In response to a comment, here is some textbook international economics.
1. A 10 percent tariff has the same effect on the relative cost of imports as a 10 percent depreciation of our currency.
2. The macroeconomic theory of the trade balance is that it is determined by the difference between domestic saving and domestic investment:
(private saving minus private investment) plus (government surplus) = (trade surplus)
3. If a tariff does not change anything on the left-hand side, it cannot change anything on the right-hand side. That requires an offsetting appreciation of the exchange rate.
4. Thus, textbook international economics predicts that a tariff (or a tariff combined with an export subsidy) will have no effect on the trade balance, but instead it will cause the domestic currency to strengthen.
5. The border-adjustment tax is analyzed as if it were an import tariff and an export subsidy. Ergo, its effect is on the exchange rate, not on the trade balance.
When we have a trade deficit, we save less so that we can consume more foreign goods.
If foreign goods become more expensive due to a tariff people will have less inventive to consume them.
They will either consume local goods or consume less goods and save more.
Let’s leave aside the foreign to local goods substitution for now, though I believe that is part of the political impetus.
If you believe that high consumption low savings is a good equilibrium, then you think this is a bad thing.
If you think higher savings and lower consumption is a good equilibrium then you think its a good thing.
Mostly I think we are selling away our nations assets in exchange for cheap plastic crap that gets thrown away a day after Christmas. That doesn’t seem responsible.
I remember reading an article about how Chicago had sold the rights to 75 years of parking revenue to some UAE investment fund. That’s literally selling your nations future for a couple cents off gas in the short term. It even stipulated that the UAE fund could control parking fees and have veto power over any public parades that might shut down the streets they owned parking spots on. Disgusting.
Two comments: #3 assumes tariffs have no effect on consumption, saving, investment or (state, local, national) spending decisions. Seems implausible.
Secondly, the simple analysis assumes only one (of two or more) countries changes tariffs or border adjustment taxes. What if every country behaved the same way? By construction, not every country’s currency could appreciate to offset the effects of tariffs. Something else has to change, most likely the global volume of trade. Not good.
In the short term, nothing can ever change, in the long term, everything does.
Arnold.
Re point 4, seemingly contradicts point 1. Do you mean at the end of point 4 “will cause the domestic currency to weaken against foreign currency” rather than strengthen?
The penny just dropped re points 1, 3 and 4. Point 4 predicts that the improvement in domestic competitiveness in point 1 would be offset by a decline in competitiveness due to appreciation of the currency, leaving trade balance unchanged.
Weird result. This is very good for American tourists abroad since a higher dollar will enrich them, but they’re immune from the border tax.
Expect the tourism industry to lobby hard for a border tax.
The tourism industry will be hit by foreigners having 10% less purchasing power coming in.
What if a country (e.g., Hong Kong) pegs the US dollar and will not change the peg.
What happens then?
Also, what happens if protectionism is in the form of quotas rather than tariffs? No matter how much the dollar changes, the number of, say, cars, that comes into the country is fixed.
3. If a tariff does not change anything on the left-hand side, it cannot change anything on the right-hand side. That requires an offsetting appreciation of the exchange rate.
I’m an old man and studied international economics many years ago when currencies were semi-fixed. But I had never head of the concept that tariffs would be offset by currency changes. I find this hard to accept as it directly contradicts the argument that the current account balance is determined by the savings-investment gap and that interest rates and currencies are the prices that change to make this balance. It also implies this tariffs never have any impact and I can not believe that countries have been applying and changing tariffs for centuries if it had no impact.
Where can I find economic studies that provide examples of exchange rates moving to offset tariff changes. If it is true there must be some examples in Europe
between the time free capital movements were reestablished in the early 1960s and the establishment of the Euro. I can see that the less developed countries with capital controls– very common in the 1960s, 70s & 80s — may not be the place to look for examples.