Discussing Tariffs with Michael Pettis

Finance professor Michael Pettis had a recent FT piece on tariffs. His piece builds on one of his Bluesky threads, which I discussed with him there. In this post, I'm going to react to some of the things he said in both the FT piece and the Bluesky conversation. (If you haven't heard of it, Bluesky is a recent addition to the social media landscape, based on the idea of protocols rather than platforms).

The Pettis FT piece starts this way:

If you want to understand the effects of tariffs on the economy, ask economic historians. Their views tend to be fairly nuanced, generally recognising that the history of tariffs is a varied one. Sometimes they are associated with higher economic growth and other times with lower.

For many economists, however, tariffs have become an ideological litmus test with little acknowledgment of these variations. Tariffs in advanced economies — and especially in the US — only matter, they argue, to the extent that they affect the prices of imported goods. For that reason, they are seen as always harmful to the economy because they always hurt consumers.

I love economic historians as much as Pettis does, but I'm not sure how he came to his impression of economists. When I talk to economists, they are always reminding us that there are "tradeoffs in everything." That applies to all economic policies, including tariffs, and when they talk about tariffs, they talk about them with a lot of nuance. (Of course, you can probably find some social media statement by an economist that doesn't have sufficient nuance, but the nuance is definitely there if you read the academic/think tank papers they publish.)

With regard to the tariff tradeoffs, as with any other economic instrument, there will be costs and benefits to tariffs, which you have to weigh and balance against each other. Prices and consumer welfare are certainly important, but they are not the only thing economists take into account. In addition to the consumer price increases that result from the tariffs, some key elements they consider are:

• the impact on industries that use imports as inputs in their own production;
• the increased profits and jobs in the protected industry;
• the deadweight losses from tariffs;
• the reduction in competition in the protected industry;
• the shift in investment away from unprotected industries, which are now relatively less profitable;
• the likely retaliation by trading partners.

In thinking about the impact of a particular set of tariffs on economic growth (and overall economic well-being), you have to weigh and balance all of these factors (among other things). Pettis doesn't seem to think economists take into account the full range of costs and benefits, but I'm curious what he makes of the numerous studies listed here or this one entitled "Are tariffs bad for growth? Yes, say five decades of data from 150 countries."

Also worth noting is that, for the purposes of this post, I'm assuming the tariffs are set by experts who are objective and knowledgeable. In the real world, however, tariff choices are heavily influenced by lobbyists, which is another element that should be taken into account in evaluating how well tariffs work.

With regard to Pettis's own weighing and balancing, I'm not sure what specific elements he is considering, but he argues in the FT piece that, in terms of the general impact of tariffs on the economy, "[s]ometimes they are associated with higher economic growth and other times with lower." His use of "associated" here is interesting, because I think he is implying causation. I have sometimes come across people who use that word and then deny later that they meant causation, but I don't think that's what he is doing. Rather, I think he is saying that at certain times and places in history, tariffs have led to higher overall economic growth. But he can correct me if I misunderstood him.

All of this came up on Bluesky when I asked Pettis about something he posted there on this same issue. He had argued the following:

As any economic historian knows, there is a long history of tariffs in which they sometimes boost overall growth and other times undermine it. That is why the idea that tariffs are always good is just as idiotic as the idea that tariffs are always bad.

I responded with this:

What are some historical examples of tariffs that you think boosted overall growth?

What I was hoping for here was a cite to a specific tariff, e.g., the 25% U.S. tariff on pickup trucks, but instead he offered the following:

US and German tariffs in the late 1860s and 1870s, Japan's in the post-War decades, China's in the past 3-4 decades, South Korea's in the 1970s and 1980s. It is actually hard to find advanced manufacturing economies that didn't become so except behind trade barriers and aggressive industrial policy.

While his references to general tariffs in a particular country/period were not what I had in mind, I decided to go with it anyway and asked him this:

In all those periods, the countries in question had a wide range of policies in place. How do you disentangle effects of the tariffs from the effects of other policies, in order to show that tariffs themselves led to a boost in overall growth? More broadly, how do you tie tariffs to growth levels?

Instead of responding to any of that, he shift to a different argument:

But that works both ways, in which case you are arguing that tariffs have no impact at all, and that it is merely an astonishing coincidence that developing countries that "succeeded" all did so behind tariff walls.

And I responded with the following:

Tariffs clearly had an impact, but did they boost overall growth? What would growth have looked like without them? That was the question I had in mind. Also, just about every country used tariffs, and many did not experience industrial development/strong growth, so maybe tariffs aren't the key?

I did not hear anything further from him, so that was the end of that.

 

In the FT piece, Pettis later explains his view of how tariffs can make an economy grow and then provides an illustration:

So wouldn’t US tariffs — a tax on consumption — make American consumers worse off? Not necessarily. American households are not just consumers, as many economists would have you believe, but also producers. A subsidy to production should cause Americans to produce more, and the more they produce, the more they are able to consume.

Tariff policy is “successful”, in other words, if it raises domestic production by enough to pull consumption up with it — ie, if it causes Americans to consume more by producing even more. In that case American consumers are clearly better off, even as the share they consume of total domestic production declines. ...

...

If ... the US was to put tariffs on electric vehicles, the relevant question is whether US manufacturers would be incentivised to increase domestic production of EVs by enough to raise the total American production of goods and services. If they are, American workers would benefit in the form of rising productivity. In turn, this would lead to wages rising by more than the initial price impact the tariffs had and American consumers would be better off.

Of course, there is little doubt that the U.S. could impose 100% tariffs on EV imports in order to promote a domestic EV industry. But that's a very different argument than one that tariffs boost economic growth more generally.

With all this in mind, my question for Pettis is related to the one I asked on Bluesky: Is there a particular set of tariffs for which you can show that they have boosted overall economic growth? What I'd want to see here is an analysis of all the factors I noted above. Based on our Bluesky exchange, he seems to be saying something along the lines of "in the periods I referenced there were tariffs and around that same time an industry grew, and therefore tariffs worked in that case." But when you take into account the full range of effects of the tariffs, I would say the issue is a lot more complicated than that. If you are making a claim about overall economic growth, as he seems to be doing, it can't just be a simple exercise of identifying the existence of tariffs that were in effect at the same time as the economy was growing. You have to think about all the various policies and circumstances that existed at that time, and consider the full range of effects of the tariffs, which, of course, is how economists evaluate these things.