Who Paid for the 2018 Trade Tariffs?

Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Kate (00:00):
Hi Veljko

Veljko (00:00):
Hello Kateryna

Kate (00:02):
And, we are talking about the topics that everybody is talking about today.
We usually try to go for topicsthat are more niche, but today
we're gonna go against our trend.

Veljko (00:11):
Indeed we are talking about trade tariffs today.
We are gonna keep the conversationtoday narrow, and we are gonna
look at a handful of papers,

Kate (00:19):
even less than a handful.

Veljko (00:21):
Three.

Kate (00:21):
That's right.

Veljko (00:22):
Three papers that specifically look at the question,
who paid for the 2018-2019 tariffs.
So the main question, whopays for the 2018 tariffs?

Kate (00:32):
And we are looking specifically as the 2018 tariffs.
That's right.

Veljko (00:36):
Yeah.
Who pays for the 2018 tariffs?

Kate (00:38):
I just said that like a minute ago.
The same thing.

Veljko (00:41):
Okay.
I can't, I don't even knowwhat our music is like.
Okay.
Okay.

(01:04):
Welcome to Questions in Finance,

Kate (01:07):
a podcast where we translate academic mumbo jumbo to answer
interesting questions in finance.
I'm Kate Holland.

Veljko (01:15):
And I'm Veljko Fotak.
Kate and I met when we were PhDstudents at the University of Oklahoma.

Kate (01:21):
Today we're university professors and we spend our days
teaching and researching companies,markets, and all things related.
Let's actually mention why did wepick these three papers, right?
I think that some of the reasons arethat all three have, very careful
analysis, and all three have beenpublished in excellent outlets.

(01:42):
So peer review journals thatrequire really extremely careful
review and highly demanding.

Veljko (01:50):
Absolutely.
This is scholarship published inthe top journals in our profession.
It also comes from some peoplethat are really heavy hitters.
So, the very first of the three papers.

The title (02:00):
"Tariff pass-through at the border and at the store."

Kate (02:05):
Fun.

Veljko (02:05):
"Evidence from US trade policy." And this comes from four co-authors.
Alberto Cavallo, at Harvard.
Gita Gopinah, also at Harvard and at theIMF, at the same time, Brent Neiman at
the University of Chicago and Jenny Tangfrom the Federal Reserve Bank of Boston.
And this was published in theAmerican Economic Review Insights,

(02:28):
in the year 2021, but was writtenshortly after the initial tariffs.

Kate (02:33):
Since I started learning Italians, completely unrelated remark here, but
Roberto Cavallo, "cavallo" is the horse.
That translates as a "horse."

Veljko (02:40):
That's absolutely true.

Kate (02:41):
Absolutely.
Just a little completelyunrelated interjection.
Caught a word that I know.
Duolingo!
Where was it published?
Sorry, I forgot.
And the year?

Veljko (02:50):
This was in, 2021.
We was finally published, and thefirst drafts, they were almost
identical to the published version,they were already out in 2019.
Right.
So then there was a two year delay.
Our journals are notfast, as you well know,
The second paper, was actually published,if I remember correctly, faster, in 2019.

(03:11):
This is a manuscript by Mary Amiti,Steven Redding and David Weinstein.

Kate (03:20):
Journal of Economic Perspectives.

Veljko (03:21):
Yes, in 2019.

The title (03:23):
" The Impact of the 2018 Tariffs on Prices and Welfare."
Mary Amiti, was at the FederalReserve Bank of New York, Steven
Redding at Princeton, andDavid Weinstein at Columbia.
And then finally, the third paper,and I'm gonna have to apologize to
Pablo, because, I, I looked it up.
Pablo Fajgelbaum, I believeis the right pronunciation.

(03:46):
Penelopi Goldberg, PatrickKennedy, and Amit Khandelwal.
Their paper was also written very quicklyand published just as quickly in 2019
in the Quarterly Journal of Economics.
And the title of the paperis pretty straightforward.
It is simply" The Returnto Protectionism."

(04:08):
And in terms of affiliation,Pablo Fajgelbaum is at UCLA,
Patrick Kennedy, at Berkeley.
Penelope Goldberg is at Yale, but atthe time of this paper, she was the
Chief Economist for the World Bank.
And Amit Khandelwal at Columbia, again.

Kate (04:25):
Excellent.
To make things a bit easier, canwe just refer to these three papers
as the Cavallo paper, the Amitipaper and the Fajgelbaum paper?

Veljko (04:35):
I'm almost tempted to call it Pablo's paper, right?
Palo Fajgelbaum.
I think Pablo is a bit easier, but okay.
So all three have veryconsistent findings,

Kate (04:44):
Right?
Very consistent.
Yes.

Veljko (04:47):
I mean, I don't think we are gonna shock anybody by giving
the murder plot away, right?
The big finding here is going to bethat the US consumers paid for this, or

Kate (04:58):
paid for the 2018 tariffs because the tariffs were
basically passed through to them.
In form of US import prices.

Veljko (05:06):
And I said US consumers, but we are gonna see that there
is a little bit of nuance there,

Kate (05:09):
Definitely not straightforward.

Veljko (05:11):
No.
But that the big narrative, thatsomehow, these tariffs were going to
be absorbed by foreign producers...that's really not the case.
And maybe we need to step back a moment...

Kate (05:24):
Let's talk a little bit historically about tariffs.
Was 2018 just a huge unexpected shock,or what have you seen historically?
Right.
It started in 1971 with Nixon imposinga 10% tariff across the board.

Veljko (05:38):
I think Amiti, and coauthors did a good job in summarizing this point.
They start by saying, " It is common forus presidents to introduce protectionist
measures early in their first term."

Kate (05:49):
Yeah.
You know, like that first 100 days.

Veljko (05:51):
Correct.
Correct.
But then they say "in 1971, RichardNixon imposed a 10% tariff, a
surcharge on duteable imports.
Not on everything.
In 1977, Jimmy Carterplaced a quote on shoes.
In 1981, Ronald Reagan pressured theJapanese government to implement a
voluntary export restraint agreement,"this is on Japanese automobiles. "In 2002,

(06:15):
George W. Bush imposed tariffs on steel.
In 2009, Barack Obama placed35% tariffs on Chinese tires."

Kate (06:22):
I'm of course the most upset about the shoe one, but that was before my
time, so I didn't get to witness it.

Veljko (06:28):
Fair enough.

They continue (06:29):
"Only George HW Bush and Bill Clinton seemed to have resisted
the pattern, with Bill Clinton actuallyliberalizing trade in his first year
by signing the North American FreeTrade Agreement in 1993" or NAFTA and
then they conclude by saying "Theseexamples of past unilateral US tariffs

(06:50):
have frequently been the subjectof complaints to the World Trade
Organization by US trading partners."

Kate (06:56):
The partners are complaining.

Veljko (06:57):
Correct.
So I think it's important to firstnotice that, in some sense what
Donald Trump is doing right now isnot tremendously unusual in spirit.
US Presidents love tariffs.
It perhaps might be unusual in scope.

Kate (07:12):
And you are referring now to the 2025 tariffs.
We're talking about 2018.
Those were also pretty extreme

Veljko (07:18):
We never made the link explicit.
We don't today want to talk in too muchdetail about what's going on in 2025.

Kate (07:25):
We will have a separate episode on that.

Veljko (07:26):
Indeed.
And yet we do wanna map what we learnedin 2018 and 2019 to the current time.
Because ultimately that'swhat you're trying to do here.
So the first point here, tariffs,even though not in the magnitude
that we are facing right now, area relatively common thing for US

Kate (07:43):
presidents to do, especially early on in their term with the exceptions that
Clinton and Bush Jr. did the opposite.
They opened up for trade andreduced tariffs while Nixon,
Carter, increased the tariffs andobviously President Trump as well.

