Yes, Tariffs Reduce Imports, but They Also Reduce Exports
Summary
International Trade Theory: The podcast discusses the Learner Symmetry Theorem, which posits that under certain conditions, an import tax is equivalent to an export tax, challenging traditional views on tariffs.
Trump's Tariff Strategy: The episode examines Trump's announcement of 100% tariffs on China and the market's reaction, highlighting the discrepancy between economic theory and real-world currency responses.
Currency Implications: It is noted that tariffs should theoretically strengthen a country's currency, but in practice, Trump's tariff announcements often led to a weaker dollar, suggesting other influencing factors.
Retaliation Concerns: The potential for foreign retaliation to US tariffs is discussed as a factor that can negate expected currency strengthening and complicate trade dynamics.
Economic Advisers' Perspective: Stephen Moran, Trump's economic adviser, argues that tariffs could be used strategically to raise revenue and strengthen the dollar, partially offsetting consumer costs.
Market Reactions: The podcast explores why markets react negatively to tariff announcements, considering factors like potential retaliation and future Federal Reserve policy adjustments.
Complexity of Economic Models: The discussion underscores the complexity of applying economic models to real-world scenarios, where multiple variables and strategic considerations come into play.
Transcript
[Music] This is the Human Action podcast where we debunk the economic, political, and even cultural myths of the days. Here's your host, Dr. Bob Murphy. Hey everybody, welcome back to Human Action Podcast. Today I'm going to be speaking about international trade theory. So this episode will be particularly relevant for those of you who are trained economists or who are getting a masters or higher, you know, if you're a student. Um, but also of course undergrads are welcome to listen in. And those of you who follow these arguments, especially like over Trump's tariffs and things like that, this will all be relevant to you folks and I'll try to keep it accessible. But there is among other things what we're going to cover is what's called learner learner symmetry theorem and it goes back to this famous 1936 article in uh economica by Aba Learner who in case that name is familiar to you in Austrian circles he was one of the market socialists right so it was Oscar Langga and Abal learner who tried to defeat Mises and Hayek in the socialist calculation debate by appealing to the idea that oh the central planners could just mimic a market economy just tell all the production you know the the managers of the factories or whatever we're going to announce this vector of prices and then you go ahead and optimize accordingly and but we can improve on what the market would do right when they would go ahead and do it. Anyway, so they're they thought they were showing Mis's critique of socialism can't saying we can't calculate can't be right because we could just mimic the market economy if we wanted to. Right? So anyway, it's same guy, but he in 1936 had an article called the symmetry between import and export taxes. And again, this is pretty famous if you go on in economics and talk about international trade. this is like a baseline result. So, as I'll explain as we go through this episode here on the Human Action podcast, he makes a lot of simplifying assumptions. And so much of the work in international trade theory since this came out has been to try to generalize the results and see, you know, how much does his counterintuitive result rely on these unrealistic assumptions and blah blah blah, right? But anyway, I thought it would be good for me to go ahead and spell this out because it is an intriguing result. Then once you think it through, it's like, "Oh, it's obvious." But at first when you hear it, it sounds crazy. All right, so let me uh let me give you the the news hook just, you know, in case you're wondering. Yeah, this sounds like it might be a lot of brain processing. I don't know if I want to deal with this, Murphy. So the news hook was recently, I think it was October 10th, Trump came out saying he was going to have 100% tariffs on China. Markets went haywire. And then I saw this interesting tweet where a guy said, what's funny is that Econ 101 says that when a country imposes a new tariff, it should make its currency strengthen. And yet every time Trump has done a surprise announcement with tariffs, the dollar falls. Haha. Or something, you know, something like that. And then people were piling in the comments trying to explain what, you know, why why is that and whatever. And people were bringing up learner symmetry theorem. So to be clear, learner symmetry theorem relies on that mechanism, right? So it's not that that's actually an explanation as to why the econ 101 thing is is off. And by the way, I don't think I learned this in econ 101. I think this is more like econ I don't know 401, let's say, um because it's kind of, you know, takes it to the next level. But in any event, that was kind of the news hook for this. And then that's that's what makes me want to explain it. And also, we're not merely going to talk about the learner symmetry theorem here in this episode. I'm going to talk more broadly about the fact that what happens if your c when you take into account the impact on your currency strength from a tariff and this is interesting because um here on the human action podcast Steven Moran was the guy who wrote this document and Stephen Moran is now the head of Trump's Council of Economic Adviserss. Yeah, this was the Human Action podcast episode that we aired it back on Valentine's Day, February 14th, 2025. Okay. And the title we had at the time was unpacking the document that spells out Trump's tariff strategy. All right. So, I had my guest for that episode was Josh Hendrickson. And so we were going over this 41page document that had been put out in November of 2024, right? So after or just as Trump is winning his re-election um but before he's sworn in. And so Steven Moran, who among other things, he's a Harvard PhD in economics, right? So this isn't some guy from Wall Street or something that just, you know, being friendly to Trump and then gets this this post. I mean he's a Harvard trained economist in anyway he's was made Trump's chair of of the council of economic adviserss and so in that document he was explaining how to use tariffs as well as other progrowth reforms to uh solidify the dollar's status as the international reserve currency but also reduce the trade deficit and so on. Okay. So, one of the things that uh Moran pointed out in that paper was he was saying a lot of the critics of Trump who don't like tariffs say that it's going to hurt consumers, but they're overlooking the fact that the US being a big player on the world stage if it imposes large tariffs among other things that will lead to a strengthening And then so that that means that consumers won't be hurt as much as the critics of the tariffs might lead you to believe because there there's this offsetting effect that the tariff is not going to make foreign goods uh make them more expensive to the same degree that you might have originally thought because the dollar is going to strengthen and partially offset that result or that effect. Okay. So, I'm just saying that this this notion that the currency might strengthen in response to a new tariff being imposed isn't just some weird thing that some market socialist from 1936 said, but it's not relevant. It's something that the guy Trump picked to be the head of his council of economic adviserss. It's one of the effects that he cited when he was trying to explain why tariffs are not as awful as the critics would have have you believe and that it's not just oh it's just a tax on consumers and it's going to make everything more expensive at the grocery store and he was trying to say no they're overlooking this obvious effect that the literature has you know known for whatever almost a century now okay so this isn't like some weird partisan thing okay so these are all related but then the again the the issue was and I went to verify to see if the guy who was laughing about um you know the the the dollar not responding the way that people thought because he got the the point was when Trump imposed that or made that announcement at least against some currencies the dollar fell right and so um you know again I I saw a guy saying this is funny that they they say that econ 101 yet it doesn't happen every time Trump's done that the dollar's fallen so I didn't go back and terify with each particular episode, but I was noticing that on prior occasions when Trump would make a particularly aggressive announcement that kind of, you know, rattled markets. It's not just that stocks would fall, but the dollar would fall, too. Okay? And so then, you know, that's that's one of the issues is why why is that the case? Okay. So, that's kind of the stuff I want to touch on here. I'm not going to give you folks any definitive and here's what I think and the case is closed now that you know the truth with a capital T you can move on. That's not my purpose in this episode. I just want to link some of these things together and give you the intuition just so you know what people are talking about. And again, like I said, it it's a neat result. It's it's counterintuitive at the least. And it's just I like stuff like that economics, right? where you might think, oh, the way to um help women is to have paid family leave, right? Like to to say if you if you're uh you know, a full-time employee and you get pregnant, then we'll give you a full year off and and with pay. And you might think that that's good. That's pro-women or something, right? And actually, not necessarily because other things equal. That would make employers more reluctant to hire women particularly if they're married and you know in their mid to late 20s because those you know statistically they're way more likely to get pregnant that if you hired some guy or a woman who was unmarried or a woman who was married but she was 50, right? So that's and and so that where would that show if they did hire them? There might be an impact on how much you paid them because implicitly you would be factoring in there's a higher chance that I'm going to have to pay them when they don't come to work for a year. And so how much would I agree on the front end to pay them? Well, clearly that's going to other things equal reduce the amount you'd offer them. So it the people who are hurt the most by a measure like that are women. you know, a married 27 year old woman who isn't planning on having kids, right? Because she's going to be lumped in statistically with the people that are most likely to take advantage of that mandated option and, you know, suffer the the consequences accordingly. Okay? So I'm just saying in general that sort of thing happens all the time when you study economics particularly from a free market perspective where it looks like oh government interventions that aim to have this particular effect either cause the opposite thing or there's some mechanism that they don't take into account that makes it disappear. Okay. So let me go ahead and jump right into the learner symmetry theorem. Also, let me just mention if you're interested in the history of economic thought, this is a neat little article to read because it's it's not that difficult. I mean, there's some math and stuff in it, but it's not uh incomprehensible if you're a modern trained economist. But his his motivation um let me just read the first paragraph here. This note does not arrive at any conclusions not previously obtained by Bastable, Marshall and Pagoo, but it shows the nature of the slip which which led Edgeworth to conclusions contrary to theirs and demonstrates the applicability of Marshall's quote offer curve apparatus to the elucidation of this problem. All right. Then he's got this real long footnote where he's going through