Talking Tariffs, Part 1: Tariff Impact Studies Rely Upon Questionable Assumptions

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[Editor’s Note: This is the first part of a three-part series that will analyze the state of mainstream perspectives of the impact of tariffs, as well as delve further into the history of Section 232 and China’s role in the current trade dialogue.]

Consultants internally often pose a question to one another – do you want a client who knows he doesn’t know something, or would you rather have a client who doesn’t know what he doesn’t know?

It turns out that phrase came from the famed economist John Kenneth Galbraith, who actually used it to describe forecasters: “We have two classes of forecasters: Those who don’t know … and those who don’t know they don’t know.”

Most consultants (and forecasters) would likely argue one would rather have the former — it’s better to work with someone who knows he doesn’t know something than one who doesn’t know what he doesn’t know.

The same argument applies to trade and tariffs.

The mass media and much of the public has embraced the notion that tariffs are bad and continued “free trade” — with China — is good.

But is it? Does the mainstream press know what it doesn’t know?

We will come to this question shortly — but first, the conventional thinking.

Koch Companies Trade Study

According to a recent Koch Companies study on trade, the U.S. economy will see some very negative impacts on the economy as a result of President Donald Trump’s trade war, including:

  • Macroeconomic losses, which project declining GDP of 1.78% and a long-term impact in 2030 of 1.25%
  • Household financial losses of $2,357 per household in 2019, which compound to $17,276 in spending power over a 12-year time frame (2018-2030) in the form of lower wages, higher prices and lower investment returns
  • Increased unemployment
  • Production losses by 2030 modeled as a loss of 1% against the baseline for agricultural and services sectors and a manufacturing production decline of 2.5% from baseline

All of the above appear as reasonable conclusions one might make based on a standard methodology using the GTAP model and database, which ironically was the very same model used by the Department of Commerce to come up with the rationale for imposing Section 232 tariffs in the first place! Other countries have also used the GTAP model to formulate trade policies.

The Koch Companies’ study stands in good company. Multiple additional governmental and pay-to-play studies have come out arguing similarly against tariffs. Here are just a few:

So why in the world should we question these studies?

Because the studies don’t tell the whole story.

Media Bias, Not Fake News

Forget about fake news: legitimate studies have confirmed anti-tariff media bias.

A study conducted in 2005 — after the Bush steel tariffs of 2002 — sought to test a prediction that, “newspapers will devote more space to the costs of tariffs than to their benefits…” The study sampled 123 stories on trade from The New York Times and 177 stories from the Wall Street Journal (the stories ran during the Bush steel tariffs of 2002 from Jan. 1 through Sept. 10).

The WSJ also showed a “slant” toward free trade as measured by more sentences criticizing tariffs than supporting them, compared to The New York Times, according to the study methodology.

Not surprisingly, the results showed newspapers covered the “costs” of steel tariffs more than the benefits and the authors concluded the results suggest “that mass media will weaken the power of special‐interest lobbies relative to unorganized interests.”

Simply put, one should expect more anti-tariff media coverage than pro-tariff coverage.

Before we dive further into the studies, let’s re-examine the history of Section 232 and what cases have resulted in presidential trade action.

Part 2 of this series will be published Friday, Feb. 7. 

Comment (1)

  1. James Murphy says:

    Notice that the studies are done by or at the request of those who will lose with tariffs and that none of the takes a serious look at our real world experience with tariffs. For a century and a half the USA was the most tariff protected nation on earth. Any serious look at that history must conclude that we prospered.

    In “The Myth of Free Trade the Pooring of America” Dr. Ravi Batra summed up the real world experience of tariffs in the range of 40-50 percent after the Civil War this way.
     
    “Between 1869 and 1899, import volume of international trade fell far short of the growth in economic activity. Foreign competition became insignificant to most U.S. manufactures. Here, then, was the classic profile of an inward-looking economic system—one for which the advocates of free trade reserve their direst predictions. Here is a society which, according to their doctrine, would fritter away its precious resource; a society where the absence of foreign rivalry would lead to choking prices and shoddy products; where producers would have no incentive to innovate and improve; in short, a society that would gradually slide into mediocrity and even poverty”
     
    “What actually happened over these years is only too well known. The gross national product of the United States quadrupled between 1869 and 1900 when measured in constant (1929) dollars. In spite of a mushrooming population, real wages jumped 50 percent, retail prices tumbled 37 percent, and annual per capita income rose from $223 in 1869 to almost $500 in 1900.”

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