Veljko (08:00):
And it's interesting Clinton, Bush, two presidents
that were back to back,

Kate (08:04):
That was a big issue for the parties, right?
Because all of a sudden bothpresidents prefer trade.
And how do you divide, the people intoDemocrat and Republican when both a
Democrat and the Republican presidentlike trade, which I think is great.
It's unifying.

Veljko (08:20):
Clearly there was a period in time where the consensus was free trade is

Kate (08:24):
good

Veljko (08:26):
the political spectrum.

Kate (08:27):
Right.

Veljko (08:27):
So much for the past, Cavallo and co-authors give us a good timeline
of what actually happened in 2018.
They say "After more than half acentury of leading efforts to lower
international trade barriers, in2018, the United States enacted
several waves of tariff increaseson specific products and countries."

(08:48):
They summarize this by sayingthat "Import tariffs increased from
2.6% to 16.6% on 12,043 productscovering approximately $300 billion
or 12.7% of annual US imports."

Kate (09:07):
Wow.
A huge increase that covereda minority, a minor part,

Veljko (09:12):
Correct.
12.7%. It covered the majority ofUS imports from China eventually.
It didn't even cover themajority of US imports.
So big distinction.
The rates were lower andnowhere near as comprehensive
as what we're facing nowadays.

Kate (09:27):
In 2018, the tariffs were lower than the 2025 tariffs.

Veljko (09:31):
Correct.
So the first wave of tariff increasesbegan in February, 2018 with the Trump
administration increasing tariffson $8 billion of solar panels and
washing machines, a second waveof tariffs in March, 2018 targeted
iron, aluminum and steel products.
And this affected a largenumber of countries.
And then the large tranche ofimport tariffs targeting $247

(09:54):
billion worth of imports fromChina, was implemented subsequently.

Kate (09:59):
So what does this?
$247 billion of products from Chinathis is a 2018 part of US trade with
China that was subject to tariffs.
So it's not the whole amountof trade with US and China,

Veljko (10:12):
They do give those statistics in more detail.
They do say that this wave targeted11,000 and some change, imported
products, Actually in terms of value,this was 48.8% of imports from China.

Kate (10:25):
Okay.
So, 247 billion is halfof the imports from China.

Veljko (10:29):
In 2019, they imposed tariffs on the rest.
Virtually every product from Chinawas eventually tariffed, not in 2018.
Perhaps this is a good moment to mentionsome of the limitations of these papers.
These three papers were extremely timely.

Kate (10:48):
Executed I immediately, yes.

Veljko (10:50):
Absolutely.
Which means that, first of all,they're only looking at the tariffs
that were imposed at the time, right?
So they're capturing everything thathappened in 2018, the point is that
we are gonna be talking a lot aboutthe numerical effects of these tariffs,
and in some sense, this is half of thetotal tariff burden that was imposed
perhaps we can extrapolate and multiplyeverything by two to get an estimate.

(11:14):
But the other thing that we need tokeep in mind is that all of these
papers look at the short term effects.
They can't tell you what happened,five years down the road.

Kate (11:23):
How people change their shopping habits.

Veljko (11:25):
Correct.
And how perhaps, industry adapts.
Some of these substitutioneffects are very slow.

Kate (11:31):
You mentioned the tariff on steels and also tariffs on automotives,
et cetera, right now we're in 2025,the average, lifespan of a car is
one of the longest historically.
It's around 13 years, people areholding onto cars for a longer time,
which I'm not sure if it's been linkedto tariffs or not, but that could be
one example of longer term impact.

Veljko (11:53):
I'll be honest, I don't know of any research that documents that,
and yet I do suspect strongly that hassomething to do with the fact that

Kate (12:01):
people hold onto cars longer.

Veljko (12:03):
Correct?
Absolutely.
Now, this is the USside of the equation.
Of course, there was some degree ofretaliation from foreign countries.
The way Cavallo and co-autho rs putit, they say that retaliatory tariffs
imposed on US exports by trade partners,and the list of trade partners includes
Canada, China, Mexico, Russia, Turkey,and the European Union, this covered

(12:27):
about $127 billion worth of US exports,which is about 8% of the total US exports.
Let's talk for a momentabout the framework, right?
What they're reallyinterested in is who pays

Kate (12:41):
We are interested in that too, who pays for the tariffs.

Veljko (12:43):
Absolutely.
And let's put this into context, theadministration in charge of these
tariffs, the Trump administration hadvery strong opinions, that foreign
exporters would be paying for thesetariffs through reduced profit margins.
A tariff is effectively a tax.
It's paid by the importer,

Kate (13:01):
right

Veljko (13:02):
So there is a view that when you impose tariffs the
margins of exporters will decrease

Kate (13:10):
Let me translate that.
The margins is sale priceminus the cost to produce it.
That's your margin.
So they think those margins on theside of exporters will shrink, right?

Veljko (13:22):
And of course the question here is, are Chinese producers that
are exporting to the United Statesjust decreasing the profit margins?

Kate (13:28):
That would be the story that everybody would wanna hear.

Veljko (13:32):
Correct.
There is an alternative, are USimporters paying higher prices?
There is a third alternative too,which is the story that is currently
being pushed by some justifyingthe 2025 tariffs, by Peter Navarro.
Which is saying, there isan third alternative, which
is a currency adjustment.
This idea that, if the United Statesimposes tariffs , of course the

(13:55):
tariff acts as a tax, which is anincrease in prices to consumers.
But if the foreign currency drops, thenthe foreign goods are cheaper to US
buyers and, in some sense the tariffsmight not be paid by anybody directly.
Now, the research that we're gonna seetoday speaks about this as well, right?

(14:16):
And they actually find that, there isno beneficial currency effect, but in
some sense we have to recognize thereare three alternatives here right?
The tariffs could be paid by theimporter, they could be paid by
the exporter, or they could be

Kate (14:29):
netted out

Veljko (14:30):
Absorbed by, by a currency adjustment in some sense, which, we
can then argue, if your currencydevalues, then in real terms, perhaps
the exporter is still paying for them.

Kate (14:39):
And if you are the US and you're putting tariffs on other countries, your
hope is that these tariffs will be paidfor by the exporter, by another country,
China, France, et cetera, that Mexico,that are selling their goods to the US.

Veljko (14:54):
But.

Kate (14:55):
But,

Veljko (14:55):
Let's get into the actual findings.
We will start withCavallo and co-authors.
I'll get right down to the bottom line.
They find that the overwhelmingmajority of the tariff increase
was passed through to US importers.

Kate (15:10):
I'm gonna copy you now and read a line from their conclusion.
"Tariffs passed through almostfully to US import prices, implying
that much of the tariffs incidentsrests with the United States."

Veljko (15:23):
Absolutely.
And now when they say almostfully, they do try to quantify it.
At some point they estimated fora 20% tariff increase, prices
by importers go up by 18.5%.
So it's
not the full 20%, it's 18 and a half.
So one and a half of that 20% is absorbedby exporters through lower export prices.

(15:51):
So it's not black and white.

Kate (15:53):
18 and a half comes back to buy it you, yourself or the US I guess.

Veljko (15:57):
18 and a half of 20.
This is not black and white,but it's a lot blacker than
white, we wouldn't call it gray.
Now, they actually do make thepoint that, there is a certain
degree of currency adjustment.
That when the United Statesimposes these tariffs of, 20%,

Kate (16:12):
On another country country

Veljko (16:14):
Well in this case, specifically on China.
They actually do find that the renminbisubsequently over the next, about year,
a little bit over a year, 15 months,actually swings in value by about 10%.

Kate (16:26):
Declines.
Which might sound like it'shurting China on one hand.
On another hand, it's making theirgoods cheaper for other countries.

