Reader, it’s hard to overestimate how incredibly bad the rate schedule of the “Liberation Day” is. From top to bottom it is incoherent. When the plan was announced on 2 April, with Donald Trump held up a plate with apparent red-up figures, economists had to climb to find out where exactly these figures came from. They seemed completely separate from reality and had nothing to do with reciprocity. People thought that the figures were the bilateral trade deficit shared by the import in that country. This led the UST to refuse that claim and release their actual calculations. Somehow it was worse than what people thought.
It would be thought that a model for ‘reciprocal’ rates would include rates from the other country. There are indeed already established methods in American legislation and the economic theory in determining which mutual rates should be in the light of unfair commercial practices. Section 301 of the Trade Act of 1974 explains different remedies, just like the Mutual rate law. There are already compensatory duty calculations; This new model has no goal when it comes to reciprocity or even correcting “unfair” commercial practices, because it does not take rates or not -Tariff barriers into account.
The model previously deals with bilateral trade shortages such as per se Proof of unfair practices. It could be argued that the general trade shortages are poor (but even that is a piece because such an argument is conditional, not per seAnd made even weaker when a nation is the international reserve currency). But bilateral? Absolutely not. There is no reason to think that trade between two partners would be equally balanced; We don’t live in an exchange economy. The entire point of money is to facilitate these bilateral trading balance. I have a trade surplus with my employer. That’s not per se Prove that I tear them away. Similarly, I have trade shortages with the grocer, the butcher, the brewer, and so on. That’s not per se Proof that the supermarket, the civil meat market, nor Abitia Brewing, arouses, tears me off. If it wasn’t money, we should have a bilateral trading balance: I should find exactly what Rouses wants for my daily meals (I am willing to bet they do not want an investigation into economics). So the starting point of the entire model Understand fundamental misunderstandings The foundations of monetary economic exchange.
But let’s assume that the starting point of the model is valid because of the argument. Let’s take a look at the model ourselves. The UST reports the model as the trade balance with a certain country shared by price elasticity of import (ε) Times Times Tariff Passthrough (φ) Times Import. This model means nothing; It hides this meaninglessness behind Greek letters, but there is no interpretable meaning for this model. It is not clear that it will even do what the authors want it to do. Reader, you will not find this model in a textbook or paper from Economics and, at least at the moment, no one has released an in -depth report about the logic of the model. So, even if the starting point was valid, there is none great facie Reason to think that the model itself has something to do with the starting point.
But let’s assume that the model is valid. The chosen model parameters are illogical. For ε and φ the UST chose the same values for each country. But there is no reason to believe that ε and φ are identical for every country, or even good in every country. Both ε and φ depend on exchange -specific factors. Goods with many substitutes, ε, for example, will be higher (or lower if it has few replacements). Consequently, this implies that the calculated rate percentage is probably incorrect; It can be too high and it can be too low.
But let’s assume because every country in the world has exactly the same ε and φ. The selected numbers for these parameters are incorrect. The authors state:
Recent evidence suggests that elasticity is almost 2 in the long term (Boehm et al., 2023), but estimates vary from elasticity. To be conservative, studies that find higher elasticities were drawn near 3-4 (eg Broda and Weinstein 2006; Simonovska and Waugh 2014; Soderbery 2018).
Those are some estimates, certainly. But despite the statement that ε of 4 is ‘conservative’, it is not actually. Many studies believe that ε is more than 5-7, especially after a trade shock (see eg. here). Furthermore, they simply bet φ at 0.25.* No quote given. The only given justification is:
The recent experience with the American rates about China has shown that the tariff bar to retail prices was low (Cavallo et al, 2021). [link added]
But the selling prices here are not the relevant measure. We need total passage. This is what Alberto Cavallo etc. actually say (emphasis added):
At the border, the input rates are much higher than the exchange rate through the exchange rate. Chinese exporters have not reduced their dollar prices muchDespite the recent appreciation of the dollar. The US exporters, on the other hand, considerably reduced the prices that were affected by foreign retribution rates. The price impact is more limited in American stores, which suggests that the store margins have fallen. Our results imply that the incidence of the rates has so far fallen largely for American companies.
The authors of the report get Cavallo et al. Instead of showing a low Passhrough, they actually show almost complete Passhrough and that the tariff pass was worn by Americans. This is a horrible case of picking cherries through the Ustr. Oh, and by the way, research shows that φ is closer to 0.8, not 0.25. Consequently, both ε and φ are underestimated, indicating that the tariff calculation is systematically too high.
But let’s assume that their choices for ε and φ are accurate because of the argument. We come to the real kicker. The authors write:
“Assuming that compensating exchange rate and general balance effects are small enough to be ignored …”
This assumption is huge. Their entire model falls apart if the assumption does not apply. Here is the problem: The entire point of the rates is to have exchange rate and general balance effects! They mention that several times in their report and the economic advisers of the Trump administration have also said that. The necessary necessary assumptions of the model have therefore never kept, which means that the whole thing is bunk AB Initio. Indeed, not 24 hours after the tariff plan was released, the stock market had registered its worst two days and debited the dollar. I don’t think I’ve ever seen a model so quickly proven so quickly. 24 hours must be a kind of record. Even the Covid Lockdown models, as bad as they were, lasted a few months to blow up.
I repeat again: it’s hard to overdo it how bad this model is. Start with the end, it is incoherent and full of poor assumptions, bad parameters and no logic. This is not the result of reasons. It is a shameful representation of science.
*By the way, this is why people initially thought that the model was just the trade balance that was shared by import. If ε = 4 and φ = 0.25 and the denominator ε * φ * imports, then ε * φ = 1 and the entire denominator to only import. The fact that the UST did not see that this is problematic.