Edgeworth and that's the you know the Edgeworth box guy if if you're you know if you've ever used those devices in your classroom instruction and the point is Edgeworth had disagreed with some of these writers on the impact of an import you know of a tariff versus an export tax and he and Edgeorth thought he had isolated that no there there's clearly a difference there and these other writers who thought otherwise cuz they you know the math misled them and what Learner what Learner is pointing out is no Edgeworth just he was focused on what the government did with the revenue and Edgeworth erroneously thought that his conclusion like he was getting a different conclusion because they screwed up their analysis when he was focusing on the the source of the tax revenue but really Edgeworth's conclusion flipped because of how the government was spending the All right. And then what makes it extra ironic or funny is uh so this is learner talking. He says um one purpose of this note is to exonerate the mathematical method from Edgeworth's error and then he's got a dash a task in which I am emboldened by my experience in having repeated this error in a seminar at the London School of Economics. Okay. So my point in case you kind of got lost there is Learner is sort of taking Edgeworth out to the woodshed saying, "Oh no, he's he messed something up. Let's let me spell this out. You can see why what's going on, you know, the real situation here." But then in a footnote, he says, "By the way, this error that Edworth made in print, I also made myself when I was presenting this material, you know, beforehand at the London School of Economics." And then now, you know, I came to realize, oh yeah, I just screwed that up. And so here, let me now write this note to Economica to explain Edgeworth's mistake that I repeated. Okay. So anyway, big picture just to give the intuition the claim is the counterintuitive claim is that under certain conditions if a government imposes an import tax that is equivalent to to them importing an export tax, right? And so it first so again like take the case of the US if this were to literally hold for the United States he would be like saying yeah all the stuff Trump wants to do with these tariffs right and that he thinks that's going to have all these impacts on you know creating American jobs and everything and it's going to um you know stick it to the foreigners and it's going to help US industry and presumably you think it would hurt US exporters as well and it's going to reduce the trade deficit Like that's part of the, you know, Trump thinks a trade deficit is like analogous to a corporate loss. Like I've I've heard Trump many times say things along those lines. Like it's it's clear that Trump is thinking as like a CEO or a business owner and thinks, you know, thinking of the United States as a giant company. And in his mental framework, he views a trade deficit as if, you know, we're oh, we had a bad quarter that our our, you know, our expenses were higher than our revenues or something and and so hence it's like a loss if you know if we shipped if we imported more stuff than we sold. He views it as like, you know, our our cost of goods sold was higher than our revenues or something. All right? And that's just not the right way to look at it for one thing. But I'm saying given that that's his mentality in a lot of times, you know, his I think it's safe to say crude mercantalist views, um you can see why you would think tariffs would be the way to address some of those issues. And like, oh, if you don't like massive trade deficits, go ahead and slap on a tariff, right? Because, you know, that will make Americans import less, so that will bring down the trade deficit, right? and it'll you know boost US job. And so the central result in learner symmetry theorem is that whatever impact you think have imposing a high tax on imports is going to have you would have the identical results if instead of doing that you imposed a big tax on US exporters. So anytime American farmers wanted to sell wheat abroad you put a big tax on that. or anytime, you know, American jet manufacturers wanted to export engines or, you know, full full vehicles abroad, the US government would slap a a big tax on that and that that would do the same thing to reduce the trade deficit and create US jobs as the import tariff. Okay, so again, at first when you first hear that, it's like, how could that be possible? So let me walk you through the logic of it. So in Learner's article, he proves that it's true in a very special unrealistic case. All right? So he, you know, it just assumes there's two countries and two goods and originally, you know, there's no um what would be called capital inflows. They have balanced trade. Put it that there's no trade deficit, there's uh, you know, no no uh frictions, you know, no transaction cost, stuff like that. And then he just looks at that simplistic world and shows, yep, it's mathematically equivalent. If one, you know, if a given one of the countries imposes Oh, and the another assumption is there's no retaliation, right? that so if one country imposes a tariff on the other country or on imports from the other country to be more accurate you you don't assume that the other country is allowed to retaliate right so just saying what you know isolate what are the effects of the one country changing its tax policy visav international goods and and again the result he shows is if they impose whatever a 10% tariff on incoming imports that is identical in terms of the economic impact of that is if instead of doing that they had imposed a 10% tax on exports that its own people were trying to send abroad. So h how what happens what's the mechanism? Well put simply as I probably led you to anticipate earlier by my remarks it's that it impacts the currency. All right. So when let's switch to you know to the context of the US when the US you know we're in original equilibrium exporters export stuff importer you know importers import stuff we have whatever the situation is and now all of a sudden out of the blue Trump decides to impose new tariffs. What does that do? The the immediate impact is it makes foreign goods a lot more expensive to Americans than they were the day before, right? And so what does that make them do? Well, it makes them not want to buy as much foreign goods, right? They switch to domestic versions or they just do without. Okay, but you can't stop the analysis there, right? In terms of standard economic theory, you would say what I just said would be a partial equilibrium analysis. But you want if you want to do a general equilibrium analysis, you need to impo, you know, do the change, the policy change, you know, imposing a tariff in this case and then compute the new equilibrium when everything settles down in the model and then you can say, oh, now that's the general equilibrium consideration and impact. Okay. So, one of the things that's clearly going to change is Americans now who previously were importing stuff are not doing it either as much or at all. And so what does that do on the foreign exchange markets? It meant previously Americans who wanted to import stuff, they were using dollars to at some point, you know, whether they were doing it themselves or they were buying it from the importer who then, you know, was doing it, you know, at some point along the way, what had to happen, like if the US is buying cars from Japan is that dollars were being used to fetch yen because ultimately the the people selling cars in Japan are getting paid in yen. All right. And so dollars were being used to buy yen. And so now because of Trump coming in all of a sudden making, you know, slapping on a new tax on Japanese cars being purchased by Americans. That makes Americans less willing to buy Japanese cars. They're willing to spend um they want to spend, I should say, fewer dollars on Japanese cars. And so the dollar strengthens against the yen. And again, that might be counter to you might have thought the dollar would fall, but no, that they're they're not as eager people are not as eager to spend dollars on yen. Okay? So that makes the dollar strengthen against the yen. And so now what happens? Suppose you were an American wheat farmer and you previously exported wheat to Japan. The tariff per se does not directly impact that at all. So you might have thought, well, that shouldn't be affected, right? Yeah, the the import importation of Japanese cars should go down, but we want the wheat exports to stay the same because we're trying to shrink the trade deficit. But that's not what's going to happen, right? Because now the stronger dollar means from the Japanese perspective, US wheat is more expensive than it was yesterday. Even though the dollar figure is the same, now the dollar has become more expensive in terms of yen. And so the yen price of wheat went up. All right? And so that's going to make the um Japanese import from their point of view less American wheat than they did before. And so, yep, it's true. Imposing a tariff on Japanese cars or all imports from Japan will other things equal reduce imports from Japan, but it will also reduce exports to Japan by having the dollar strengthen. Okay? So, it's not a I want to be clear here. The claim is not that there that the tax won't affect international trade. That's not the claim, right? You might be thinking, "Oh, so the dollar strengthens and completely offsets it." And so Japanese cars, yep, the tariff makes them 10% more expensive, but then the price falls 10%. You know, the the the effective dollar price and therefore it's a complete wash. And no, that that's not the claim. Definitely even when the dust settles and the dollar has strengthened, Japanese cars are still more expensive to US consumers, including the change in the currency and including the new tariff than it was before or than they were before. But the the the claim is when the dust settles, it's still the case or it's also the case that American wheat priced in yen is more expensive for Japanese importers than it was before. And so that's why they buy fewer bushels of US wheat. And so, yep, the um amount of cars sent to Americans from Japan does go down. But guess what? the amount of wheat sent from the US to Japan also goes down and so the trade deficit does not shrink as much as you thought it would have and in fact maybe it doesn't shrink at all. So again the the volumes of imports and exports shrink but because the deficit is the difference between the two it's not obvious that you're going to do much about the deficit per se if that's what your ostensible goal was. Okay. So that's the basic result. Now let me give you and I get and I told you like what the mechanism was the intuition for seeing like wow that's I wasn't expecting that. Why would why would a tax on imports be kind of equivalent to a tax on exports if you take money out of it or monese plural because the you know in these examples there's two currencies. If you just think of it as international barter well then it's really obvious why that's the case. All right. And I I owe this point to Scott Sumner. He was the first one to say it that that I saw say it. I'm guessing he just read it somewhere else because it's a pretty standard point once you think about it. Um but if you were in a world where people didn't use money or at least not for international trade and all you did when it came to international trade was people made bilateral exchanges you know mutually agreed upon that you know some wheat farmer wanted cars from Japan and vice versa and you know the wheat farmer said I'm going to send Hey, m Mr. car dealer over there. I'm going to send you this many bushels of wheat and then you make sure on the next ship out of Tokyo there's an extra Toyota waiting for me and that that's what the trade between Japan and the United States looked like and every single transaction just had real goods on both sides. Well, then it would be crystal clear, right? If Trump came in and that was what the status quo had been