Veljko (16:37):
The issue with this, right?
They're actually finding wheneverthere's a currency adjustment,
they find prices adjust.
So they don't eat up theeffect of the currency rate.
As the renminbi is dropping in value,prices in renminbi are increasing
and prices in dollars stay the same.
So they're actually finding that theycall it a perfect pass through, or almost

(17:00):
perfect pass through of the exchange rate.
So they're finding that yes, theexchange rate is depreciating,
but the prices are adjusting.

Kate (17:06):
US is still paying the same dollar amount, but the Chinese good
manufacturer is now charging more inreminbi because the currency depreciated.

Veljko (17:14):
And not only that, but eventually they find that the effect of the exchange
rate change is very shortlived too.
So when the tariffs are putinto place, it maybe loses.
10% over the next year or 15months, but then it quickly
reverts back to its previous value.
So for all of these reasons, thecurrency adjustment does not

(17:34):
have the beneficial effects that,

Kate (17:36):
and I guess when it jumps back to its original value, if you know
the producer from China was initiallycharging you 90 and now it's charging
you a hundred and now the currency wentback to where you were at 90, they're not
gonna drop the price from a hundred to 90.
They stay at the hundred.
So it's eventually gonnabecome more expensive

Veljko (17:54):
Prices are always a lot stickier on the way down and on the way up.

Kate (17:58):
wants to reduce prices.

Veljko (18:00):
Yeah.
And you give them an excuse toincrease them, they do it immediately.
Then they have to cut themand they take their time.
Now the other side of thisequation, So as the US is imposing
tariffs, China is responding back.
When they look at the retaliatorytariffs imposed by China on US exports,
they actually do find that US exportersare forced to drop their prices.

(18:26):
But leet me just quantifythis for a second.
What they actually do find is thatwhen China imposes 15% tariffs,
US export prices drop by 7%.
Let's be clear, right?
This is a more equal splitin some sense, right?
When the US imposes tariffson China, the US eats up

Kate (18:43):
18 and a half percent out of 20.

Veljko (18:46):
Yeah.
When China imposes tariffs

Kate (18:48):
If it was 20%, it would be 10 and 10 basically.

Veljko (18:51):
Yeah.
The pain is a lot more evenly split.

Kate (18:53):
So basically, the tariff that is supposed to hurt foreign countries
and bring employment or increaseemployment in the US ends up making US
consumers pay more for imported goods.
And then what happens to the peoplewho make products here in the US

(19:13):
and sell it to other countries?
AKA exported, well, they endup having to, cut prices.
I found interesting about that resultthe differentiation that they found.

Veljko (19:26):
Absolutely.
I mean, the asymmetry's striking, right?
One of the things that they're gonnafind, the tariffs that the United
States imposes on foreign countriesare not very effective, but they're
gonna find that the retaliatorytariffs are a lot more effective.

Kate (19:40):
The coolest thing for me was how they differentiated by product type.
Not everybody had to cut prices.
The producers who made undifferentiatedgoods, like commodity goods.
So if you think about a soybeanproducer, soybean is a commodity.
It's non-differentiated.
They're the ones who had to dropthe prices the most, and those who

(20:01):
made differentiated goods, somespecialized clothing or some specialized
technology, they actually didn'thave to change their pricing so much.
So I would say the commodity producersin the US, farmers had to drop
their prices the most in responseto the 2018 tariff that other
countries then impose on the US.
And that becomes a bit of aninteresting paradox, right?

(20:23):
What they're pointing out is thatyou can withstand tariffs if you
make differentiated goods, if youmake something like technology.
But if you make something thateverybody makes like commodities,
soybeans, corn, wheat, I dunno,pork bellies, then you can not.
So US then actually sells toforeign countries, exports these

(20:46):
non-differentiated type goods,which is a bit surprising.

Veljko (20:50):
You're absolutely right, Kate.
Why is it that China isso much more successful?

Kate (20:53):
It depends on the type of products that US buys from China and the types
of products that China buys from the US.
But for example, US sells soybeansto China, which is a commodity good.
You can grow soybeans in the USin Brazil and Mexico, anywhere.
It's gonna be the same soybean and Chinasells to the US anything from t-shirts to

(21:17):
computer parts to hair dryers and so on.
So their products arenot as commodity like.
They're a little bit more complicatedand a little bit more difficult
to substitute with a product fromanother country or from the US for
that matter, for the same price.

Veljko (21:34):
First of all, you're absolutely right.
That's one of the big findings by Cavallo.
They look at an index of how substitutableproducts are, and they actually find that
the products the United States sells toChina, have more substitutes than the
products China sells to the United States.
And I just wanna emphasize how, that'snot what I would've expected, right?

(21:58):
I think in some sense wehave a prejudice in our head.
We think China is producingcheap trinkets that we are
buying in the United States.
We are the advanced economy

Kate (22:06):
We are selling some pharmaceuticals and something more complicated.
But it's actually like whenyou look at it, it's different.
It's US sells a lot of commoditieslike soybeans to China, right?

Veljko (22:16):
A lot of agricultural commodities.
Now, it's really interesting thatthe biggest single export product
and the single biggest exporter asa company, and they're one and the
same in this context, is airplanesmade by Boeing for the United States.
I seem to remember when I wasteaching this to my class that
Boeing accounted for something like15% of US exports to China in 2018.

(22:40):
Which is in amazing that a single companyaccounts for 15% of the exports between
the two largest economies in the world.
And it was interesting that China went"oh, Airbus planes are just as good."
In a moment when Boeing is sufferingfrom a lot of reputational problems,
and a lot of quality issues on its own.

Kate (23:00):
This makes me think about, I'm gonna flip it for
just a second, back to imports.
Go back to the importer's perspective,I'm gonna bring in an example of Nike.
Nike is a US company, but Nikemanufactures most of their shoes,
which is their main product inAsia and predominantly in China.
For Nike, it's going to be quiteexpensive to bring in their shoes

(23:21):
back to the US and sell them becauseover 55% of Nike's products are
actually sold in the United States.
So think about Nike, it's goingto experience higher costs, which
you know, is gonna translate intolower profit margins for a company.
When the tariffs were announced,Nike's stock price tanked.

(23:45):
It was a blood bath for them.
Perhaps reflecting some of this.
Now Nike is likely not gonnawant to take care of all of the
tariff and they're gonna pass theprice increases to US consumers.
If you like Nikes, you might wannago buy a pair right now because the
prices on Nikes might be going up.

(24:07):
And while that's happening, you'llbe buying fewer Nikes as they will
experience smaller sales, higher costs.
So profit margin pressure on all sides.
That's why we saw such a bigdrop in their stock price.
So just, just wanting to flip and throw inanother example, but from the import side,

Veljko (24:23):
That makes a lot of sense.
I think that, Nike wasthe headline of 2018.
I think Apple is theheadline of 2025, right?
As a company that was exceedinglyreliant on Chinese manufacturing.
But, okay.
I wanna mention one last, elementin this Cavallo paper that
perhaps is the most nuanced, insome sense the most surprising.

(24:45):
After looking at import prices,they pull out a new data set
where they look at retail prices.

Kate (24:51):
Oh, interesting.
Interesting.
So what we pay in stores
here?

Veljko (24:55):
And while they found that prices at the import
point increased dramatically,

Kate (25:02):
Nike has to pay more for the shoes they're bringing into the country.

Veljko (25:05):
Again, that 18.5% out of 20% increase.
What they actually find is thatthe impact on retail prices to
consumers is a lot more modest.
With this 20% increase in tariffs,they find evidence of retail prices
increasing between 0.9 and 1.4%.

Kate (25:25):
Oh, okay.
So, you know, no need to rushout and buy an additional pair of
Nikes because prices of Nikes areunlikely to actually go up too much.

Veljko (25:34):
It's interesting that you put it in that time dimension, right?
Because I think that's one of thelimitations and weaknesses of this paper,
and of these three papers in general.
So first of all, what's going on?
Import prices are going up dramatically18.5%, but retail prices are not, it
means that the retailers, in this case,

Kate (25:52):
Nike,

Veljko (25:53):
Well, the data that they get is from two big retailers

Kate (25:56):
like Walmart and Target, let's say.

Veljko (25:58):
So yeah, let's say not Walmart, not Target for legal purposes.
But I think you're spot on.
What this makes it sound, if thisis correct, is that Walmart and
Target are paying higher inputprices and then they're not
transmitting this to their consumers.
In other words, they're absorbing the hit.
Now, if you know anything about howthese retailers work, it's extremely

(26:22):
clear that they can't take a 20%profit margin cut in perpetuity.

Kate (26:27):
One thing that they will do is offset this cost increase by
lowering other costs and one easy costto lower, salary related expenses.
So they're gonna lay off people.

Veljko (26:39):
Cavallo and company don't directly test that.
They don't have a lot of evidence of that.
But they actually find the otherside of the profit equation.
They find that there is someevidence that these retailers
are increasing all prices.

Kate (26:52):
Not only of the goods that were subject to tariffs.

Veljko (26:55):
Correct.
The problem is that their analysisis a difference in difference.
They look at, how prices of goodscovered by tariffs increased related to
prices of goods not covered by tariffs.
Effectively, because they wannacontrol for price inflation indirectly.
But if you're a retailer and now pricesof a, particular trinket went up by
20%, and you're thinking, I can'tincrease prices of this trinket by 20%.

(27:18):
You might spread that increase alittle bit across product lines.
They're saying, that's how weget generalized inflation from

Kate (27:24):
that.
I see.
You know what this reminds me of?
The university management of courses.
So for example, students always wannatake the super cool finance classes,
which get prerequisites tagged ontothem and other general ed classes, which
the students would generally not take.
Those general ed classes and prerequisitesget slotted into these horrible times

(27:48):
like 8:00 AM which college studentsnever wanna take them, but they have
to if they want to take the actualfun, upper level, finance course, at
3:00 PM at the time that they want.
So it's like this reshuffling ofcourses, given, what somebody wants.
My analogy here comes down to that,if the tariffs are mostly hitting

(28:09):
these lower end goods, what we'regonna see is these producers probably
increasing their best products.
Stuff that people really wannabuy to offset things for.
This isn't completely arbitrary...

Veljko (28:21):
I think you're just a much smarter person than I am.
You see these analogies where Ifail to see the link, but I promise
I'm gonna listen to the episodecarefully and I'm sure I'll get it.
Fair enough.
I thought that when you started going onthis university tangent, you were gonna
talk about the cross subsidization...

Kate (28:38):
Oh, you mean liberal arts courses and STEM courses?
Yeah.
That's a whole other interesting area.

Veljko (28:43):
it is.

Kate (28:43):
Let's get back to tariffs.

Veljko (28:45):
Correct.
Okay.
In reality, they do rule out thishypothesis of this increase in everything.
In order to do that, they actuallylook at prices charged by Canadian
retailers on Chinese goods versusprices charged by US retailers.

Kate (29:02):
Okay.

Veljko (29:02):
With Canada not having tariffs on china, And they're gonna find that
the generalized inflation impact in theUnited States is the same as in Canada.
And they're gonna concludethat, that really there isn't
much of a spread out effect.

Kate (29:14):
So explain that to me again.

Veljko (29:15):
They found a slight increase in prices all around, not specific to the
items covered by the tariffs and nowthey're hypothesizing that this might be
coming from retailers spreading the price.

Kate (29:28):
Yeah.
So what is this Canada-US comparison?

Veljko (29:31):
In order to test or rule out that alternative hypothesis now
they're gonna control the increasein prices on Chinese goods by US
retailers versus Canadian retailers.
And they're gonna find that both the USand Canada increased prices at the same
rate.
So they're gonna conclude that thisis some natural rate of inflation on
prices, not the effect of trade tariffs.

(29:53):
So then they're gonna ultimatelyconclude that no, these retailers
are really absorbing the pricing.

Kate (29:59):
So isn't this like a favorable outcome?
The common people can buy thingsfor a similar price, slightly higher
across the range, but who is hurt aregoing to be Walmart targets, Nikes.
So what's gonna happen is theirshare prices are going to go down.
All of those investors in the stockmarket, the rich people, they're going

(30:22):
to be hurt while the regular people canstill buy their goods at the same price.

Veljko (30:26):
First of all, I do believe that the lack of pass through evidence in
these papers is largely a factor of theshort term nature of what they look at.

Kate (30:36):
So you're saying, don't pass it through in six months,
but a year or two years.

Veljko (30:40):
I don't believe the Target or Walmart can absorb a
20% increase, they don't have a20% profit margin on anything.
And well, that's probably nottrue, but on, on most goods, they
don't have a 20% profit margin.
And Cavallo and co-authors, in theirdefense, they make this point themselves.
They're saying maybe they can absorba price increase for six months for
a year, because, as we said earlier,prices are sticky, because you don't

(31:03):
know how permanent these tariffs are.
You don't wanna shock your consumers ifyou're not sure that it's gonna stick.
Yeah.
So they're saying, if you look atit from a longer point of view,
perhaps, but I don't think you'rewrong, if you're gonna stick to the
evidence that these papers present.
In some sense, one of the big criticismthat we all level at tariffs is that

(31:25):
they are a regressive form of taxation.
And what we mean with regressivethat they have a relatively higher
impact on low income individuals.
That usually comes from the idea,low income individuals are spending
a bigger proportion of their incomeand hence they are more affected
by a tax that affects consumption.
Now, you are absolutely right thatif retailers are eating this up and

(31:50):
the impact is not showing throughinflation or through higher prices to
consumers, but actually showing through

Kate (31:57):
The stock market

Veljko (31:58):
Then that's less bad in many ways.
It's a more progressive form of taxation.

Kate (32:03):
I mean, yeah, I said that, but obviously since I've looked
at the papers, let me point outthe elephant in the bathtub here.
All papers across the board showsthat the US economy shrinks and
we have this dead weight loss.
The numbers are huge, right?
The papers results arequite similar to Cavallo.
We'll talk about, what they add, butthey show that per month, there's

(32:27):
these losses of $1.4 billion in the US.
This is how much less peopleend up spending and having
$1.4 billion per month in 2018.

Veljko (32:40):
It's interesting you mentioned this 1.4 billion per
month, that's actually theirestimate of the dead weight.

Kate (32:46):
That's right.

Veljko (32:46):
Welfare loss.
There is a little bit to unpack here.
First of all, the overallfindings are very similar.
Amiti and company, they don'tmake this distinction between
import prices and retailer prices.
So they're gonna stop at import prices.

Kate (33:00):
Which was Cavallo's addition, looking at retail prices and also
differentiated by commodity goodsand more differentiable goods.

Veljko (33:07):
The first big finding by Amiti and co-authors is gonna be,
consistent with the Cavallo paper.
There is no drop in prices chargedby Chinese or foreign exporters.
The prices impact is beingabsorbed by US importers.
So in that sense, they absolutely agree.
And you're right, the big contributionhere by Amiti and co-authors is
gonna be in quantifying this.

(33:30):
Now here is where it gets interesting.
I wouldn't get too hung up on theexact numbers because let's remember
this is the first half of the tariffs.

Kate (33:38):
Because the second half happens in 2019, the next year, and this is
all happening for 2018 specifically.

Veljko (33:45):
Correct.
So they quantify as such.
They break it down into three big numbers.
The higher costs to consumersand importers are at about
$3.2 billion per month.
This $3.2 billion per month, this isa loss to US consumers and importers,

(34:06):
but this is money that's not burned.
This is money that effectively goesto the United States government,

Kate (34:14):
At least a part of that money.

Veljko (34:16):
Well, I mean, the entire price increase is paid
as a tax to the government.
Now, there's inefficienciesin raising this money, as
you're correctly, pointing out.
You're not recouping all of this.
And then there are inefficienciesin how you are spending that money.
And yet, if you assume that the USgovernment is spending that money
in a prosocial manner, you're notwasting $3.2 billion, you're at

(34:39):
most wasting a portion of that.
But they're gonna say, okay,let's assume this is $3.2 billion.
This is not a wealth destruction.
It's a wealth transfer fromimporters and consumers that buy
imported goods to the government

Kate (34:52):
That's right.
And the government's gonna settle thedeficit hopefully with it that was
created previously with the 2008 financialcrisis, amplified with Covid, et cetera.

Veljko (35:02):
Correct.
Now there's also a second number, whichis a $2.4 billion loss to US exporters,
because of retaliatory tariffs.

Kate (35:13):
So this makes me think this is a totally crazy marketing ploy.
You say, okay, we're gonna put thesetariffs on these other foreign countries.
But in reality what ends up happeningis US consumers and US producers
that export to other countries endup paying up and the US government
ends up keeping the extra money.
The selling point of, Hey, we'regonna make it more expensive for

(35:35):
others so things are better for us.
And in reality, who pays isactually US consumers and US
producers who are exporting, they'rethe ones who are transferring
the money to the US government.
I think that's a very hidden point in thisbecause this is not how it's marketed.
We're gonna put tariffs on other countriesand hey guys, you all US consumers

(35:55):
and producers, you are gonna pay morethrough your taxes and other things.

Veljko (35:59):
Well, now, in all fairness, you are leaving one group out, which
is US producers that sell domestically.

Kate (36:05):
So governments benefit and these producers that you are pointing out.

Veljko (36:08):
Correct.
Because they're gonna befacing less competition.

Kate (36:12):
Certain producers of goods that are not commodities.

Veljko (36:16):
Yes, fair enough.
In particular, what they'regonna be finding here is that
US producers, I'll quote them.

They say (36:22):
"Tariffs have also changed the pricing behavior of US producers
by protecting them from foreigncompetition and enabling them
to raise prices and markups.
And we estimate that the combinedeffect of input and output tariffs
have raised the average price ofUS manufacturing by one percentage
point." And they compare these tooverall inflation, which is about 2%

Kate (36:46):
Not a win.

Veljko (36:47):
You are accelerating the rate of inflation by 50 percent.
inflation on manufacturing goods protectedby these tariffs goes from 2% to 3%.

Kate (36:55):
But, what we are pointing out, something important that these papers
are saying is that there is a subsetof US companies, US producers that
make goods that they differentiated,that are mostly produced, perhaps, in
the US that are going to benefit fromthis compared to companies like Nike.

Veljko (37:13):
But Kate, the point that they're making is that these producers, well
you're saying differentiated, but they'renot necessarily differentiated, in the
sense, there can be a better good abroad.
It is just that now thatgood is behind tariffs.
And in some sense, I guess what'simportant to point out is that it
might a gain to a US producer, butit's at the expense of a US consumer

Kate (37:37):
because it limits their choices.
Previously I could have five differentbutters to choose from and now only one.

Veljko (37:44):
So partially because of less choice, some of it comes
from less choice, some of it comesfrom paying more for the same good.

Kate (37:51):
And I think this is another finding of the papers that we're discussing is
they actually showed that, there's goingto be less choice in terms of products.
Is that correct?

Veljko (38:03):
Absolutely.
There's gonna be less choice,but before that, I don't
think everybody understands theconcept of dead weight, right?
We economists like to talkabout dead weight, but, the
deadweight loss of a tariff, right?
What is that?
That's the inefficiency caused bya reduction in overall economic
activity, due to imposition of tariffs

Kate (38:22):
mm-hmm.

Veljko (38:22):
on imported goods.
Let's say you're putting a20% tariff on some good.
There is one effect, which is, nowsomebody's paying 20% more for that good.
That's the first number.
Then there's an effect on theretaliatory tariff and your
exporters are getting less money.
But then there's a third effectin loss of economic activity.

Kate (38:41):
People just buy less.

Veljko (38:43):
Well, it's not just ultimate products.
That's the point ofthis dead weight, right?
It could be that you are a US firmthat buys Chinese screws to make boats.
And now all of a sudden, becausethe screws get a lot more expensive,
you're making fewer boats andyou're creating less value
added
and your profits come down.
That's the kind of loss of economicactivity that comes from this dead weight.

(39:06):
And some of your importers andbuyers are just gonna substitute.
But

Kate (39:09):
It's funny that you picked boats.
I think boats is, one of US and reallyglobal preferred past times and the
advertisement of we're gonna imposetariffs, so now fewer of you can
buy boats wouldn't have worked well,

Veljko (39:24):
You're absolutely right that a lot of the effects here are on quantities.
I will mention these estimates thatare coming from this Amiti paper.
They're estimating that a 1%increase in tariff reduces imports
of that particular good and productcovered by the tariff by 6%.
So, huge degree of elasticity.

(39:45):
You increase prices by 1% of this tariff,but you're decreasing volumes by 6%.
The overall value of theproduct actually goes down.
One of the points that they're actuallymaking here is, just because us importers
are eating up all of this, this isnot good news for Chinese exporters.
Because they're exporting a lot less.

Kate (40:05):
It ends up hurting China,

Veljko (40:06):
I mean, if you're asking, who pays for these tariffs, it's US importers.
Right.
If you're asking whodo these tariffs hurt?

Kate (40:14):
Yea.

Veljko (40:14):
Both sides.

Kate (40:15):
Right.

Veljko (40:15):
Just in different ways.
There is a price channell.

Kate (40:18):
There's a quantity channel.

Veljko (40:20):
And we shouldn't forget about that.

Kate (40:21):
So you know what I am really interested, we keep talking about
all of these effects, that anegative for US consumers, negative
for US exporters or companiesthat produce here and sell abroad.
But we did mention thatthere's several winners.
One winner is the government becausethe government gets more money, in the
form of a tariff revenue transfer to it.

(40:42):
And there's certain producers.
So I'd like to talk a bit more about thewinners, and I'd like to talk a bit more
about the winners from, Fajgelbaum'spapers' perspective, because they think
they do a super interesting job intheir paper, regionally identifying
different winners and losers.

Veljko (41:01):
Absolutely.
So, they do quantify this, right?
And their quantification findsthat the gains to domestic producers
are smaller than the losses bydomestic consumers and importers,

Kate (41:15):
Oh, wait, say that again.

Veljko (41:16):
They find that the gains to domestic producers

Kate (41:19):
yeah Yes.

Veljko (41:19):
Are smaller than the losses to domestic consumers.

Kate (41:25):
The consumers are still suffering more, than the US producers are making up.

Veljko (41:29):
Their estimation of the losses to US consumers, which
includes individuals and firms, areapproximately $51 billion in 2018.

Kate (41:39):
Wow.
That's a huge number for 2018.
$51 billion.

Veljko (41:44):
yeah.
And I didn't really think about how thisclearly these papers agree, directionally.
I didn't even attempt to do the back ofthe envelope, in trying to reconcile,
some of their point estimates.
$3.2 billion a month is what Amitat al. estimate was being increased.

(42:07):
3.2 billion times 12 months,which I think compares to the
50 billion, that Fajgelbaum....

Kate (42:14):
Yeah.

Veljko (42:15):
I mean, ballpark, let's just say that you take one paper,
you're gonna be at 35, 40 billion.
The other one gonna be at 50.
One of the things that we are gonnafind is that in this Fajgelbaum paper,
the drop of the affected productsis dramatic, but foreign substitutes
largely make up for it, right?
And we're gonna see that in a second.

(42:35):
But I just wanna stick for a momentto the headline numbers, $51 billion
is the Fajgelbaulm estimate of theincrease in consumer prices, by
importers, retailers and consumers.
Then they're gonna subtract fromthese gains to us producers.
This is what we weretalking about earlier.
They raise prices.
These are 9.4 billion.

(42:57):
So you have 51 billion lossesto US consumers, 9 billion
gains to US retailers.
Then they're gonna subtract theestimate of taxes that are raised.

Kate (43:09):
This is getting complicated.

Veljko (43:11):
Well, the point is, 51 billion is how much more you are spending.
Of this 51 , some of it gets raised,goes to the government in forms of taxes.
They're gonna take that out.
Then they're gonna take out against toUS producers, and then they're gonna
ultimately conclude that the aggregatereal income loss is about $7.2.

Kate (43:32):
So 7.2 billion sounds a lot better than 51.
So basically there's a huge transferfrom US consumer to the US government
and to a subset of US producers.

Veljko (43:43):
That's exactly the point here.

They say (43:45):
" adding up these gains, tariff revenues, and the losses from
higher import costs yields a shortrun loss of the 2018 tariffs on
aggregate real income of $7.2 billion
Or Or 0.04% GDP,

Kate (44:01):
Small.

Veljko (44:02):
Very small.
"Hence, we find substantialredistribution from buyers of
foreign goods to US producers andto the government, but a small net
loss for the US economy as a whole.

In parenthesis (44:15):
"which is not statistically significant
at conventional levels.
After accounting for theparameter standard errors).

They continue (44:23):
" While we cannot reject the null hypothesis that
the aggregate losses are zero, theresults strongly indicate large
consumer losses from the trade war.
Again, redistribution from consumersto the government and producers.
" If a trade partner had not retaliated, theeconomy would actually have experienced
a modest and also not statisticallysignificant gain of $0.5 billion."

Kate (44:46):
But of course other countries do retaliate.

Veljko (44:49):
Yeah, it's like getting into a boxing match and saying, "I
lost because the other guy punchedme back." If you're playing tennis,
the other guy gets a racket.
If you're boxing, the otherguy gets to punch back.
Or gal. But it's interestingthat they're saying, everything
that's raised to taxation... yes.
It's inflation.
It's going into the pockets of thegovernment and it's regressive.
Think about it, what you're sayingwhen you're transferring money

(45:11):
from consumers to producers.
You're transferring money from people whospend money to people who invest money.
You're transferring wealth from thelower classes to the upper classes.
And this is the wrongkind of redistribution.
So it's not necessarily beneficialand yet, it helps putting the
overall numbers in perspective.

Kate (45:30):
So before we talk more about the, Fajgelbaum paper, let's quickly summarize.
We are looking at 2018 tariffs.
We're trying to figure outwho paid for those tariffs.

Veljko (45:41):
And largely we are finding that the tariffs are paid by US importers, and
yet these importers are not necessarilytransferring this price increase onto
retail consumers, or at least thereis a substantial delay in doing that.

Kate (45:55):
And then we see an increase across the board in all prices
of various goods as well.
Not only the goods that aresubject to tariffs, just because
companies spread it around.

Veljko (46:05):
I wouldn't go there because the comparison with Canada shows that yes,
there is an increase across the board, butit's not specific to the United States.
US producers of goods affectedby tariffs are raising prices.
Producers of good, specifically targeted.

Kate (46:22):
Okay.
Another finding besides, that USconsumers have, the big price cost
here is that US exporters, companiesin the US that sell to other foreign
countries, including China, endup having to lower their prices.

Veljko (46:36):
Correct.
This, idea that retaliatory tariffsare a lot more effective than US
tariffs in the first place.
It's something that Ifound very surprising.
I think we all tend to assume, in thebig conversation about the US-China
trade wars that the US has the upperhand, first because they've been
telling us constantly that's the case.
And second, I think thereis a sense of asymmetry.

(46:57):
The United States buys a lot from China.
China buys a lot lessfrom the United States.

Kate (47:02):
But it comes down to what kind of goods are we
buying and they're buying from.

Veljko (47:06):
What these papers are really emphasizing is that it's not the
sheer quantity of goods that youbuy, it's the degree of how...
substitutable... a horrible word, right?
But how easy it is to find a substitute.

Kate (47:18):
If it's a commodity good, then, you are dropping the prices by a lot.

Veljko (47:22):
The definition of a commodity is a good that is standardized, right?
And because of that, easilysubstitutable I think, for those of
us who are not steeped in the tradeliterature, the idea that the US
exports to China are a lot easier tosubstitute than Chinese exports to the
United States is perhaps surprising.
Now, one thing that we shouldmention when we say that is that

(47:42):
all of this excludes services,

Kate (47:45):
Services have been excluded because the tariffs were on goods,

Veljko (47:48):
Correct.
And the services that the United Statesexport to China are probably a lot
harder to substitute than the soybeans.

Kate (47:56):
But we have a surplus in services.
We have a deficit in goods.

Veljko (47:59):
Yeah.
The point is that when we arethinking we are the economy that
produces intellectual goods it'strue, but through the service channel.
You know, we sell a lot of IT consulting.

Kate (48:09):
Right.

Veljko (48:10):
That's not here.
That's not covered by this discussion.
I just wanna mention one paper thatcomes from China, by author's
last names, Fang, Han, and Lee.
And this is a working paper, 2023.
"Who pays for the tariffs and why?At Tale of Two Countries." And it's
interesting because they're lookingat this from their own side of the

(48:30):
equation with their own prejudice.
They find the same results that theUnited States tariffs are paid by
United States importers and theChinese tariffs are kind of split.
The paper we mentioned wasfinding about a 50 50 split.
They're finding a 60 40 split.
So they're actually finding that60% is absorbed by the Chinese
importers and 40% by the US exporter.

(48:51):
So ballpark, they're finding very similarfigures and also this substitute effect.
And yet I think it's interesting to lookat researchers coming from these two
countries, approaching this researchwith their own biases, being equally
surprised by the same set of results.

(49:11):
One finds 50 50, the otherone is finding 60 40.
Fairly close enough I think, to giveus some reassurance that this is real.
As we are concluding this conversation,

Kate (49:20):
So we are summarizing before we switch to the interesting
political, effects pointedout by Faujgelbaum's paper.

Veljko (49:27):
Absolutely.
This is basically their mainfindings and their common findings.
Now, you are absolutely right,out of the three, it's the,
Fajgelbaum, or Fajgelbaum.
I think it's Fajgelbaum.
I had to Google it.
The paper published in the QuarterlyJournal of Economics, that mostly
gets back to the political side.
And they're gonna land us on a paradox.

Kate (49:48):
Our listeners should take a look at figure five, six, and seven.
They have a map of the US withhighlighted counties and these effects
that we'll talk about at the countylevel, which these maps are super cool
because you see the map of the US andyou can see county by county impact of US
and the retaliatory tariffs on importers.

(50:10):
And then the same on exportersand then also on real wages.
Those graphs are great.
Figures.
Figures,

Veljko (50:17):
Yeah.
Yeah.
They are.
They're really interesting to look at.
But we were talking about thethe political findings.. Do you
wanna quickly summarize those?

Kate (50:23):
I would like to summarize.
So basically they show severalvery interesting results.
Number one is that in 2018, reallyincreased tariffs for areas that
we will call battleground areas.
Those areas really have a final say onthe vote in the presidential election.
And they're implying that this wasdone in order to gain political

(50:47):
votes in those battleground states.

Veljko (50:49):
They impose tariffs on products that originate from battleground states.

