Thread by @Trinhnomics

Ready? Lunch-time reading. I know u want to! haha. Okay, here is a paper on tariffs & who pays for the tariffs.

Yes, this paper argues that Chinese producers do & the US consumers gain, contrary to what people say.

True story. It really says that. Ready?🤗 Here we go.

Before we talk about who pays for tariffs, let's back it up. We must look at China's trade (exports & imports). We know it exports about USD2.2trn & imports roughly 2.1trn (some variance from year to year as imports decline ytd then'd be smaller in 2019).

Let's look at details👇🏻

You should know by now if u follow me that China's trade structure is very interesting & reflects its comparative advantage (a lot of people who are hardworking & not much natural resources - arable land limited).

EXPORTS are mostly manufactured goods. Imports mostly commodities

In other words, China's EXPORTS ARE MORE ELASTIC than China's IMPORTS. That is key in most of the literature I have read on elasticity of trade for China

Note that these studies are super dated. But common sense tells u based on looking at this is that China imports essentials

That is the chart that shows NET IMPORTS OF ESSENTIALS - LARGEST IN ASIA & China is the largest consumer of many key commodities & that reflects its comparative advantage (a lot of hardworking people, limited arable land & natural resources).

U're like when are we gonna talk about this awesome paper. Do not worry, just want to prep you with some key facts/info before we dive straight into it

Okay, there is a concept in economics called elasticity, which is basically relative change of quantity to change of prices 👈🏻

U're inelastic when NO MATTER THE CHANGE OF PRICE, GONNA BUY. That is what opiate addiction is. Most things falls into some sort of elasticity scale. People like to categorize this into essentials vs discretionary for consumer goods. Essentials bottom of Maslow's needs (eg,food)

Anyway, most people that analyze trade-war tend to focus on the differential b/n US & China export/import relationship & they don't look at China's or US' trade structure. Right? They don't. But u should. Why? B/c of this issue of substitution effect/elasticity

Tariffs so far👇🏻

That chart just tells you a SLICE of the puzzle as it shows the items tariffed by China & the US but I zoomed it out for you.

Okay, ready? Here we go. Before we talk about this paper, I want to show you 1 thing - the differential b/n US & China CPI - China is 2.8% vs US 1.7%YoY

Note that when trade-war started, everyone says omgosh the Americans are going to pay hardcore. Why? Just look at that picture of tariffs - the Americans import more from the China & tariffs on Chinese goods will RAISE IMPORT COSTS & PASS-THROUGH.

So far, PPI OK & CPI sub 2% 👇🏻

But this does not make any sense. Why is China CPI rising to 2.8% & some say'll surpass 3% by end Q4 2019 (yes, the gov said that at 1 pt) if the amt that China retaliated vs the US is small vs what the Americans face in tariffed goods.

This is why I started w/ trade structure.

So finally, we'll talk about this paper 👇🏻:

Written by a European org called EconPol - a network of 14 policy-oriented university & non-university research institutes across 12 countries, who contribute scientific expertise to the disc of the EU 👇🏻

econpol.eu/sites/default/…

As always, I like to give background of institutions publishing research etc. Seems credible to me as I know nothing about EconPol (excuse my ignorance) but I recognize the institutions they affiliate w/.

Anyway, Who's Paying for the Trade War w/ China?

The argument they make is a rather simple 1 & has been proven true. And that is regarding this issue of elasticity of demand & producers pay if demand is ELASTIC & consumers pay if INELASTIC

In China, consumers pay costs of CNY depreciation due to import structure & also tariffs

Because the depreciation of the FX & additional tariffs on food (American agri products) are basically pushing up food prices in China, which doesn't help w/ this African Swine Flu eliminating 1/3 to 1/2 pig population.

Inversely, the US DON'T RELY on imports for essentials👈🏻.

So let's look at this CPI divergence again. What does it show?
a) US CPI 1.7% < China CPI 2.8%, which is by 1.1% & that is despite the fact that there are more tariffs on American import of Chinese goods
b) US PPI 2% > China PPI of -0.8% reflects US producers facing higher prices

On the latter pt of US PPI vs China contracting PPI:
a) Tariffs are hurting Chinese investment as seen by contracting PPI
b) Tariffs are hurting Chinese households, as seen by higher CPI
On the US side, tariffs are hurting American producers, as costs higher but PPI slowing again

Finally, the paper raises an important pt & something that people are not paying attention:
a) @realDonaldTrump should not raise tariffs ALL THE WAY TO ALL OF CONSUMER GOODS & this is why despite escalation he has NOT actually done what he threatened
b) US producers more impacted