Carney: The New York Fed’s Muddled Thinking on Trade and Tariffs

The New York Federal Reserve Bank has published a strikingly muddled attack on the Trump administration’s tariffs.

Mary Amiti, an economist at the New York Fed, published a blog post Monday that purports to undermine one of what she describes as “one of objectives of these new tariffs” that steadfastly ignores the actual objectives of the new tariffs. It is not really a critique of the Trump administration’s trade policies at all. It’s an attack on a straw man.

Amiti, who co-authored the post with three academic economists, argues that raising tariffs on imported goods will not narrow the U.S. trade deficit because they are likely to raise costs for U.S companies and make U.S. products less competitive.

The problem here is that the Trump administration’s tariffs–25 percent on steel imports, ten percent on aluminum, and 25 percent on $50 billion of goods from China–are not aimed at reducing the trade deficit. At least not in the short-term and definitely not in the way Amiti seems to think.

The stated purpose of the steel and aluminum tariffs is to ensure the U.S. has viable steel and aluminum companies for the purposes of national defense. Critics of the tariffs may not agree that the U.S. needs to protect its steel and aluminum producers. They may doubt steel and aluminum producers are critical for national defense. But it is simply wrong to say the purpose of the metals tariffs is trade deficit reduction.

How would that even work? The U.S. imported a bit less than $1 billion of  Chinese steel in 2017, which was less than 0.18 percent of our $568.4 billion trade deficit. It’s true that China pushed more steel into the U.S. markets through transshipments–basically using other countries as staging grounds for dumping steel into the U.S.–but reducing these does not cut the trade deficit with China.

What about that $50 billion? Or the longer list of $200 billion of Chinese goods the U.S. is planning to pin with tariffs?

There too the goal of the policy is not to mechanically reduce the trade deficit. It is to cajole China into giving up the bad policies that keep its markets largely closed from foreign competition and that the Trump administration’s investigation revealed enable the theft of U.S. technology.

President Trump no doubt thinks the tariffs will bring down our trade deficits but not in the way the New York Fed’s Amiti thinks. As he has spelled out many times, the purpose of the tariffs is to force better behavior on the part of our trading partners and accomplishing that would bring down trade deficits.

The New York Fed research backing their claim is also very odd. The central claim is that China’s accession to the World Trade Organization, which was followed by lower tariffs on goods imported into the country, resulted in cheaper Chinese production and domestic productivity gains. This allowed Chinese companies to cut prices, boosting exports to the U.S., the study claims.

So what does that have to do with U.S. tariffs? The economists argue that the process would also work in reverse. Increasing tariffs on Chinese goods would not only reduce imports but squeeze U.S. exports by raising their cost of production.

U.S. exports will fall “not only because of other countries’ retaliatory tariffs on U.S. exports, but also because the costs for U.S.  firms producing goods for export will rise and make US exports less competitive on the world market,” the blog post argues. “The end result is likely to be lower imports and lower exports, with little or no improvement in the trade deficit.”

This is a pretty weird argument. It is based on very old data and entirely ignores very important differences between the U.S. and China. To see the problem clearly, imagine if the U.S. even further reduced its tariffs against China, allowing even more imports. In the model the Fed folks are using here, you would expect to see the trade deficit fall. That is as absurd as it sounds.

Alan Tonelson points to two more analytical errors:

 [S]hould the United States accept this result if much of the foreign competition faced by its manufacturers is predatory? In this vein, the Fed post contains not a single word about China’s currency manipulation – which kept the value of the yuan significantly and artificially suppressed throughout the early post-WTO admission years (and arguably still does) for reasons completely unrelated to trade liberalization, and which gave Chinese products a major and wholly artificial advantage in China’s own market, the U.S. market, and markets around the world.

…[T]he authors similarly ignore the impact of China’s value-added tax (VAT) system, which not only surrounds the entire Chinese economy with high, tariff-like walls that nonetheless aren’t technically considered tariffs, but which provides comparably impressive subsidies for China’s exports.  Not to mention the other massive supports Beijing offers to manufacturing, or its still (and perhaps increasingly) formidable array of non-tariff trade barriers.

There is a lot of good work on tariffs that economists at the Federal Reserve could do. But attacking a straw man argument for tariffs while absurdly ignoring crucial distinctions between the U.S. and Chinese economies does not qualify.