and said, "Oh, from now on, any American who wants to import stuff from Japan, I'm gonna impose a 10% tax on those transactions." It would be crystal clear in that setting or that context that by Trump taxing imports from Japan, he was simultaneously and equivalently taxing exports to Japan. Because every single transaction, if it were in kind, would simultaneously be an import and an export, right? The very transaction by which the American wheat farmers imported Japanese cars would just by flipping the coin, even though there's no coin here, that's the whole point, would simultaneously or equivalently be the US wheat farmers exporting wheat to Japan. So if you're taxing that transaction, clearly you are disincentivizing or penalizing imports and exports with one fell's stroke, right? You're necessarily doing the same thing. Those are just the different ways of describing these the same thing you're doing. Okay? So that should help give you some intuition because again I told you some of the assumptions when learner went through to actually prove his result mathematically is he assumed in the beginning the you know the original status quo before one of the countries imposes an import tax he assumed that they had balanced trade and then that's how he's able to make it go through mathematically. And so notice in my barter example, if you assume if you took out money and just assumed that countries, you know, their citizens traded with each other in terms of what's called direct exchange, just goods for goods. Notice in that framework or that kind of setting, those countries necessarily would have balanced trade with each other, right? because you know that however x bushels of wheat trading for one car from Japan if that's the market price with each transaction you say oh how many imports were there and you can say like one one car worth you say how many exports well x barrels or bushels of wheat and you say well was that balanced and say yes because that's that's the same market price market value right so imports would always equal exports necessarily if you weren't using money. Okay. Um, now what ends up happening, well, let me just drive home that point again. So again, what what I'm trying to get you to see is it's not surprising when you reflect upon it that Learner is able to prove mathematically that if you start out with countries, you know, where there's no frictions and things like that and they originally have balanced trade with each other that if one of the governments imposes an import tax that is equivalent to them imposing an export tax on their own people, on their own producers, and that it's not going to have any impact on the trade deficit, right? It it will restrict the absolute flow of goods both ways, but it'll restrict it to the same degree. And it's obvious when you say, oh, because just imagine the case of literal barter where clearly that's going to be the impact. And originally, there was no trade deficit. And when the dust settles, there's also going to be no trade deficit. It's just imports and exports would have been reduced depending on how, you know, steep the the tariff is. Okay, one other interesting quirk from that analysis is I think learner shows this in his paper and then others you know have elaborated upon it but one implication of that if you're if you're with me so far and can at least take these results in so far as they go. One implication is what if what the government did is impose tariffs, you know, taxes on imports. It raises revenue from them and then what if it used that revenue not to like, you know, give a lump sum rebate to people or to cut income tax rates or to fund a green new deal or pay for social security, whatever. What if it used those new revenues from the new tariff to subsidize exports, right? So you t you put a tax on imports and then the money you raise you turn around and you say to exporters, hey for every like you say to the American wheat farmer, you know what? Not only are we going to refrain from taxing you, but for every bushel of wheat that you export to Japan, we'll give you an extra dollar from the federal government. What do you think about that? Right. So, you would think that onetwo punch of putting a tax on Japanese cars and subsidizing American wheat exports to Japan, you would think that would really shrink the trade deficit with Japan, right? And actually, no. that that would largely just be a wash at least in you know in the learner framework because just think it through a tax on imports under certain conditions is equivalent to a tax on exports right so that means a subsidy is like a negative tax right so what that means a correlary of that is to say oh a subsidy given to the exporters is equivalent to a subsidy given to the importers, right? Because again, a subsidy is just a negative tax. And so then what that means is if you were to tax imports and subsidize exports, that's equivalent to you taxing imports and subsidizing imports. And so imagine now if they said to the people trying to import cars from Japan, hey, we're going to impose um what works out to like it could be levied as a percentage, but suppose the way the math works out, it ends up being yeah $1,000 for every car that you import from Japan, you're going to owe us $1,000 for every car as a new tariff. But then for every uh car you import from Japan, we'll pay you $1,000 to subsidize that activity. And you can see how those two would cancel out. And so when all is said and done, you wouldn't be doing anything. Okay? And so you can see how if they literally did it to the same thing, it would be a wash. It would just be kind of pointless. And so that's why again if the conditions for learner symmetry hold, it would also be likewise completely a wash and just pointless if they taxed imports and used the revenue to subsidize exports once the dust settled. It would just be a wash. Okay. And so armed with that result, Scott Sumner made the joke that he was saying with, you know, some of his friends because they don't like Trump. Um, they especially don't like, you know, his rhetoric on trade. They think he's ignorant of economics. And so they're saying what we should do is plant some moles, you know, in Trump's circles and say, "Hey, not only should you guys tax imports to make America great again, but why don't you really seal the deal and use the revenue that you raise to subsidize US exports? That'll really stick it to people. That'll really shrink that trade deficit, huh?" And then they would be twirling behind the scenes knowing that the e the subsidies to the exporters would just undo to a first approximation the economic fallout from the import tax. Okay. All right. So now they've walked you through that. Let me now explain like okay but surely there's more to the story here. Okay. So one thing is what happens if you don't originally start from balanced trade. All right. Um and in particular they do use money and that also opens up the idea that there could be intertemporal transactions. Okay. So strictly speaking before what I was talking about they don't use money they just do it in kind. without the use of money, you could still have a trade deficit in the sense what if people buy cars from Japan and they don't use money. What instead they do is they send over IUS and say I owe you whatever the equivalent of 1.1 cars next year if you give me a car right now. Okay? So that would be counted as a part of the trade deficit, right? because the car coming in would be an import and there would be no corresponding export. All right, but obviously in the real world the way that's all facilitated is with the use of money. And yes, you have debt contracts, but they're denominated in money. Okay, so that's that's why the the perfect symmetry does not necessarily hold. That's something that can break the symmetry because again if it were just in kind and people in Japan were sending cars to people who were sending bushels of wheat in exchange then clearly trying to tax imports is the same thing as taxing exports. But if you break this symmetry and it's like no technically what happens is there's you know one set of transactions is really just imports where people are sending money to the Japanese in exchange for cars and then a different set of transactions are clearly exports where you know a bunch of American farmers are exporting wheat in exchange for money and so you've broken those transactions up and so that's why in principle you could tax one and It's not necessarily the same thing. And then as I'm saying more broadly, you can see why given that you have broken it up like that, it's not necessarily identical and just exaggerated to see the intuition. Suppose you start out from an original position where the US is just importing cars from Japan and not exporting anything to them at all. Well, then it obviously it can't possibly be the case that imposing a 10% tax on Japanese imports of cars has the same effect on the US economy is imposing a 10% tax on exports of wheat to Japan. If by assumption in this particular scenario we're analyzing, it's possible that there are a bunch of car imports and zero wheat exports, right? among other things, if you imposed a tax on something that wasn't happening, you would raise zero dollars in revenue, right? So, so how could they be equivalent, right? All right. So, again, the the re the reason that differs from what I was saying before is here we don't have the fact that the imports and the exports are just flip sides of the same coin, that they're different. Now, what what ends up happening, just in case you're wondering like what that is weird, what's going on? It's because why would the it's the time element, right? And that really complicates everything. And so why is it in the grand scheme, why are the Japanese being so foolish is to go and into factories and sweat like crazy and make all these cool vehicles, very dependable. They put them on ships and send them across the ocean and the Americans never have to give them any goodies. Like that seems kind of crazy. Why would they do that, right? Right? Like that's what would happen, you know, when Caesar went around and conquered the neighboring regions. Why did he do that? Well, among other things, they would send him tribute, right? So, a conquering empire has regions around the world sending them goodies for, you know, without sending stuff out in exchange. So, why would the Japanese do that to the US? And you can say, well, could they drop nuclear weapons on them? But that's presumably not what's going on right here in this one instance, right? And so, why is that? And the answer of course is that they're not getting wheat or jet aircraft. They're building up financial assets denominated in US dollars and that that they consider that to be part of their financial wealth and that down the road among other things that could fuel consumption for example. Okay. So that's one way of looking at it. If the if you were just going to do an intertemporal exchange and for example um suppose what the Japanese sent were 100 cars this year and what they received in exchange was not just a certain number of bushels of wheat and it was just a spot transaction. It was like a barter in kind. But instead, what they did is they sent a 100 cars this year. And what they received was the financial wherewithal to perpetually get one bushel of wheat forever from the United States, right? So that's another way of viewing it. So you you know in principle you could make exchanges like that you know intertemporal and trade a bunch of present goods in exchange for a flow of future goods but I'm saying the way the trade statistics are calculated and whatnot clearly there would be a huge import on the front end of the United States where they would have a trade deficit with Japan they would get a bunch of cars now in exchange just for one bushel of wheat which doesn't have the same market value as the 100 cars and then if If nothing else happened in subsequent years, it would flip and Japan would have a tiny trade deficit with the US. It wouldn't have what's called a current account deficit if you're a purist on this stuff. Okay? So, I'm just explaining how these things are quantified and how intertemporal transactions kind of makes things way more complicated, but I just want to give you the framework so you know how to think about it. All right. So um anyway that's that's how you start realizing oh yeah the limitations of learner's original framework having said all that though still I think it's useful to work through that just to get the first approximation just like our standard results in economics like with comparative advantage you know how you know geez if there's one country whose workers are better at everything. Do they benefit from free trade? And you know, how do you analyze that? We can use little thought experiments and do stuff. Well, suppose there's two countries with two goods and we can and you can walk through and just see the logic. That doesn't mean in the real world there's countries with just two goods. But it is, I think, useful to walk through those simpler examples. Just like why do we study what's called Robinson Crusoe economics? And it's because you can actually build up a lot of the logic of markets and capital accumulation and standard concepts like consumption and income and saving and things like that just by considering Robinson Crusoe on his isolated island picking coconuts with his bare hands at first and then he oh if I save some of those and live below my means and build up a stockpile then in future days I can eat those coconuts and draw down my savings while I go get some sticks together and and build a ladder and then I can do this and I can go build a you know take a a stick and sharpen it so I can go get fish and d right there's a lot you can do with that. That doesn't mean oh we think the real world right now is basically like a guy deserted on an island somewhere. That's not the point. But it it lets you think through the implications of certain um ways of thinking. Okay. So that's what I would say likewise with this learner symmetry theorem that yes it it's assumptions were very strong to make the result go through but just thinking through the logic of it I think that does show oh one of the things that happens when a government imposes a tariff at least other things equal is you would expect its currency to strengthen and that at least partially offsets the initial primapaccia impact of that tariff. Okay. So incidentally, just to continue that train of thought, that was the point that Stephen Moran was making in his 41page document that he released um you know before becoming the head of Trump's Council of Economic Adviserss where he was explaining how tariffs and other tools could be used to revamp international trade and you know the the global financial system in ways that would benefit the United States. Okay. So, real quickly, his point was, oh, we can, among other things, impose tariffs. And then I think he wanted to use some of the revenue like to reduce income tax rates or something like that. Um, and he was saying just because we impose a tariff does not mean that all of a sudden foreign goods are going to just be that much more expensive to US consumers. because he was saying that will partially that effect will partially be undone by the strengthening of the US dollar, the appreciation of the US dollar. Okay? And and you might say, so is it a wash? No. But his point was now we've raised revenue, right? That that's where he was coming from. He was saying what we could do is impose tariffs that will raise a bunch of revenue for the Treasury that we can do to like reduce income taxes or other things that are distortion. and some of the brunt of that tax hike on imports will be partially undone by the strengthening dollar. That was his argument. Okay. So again, he wasn't saying it was a complete wash. His point was though this is a way we can raise revenue um and and you know partially shield the consumers from the full impact of that. Whereas if we raised like domestic sales taxes or something, Yep. that's going to make stuff more expensive and there's not some counterveailing force. He was arguing that, you know, would it would cushion the blow to consumers. They were just going to have to eat it. Okay. Um why don't I just conclude then with some of the possible explanations for why in practice hasn't this been happening? Right. So again, I just showed you how it's pretty standard in terms of international trade theory to assume that other things equal. If a government imposes a new tariff, that should make the currency of that government strengthen in the foreign exchange markets. And yet in practice there were several times since Trump came back into office where he made what was a surprise announcement. And how do you know like because you could see it rattled markets, right? Like the stock market fell and everything like that. And and also it's not just that the stock market fell, but the dollar often would fall against other major currencies in response to this news. And so the question is, well, why is that? Shouldn't be the other way around. I thought the whole point was a tariff makes your currency appreciate, not depreciate. All right? So, I have not done enough research for me to like I'm not here saying which one I think is the right answer. I'm just explaining some of the candidates that I've seen people offer that, you know, are are plausible contenders. Okay. So, one thing is people could fear retaliation, right? Right? So in all this discussion that I've said so far in this episode, we have assumed the other countries don't retaliate, right? And so if your country imposes a 10% tariff and we just walk through the implications of that holding holding everything else equal, but what if because your country does that, what if foreigners now impose a 10% tariff against you? Okay, so there's that element. Um, and so obviously if if other things equal you imposing your 10% tariff makes the dollar strengthen against the yen. Okay. And you let the dust settle and now the Japanese retaliate and they impose a 10% tariff on US imports into their country. Well, using the same analysis from that new starting point, that would make the yen strengthen against the dollar. And so that would largely undo the first thing. And then if in general, you know, because the two um because each of those tax hikes is distortionary, well now the whole world is poorer and it's not clear. It can't be that both the dollar and the yen strengthen against each other on net. Obviously, that's impossible. But you can see how um once you allow for retaliation, it's no longer obvious which way it goes. You have to make assumptions about it. And so I could see, you know, given that the US is such a dominant force and is so has such a large trade deficit, you could you could see the argument being made that you know the the US is more dependent at least on the margin on international trade and that you know disturbances to that would impact US markets more than others. And so I could I can see why, you know, you might say, "All right, especially once you allow for the fact that Trump and also too that he's being erratic, right? It's not that this is just some formula that was announced two months ahead of time and you know he it was citing in the economic literature because there is a whole literature on optimal tariff theory and that's what one of the things that Steven Moran again trained economics from PhD economics from Harvard that he was citing that literature right that there's a thing saying that the US has control over the global price of commodities and so in particular there's an argument that the US could impose at least these modest tariffs without um severely distorting things and you can make arguments that it could end up benefiting all things considered. By the way, I don't endorse all that stuff. I'm just saying it's not the case that the only economists advising Trump are mired in the year 1650 and that they haven't read Adam Smith or David Ricardo and you know they don't know anything about international trade. No, there are cutting edge neocclassical peer-reviewed models in the, you know, top journals blah blah blah that say within a certain range the US could impose a tariff and that would actually end up benefiting Americans on net. Okay? And Stephen Moran was citing that literature and saying, "So why don't we do that?" And then with the revenue we raise, I'm not saying go and waste it on, you know, boondoggle government projects. I'm saying why don't we cut taxes or why don't we, you know, at least reduce the deficit or blah blah blah, right? Stuff like that. Okay. Um, but even though the Trump administration has guys like Moran in his corner, in practice, what they've been doing with tariffs thus far has not been carefully explained, transparent, rational policy calibrated to the empirical estimates of the literature for economic optimality. No, that's not at all what's been going on. It's all right, we got these big tariffs. Whoa, markets crash. Whoa. Hey, I was just kind of kidding about that. Pump the brakes. We're We're in negotiations. Okay, markets recover. Ah, China 100%. Bam. Markets crash. No, no, no. We're working things out. I just had to show them who's bossing. Right. So, I'm saying with this stuff, once you factor in all of that, it's not clear that this sort of, you know, baseline initial result from a 1936 economics article is the way to think about it. that there's a heck of a lot more going on than just each time Trump makes an announcement to just say, "Okay, the US now has imposed a tariff and everything else is going to stay the same." That no, this is like part of a cat and mouse game or an arms race or whatever metaphor you want to use. And every time something like this happens, that probably makes international investors more concerned about the, you know, the credibility of the US government and things like that. And so I could see how every time something like this happens, the dollar actually ends up falling, especially when you take into account the retaliation that may occur cuz it's kind of like either this is just a bluff and Trump is just doing this as a negotiating tactic. And so yeah, you're not thinking that over the next two years this is going to be the new rate or if it is then probably other countries are going to retaliate and that's going to be the new normal, right? So either way, it's not that you would think people taking that into account that the dollar should respond as if this were just, oh yeah, those tariffs on China are just the new normal and everything else is the same as it was and and will be the same as it was except for that one shift. That that's that's not the way you would expect things to play out. Okay. And then one another one I will mention is to the extent that people think this is indicative of something that's going to hurt the economy. Well then maybe that's going to make the Fed more likely to have looser policy in the future. And so that could make the dollar weaken in and of itself. And that's just another variable to throw into the mix. And so that's why when Trump comes out of nowhere and shocks markets with an announcement that I mean because another way of putting it is you you probably wouldn't think the stock market should fall as much as it does every time Trump does something like that. And I don't necessarily think that's oh that's just because traders are emotional or things like that. It's partly because, you know, they're trying to extrapolate as much information as possible from what's a very noisy signal. And when Trump makes an announcement, it's not just that, but then that's giving you more information about what do you think's coming down the road. And so again, when you start playing that long game in your head strategically, you can get a better sense of why it might be that when Trump surprises people with this announcement of a very large tariff that it makes people think, among other implications, oh yeah, the Fed, the economy is going to be weaker now than I thought last week, and the Fed is going to have to open up the monetary spigots to try to offset that more than I thought was going to be the case a week ago. And so that's why I now think the dollar is going to be weaker against these other currencies than I did last week. And that's why the dollar would also fall on the news. Okay, I will wrap it up there. Thanks everybody for your attention. I'll see you next time. Check back next week for a new episode of the Human Action podcast. In the meantime, you can find more content like this on mises.org. [Music] [Applause] [Music] [Applause] [Music] [Applause]