Kate (50:54):
That's right.
That were produced in battleground states.
Interestingly, if you look acrosscounties and areas that vote either
largely Democrat or largely Republicanaround the 2018 tariffs, you will
not see any preferential treatmentfor either one of those areas.
Both of those areas that either votevery Democrat, very Republican, don't

(51:16):
get much benefit from the tariffs.
The areas that really benefit from thetariffs are those that produce goods
in battleground areas, the swing areas.
This is where you canreally gain the votes.
That's one interesting finding.
Another interesting finding is whenyou look at the overall impact of
things, including the US tariffsand the retaliatory tariffs from

(51:42):
other countries, it results in lowerwages, or in real wage losses.
And they actually map it county by county.
Where do we see the largestwage losses in the US?
It's going to be in areas thatproduce commodity type products.
In my example, soybeans oragricultural products, interestingly.

(52:07):
Those are the areas that generallyvote more pro Republican in elections.
So interestingly, when you look at theimpact of tariffs on the US map and
overlay the voting patterns, what yousee is counties that suffer the most are
counties that vote largely Republican.
This is coming mostly from the wayretaliatory tariffs have worked from

(52:32):
China and other countries becausethese areas produce commodities.

Veljko (52:37):
At the time, I remember the reporting in the media and
they were crediting China with astrategic master's plan, right?
There was this impression thatmost of the retaliatory tariffs
were targeted at the red states.

Kate (52:50):
They have this figure seven, which has a graph and it shows the
higher the percentage of your Republicanpresidential vote, the higher
the country import tariff change.
The retaliatory tariff change.
It's because these areas thatlargely vote for Republican
presidents end up also being areasthat produce a lot of commodities

Veljko (53:11):
China said we are gonna target products for which there are
substitutes, and of course that meantagricultural products first and foremost.
And of course, agricultural areas,on average tend to vote Republican.

Kate (53:24):
No, it's not.
It's not only agriculture, but it isareas that produce, commodity like goods.

Veljko (53:30):
Big industrial production in the United States nowadays is concentrated
in the non-union Southern red states.
Implications of these are subtle.
Because if you are thinking aboutthis in terms of electoral gains for
the party that imposed the tariffs,right now you're putting yourself in
the shoes of the Trump administration.

Kate (53:51):
You want to gain the votes of those in swing counties, in battleground areas.
That's why you're giving thebest tariffs protections to
products produced in those areas.

Veljko (54:02):
this in a cynical manner in terms of, my chances of winning the
next election, then this is great.
You're losing some votes whereyou don't exactly need them,
where you have a large margin.

Kate (54:11):
The republican areas are the ones that are hit the
most, see the worst outcome.
So perhaps you lose some of thevotes, but you still staying
well above 50% there probably.
If the tariffs, especially theretaliatory tariffs are making
those areas worse off, you candepict it as a defense mechanism...

Veljko (54:29):
That's the perversion here.
Actually in the areas really worst hitwith these retaliatory tariffs, the
Trump administration made electoralgains because they managed to sell
themselves as being tough on China.

Kate (54:40):
The reality is this all happened because the initial tariffs were imposed
in the first place, and that made it moredifficult for these producers to trade
and sell their product internationally.

Veljko (54:51):
And in contrast, you have electoral gains in these contested
vote counties because you protectedAmerican jobs in the first place.
That's the $9 billion of US producersurplus that you created, which is
concentrated in these contested areas.

Kate (55:08):
Anything else you wanna talk about on this political side?

Veljko (55:11):
I just don't know if we made the political point as well as we
could and as importantly as we should.
Because effectively what this meansis that a party can impose tariffs,
create redistribution effectswhich are regressive in nature.

Kate (55:29):
Let's translate that.

Veljko (55:30):
We define regressive earlier.
We are redistributing from consumers.
And this burden falls relatively moreon the medium and lower class, to
shareholders who tend to be wealthier.
So it's regressive in the sense thatit's redistributing from the poor to
the rich, for lack of a better term.
And create a net welfare loss,

Kate (55:52):
To some producers, to some shareholders.
We have to differentiate

Veljko (55:55):
I'm saying net net welfare loss, right?
The gains to some groups are clearlysmaller here than the losses to
other... But the point is, youare enacting economically policies,
which are net negative for the USeconomy and for US citizens and yet
walk out with an electoral advantage.

(56:16):
Which is not purely predicated on peoplenot understanding what's happening.
It's predicated on the fact that thepain is concentrated in areas where
you have a solid electoral lead.

Kate (56:29):
So the areas that you inadvertently hurt the most are the ones that
support you the most to start with.

Veljko (56:34):
You're hurting your own.

Kate (56:36):
It's not that you are hurting your own.
When we look at the US plan for tariffs,it's that they were really helping out
areas that were battleground states.
They were helping goodsproduced in battleground areas.
If you looked at Republican votingareas and Democrat voting areas,
the effect was quite similar.

(56:56):
The tariffs were not helpinggoods produced in those areas.

Veljko (56:59):
It's the retaliation that hurts.

Kate (57:02):
It's the retaliation from China, but other countries perhaps too, that
is creating this effect of the worstoutcomes happen to be born by counties and
areas that vote strongly, very stronglyfor Republican presidential candidates.

Veljko (57:19):
I think that before we conclude, perhaps we can spend a
couple of minutes into, again, wedo want to have separate episodes
talking about the current tariffs,

Kate (57:29):
You have a paper on tariff exemptions, which is a very important
topic, it because many companieswill be exempted from these tariffs.

Veljko (57:36):
And I wanna talk about the formula, right?
I think that there is a large part ofthe commentary that has claimed that
the tariff formula is utter nonsense.
That there is no logic behind.
but it's not true.
There is logic.
It's flawed, it'smistaken, it's misapplied.
And yet there is a logic behind it.

Kate (57:53):
I'm afraid that it'll be a boring episode, but I'm game, let's do it.
You are doing an advertising campaignfor our next few episodes, right?
Is that what we're doing here?

Veljko (58:01):
Well.
I guess we got carried away.
But, as we conclude today, and withoutgetting into too much detail about what's
happening right now, because we'll talkabout it in the next episode.... what
can we learn here that applies to today?
And what maps and what doesn't map?

Kate (58:15):
We looked at three papers today and I think all three papers
had very similar conclusions.
The biggest conclusion is thatthe predominant majority of US
tariffs imposed on their foreigntrading partners is actually born
or paid for by the US consumer.

(58:35):
So the examples that we useis, for example, a 20% tariff.
Out of that 18 and a half percentwould be born by US retailers,
ultimately US retailers.
So that's number one.
Number two is that when you lookat actual retail prices, so prices
in Walmart or Target, you actuallydon't see large price increases.

(58:59):
So who is eating up theseincreases in import prices?
It's going to be Walmart'sTargets, perhaps Nikes, et cetera.
Number three, if you are a companyin the US that makes goods and sells
them to foreign countries, so if youare an exporter, you are going to
be hurt by these tariffs imposed bythe US on foreign countries because

(59:22):
there'll be retaliatory tariffs.
So if you are selling goods thatyou make in the US that are not
differentiated commodity goods likesoybeans, as we've been joking in
the episode, you are dropping yourprices, I think like close to 7%.
So it's three key things and then,I would like to highlight the most
interesting one to me is the politicalone, but before I get to the political
one, what do you think about thosethree points that I summarized?

Veljko (59:46):
I think you're spot on.
And yet I am wondering, howdo they map to the present?
And in particular, in both cases,China was special, the tariffs we just
discussed in 2018, they started bycovering a variety of countries with steel
and aluminum with the washing machines.
But then effectively, the second phaseand the majority of the tariffs were
applied on China, and now we are seeingvery similar mechanics at play where we

(01:00:10):
were told, huge tariffs on everybody andthen most of the studies were removed.
We have a 10% rate on everybody, butthen Chinese are a hundred percent plus.
I was reading some commentary thatwas making the point that you
cannot necessarily extrapolate forwhat happens when you impose a 20%
tariff rate to what happens when youimpose a hundred percent tariff rate.

