic monopolists market share would likely increase prices.
Carney said Trump’s tariffs were not “protectionist” but aimed at getting better terms of trade and the U.S. market they sought to “protect” against China’s state-run, state -subsidized players is a competitive one, rather than one dominated by few players.
Prices of durable goods during Trump’s four-year term increased 1.3 percent.
Most American firms passed only a fraction of any tariff cost increases, in the range of costing a family $100/family/year. A comprehensive study of two large retailers found that on goods subject to tariffs vs. those not subject to tariffs, the prices increases were little different and amounted to less than one percent. Carney reported that multiple studies have found little pass through of tariff costs to consumers.
Interestingly, even the tariffs on metals were either absorbed by the exporting nations or by the importing firms in corporate sectors, affecting their margins but not being passed on to consumers.
We thought you’d be interested in evolving trade data and theory.
Our address: Agribusiness Freedom Foundation, P.O. Box 88179, Colorado Springs, CO. 80908.
To support the work of AFF, you can contribute with any major credit cards here:
Or,
If you wish to use your Paypal acct. click below: