April 6, 2025

by Stephen Stofka

This is part of a series on centralized power. The debates are voiced by Abel, a Wilsonian with a faith that government can ameliorate social and economic injustices to improve society’s welfare, and Cain, who believes that individual autonomy, the free market and the price system promote the greatest good.

Abel set his water glass on the table. “I’ve been looking forward to our breakfast this week. I want to hear how  you are going to normalize the tariffs that Trump enacted this week.”

Cain shook his head. “Sorry to disappoint you. It’s hard to make sense of the layers of tariffs. 10% base tariff in addition to some previous tariffs except where excluded blah-blah-blah. A company that does international compliance had a table and explanation that helped (Source).”

Abel frowned. “We are on a carousel of weekly announcements and executive orders from the White House. A lot of uncertainty. J.P. Morgan estimates the probability of a global recession at 60% (Source). A few days ago, before the tariff rates were announced, the bank was putting the probability at 40% (Source). That’s quite a jump. Shows how surprised even the analysts at the bank were when the actual tariffs were announced.”

Cain stirred his coffee thoughtfully. “Did you see Trump’s press conference Wednesday? The one where he announced the tariffs? He had a chart, I’ll call it the tariff chart, showing the tariffs that other countries impose on U.S. goods, and I realized that someone in his administration had pulled those numbers out of their ass.”

Abel laughed. “Well, the U.S. Trade Representative has an explainer of how they calculated the rates (Source). Basically, they think that the U.S. should have a net trade balance of zero for each of its trading partners. Anything other than that means that country has enacted trade barriers and/or is engaged in some kind of currency manipulation. It’s nuts.”

Cain nodded. “Good point. International trade is not a zero-sum game. Anyway, the U.S. has the third-lowest tariffs in the world, just behind Japan and Switzerland. As of 2023, it was 2.2% (Source). The EU has an average of less than 3%. Trump’s chart showed that the EU has a 39% tariff rate. Trump exaggerates a lot, but this was excessive even for him.”

Abel wiped syrup off his finger with a napkin. “Well, there probably is some currency manipulation, don’t you think?”

Cain swallowed hurriedly before replying, “Some, but not to the extent shown on that chart. The Congressional Research Service just did a report, a one-pager, answering some of the concerns of House members about currency manipulation (Source). Only Switzerland, Taiwan and Vietnam met the 2015 criteria for currency manipulation.”

Abel asked, “What’s the criteria?”

Cain replied, “First is that the country has a trade surplus greater than $20 billion.”

Abel interrupted, “They sold us $20 billion more than we sold them.”

Cain replied, “Right. The second was that their current account surplus…”

Abel interrupted again, “That’s mostly the trade surplus.”

Cain replied, “Yeah. That’s shouldn’t be more than 2% of that country’s GDP. The third and last criteria is if that country buys dollars in the FX, or foreign exchange, market that is more than 2% of their GDP (Source). That shows their intention to drive up the price of dollars relative to their own currency.”

Abel made a soft clapping sound. “You’ve done your homework.”

Cain laughed. “I’ll bet there are a lot of people trying to understand or refresh their limited understanding of international trade. It’s a WTF moment like when the Twin Towers collapsed on 9-11.”

Abel interrupted, “Except there is even more misinformation now than there was 25 years ago.”

Cain continued, “So, look past the hocus-pocus on the tariff chart and look at the movement in exchange rates between countries. China’s yuan is trading at 86 cents today, the same as it was in 2011 (Source). Is China actively suppressing the value of the yuan? Probably. How much? 20%? 40%?”

Abel asked, “Yeah, but that’s not a tariff.”

Cain nodded. “But it’s an advantage for China’s exporters and a disadvantage for U.S. exporters.”

Abel replied, “So Trump equates ‘advantage’ with ‘tariff.’”

Cain sighed. “I think so.”

Abel argued, “But the advantage for China’s exporters is also an advantage for American consumers who get lower prices. I mean, I bought a cordless pruner, like for cutting tree limbs. It was made in China, well built and cost me less than $100. It’s a good deal.”

Cain frowned. “Yeah, a good deal for you but a bad deal for any American company that might want to make a cordless pruner. At least that’s the way Trump thinks. An American made tool employs an American worker who pays income taxes, Social Security taxes and local taxes. The more that American workers are employed, the less dependent they are on government.”

Abel replied, “So, let’s say that an American-made pruner had cost me $150. That’s a 50% tax on my income.”

Cain interrupted, “And now that pruner will cost you $150 because Trump is charging a 54% tariff on Chinese goods (Source).”

Abel frowned. “So, I would be paying more for an American-made pruner, but another American is less dependent on government welfare because they have a job. Is that what Trump is thinking?”

Cain nodded. “I can’t look inside his head but I’m guessing that is the reasoning underlying the direction of these policies. The problem is that it will take years to build a factory that makes a cordless pruner at a competitive price and the supply chain that supplies the parts for that pruner. A piston in an American-made car starts off in Tennessee as raw aluminum powder, goes to Pennsylvania, then to Canada, then to Mexico and finally to Detroit (Source). The 21st century supply chain is no longer confined to one region or one country. Trump will be out of office by the time a new supply chain is built.”

Abel had a faraway look in his eyes. “When I was a kid, I heard on a talk show that telephone customers who lived in urban areas had a fee tacked onto their monthly bill to support the customers in rural areas. I told mother that I didn’t think that was fair. She explained that it cost more to provide telephone service in a rural area where she grew up. She had lived in both worlds, rural and urban. Because costs were shared, telephone service was more affordable in rural areas, and she could talk to her family. She had that sense of a broad community. Maybe we have lost that. We live in our siloed worlds, absorbed in a perspective that we agree on and share with others.”

Cain replied, “It’s like what happened to music when FM radio started in the 60s and 70s. Large AM radio stations like WABC used to play a variety of music to appeal to a broad consumer base so they could sell advertising. As FM stations proliferated, each station’s choice of music narrowed to a particular taste. In fact, I think it was called ‘narrowcasting,’ not ‘broadcasting’ (Source). A hard rock fan could listen to only hard rock, not soft or pop rock. A country music fan who preferred traditional Nashville style music over Bluegrass could listen to a station that catered to their tastes.”

Abel laughed. “Specialization, the secret to progress, according to Adam Smith. Now we have specialized perspectives and opinions.”

Cain interrupted, “And tailor-made facts, carefully selected to support our opinions. That’s how those tariff rates wound up on Trump’s chart.”

Abel replied, “There’s no consensus.”

Cain nodded. “Divide and conquer. It’s a winning strategy in politics.”

Abel asked, “You’ve studied this recently. Why do you think they chose 10% as a base tariff rate?”

Cain replied, “Exchange rates, I think. Like we discussed before, a strong dollar helps the American consumer buy foreign-made goods at a discount.”

Abel interrupted, “And buy more local services with the money they saved.”

Cain replied, “Right. That’s what Trump’s team doesn’t get. It’s goods and services, not just goods. I can’t buy a haircut from China. Last year, a Federal Reserve study estimated that private services added 72% of economic value in the U.S. (Source). That $50 you saved on the cordless pruner might have been spent at a restaurant or some other service business. That business hires workers who pay federal and local taxes. The business itself supports the local economy with sales, use and property taxes.”

Abel sighed. “Now the $50 will be a tariff charge that goes to the federal government directly. That will hurt service businesses, service workers and local governments.”

Cain shook his head. “More likely is that you decide not to buy the cordless pruner for $150. There is less economic activity. You trim your trees and bushes by hand and save the money. Now someone on Trump’s team might say that the money you saved will be invested in the American economy, but investors are less willing to invest those savings because there is less economic activity. Interest rates go down because there is less demand for loans. The money you saved earns less interest. Consumer or saver, you’re getting screwed.”

Abel nodded. “It’s an endless carousel of cause and effect. Trump wants to return to some imagined idyllic age maybe in the 1950s when he was growing up. That world is out of reach and Trump will destroy this world in his effort to get back to that world.”

Cain shrugged. “Destroy might be an exaggeration. But he will definitely hurt this economy in his pursuit of that dream, I think.”

Abel asked, “Back to the 10% base tariff. Where do you think they came up with that?”

Cain nodded. “Oh yeah. So, if I am going to take a vacation in Europe, I can look up the euro-to-dollar exchange rate to see how many euros my money will buy. Then there’s several indexes that construct a type of average of several currencies against the dollar. There’s a traditional dollar index called DXY that’s often cited in financial markets, but it’s heavily weighted toward the Euro and doesn’t include the Chinese yuan. China is our third largest trading partner (Source) so the Federal Reserve maintains a broad trade-weighted index that includes the Chinese yuan. It is up 20% in the past decade (Source).”

Abel asked, “So that could be used to justify even a 20% base tariff rate?”

Cain sighed. “Like Trump said, the U.S. was being wonderful not charging more.”

Abel asked, “So, we’ve been talking about broad movements of money and goods but most of us stay focused on the prices we pay each week for gas, groceries and other necessities. Next week, we are going to encounter these tariff rates when we go to the grocery store. We get a lot of produce from Mexico and other Central American countries.”

Cain argued, “There are no additional tariffs on those imports from Mexico that were included under the USMCA that Trump negotiated in 2017 (Source).”

Abel replied, “Yeah, but that doesn’t include bananas from Guatemala, for example. During the winter, we get fruits and veggies from Australia and South America. Kennedy wants us to eat healthier, but the tariffs will make healthy foods more expensive.”

Cain nodded. “In the next few weeks, I’m guessing that consumers are going to get very angry. People who were thinking of buying a new car with their tax refund will be heartbroken when they see the increase in prices at the dealership.”

Abel replied, “I heard that some people were trying to lock in deals before the tariffs took hold.”

Cain nodded. “There’s that rush to buy phenomenon but we really notice persistently higher prices in the goods we buy regularly. Members of Congress are going to see their phones blow up with complaints.”

Abel argued, “The Congress has been pretty passive. You think public sentiment will have much effect?”

Cain sighed. “Who knows? Trump has gone rogue.”

Abel asked, “Not what his supporters expected? His poll numbers have declined, and his approval rating is below the average of U.S. Presidents (Source).

Cain replied, “He’s a lame duck president. I don’t know if he cares. Like I said, I think he’s gone rogue.”

Abel stood up. “A rogue president. Unsettling. Look, I’ll see you next week when prices are up on everything. I wonder how much the restaurant will charge for our meal next week? I think I’ll keep a copy of our tab to compare.”

Cain waved. “See you later.”

////////////////////

Image by ChatGPT in response to the prompt “draw an image of a carousel with people sitting on the animals”

Notes: 1) In the U.S. Trade Representative’s explainer of the tariff calculations there is an in-text citation to Cavallo et al. without a corresponding reference. The reference is:
Cavallo, Alberto, Gita Gopinath, Brent Neiman, and Jenny Tang. “Tariff Passthrough at the Border and at the Store: Evidence from U.S. Trade Policy.” (pdf) American Economic Review: Insights 3, no. 1 (March 2021). See the lead author’s page.
2) The title of the first reference is incorrect. The title should read: The long and short (run) of trade elasticities.
3) Because of the values assigned to epsilon and phi in the denominator of the formula, the calculation of the tariff change is essentially (exports – imports) / -imports. A more appropriate measure would be a difference-sum ratio, as in (exports – imports) / (exports + imports).