Yes, Tariffs Reduce Imports, but They Also Reduce Exports
Summary
Transcript
[Music] This is the Human Action podcast where we debunk the economic, political, and even cultural myths of the days. Here's your host, Dr. Bob Murphy. Hey everybody, welcome back to Human Action Podcast. Today I'm going to be speaking about international trade theory. So this episode will be particularly relevant for those of you who are trained economists or who are getting a masters or higher, you know, if you're a student. Um, but also of course undergrads are welcome to listen in. And those of you who follow these arguments, especially like over Trump's tariffs and things like that, this will all be relevant to you folks and I'll try to keep it accessible. But there is among other things what we're going to cover is what's called learner learner symmetry theorem and it goes back to this famous 1936 article in uh economica by Aba Learner who in case that name is familiar to you in Austrian circles he was one of the market socialists right so it was Oscar Langga and Abal learner who tried to defeat Mises and Hayek in the socialist calculation debate by appealing to the idea that oh the central planners could just mimic a market economy just tell all the production you know the the managers of the factories or whatever we're going to announce this vector of prices and then you go ahead and optimize accordingly and but we can improve on what the market would do right when they would go ahead and do it. Anyway, so they're they thought they were showing Mis's critique of socialism can't saying we can't calculate can't be right because we could just mimic the market economy if we wanted to. Right? So anyway, it's same guy, but he in 1936 had an article called the symmetry between import and export taxes. And again, this is pretty famous if you go on in economics and talk about international trade. this is like a baseline result. So, as I'll explain as we go through this episode here on the Human Action podcast, he makes a lot of simplifying assumptions. And so much of the work in international trade theory since this came out has been to try to generalize the results and see, you know, how much does his counterintuitive result rely on these unrealistic assumptions and blah blah blah, right? But anyway, I thought it would be good for me to go ahead and spell this out because it is an intriguing result. Then once you think it through, it's like, "Oh, it's obvious." But at first when you hear it, it sounds crazy. All right, so let me uh let me give you the the news hook just, you know, in case you're wondering. Yeah, this sounds like it might be a lot of brain processing. I don't know if I want to deal with this, Murphy. So the news hook was recently, I think it was October 10th, Trump came out saying he was going to have 100% tariffs on China. Markets went haywire. And then I saw this interesting tweet where a guy said, what's funny is that Econ 101 says that when a country imposes a new tariff, it should make its currency strengthen. And yet every time Trump has done a surprise announcement with tariffs, the dollar falls. Haha. Or something, you know, something like that. And then people were piling in the comments trying to explain what, you know, why why is that and whatever. And people were bringing up learner symmetry theorem. So to be clear, learner symmetry theorem relies on that mechanism, right? So it's not that that's actually an explanation as to why the econ 101 thing is is off. And by the way, I don't think I learned this in econ 101. I think this is more like econ I don't know 401, let's say, um because it's kind of, you know, takes it to the next level. But in any event, that was kind of the news hook for this. And then that's that's what makes me want to explain it. And also, we're not merely going to talk about the learner symmetry theorem here in this episode. I'm going to talk more broadly about the fact that what happens if your c when you take into account the impact on your currency strength from a tariff and this is interesting because um here on the human action podcast Steven Moran was the guy who wrote this document and Stephen Moran is now the head of Trump's Council of Economic Adviserss. Yeah, this was the Human Action podcast episode that we aired it back on Valentine's Day, February 14th, 2025. Okay. And the title we had at the time was unpacking the document that spells out Trump's tariff strategy. All right. So, I had my guest for that episode was Josh Hendrickson. And so we were going over this 41page document that had been put out in November of 2024, right? So after or just as Trump is winning his re-election um but before he's sworn in. And so Steven Moran, who among other things, he's a Harvard PhD in economics, right? So this isn't some guy from Wall Street or something that just, you know, being friendly to Trump and then gets this this post. I mean he's a Harvard trained economist in anyway he's was made Trump's chair of of the council of economic adviserss and so in that document he was explaining how to use tariffs as well as other progrowth reforms to uh solidify the dollar's status as the international reserve currency but also reduce the trade deficit and so on. Okay. So, one of the things that uh Moran pointed out in that paper was he was saying a lot of the critics of Trump who don't like tariffs say that it's going to hurt consumers, but they're overlooking the fact that the US being a big player on the world stage if it imposes large tariffs among other things that will lead to a strengthening And then so that that means that consumers won't be hurt as much as the critics of the tariffs might lead you to believe because there there's this offsetting effect that the tariff is not going to make foreign goods uh make them more expensive to the same degree that you might have originally thought because the dollar is going to strengthen and partially offset that result or that effect. Okay. So, I'm just saying that this this notion that the currency might strengthen in response to a new tariff being imposed isn't just some weird thing that some market socialist from 1936 said, but it's not relevant. It's something that the guy Trump picked to be the head of his council of economic adviserss. It's one of the effects that he cited when he was trying to explain why tariffs are not as awful as the critics would have have you believe and that it's not just oh it's just a tax on consumers and it's going to make everything more expensive at the grocery store and he was trying to say no they're overlooking this obvious effect that the literature has you know known for whatever almost a century now okay so this isn't like some weird partisan thing okay so these are all related but then the again the the issue was and I went to verify to see if the guy who was laughing about um you know the the the dollar not responding the way that people thought because he got the the point was when Trump imposed that or made that announcement at least against some currencies the dollar fell right and so um you know again I I saw a guy saying this is funny that they they say that econ 101 yet it doesn't happen every time Trump's done that the dollar's fallen so I didn't go back and terify with each particular episode, but I was noticing that on prior occasions when Trump would make a particularly aggressive announcement that kind of, you know, rattled markets. It's not just that stocks would fall, but the dollar would fall, too. Okay? And so then, you know, that's that's one of the issues is why why is that the case? Okay. So, that's kind of the stuff I want to touch on here. I'm not going to give you folks any definitive and here's what I think and the case is closed now that you know the truth with a capital T you can move on. That's not my purpose in this episode. I just want to link some of these things together and give you the intuition just so you know what people are talking about. And again, like I said, it it's a neat result. It's it's counterintuitive at the least. And it's just I like stuff like that economics, right? where you might think, oh, the way to um help women is to have paid family leave, right? Like to to say if you if you're uh you know, a full-time employee and you get pregnant, then we'll give you a full year off and and with pay. And you might think that that's good. That's pro-women or something, right? And actually, not necessarily because other things equal. That would make employers more reluctant to hire women particularly if they're married and you know in their mid to late 20s because those you know statistically they're way more likely to get pregnant that if you hired some guy or a woman who was unmarried or a woman who was married but she was 50, right? So that's and and so that where would that show if they did hire them? There might be an impact on how much you paid them because implicitly you would be factoring in there's a higher chance that I'm going to have to pay them when they don't come to work for a year. And so how much would I agree on the front end to pay them? Well, clearly that's going to other things equal reduce the amount you'd offer them. So it the people who are hurt the most by a measure like that are women. you know, a married 27 year old woman who isn't planning on having kids, right? Because she's going to be lumped in statistically with the people that are most likely to take advantage of that mandated option and, you know, suffer the the consequences accordingly. Okay? So I'm just saying in general that sort of thing happens all the time when you study economics particularly from a free market perspective where it looks like oh government interventions that aim to have this particular effect either cause the opposite thing or there's some mechanism that they don't take into account that makes it disappear. Okay. So let me go ahead and jump right into the learner symmetry theorem. Also, let me just mention if you're interested in the history of economic thought, this is a neat little article to read because it's it's not that difficult. I mean, there's some math and stuff in it, but it's not uh incomprehensible if you're a modern trained economist. But his his motivation um let me just read the first paragraph here. This note does not arrive at any conclusions not previously obtained by Bastable, Marshall and Pagoo, but it shows the nature of the slip which which led Edgeworth to conclusions contrary to theirs and demonstrates the applicability of Marshall's quote offer curve apparatus to the elucidation of this problem. All right. Then he's got this real long footnote where he's going through Edgeworth and that's the you know the Edgeworth box guy if if you're you know if you've ever used those devices in your classroom instruction and the point is Edgeworth had disagreed with some of these writers on the impact of an import you know of a tariff versus an export tax and he and Edgeorth thought he had isolated that no there there's clearly a difference there and these other writers who thought otherwise cuz they you know the math misled them and what Learner what Learner is pointing out is no Edgeworth just he was focused on what the government did with the revenue and Edgeworth erroneously thought that his conclusion like he was getting a different conclusion because they screwed up