(01:00:30):
When you impose a 20% tariffrate, a lot of prices go up.
When you impose a hundredpercent plus tariff rate.
Commerce just ceases in most cases.
So I think that, we canextrapolate from this lesson
that the foreign producers arenot gonna pay for this tariff.
And yet I'm not sure we shouldbe expecting the same degree

(01:00:51):
of gains to US producers.
You're expecting now all of a suddena little bit more substitution.
So I don't think you canlinearly extrapolate right?
What happens with the 20% tariff,multiply by six and say, this
is what happens with 120%.

Kate (01:01:05):
We just gotta wait and see right now.

Veljko (01:01:08):
Correct?
And then I also think the fact that,these tariffs are covering a large number
of countries at the 10% level... weare gonna see less substitution effects.
There's one figure from the Amit paperthat we didn't mention, which actually
tries to estimate job creation costs.
They claim that if you took theoverly optimistic view that this

(01:01:31):
trade war is gonna create 35,000 jobs,

Kate (01:01:34):
Oh yes, I remember that.

Veljko (01:01:35):
They say, we lost 35,000 jobs in the steel and aluminum
es over the last 10 years.
So if this tariffs were capableof bringing this back, how
much would this cost us by job?
And to take this estimate of dead weightloss that we spoke about earlier, that's
a very conservative estimate of loss.
That's just the dead weight.
They divided by the number of 35,000 jobs.

(01:01:58):
Effectively you are creating a job forevery $232,000 of dead weight cost.

Kate (01:02:05):
That's probably four or five times the salary of
a steelworker, I would assume.

Veljko (01:02:09):
They actually claim that the average salary of a
steel worker is $52,500 a year.
So it would be a lot easierto just write them a check.
Now, of course we know that a jobis a lot more than a paycheck,
human dignity and so forth.
And yet it's a very interestingquantification of that.
Even if you take some extremely optimisticassumptions about how many jobs is this

(01:02:32):
going to create, it's still a veryexpensive way of creating those jobs.
Back to the conversation that we werehaving, I think that the danger here
is to extrapolate from 20% tariffsto a hundred percent plus tariffs.
And the other unfortunate limitationof all of these studies is
that all of this is short term.

Kate (01:02:51):
Yeah.
I would like to throw in a fourthone now, which to me was the most
interesting the political effects.
This is going to bethe Fajgelbaum's paper.
They split up the US counties, buy theirvotes, Democrat and Republican votes.
And what they show is that the 2018tariffs were especially beneficial to
those areas that are what we callbattleground states or swing areas.

(01:03:14):
Those areas where the votesfor presidency are very close.
This was perhaps done to gainvotes from those swing areas.
From those battleground states,they've seen the most positive effect
of tariffs because products thatthey produce have been protected

(01:03:34):
most by the 2018 wave of tariffs.
But counties that vote largelyDemocrat or largely Republican, didn't
see much benefits of these tariffsfor the products produced there.
What's interesting, if you overlaythat with the retaliatory tariffs from
China, which ended up being mostlyon commodity goods that are easily

(01:03:55):
substitutable, you end up actuallyseeing even a different story and
that the counties that mostly votedRepublican ended up being hurt the most.
They saw the biggest lossesagainst these counties generally
produce commodity goods.
And so that's a political effect there,how the tariffs were really targeting

(01:04:17):
the battleground states and then how theretaliatory tariffs actually ended up
hurting the Republican counties the most.

Veljko (01:04:26):
So if anybody from the European Union is listening and they're
trying to figure out how to put downretaliatory tariffs right now, they
shouldn't target red states, but theyshould target contested areas, and
that is more likely to have a lever on

Kate (01:04:42):
On the final vote.
, that's interesting.

Veljko (01:04:45):
Yeah.
Let's see if that gets us accusedof treason for suggesting how
to retaliate . Okay I think we'vesaid a lot about these three papers.
It's interesting because we canlearn something that applies to the
present, but there is a lot more.

Kate (01:04:59):
Yeah.
We're gonna have a mini series and there'sgonna be a few more episodes to come.

Veljko (01:05:02):
Specifically on trade tariffs and the things we
were trying not to talk about.
When it comes to our audience one of theengines of our decision to talk about
tariffs is your questions that you'vebeen so enthusiastically sending us.
So please do keep them coming.
We look forward to yourinput and your feedback.

(01:05:23):
Do let us know if you have any questionsabout trade tariffs and, related topics,
or if you have any questions in generalthat you would like us to explore.

Kate (01:05:32):
Today, we looked at the impact of 2018 US tariffs
and who really pays for them.
We find that these tariffs endup being paid by US retailers.
And that US exporters, those firmsthat produce here and sell to other
countries, end up having to lower theprices that they charge for their goods.

(01:05:54):
Overall, tariffs createcertain winners and losers.
The loser is largely the USeconomy and US retailers.
The winners are the US governmentand certain producers in the US,
specifically the producers of prettydiversifiable on non-commodity type goods.

Veljko (01:06:13):
And if I can add one point that I found surprising, after reading these
three papers, I walked away with anunderstanding of relative bargaining
power very different from where I started.
I was giving for granted for avariety of reasons that the United
States had the upper hand in tradenegotiations vis-a-vis China.
A lot of the findings we see here

Kate (01:06:34):
Yeah.

Veljko (01:06:34):
seem to reveal that's really not the case.

Kate (01:06:37):
We're probably gonna do more research and throw it into the next
episode where we will actually talkabout which goods are sold from
China to the US and which goodsare sold from the US to China.

Veljko (01:06:47):
I also think it would be very interesting to talk about, ultimately
you're finding that this was bad forthe United States, depending on which
estimates you're taking, a quarter of apercentage point of GDP, half a percentage
point of GDP somewhere there at the sametime, this was bad for Chinese exporters.
There's literature here that wedidn't really look at, but that

(01:07:08):
effect was a bigger proportion of GDP.
Partially because China exportsmore, partially because China's
GDP dollars is, is smaller.
So, you ultimately have theUnited States loses a quarter to
a half percentage point of GDP.
China loses one and a half totwo percentage points in GDP.
So, when you're trying to evaluatethe success or failure of these

(01:07:30):
tariffs, if the goal is to imposepain on China, which is the way the
Trump administration has often framedit, then that goal is achieved.
If the goal is to create jobsin the United States, then
that goal is not achieved.
If anything, the dead weight affectspoint to eventually a net loss of jobs.

Kate (01:07:49):
But the government ends up getting more money.

Veljko (01:07:51):
Correct.
In the subsequent years, US importsfrom China dropped by about, I know
the figure for 2020 by $32 billion.
And at the same time, US imports fromVietnam, Mexico, and a handful of
other countries went up by about 35.

Kate (01:08:07):
So it's just got substituted.

Veljko (01:08:09):
Correct.
So

Kate (01:08:10):
Whatever was produced in China is now produced in Vietnam
and Mexico and sold into the US.

Veljko (01:08:15):
Correct.
There is a trade warbetween the US and China.
China loses the United States loses.
There are some thirdparty countries out there.
who are the ultimate winners.

Kate (01:08:25):
Let's finalize this.

Veljko (01:08:26):
Let's do close this down.
As we said, please, to our audience,as always, we really benefit from
your likes and recommendations.

Kate (01:08:36):
Please, recommend us to your family, friends if you like it, and continue
listening to our episodes future and past.

Veljko (01:08:43):
And stay tuned for additional discussion on trade tariffs.
Bye-bye.

Kate (01:08:48):
Bye.

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