Friday, March 23, 2018

Vox Popoli: The math of trade war

As I predicted, China responds in a measured and mostly symbolic manner, with 128 tariffs affecting less than 2 percent of US exports to China:

China is 'firing back' after US announces tariffs on steel and aluminum. The world's second-largest economy has responded to President Donald Trump's controversial trade tariffs.

China's commerce ministry proposed a list of 128 U.S. products as potential retaliation targets, according to a statement on its website posted Friday morning.

The U.S. goods, which had an import value of $3 billion in 2017, include wine, fresh fruit, dried fruit and nuts, steel pipes, modified ethanol, and ginseng, the ministry said. Those products could see a 15 percent duty, while a 25 percent tariff could be imposed on U.S. pork and recycled aluminium goods, according to the statement.

The statement did not go into greater detail. U.S. agricultural products, particularly soybeans, have been flagged as the biggest area of potential retaliation by Chinese President Xi Jinping's administration.

Just to keep it simple and understand the most extreme scenario, let's pretend that these tariffs will be enough to completely kill the US ability to export these goods to China. That is $3 billion removed from GDP that represents 1.7 percent of US exports to China and 0.00148 percent of total US exports. Against that, let's pretend that the US tariffs were sufficient to entirely shut down the Chinese ability to sell the $60 billion in goods that are affected by them in the USA.

The net means the US economy just grew by $57 billion. A bit more if the domestic goods are more expensive.

See how this works? And notice how the media never explains any of this, or even bothers to try to work out the price elasticity of the tariff-affected products.