their analysis when he was focusing on the the source of the tax revenue but really Edgeworth's conclusion flipped because of how the government was spending the All right. And then what makes it extra ironic or funny is uh so this is learner talking. He says um one purpose of this note is to exonerate the mathematical method from Edgeworth's error and then he's got a dash a task in which I am emboldened by my experience in having repeated this error in a seminar at the London School of Economics. Okay. So my point in case you kind of got lost there is Learner is sort of taking Edgeworth out to the woodshed saying, "Oh no, he's he messed something up. Let's let me spell this out. You can see why what's going on, you know, the real situation here." But then in a footnote, he says, "By the way, this error that Edworth made in print, I also made myself when I was presenting this material, you know, beforehand at the London School of Economics." And then now, you know, I came to realize, oh yeah, I just screwed that up. And so here, let me now write this note to Economica to explain Edgeworth's mistake that I repeated. Okay. So anyway, big picture just to give the intuition the claim is the counterintuitive claim is that under certain conditions if a government imposes an import tax that is equivalent to to them importing an export tax, right? And so it first so again like take the case of the US if this were to literally hold for the United States he would be like saying yeah all the stuff Trump wants to do with these tariffs right and that he thinks that's going to have all these impacts on you know creating American jobs and everything and it's going to um you know stick it to the foreigners and it's going to help US industry and presumably you think it would hurt US exporters as well and it's going to reduce the trade deficit Like that's part of the, you know, Trump thinks a trade deficit is like analogous to a corporate loss. Like I've I've heard Trump many times say things along those lines. Like it's it's clear that Trump is thinking as like a CEO or a business owner and thinks, you know, thinking of the United States as a giant company. And in his mental framework, he views a trade deficit as if, you know, we're oh, we had a bad quarter that our our, you know, our expenses were higher than our revenues or something and and so hence it's like a loss if you know if we shipped if we imported more stuff than we sold. He views it as like, you know, our our cost of goods sold was higher than our revenues or something. All right? And that's just not the right way to look at it for one thing. But I'm saying given that that's his mentality in a lot of times, you know, his I think it's safe to say crude mercantalist views, um you can see why you would think tariffs would be the way to address some of those issues. And like, oh, if you don't like massive trade deficits, go ahead and slap on a tariff, right? Because, you know, that will make Americans import less, so that will bring down the trade deficit, right? and it'll you know boost US job. And so the central result in learner symmetry theorem is that whatever impact you think have imposing a high tax on imports is going to have you would have the identical results if instead of doing that you imposed a big tax on US exporters. So anytime American farmers wanted to sell wheat abroad you put a big tax on that. or anytime, you know, American jet manufacturers wanted to export engines or, you know, full full vehicles abroad, the US government would slap a a big tax on that and that that would do the same thing to reduce the trade deficit and create US jobs as the import tariff. Okay, so again, at first when you first hear that, it's like, how could that be possible? So let me walk you through the logic of it. So in Learner's article, he proves that it's true in a very special unrealistic case. All right? So he, you know, it just assumes there's two countries and two goods and originally, you know, there's no um what would be called capital inflows. They have balanced trade. Put it that there's no trade deficit, there's uh, you know, no no uh frictions, you know, no transaction cost, stuff like that. And then he just looks at that simplistic world and shows, yep, it's mathematically equivalent. If one, you know, if a given one of the countries imposes Oh, and the another assumption is there's no retaliation, right? that so if one country imposes a tariff on the other country or on imports from the other country to be more accurate you you don't assume that the other country is allowed to retaliate right so just saying what you know isolate what are the effects of the one country changing its tax policy visav international goods and and again the result he shows is if they impose whatever a 10% tariff on incoming imports that is identical in terms of the economic impact of that is if instead of doing that they had imposed a 10% tax on exports that its own people were trying to send abroad. So h how what happens what's the mechanism? Well put simply as I probably led you to anticipate earlier by my remarks it's that it impacts the currency. All right. So when let's switch to you know to the context of the US when the US you know we're in original equilibrium exporters export stuff importer you know importers import stuff we have whatever the situation is and now all of a sudden out of the blue Trump decides to impose new tariffs. What does that do? The the immediate impact is it makes foreign goods a lot more expensive to Americans than they were the day before, right? And so what does that make them do? Well, it makes them not want to buy as much foreign goods, right? They switch to domestic versions or they just do without. Okay, but you can't stop the analysis there, right? In terms of standard economic theory, you would say what I just said would be a partial equilibrium analysis. But you want if you want to do a general equilibrium analysis, you need to impo, you know, do the change, the policy change, you know, imposing a tariff in this case and then compute the new equilibrium when everything settles down in the model and then you can say, oh, now that's the general equilibrium consideration and impact. Okay. So, one of the things that's clearly going to change is Americans now who previously were importing stuff are not doing it either as much or at all. And so what does that do on the foreign exchange markets? It meant previously Americans who wanted to import stuff, they were using dollars to at some point, you know, whether they were doing it themselves or they were buying it from the importer who then, you know, was doing it, you know, at some point along the way, what had to happen, like if the US is buying cars from Japan is that dollars were being used to fetch yen because ultimately the the people selling cars in Japan are getting paid in yen. All right. And so dollars were being used to buy yen. And so now because of Trump coming in all of a sudden making, you know, slapping on a new tax on Japanese cars being purchased by Americans. That makes Americans less willing to buy Japanese cars. They're willing to spend um they want to spend, I should say, fewer dollars on Japanese cars. And so the dollar strengthens against the yen. And again, that might be counter to you might have thought the dollar would fall, but no, that they're they're not as eager people are not as eager to spend dollars on yen. Okay? So that makes the dollar strengthen against the yen. And so now what happens? Suppose you were an American wheat farmer and you previously exported wheat to Japan. The tariff per se does not directly impact that at all. So you might have thought, well, that shouldn't be affected, right? Yeah, the the import importation of Japanese cars should go down, but we want the wheat exports to stay the same because we're trying to shrink the trade deficit. But that's not what's going to happen, right? Because now the stronger dollar means from the Japanese perspective, US wheat is more expensive than it was yesterday. Even though the dollar figure is the same, now the dollar has become more expensive in terms of yen. And so the yen price of wheat went up. All right? And so that's going to make the um Japanese import from their point of view less American wheat than they did before. And so, yep, it's true. Imposing a tariff on Japanese cars or all imports from Japan will other things equal reduce imports from Japan, but it will also reduce exports to Japan by having the dollar strengthen. Okay? So, it's not a I want to be clear here. The claim is not that there that the tax won't affect international trade. That's not the claim, right? You might be thinking, "Oh, so the dollar strengthens and completely offsets it." And so Japanese cars, yep, the tariff makes them 10% more expensive, but then the price falls 10%. You know, the the the effective dollar price and therefore it's a complete wash. And no, that that's not the claim. Definitely even when the dust settles and the dollar has strengthened, Japanese cars are still more expensive to US consumers, including the change in the currency and including the new tariff than it was before or than they were before. But the the the claim is when the dust settles, it's still the case or it's also the case that American wheat priced in yen is more expensive for Japanese importers than it was before. And so that's why they buy fewer bushels of US wheat. And so, yep, the um amount of cars sent to Americans from Japan does go down. But guess what? the amount of wheat sent from the US to Japan also goes down and so the trade deficit does not shrink as much as you thought it would have and in fact maybe it doesn't shrink at all. So again the the volumes of imports and exports shrink but because the deficit is the difference between the two it's not obvious that you're going to do much about the deficit per se if that's what your ostensible goal was. Okay. So that's the basic result. Now let me give you and I get and I told you like what the mechanism was the intuition for seeing like wow that's I wasn't expecting that. Why would why would a tax on imports be kind of equivalent to a tax on exports if you take money out of it or monese plural because the you know in these examples there's two currencies. If you just think of it as international barter well then it's really obvious why that's the case. All right. And I I owe this point to Scott Sumner. He was the first one to say it that that I saw say it. I'm guessing he just read it somewhere else because it's a pretty standard point once you think about it. Um but if you were in a world where people didn't use money or at least not for international trade and all you did when it came to international trade was people made bilateral exchanges you know mutually agreed upon that you know some wheat farmer wanted cars from Japan and vice versa and you know the wheat farmer said I'm going to send Hey, m Mr. car dealer over there. I'm going to send you this many bushels of wheat and then you make sure on the next ship out of Tokyo there's an extra Toyota waiting for me and that that's what the trade between Japan and the United States looked like and every single transaction just had real goods on both sides. Well, then it would be crystal clear, right? If Trump came in and that was what the status quo had been and said, "Oh, from now on, any American who wants to import stuff from Japan, I'm gonna impose a 10% tax on those transactions." It would be crystal clear in that setting or that context that by Trump taxing imports from Japan, he was simultaneously and equivalently taxing exports to Japan. Because every single transaction, if it were in kind, would simultaneously be an import and an export, right? The very transaction by which the American wheat farmers imported Japanese cars would just by flipping the coin, even though there's no coin here, that's the whole point, would simultaneously or equivalently be the US wheat farmers exporting wheat to Japan. So if you're taxing that transaction, clearly