Risky trade wars

So a tariff bill directed against China has been passed by the House and probably the Senate. As even straight F students in economics should know, increasing tariffs in the middle of something that has words like “ Great “ and “ Recession “ is a risky business. The Smooth-Hawley tariffs are sometimes held as a major causal factor in the prolongation of the Great Depression. And trade wars are definitely not the way to go in the middle of a worldwide slowdown.

A House document cites economist Paul Krugman’s calculation that a low yuan costs America 1.4% of GDP. It is not clear if this calculation refers to a 1.4% GDP level shift with no growth dynamics incorporated. In good times, American GDP grows by 2-4% annually. So a 1.4% GDP shift should be relatively negligible compared with what 2-4% growth can bring year after year. And that really is the big American problem right now.

Also, the 1.4% GDP level shift cannot happen overnight. There needs to be slack capacity in precisely those manufacturing sectors for the thing to happen quickly. There is no clear text out there that says that this tariff bill has been designed in a way as to quickly shift manufacturing from China to the US in specific goods.

Overall, it looks like a risky thing just like the yuan pressure diplomacy being pursued by the Obama administration on the global stage. It is not clear if the short-term and long-term objectives and consequences have been thought out prior to this onslaught.