Brent Neiman writes:

My first question, when the White House unveiled its tariff regime, was, “How on earth did they calculate such huge rates?” Reciprocal tariffs, after all, are supposed to treat other countries the way they treat us, and foreign tariffs on American goods are nowhere near these levels.

The next day it got personal. The Office of the U.S. Trade Representative released its methodology and cited an academic paper produced by four economists, including me, seemingly in support of their numbers. But they got it wrong. Very wrong. I disagree fundamentally with the government’s trade policy and approach. But even taking it at face value, our findings suggest the calculated tariffs should be dramatically smaller — perhaps one-fourth as large.

Let’s start with the biggest mistake. The office said it calculated its reciprocal tariffs at a level that would theoretically eliminate trade deficits with “each of our trading partners,” one by one. Is that a reasonable goal?

It is not. Trade imbalances between two countries can emerge for many reasons that have nothing to do with protectionism. Americans spend more on clothing made in Sri Lanka than Sri Lankans spend on American pharmaceuticals and gas turbines. So what? That pattern reflects differences in natural resources, comparative advantage and development levels. The deficit numbers don’t suggest, let alone prove, unfair competition.

There are some reasonable arguments in favor of reducing the overall trade deficit, such as to reduce risks from our debt. But these arguments don’t apply country by country. The Nobel laureate Robert Solow explained why when he quipped, “I have a chronic deficit with my barber, who doesn’t buy a darned thing from me.” Mr. Solow also surely ran a chronic surplus with his students, and these imbalances reveal nothing about trade barriers in hair care or higher education, nor would they speak to his financial health. [Continue reading…]