you are disincentivizing or penalizing imports and exports with one fell's stroke, right? You're necessarily doing the same thing. Those are just the different ways of describing these the same thing you're doing. Okay? So that should help give you some intuition because again I told you some of the assumptions when learner went through to actually prove his result mathematically is he assumed in the beginning the you know the original status quo before one of the countries imposes an import tax he assumed that they had balanced trade and then that's how he's able to make it go through mathematically. And so notice in my barter example, if you assume if you took out money and just assumed that countries, you know, their citizens traded with each other in terms of what's called direct exchange, just goods for goods. Notice in that framework or that kind of setting, those countries necessarily would have balanced trade with each other, right? because you know that however x bushels of wheat trading for one car from Japan if that's the market price with each transaction you say oh how many imports were there and you can say like one one car worth you say how many exports well x barrels or bushels of wheat and you say well was that balanced and say yes because that's that's the same market price market value right so imports would always equal exports necessarily if you weren't using money. Okay. Um, now what ends up happening, well, let me just drive home that point again. So again, what what I'm trying to get you to see is it's not surprising when you reflect upon it that Learner is able to prove mathematically that if you start out with countries, you know, where there's no frictions and things like that and they originally have balanced trade with each other that if one of the governments imposes an import tax that is equivalent to them imposing an export tax on their own people, on their own producers, and that it's not going to have any impact on the trade deficit, right? It it will restrict the absolute flow of goods both ways, but it'll restrict it to the same degree. And it's obvious when you say, oh, because just imagine the case of literal barter where clearly that's going to be the impact. And originally, there was no trade deficit. And when the dust settles, there's also going to be no trade deficit. It's just imports and exports would have been reduced depending on how, you know, steep the the tariff is. Okay, one other interesting quirk from that analysis is I think learner shows this in his paper and then others you know have elaborated upon it but one implication of that if you're if you're with me so far and can at least take these results in so far as they go. One implication is what if what the government did is impose tariffs, you know, taxes on imports. It raises revenue from them and then what if it used that revenue not to like, you know, give a lump sum rebate to people or to cut income tax rates or to fund a green new deal or pay for social security, whatever. What if it used those new revenues from the new tariff to subsidize exports, right? So you t you put a tax on imports and then the money you raise you turn around and you say to exporters, hey for every like you say to the American wheat farmer, you know what? Not only are we going to refrain from taxing you, but for every bushel of wheat that you export to Japan, we'll give you an extra dollar from the federal government. What do you think about that? Right. So, you would think that onetwo punch of putting a tax on Japanese cars and subsidizing American wheat exports to Japan, you would think that would really shrink the trade deficit with Japan, right? And actually, no. that that would largely just be a wash at least in you know in the learner framework because just think it through a tax on imports under certain conditions is equivalent to a tax on exports right so that means a subsidy is like a negative tax right so what that means a correlary of that is to say oh a subsidy given to the exporters is equivalent to a subsidy given to the importers, right? Because again, a subsidy is just a negative tax. And so then what that means is if you were to tax imports and subsidize exports, that's equivalent to you taxing imports and subsidizing imports. And so imagine now if they said to the people trying to import cars from Japan, hey, we're going to impose um what works out to like it could be levied as a percentage, but suppose the way the math works out, it ends up being yeah $1,000 for every car that you import from Japan, you're going to owe us $1,000 for every car as a new tariff. But then for every uh car you import from Japan, we'll pay you $1,000 to subsidize that activity. And you can see how those two would cancel out. And so when all is said and done, you wouldn't be doing anything. Okay? And so you can see how if they literally did it to the same thing, it would be a wash. It would just be kind of pointless. And so that's why again if the conditions for learner symmetry hold, it would also be likewise completely a wash and just pointless if they taxed imports and used the revenue to subsidize exports once the dust settled. It would just be a wash. Okay. And so armed with that result, Scott Sumner made the joke that he was saying with, you know, some of his friends because they don't like Trump. Um, they especially don't like, you know, his rhetoric on trade. They think he's ignorant of economics. And so they're saying what we should do is plant some moles, you know, in Trump's circles and say, "Hey, not only should you guys tax imports to make America great again, but why don't you really seal the deal and use the revenue that you raise to subsidize US exports? That'll really stick it to people. That'll really shrink that trade deficit, huh?" And then they would be twirling behind the scenes knowing that the e the subsidies to the exporters would just undo to a first approximation the economic fallout from the import tax. Okay. All right. So now they've walked you through that. Let me now explain like okay but surely there's more to the story here. Okay. So one thing is what happens if you don't originally start from balanced trade. All right. Um and in particular they do use money and that also opens up the idea that there could be intertemporal transactions. Okay. So strictly speaking before what I was talking about they don't use money they just do it in kind. without the use of money, you could still have a trade deficit in the sense what if people buy cars from Japan and they don't use money. What instead they do is they send over IUS and say I owe you whatever the equivalent of 1.1 cars next year if you give me a car right now. Okay? So that would be counted as a part of the trade deficit, right? because the car coming in would be an import and there would be no corresponding export. All right, but obviously in the real world the way that's all facilitated is with the use of money. And yes, you have debt contracts, but they're denominated in money. Okay, so that's that's why the the perfect symmetry does not necessarily hold. That's something that can break the symmetry because again if it were just in kind and people in Japan were sending cars to people who were sending bushels of wheat in exchange then clearly trying to tax imports is the same thing as taxing exports. But if you break this symmetry and it's like no technically what happens is there's you know one set of transactions is really just imports where people are sending money to the Japanese in exchange for cars and then a different set of transactions are clearly exports where you know a bunch of American farmers are exporting wheat in exchange for money and so you've broken those transactions up and so that's why in principle you could tax one and It's not necessarily the same thing. And then as I'm saying more broadly, you can see why given that you have broken it up like that, it's not necessarily identical and just exaggerated to see the intuition. Suppose you start out from an original position where the US is just importing cars from Japan and not exporting anything to them at all. Well, then it obviously it can't possibly be the case that imposing a 10% tax on Japanese imports of cars has the same effect on the US economy is imposing a 10% tax on exports of wheat to Japan. If by assumption in this particular scenario we're analyzing, it's possible that there are a bunch of car imports and zero wheat exports, right? among other things, if you imposed a tax on something that wasn't happening, you would raise zero dollars in revenue, right? So, so how could they be equivalent, right? All right. So, again, the the re the reason that differs from what I was saying before is here we don't have the fact that the imports and the exports are just flip sides of the same coin, that they're different. Now, what what ends up happening, just in case you're wondering like what that is weird, what's going on? It's because why would the it's the time element, right? And that really complicates everything. And so why is it in the grand scheme, why are the Japanese being so foolish is to go and into factories and sweat like crazy and make all these cool vehicles, very dependable. They put them on ships and send them across the ocean and the Americans never have to give them any goodies. Like that seems kind of crazy. Why would they do that, right? Right? Like that's what would happen, you know, when Caesar went around and conquered the neighboring regions. Why did he do that? Well, among other things, they would send him tribute, right? So, a conquering empire has regions around the world sending them goodies for, you know, without sending stuff out in exchange. So, why would the Japanese do that to the US? And you can say, well, could they drop nuclear weapons on them? But that's presumably not what's going on right here in this one instance, right? And so, why is that? And the answer of course is that they're not getting wheat or jet aircraft. They're building up financial assets denominated in US dollars and that that they consider that to be part of their financial wealth and that down the road among other things that could fuel consumption for example. Okay. So that's one way of looking at it. If the if you were just going to do an intertemporal exchange and for example um suppose what the Japanese sent were 100 cars this year and what they received in exchange was not just a certain number of bushels of wheat and it was just a spot transaction. It was like a barter in kind. But instead, what they did is they sent a 100 cars this year. And what they received was the financial wherewithal to perpetually get one bushel of wheat forever from the United States, right? So that's another way of viewing it. So you you know in principle you could make exchanges like that you know intertemporal and trade a bunch of present goods in exchange for a flow of future goods but I'm saying the way the trade statistics are calculated and whatnot clearly there would be a huge import on the front end of the United States where they would have a trade deficit with Japan they would get a bunch of cars now in exchange just for one bushel of wheat which doesn't have the same market value as the 100 cars and then if If nothing else happened in subsequent years, it would flip and Japan would have a tiny trade deficit with the US. It wouldn't have what's called a current account deficit if you're a purist on this stuff. Okay? So, I'm just explaining how these things are quantified and how intertemporal transactions kind of makes things way more complicated, but I just want to give you the framework so you know how to think about it. All right. So um anyway that's that's how you start realizing oh yeah the limitations of learner's original framework having said all that though still I think it's useful to work through that just to get the first approximation just like our standard results in economics like with comparative advantage you know how you know geez if there's one country whose