re: Trump's Tariffs Are Across The Board "Tax" Hikes

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Trump's Tariffs Are Across The Board "Tax" Hikes

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As I've tried to explain to IBF, the problem is generic economists tend to blindly fall back on assumptions they are taught. In this instance, they are applying by rote classical 19th century tariff insights to a 21st century concept.

By rote they say if China exports a $100 widget, and the US applies a 10% tariff, US consumers will pay $110 for the widget. Hence, US consumers as taxed $10 dollars which the government collects. That is the classic teaching.

However, unlike the 19th century, economies are now based on fiat currency, not commodity-based money such as the gold standard or bimetallism. So in the 21st century $100 widget example, China can counter the tariff by unilaterally devaluing its currency 10%. So the classical model no longer necessarily holds.

If China devalues its currency by 10%, it concomitantly lowers cost of its exports. Now China exports its $100 widget for $90. The US applies its 10% tariff ($9). US consumers pay $99 for the previously $100 widget, while the US collects $9 dollars in tax on it.

Meanwhile folks like IBF bitch that the consumer is paying $9 more than he should because of the tariff/tax. In reality though, consumers would never get to buy the widget for $90, because as soon as the tariff was eliminated, China would revalue its currency to the original level, and the widget would return to its $100 price.

Which of course raises the question, if the consumer is paying $99 and the US government is collecting $9 of that in tariff money (so far this year we've collected about $35 billion in tariffs), who is paying for the tariffs? The consumer isn't paying more for the widget. Yet the US government has collected billions in tariffs.

Who is paying?

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China pays a huge cost in currency devaluation. E.g., their exports to the EU and Asia are concomitantly devalued. China is in a bind and probably cannot afford to drop the RMB further. That was one consideration in the decision to delay adding September tariffs. Those would have been transmitted to US consumers per the classic economics model.

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