HAT Manifesto Part 1/3 - Rubric Cube - 250803 edit

 

Optimal Tariffs – Short-Run Good for the U.S., Bad for the World; Likely Long-Run Good for Both the U.S. and World.
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Summarize article: Breitbart Business Digest: Modern Trade Theory Backs Trump’s Tariff Playbook (John Carney, Aug. 13, 2025)
ChatGPT summary:
Core Research Finding:
Economists Oleg Itskhoki (UCLA) and Dmitry Mukhin (University of Wisconsin-Madison) argue, even in a globalized, financially complex economy, there is still an optimal tariff for the United States.
Traditional free-trade logic weakens once global capital flows, currency movements, and external asset structures are considered.
In a balanced-trade model, they find a welfare-maximizing U.S. tariff of 34%, with a revenue-maximizing rate near 80%.
Calibrated to current U.S. conditions (trade deficits, large foreign-held dollar liabilities), the optimal tariff falls to about 9%—still positive and justifiable.
-Key Mechanism:
Valuation effects: Tariffs tend to strengthen the dollar, which reduces the dollar value of U.S. foreign assets.
This offsets some trade-term gains, lowering the optimal rate compared with pure goods-market models.
-Role of Retaliation:
In their model, retaliation produces the largest costs of tariffs.
However, recent U.S. tariffs (2018–2025) often did not trigger full trade wars.
Instead:
Japan signed a bilateral deal.
The EU restarted negotiations.
China agreed to major purchase commitments.
India has responded diplomatically.
This absence of major retaliation increases the potential gains from U.S. tariffs.
-Negotiation Leverage:
Tariffs can secure side payments (trade concessions, investment pledges, purchase commitments) not modeled in the paper but which would boost U.S. welfare.
Such outcomes reduce the necessary tariff rate for trade balance goals while amplifying benefits.
Political and Legal Practicality:
Production/export subsidies may be more efficient in theory but are politically hard, controversial, or treaty-prohibited.
Tariffs are simpler, enforceable, and authorized under U.S. law.
Managed-trade deals can mimic subsidy effects through diplomacy.
Modern Framing:
The authors position tariffs as a macro-financial policy tool, influencing:
Trade balance
Exchange rate
International investment position
Their work challenges the prevailing view of tariffs as inherently harmful.
Implication for Trump’s Policy:
Trump’s recent tariffs, followed by negotiated deals rather than trade wars, fit the model’s predictions.
In this light, his trade strategy aligns with what modernized economic theory says can be optimal—making his policy less of a historical throwback and more of a theory-driven approach.
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See Figure 1 - Side-by-side comparison table:

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If the U.S. charges optimal tariffs does the world as a whole economically come out ahead or behind?
ChatGPT:
Behind.
In standard trade theory, a U.S. “optimal” tariff raises U.S. welfare by improving its terms of trade, but it reduces total world welfare because some mutually beneficial trades no longer happen - deadweight loss.
The U.S. gain is mostly a transfer from foreigners, the tariff amount, while the lost trades are a pure global loss.
With retaliation, the world loss is larger.
The main ways the world could come out ahead is if the U.S. tariffs
-the U.S. negotiates lower foreign barriers/subsidies
-induce offsetting efficiency gains for foreign suppliers
[Example efficiency gains would be breaking/lessening cartel and union power in foreign countries resulting in lower costs and prices both domestically and for exports].
Absent those corrections, global welfare falls relative to free trade.
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So, the U.S. charging optimal tariffs in the short run helps the U.S. economy and hurts the overall world economy. But in the long run can also help the overall world economy?
ChatGPT:
Exactly — but that long-run world benefit only happens under certain conditions.
Short run
U.S. economy: Gains from improved terms of trade and tariff revenue.
World economy: Loses, because some mutually beneficial trades disappear - global deadweight loss.
Effect: U.S. up, world total down.
Long run — two possible paths
1 - Partners adapt or retaliate:
U.S. gains shrink, global losses persist or grow.
Efficiency falls in both U.S. and foreign countries - less specialization and weaker competition.
World economy stays behind and U.S. gains shrink.
2 - Tariffs prompt negotiated concessions:
Lower foreign tariffs
Market-access agreements
Removal of subsidies or trade barriers
Once barriers fall on both sides, trade expands beyond the pre-tariff baseline.
World economy can end up ahead, because the temporary tariff pain is offset by a more efficient, liberalized trade environment in the long run.
Optimal tariffs by themselves are zero-sum plus deadweight loss.
But if they induce structural trade reforms, they can be the catalyst for positive-sum outcomes over time.
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