April 01, 2017
Donald Trump’s bluster about imposing large tariffs and forcing companies to make things in America has led to backlash where we have people saying things to the effect that we are in a global economy and we just can’t do anything about shifting from foreign produced items to domestically produced items. Paul Krugman’s blog post on trade can be seen in this light, although it is not exactly what he said and he surely knows better.
The post points out that imports account for a large percentage of the cost of many of the goods we produce here. This means that if we raise the price of imports, we also make it more expensive to produce goods in the United States.
This is of course true, but that doesn’t mean that higher import prices would not lead to a shift towards domestic production. For example, if we take the case of transport equipment he highlights, if all the parts that we imported cost 20 percent more, then over time we would expect car producers in the United States to produce with a larger share of domestically produced parts than would otherwise be the case. This doesn’t mean that imported parts go to zero, or even that they necessarily fall, but just that they would be less than would be the case if import prices were 20 percent lower. This is pretty much basic economics — at a higher price we buy less.
While arbitrary tariffs are not a good way to raise the relative price of imports, we do have an obvious tool that is designed for exactly this purpose. We can reduce the value of the dollar against the currencies of our trading partners. This is probably best done through negotiations, which would inevitably involve trade-offs (e.g. less pressure to enforce U.S. patents and copyrights and less concern about access for the U.S. financial industry). Loud threats against our trading partners are likely to prove counter-productive. (We should also remove the protectionist barriers that keep our doctors and dentists from enjoying the full benefits of international competition.)
Anyhow, we can do something about our trade deficits if we had a president who thought seriously about the issue. As it is, the current occupant of the White House seems to not know which way is up when it comes to trade.
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