workers are better at everything. Do they benefit from free trade? And you know, how do you analyze that? We can use little thought experiments and do stuff. Well, suppose there's two countries with two goods and we can and you can walk through and just see the logic. That doesn't mean in the real world there's countries with just two goods. But it is, I think, useful to walk through those simpler examples. Just like why do we study what's called Robinson Crusoe economics? And it's because you can actually build up a lot of the logic of markets and capital accumulation and standard concepts like consumption and income and saving and things like that just by considering Robinson Crusoe on his isolated island picking coconuts with his bare hands at first and then he oh if I save some of those and live below my means and build up a stockpile then in future days I can eat those coconuts and draw down my savings while I go get some sticks together and and build a ladder and then I can do this and I can go build a you know take a a stick and sharpen it so I can go get fish and d right there's a lot you can do with that. That doesn't mean oh we think the real world right now is basically like a guy deserted on an island somewhere. That's not the point. But it it lets you think through the implications of certain um ways of thinking. Okay. So that's what I would say likewise with this learner symmetry theorem that yes it it's assumptions were very strong to make the result go through but just thinking through the logic of it I think that does show oh one of the things that happens when a government imposes a tariff at least other things equal is you would expect its currency to strengthen and that at least partially offsets the initial primapaccia impact of that tariff. Okay. So incidentally, just to continue that train of thought, that was the point that Stephen Moran was making in his 41page document that he released um you know before becoming the head of Trump's Council of Economic Adviserss where he was explaining how tariffs and other tools could be used to revamp international trade and you know the the global financial system in ways that would benefit the United States. Okay. So, real quickly, his point was, oh, we can, among other things, impose tariffs. And then I think he wanted to use some of the revenue like to reduce income tax rates or something like that. Um, and he was saying just because we impose a tariff does not mean that all of a sudden foreign goods are going to just be that much more expensive to US consumers. because he was saying that will partially that effect will partially be undone by the strengthening of the US dollar, the appreciation of the US dollar. Okay? And and you might say, so is it a wash? No. But his point was now we've raised revenue, right? That that's where he was coming from. He was saying what we could do is impose tariffs that will raise a bunch of revenue for the Treasury that we can do to like reduce income taxes or other things that are distortion. and some of the brunt of that tax hike on imports will be partially undone by the strengthening dollar. That was his argument. Okay. So again, he wasn't saying it was a complete wash. His point was though this is a way we can raise revenue um and and you know partially shield the consumers from the full impact of that. Whereas if we raised like domestic sales taxes or something, Yep. that's going to make stuff more expensive and there's not some counterveailing force. He was arguing that, you know, would it would cushion the blow to consumers. They were just going to have to eat it. Okay. Um why don't I just conclude then with some of the possible explanations for why in practice hasn't this been happening? Right. So again, I just showed you how it's pretty standard in terms of international trade theory to assume that other things equal. If a government imposes a new tariff, that should make the currency of that government strengthen in the foreign exchange markets. And yet in practice there were several times since Trump came back into office where he made what was a surprise announcement. And how do you know like because you could see it rattled markets, right? Like the stock market fell and everything like that. And and also it's not just that the stock market fell, but the dollar often would fall against other major currencies in response to this news. And so the question is, well, why is that? Shouldn't be the other way around. I thought the whole point was a tariff makes your currency appreciate, not depreciate. All right? So, I have not done enough research for me to like I'm not here saying which one I think is the right answer. I'm just explaining some of the candidates that I've seen people offer that, you know, are are plausible contenders. Okay. So, one thing is people could fear retaliation, right? Right? So in all this discussion that I've said so far in this episode, we have assumed the other countries don't retaliate, right? And so if your country imposes a 10% tariff and we just walk through the implications of that holding holding everything else equal, but what if because your country does that, what if foreigners now impose a 10% tariff against you? Okay, so there's that element. Um, and so obviously if if other things equal you imposing your 10% tariff makes the dollar strengthen against the yen. Okay. And you let the dust settle and now the Japanese retaliate and they impose a 10% tariff on US imports into their country. Well, using the same analysis from that new starting point, that would make the yen strengthen against the dollar. And so that would largely undo the first thing. And then if in general, you know, because the two um because each of those tax hikes is distortionary, well now the whole world is poorer and it's not clear. It can't be that both the dollar and the yen strengthen against each other on net. Obviously, that's impossible. But you can see how um once you allow for retaliation, it's no longer obvious which way it goes. You have to make assumptions about it. And so I could see, you know, given that the US is such a dominant force and is so has such a large trade deficit, you could you could see the argument being made that you know the the US is more dependent at least on the margin on international trade and that you know disturbances to that would impact US markets more than others. And so I could I can see why, you know, you might say, "All right, especially once you allow for the fact that Trump and also too that he's being erratic, right? It's not that this is just some formula that was announced two months ahead of time and you know he it was citing in the economic literature because there is a whole literature on optimal tariff theory and that's what one of the things that Steven Moran again trained economics from PhD economics from Harvard that he was citing that literature right that there's a thing saying that the US has control over the global price of commodities and so in particular there's an argument that the US could impose at least these modest tariffs without um severely distorting things and you can make arguments that it could end up benefiting all things considered. By the way, I don't endorse all that stuff. I'm just saying it's not the case that the only economists advising Trump are mired in the year 1650 and that they haven't read Adam Smith or David Ricardo and you know they don't know anything about international trade. No, there are cutting edge neocclassical peer-reviewed models in the, you know, top journals blah blah blah that say within a certain range the US could impose a tariff and that would actually end up benefiting Americans on net. Okay? And Stephen Moran was citing that literature and saying, "So why don't we do that?" And then with the revenue we raise, I'm not saying go and waste it on, you know, boondoggle government projects. I'm saying why don't we cut taxes or why don't we, you know, at least reduce the deficit or blah blah blah, right? Stuff like that. Okay. Um, but even though the Trump administration has guys like Moran in his corner, in practice, what they've been doing with tariffs thus far has not been carefully explained, transparent, rational policy calibrated to the empirical estimates of the literature for economic optimality. No, that's not at all what's been going on. It's all right, we got these big tariffs. Whoa, markets crash. Whoa. Hey, I was just kind of kidding about that. Pump the brakes. We're We're in negotiations. Okay, markets recover. Ah, China 100%. Bam. Markets crash. No, no, no. We're working things out. I just had to show them who's bossing. Right. So, I'm saying with this stuff, once you factor in all of that, it's not clear that this sort of, you know, baseline initial result from a 1936 economics article is the way to think about it. that there's a heck of a lot more going on than just each time Trump makes an announcement to just say, "Okay, the US now has imposed a tariff and everything else is going to stay the same." That no, this is like part of a cat and mouse game or an arms race or whatever metaphor you want to use. And every time something like this happens, that probably makes international investors more concerned about the, you know, the credibility of the US government and things like that. And so I could see how every time something like this happens, the dollar actually ends up falling, especially when you take into account the retaliation that may occur cuz it's kind of like either this is just a bluff and Trump is just doing this as a negotiating tactic. And so yeah, you're not thinking that over the next two years this is going to be the new rate or if it is then probably other countries are going to retaliate and that's going to be the new normal, right? So either way, it's not that you would think people taking that into account that the dollar should respond as if this were just, oh yeah, those tariffs on China are just the new normal and everything else is the same as it was and and will be the same as it was except for that one shift. That that's that's not the way you would expect things to play out. Okay. And then one another one I will mention is to the extent that people think this is indicative of something that's going to hurt the economy. Well then maybe that's going to make the Fed more likely to have looser policy in the future. And so that could make the dollar weaken in and of itself. And that's just another variable to throw into the mix. And so that's why when Trump comes out of nowhere and shocks markets with an announcement that I mean because another way of putting it is you you probably wouldn't think the stock market should fall as much as it does every time Trump does something like that. And I don't necessarily think that's oh that's just because traders are emotional or things like that. It's partly because, you know, they're trying to extrapolate as much information as possible from what's a very noisy signal. And when Trump makes an announcement, it's not just that, but then that's giving you more information about what do you think's coming down the road. And so again, when you start playing that long game in your head strategically, you can get a better sense of why it might be that when Trump surprises people with this announcement of a very large tariff that it makes people think, among other implications, oh yeah, the Fed, the economy is going to be weaker now than I thought last week, and the Fed is going to have to open up the monetary spigots to try to offset that more than I thought was going to be the case a week ago. And so that's why I now think the dollar is going to be weaker against these other currencies than I did last week. And that's why the dollar would also fall on the news. Okay, I will wrap it up there. Thanks everybody for your attention. I'll see you next time. Check back next week for a new episode of the Human Action podcast. In the meantime, you can find more content like this on mises.org. [Music] [Applause] [Music] [Applause] [Music] [Applause]