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In this week’s Grumpy Economist Weekly Rant, John Cochrane uses basic economic principles to examine a central claim in current trade debates: that foreigners can be made to pay US tariffs. Rather than focusing only on who makes the initial payment, Cochrane argues that the analysis must follow where the money ultimately goes and what the transaction means in terms of real goods and services.
Even if foreigners bear the full burden of a tariff, Cochrane explains, they ultimately need to obtain dollars by selling more goods to Americans—or Americans must use the foreign currency they receive to buy more goods abroad. The same logic applies to claims about predatory trade and intellectual-property payments: receiving more money from abroad ultimately matters because of what that money can buy. Trade policy, he argues, is clearer when policymakers look beyond the direction of the payment to the underlying exchange of goods and services.
Transcript
Hi. I’m John Cochrane, senior fellow here at the Hoover Institution, and welcome to my Grumpy Economist Weekly Rant.
Today, I’m gonna show you how some simple basic economics can clarify a lot of confusing discussions in trade. There are a few basic tricks we economists have to clear through the smoke of policies.
First, follow the money past the initial recipient. See where it goes. Second, look past the money to the underlying goods and services.
Recent trade discussions brought these adages back to my mind. Former Fed Governor Stephen Miran attracted a lot of attention with careful calculations that foreigners pay for the tariffs. President Trump talks frequently about making foreigners pay for things. And I heard a lot about China’s supposedly predatory trade practices.
Let’s get past the kerfuffle over whether, indeed, foreigners bear the burden of tariffs. Suppose, for the sake of argument, that they do, 100%.
Where, then, do foreigners get the money to pay those tariffs? There’s only one way to get dollars. You have to sell more things to the US. If they send us yuan or euros instead, there’s only one thing we can do with foreign currency: buy more foreign goods.
Now, I happen to think that’s great. Put stuff on boats, send it to the US for free. But I’m not sure that President Trump, Steve Miran, and the other trade warriors want to increase US imports.
Look past the money. Suppose China sends us 100 cars and we send them 100 tons of wheat. We put in a tariff. So, for every car that China sells in the US, they have to give another car to the US government. Look past the money. China has to send us 200 cars in return for 100 tons of wheat. The imports rise, exports fall.
The president and his trade warriors have a good businessman’s intuition that getting people to pay you is a good thing, but they forget the point of getting people to pay you is what you do with the money: buy more stuff.
I heard predatory trade bandied about a few times recently, which set me off. The most interesting, the speaker acknowledged that colonialism was predatory. The UK forced China and India, so goes the claim, to put things on boats and send them to England.
But in the next sentence, the speaker claimed that allowing China to enter the World Trade Organization was the worst policy mistake of our generation because, well, China puts things on boats and sends them to us at artificially low prices.
Well, make up your mind. Either colonial extraction was a great favor by England to China and India by inducing China and India to develop their export industries, or the exact same act is a favor to us, not to them.
People complain that China steals intellectual property. Okay. Suppose China paid royalties on all the intellectual property it uses. What would we do with the money? Buy more stuff from China. Well, fine with me, but is that what you really want?
Now, there’s lots more to trade, and I’m focusing on one narrow point. Even if Miran’s optimal tariff argument is right, and foreigners do pay for the tariffs, and acknowledging that means they put stuff on boats and trucks and send it to us, do we want to do that?
Is the US’s position and role in the world to use our market power, including military force, to get the rest of the world to put things on boats and send them to us for free? If you don’t wanna send the Marines to Mexico to take their workers’ belongings, just why is doing the same thing by trade policy a wise policy overall?
Well, back to the main point, a little Econ 101. It always helps to ask where the money goes for a few steps, and it always helps to look past the money and figure out what a policy means in terms of the underlying real goods and services.
Thanks for listening. And if you enjoyed my Weekly Rant, please click to subscribe.
John H. Cochrane is the Rose-Marie and Jack Anderson Senior Fellow of the Hoover Institution at Stanford University. An economist specializing in financial economics and macroeconomics, he is the author of The Fiscal Theory of the Price Level. He also authors a popular Substack called The Grumpy Economist.