Liberation Day notes

Very under-baked notes

• trade deficits are not de facto “unfair” or “protectionist,” so that’s dumb

• speculating about the impacts is still just speculating, but the opening salvo is worse than expected

• is there bigger game afoot? maybe?

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Liberation Day notes

Yesterday was a busy day, and then, like most people, from 5pm onwards, I spent a few hours trying to make heads or tails of the Liberation Day announcements.

These are really just a few very undeveloped thoughts.

Where do the numbers even come from?

This is the first time the administration did something truly baffling.

The various tariffs appeared to have no discernable rhyme or reason . . . I mean, what do these numbers even mean:

Why does Japan get a 46% and a 24%, while Singapore get a 10% and a 10%?

As best as I can tell, this guy cracked the code for how the administration came up with the tariff numbers (because twitter is amazing, as per usual):

Orthonormalist

On a plot, it looks like this:

Zygi

In other words, the tariff rate is the trade deficit expressed as a percent (with a 10% floor). So, (Exports - Imports)/Exports.

So, if you export a lot to the US, but import very little from the US, then your tariff rate will be high.

Well, at least the numbers are not random, but as a method for developing tariff rates, that strikes me as pretty dumb.

• Reciprocal tariffs are defensible and coherent, even if flawed, (and it’s true, that other countries, including many of the complainers, are far more protectionist than the US)

• Even pure-play protectionism, i.e. rebuild the manufacturing base, is defensible and coherent, even it’s not sound economics (and unsound economics is the starting point of most economic interventions). The sociological argument is stronger.¹

But the trade deficit is a poor proxy for either of those things.

Any smaller country that makes something we like is going to have a big trade deficit. That doesn’t mean they are being “unfair” (i.e. reciprocity) or that they threaten some key industrial base (i.e. protectionism).² If you’re going to use the trade deficit, then at least weight it by population, or something. Likewise, there are relatively protectionist countries (e.g. the UK) that have no trade surplus with the US, and therefore have only the 10% floor.

It seems gimmicky and rushed, and it’s hard to defend on principle. It wouldn’t surprise me if there’s more to the “trade deficit” than meets the eye (in at least some cases), but as a proxy for some genuine gripe, it’s very crude.

What does it mean?

It’s still unclear what real economic impact the tariffs will have, although, I’ll be honest, the opening salvo is worse than I was expecting. (Even if it’s still true that there is little or no demonstrable impact, yet, other than on asset-prices, of course.)