Donald Trump's prices will be boomerang on American exporters

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Greetings! Two weeks ago, I underlined certain problems Of opinion that commercial deficits harm the manufacturing sector, this interior manufacturing production has a simple link to manufacturing jobsAnd that, therefore, it is logical to want to slow down trade deficits and seek “balanced trade”. As I pointed out, a surprising number of people agree with American president Donald Trump on this subject, even some who do not agree violently with him on everything else.

What I did not expect to know how you could reduce trade deficits in the first place (if you thought it would be a good idea) and, in particular, that the higher American prices really reach a more balanced trade. So, this week, I want to spend time on the reason why this is unlikely. Share your thoughts and reactions to Freelungh@ft.com.

The economy is sometimes derived rightly to develop fantasy models and statistics to prove what everyone already knew. But the economy has its best ways to show that the economy can behave in a completely unexpected and paradoxical way – new knowledge without which we are likely to pursue policies that achieve the opposite of what we want. No economic field is richer in these revelations than international trade theory.

The Lerner symmetry theorem is a famous discovery in trade theory. In 1936, Abba Lerner showed that an import rate and an export tax had the same economic effect: they reduce exports and imports. It's confusing; We naturally believe that the punishment of imports should shrink the trade deficit (or increase net exports), while taxed exports should increase (or reduce net exports).

But to follow our natural beliefs in the development of policies would make us lose each time that the Lerner equivalence holds. If the prices punish exports as much as imports, it is obviously vain to use them to resolve a supposedly problematic trade deficit. And it is particularly futile if your goal is to make your savings a wider manufacturing exporter.

I come back to the political implications below, but first take a moment to obtain an intuitive understanding of the reason why the Lerner symmetry can hold.

The initial effect of import prices is, of course, to make imports more expensive and therefore encourage buyers to seek alternatives. (This is indeed the point, if Trump's words are something. And some of these resources that will be redeployed will be those already involved in manufacturing for export – and this is one of the reasons why exports will fall.

(For a depressed economy running well below its potential, things are different: prices could possibly stimulate overall demand – reduce it in other countries – and restore full employment. But it would only be a short -term effect, and not the best policy to achieve it.)

Another reason why the prices harm exports is that when the supply chains cross the borders, the prices increase the cost of imported inputs, harming the productivity of manufacturing, which, in turn, will make the sector less able to export. Many American exports, including cars, contain up to 20% imported content, Torsten Sløk of Apollo highlighted last week.

A third reason could be that if the drop in importation demand strengthens currency, the appreciation hurts exporters – although the US dollar has gone in the other direction since the announcement of Trump prices on the “Liberation Day”.

(The Lerner origin theorem has looked at simple and balanced savings. You can read here A recent formal explanation of Arnaud Costinot and Iván Werning who shows that the old result is well widespread in more realistic situations with unbalanced trade, limited competition, behavioral biases, cross -border investments and imperfect price adjustments. Here is a similar exercise in Jesper Lindé and Andrea Pescatori in the IMF stressing when the theorem generalizes and the conditions in which he no longer holds. Both are 2017; It may not be surprising that several research documents seeking to update the Lerner theorem appeared shortly after Trump took office.)

With theory in mind, we can give meaning to the striking results of Like estimates of the Institute Effects of “Liberation Day” – an illustration of Lerner symmetry in action. Julian Hinz, Isabelle Méjean and Moritz Schularick calculate that Trump's trade policy (April 9, compared to the end of 2024) will reduce trade between the United States and China by almost half, and perhaps more than 70% in the long term. But take a closer look at what happens to exports:

Exports from the United States should slide by 17%, or around $ 500 billion on Current numbers. It is more than the drop in imports from China and, above all, a much more abrupt fall than for the own exports of China or the world exports as a whole (about 5%). The authors do not bring back how much American total imports would fall, but I asked Schularick to check the figures, and their model estimates a total decrease of 5% of imports, which comes About 200 billion dollars. Much less, in other words, than loss of export. If these types of estimates are almost confirmed, Trump will permanently broaden the trade deficit and will not shrink it at all.

The difference between China and the United States is that only the latter increases prices on everyone (China is only response against the United States). This prevents importers and producers from finding alternatives to China, while China can both replace American imports and find new markets for its exports. As Martin Wolf underlined last week“It is easier to replace the loss of demand than missing supply”, especially if you do not impose a tax on the attempt.

The lesson here is that taxing any trade is equivalent to taxing trade in general – in both directions. Does this mean that commercial policy cannot affect the trade balance at all? No. If you take prices at the limit, they have closed all the exchanges, and you therefore get a commercial balance by definition (zero imports and zero exports).

It is therefore obviously possible to eliminate a deficit through prices, but you may need to cut yourself in practically the world economy to do so. The question of the billion dollars is to know if Trump has his stomach to go so far, and if he does it-how will an autarkic are reduced in the United States, and how much can the rest of the global economy do with an American hole? Send me your point of view.