Ep. 384 Explaining Optimal Tariff Theory and Its Relation to Standard Free Trade Arguments
Bob first explains the neoclassical theory of “optimal tariffs,” by which a large country can use a modest tariff to improve its terms of trade. He then shows how this theoretical possibility is consistent with standard arguments making the case for free trade.
Mentioned in the Episode and Other Links of Interest:
- The link for Monetary-Metals.com.
- Fed Reserve Bank of Richmond piece on optimal tariff theory.
- Bob and Josh Hendrickson discuss Stephen Miran’s strategy for using tariffs to help the US position.
- Bastiat’s “Petition of the Candlemakers.”
- Bob on the Human Action podcast clarifies comparative advantage.
- Bob interviews Brian Domitrovic on economists having a biased view of tariffs vs. income taxes.
- Help support the Bob Murphy Show.
About the author, Robert
Christian and economist, Chief Economist at infineo, and Senior Fellow with the Mises Institute.
Assuming I am stupid and there’s not-stupids here: Why didn’t Bob or Josh come up with the very first austrian objection to the ‘Optimal Tariffs’ approach. What is unseen in that claim of improved status due to lower import prices?
Well the China-tariff-lowered world-price is the price available to your other competitors (notChina), for purchasing input factors of production. Tariffs on any import factors puts you at the comparative disadvantage to nonChina in sourcing the input factors from China.
It doesn’t matter that the world price got lowered, cause your importers get the taxed price, competitors get the untaxed price, and can do far more things with those factors due to lower marginal costs versus alternatives.
Additionally Optimal Tariff theory fails to account that every cent in government hands is a net harm to society. A-priori. It’s not subject to price-test and therefore is, in agreggate, on the mean, unprofitable, capital-destructive, human-life-destructive.
What am I missing here guys?
Is the entire Trump-Tariff discussion supposed to be magically constrained to consumer end-products and not any input factors of production? Oh?, And what are those exactly, i wonder, that cannot ever be used as an input factor in some kind of production?
Thanks for bringing the topic to our attention, but to my mind the most GLARINGLY OBVIOUS objection to the price-lowering argument is that your producers and consumers nonetheless suffer higher prices than everyone else in the world.
Celebrating that is satanic.
Yes i was ignoring changes in Dollar Value here. But their claim doesn’t rely on it.
I’m still at a loss as to how we are all supposedly better off by paying more for stuff.
If tariffs make us better off, why do we tolerate no tariffs between states? Or cities? Or individual households? Seems silly to purposely cripple ourselves like this.
The tariffs hurt the outside party. So if two US states imposed tariffs on each other, they would both be poorer than if they didn’t. At the end of the episode, I explained why–even if we stipulated the “optimal tariff” literature–it would still make sense for economists to champion international free trade agreements.
Not sure I follow. If Rhode Island applied a tariff to California, California could not reciprocate because nobody in California is buying things from Rhode Island. Presumably the people who believe in these “optimal tariffs” also don’t apply a tariff to their own households when they go shopping even though none of the stores they visit can reciprocate either.
It’s just bizarre to talk about this as an economic theory.
But we know Economists love getting into the intervention-modification debates.
https://www.hudsonbaycapital.com/documents/FG/hudsonbay/research/638199_A_Users_Guide_to_Restructuring_the_Global_Trading_System.pdf
It’s at least got a foundational understanding of the price distortions we incurred by reserve currency status.
But then there’s stuff like “America runs large current account deficits not because it imports too much, but it imports too much because it must export USTs to provide reserve assets and facilitate global growth. ” That ‘must’ is someone’s order, “obey or else”, and not economic law.
He continues: “Tere are no meaningful alternatives to the dollar or the UST. A reserve currency must be convertible into other currencies, and a reserve asset must be a stable store of value governed by reliable rule of law. ” Again the context here is an unacceptable evil, but ok I’m not his audence.
I think we really are watching the resistance to the CBDC thing. A inter-elite confrontation over a very global commification.
Really good analogies and comments reviewed at the end. Re-listen to this one folks! Pay attention this time!
But look at P25 of the document, it’s handwaving:
“Classically, modest tariffs can improve welfare because reduced demand from the tariff-
imposing country depresses prices of the imported goods.14”
“Improve welfare” “Decrease prices?” Look the price after tax goes UP. For the consumer the price goes UP. The GLOBAL PRICE DECREASES, BUT WE DON’T GET THE BENEFIT OF THAT.
“While the tariff produces distortionary welfare losses due to reduced imports and more expensive home production, up to a point, those losses are dominated by the
gains that result from the lower prices of imports.”
ASSERTION: NO CAUSAL LOGIC.
I thought about it with some back of the envelope numbers. Let’s suppose you have an item that retails for $100, and you get this kind of supply chain.
Retail: $100
Wholesale: $80 (retailer adds $20 markup)
Factory gate in China: $60 (importer adds $20 markup)
Then after a 20% tariff gets imposed on the importer you get this:
Retail: $102
Wholesale inc tariff: $84 (retailer adds $18 markup)
Tariff imposed on $70 (government takes $14)
Factory gate in China: $52 (wholesaler adds $18 markup)
The factory ends up paying $8 of the tariff, because as soon as the sell a nominally $60 item for a discount they already made a payment. Take note that if the government merely gives the money to Elizabeth Warren or something similarly asinine … then everyone is worse off. Although the retail consumer is only $2 worse off, which hardly seems a big deal.
However if the government uses the $14 to reduce other taxes or perhaps pay the national debt then it’s fair to say that some people in the USA will be better off … probably not everyone.
I disagree with the statement that the “optimal tariff” just automatically makes people better off … but it will only work if some other tax is reduced or the money gets rebated somehow.
There may also be long term effects … in as much as local industries get less efficient because there’s less competition. It’s hard to measure. Australian government had many attempts to protect the local automotive industry but finally gave up and threw in the towel. We still have a bunch of special taxes on automobiles … but now they just shrug and admit they are taxing us and don’t pretend any of it serves any genuine purpose.