Michael Pettis Profile picture
Nov 10, 2024 11 tweets 3 min read Read on X
1/11
A new paper by the NBER on the McKinley tariffs of the late 1890s claims that the US economy did not benefit from the tariffs, mainly because they "may have reduced labor productivity in manufacturing."

bloomberg.com/opinion/articl…
2/11
Tyler Cowen (along with a number of other economists and journalists) argues that this paper is evidence that if the US were to impose tariffs today (or other trade intervention policies, presumably), they too would hurt the economy.
3/11
But this argument makes the same mistake as claims about the similar lessons of the Smoot Hawley tariffs of 1930. It treat tariffs a little hysterically, either as inherently and always bad for the economy, or as inherently and always good for the economy.
4/11
But tariffs are neither. They are simply one of a huge range of industrial and trade policies that work (much like currency devaluation) by shifting income from households (as net importers) to producers (as net exporters).
5/11
To put it another way, tariffs work in large part by forcing up the domestic savings share of GDP. For that reason their impacts on the economy must depend in large part on whether investment in the economy is constrained by scarce savings or by weak demand.
6/11
In economies running persistent trade surpluses, saving exceeds investment by definition, with the very purpose of trade surpluses being to resolve weak domestic demand. In that case policies that further weaken domestic demand and boost savings are not likely to help.
7/11
On the contrary, they need the opposite policies. That is why most economists, for example, call on China to implement policies that increase the consumption share of GDP (i.e. reduce the savings share). China should, in other words, reduce tariffs and strengthen the RMB.
8/11
But the impact of tariffs on deficit economies will be radically different. In that case by pushing up the savings share, these economies can either enjoy more investment and growth, or the same amount of investment and growth driven by less debt.
9/11
The US had been running large surpluses for over 20 years in 1900 and for over 60 years in 1930. It is not at all surprising that increasing tariffs was unlikely to benefit the economy. Surplus countries should implement the opposite transfers.

stlouisfed.org/on-the-economy…
10/11
Today, however, the US has been running massive deficits for roughly five decades. It should surprise no one that policies that benefit the economy under one set of imbalances are unlikely to do the same under a set of diametrically opposed imbalances.
11/11
That's why instead of pounding the table about whether tariffs are inherently good or inherently bad, we should instead discuss what the conditions are under which tariffs (and other trade and industrial policies) will or won't benefit the economy.

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More from @michaelxpettis

Apr 1
1/10
Paul Krugman is right to say that foreign central bank purchases of US bonds are unlikely to be big enough to drive US trade imbalances, but then he sort of misses the main point, which is that the US economy must...
open.substack.com/pub/paulkrugma…
2/10
adjust to net inflows whether or not these inflows are driven by central banks or by other entities. What matters is the extent to which countries that need to acquire foreign assets to balance their surpluses acquire these assets in the US.
3/10
Whether trade surpluses show up mainly in the form of rising central bank reserves, as was the case with China two decades ago, or in the form of rising foreign asset accumulation outside the central bank, as has been the case with China since 2017, makes little difference.
Read 10 tweets
Apr 1
1/8
Reuters: "During Sunday's meeting, the countries' trade ministers agreed to speed up talks on a South Korea-Japan-China free trade agreement deal to promote "regional and global trade", according to a statement released after the meeting."
reuters.com/world/china-ja…
2/8
This sounds good on paper, but China and South Korea both depend on trade surpluses to resolve their weak domestic demand, and while Japan has been running small deficits recently, it is unlikely to want them to surge by enough to help resolve the net imbalances.
3/8
In the growing global trade conflict, countries that rely on large manufacturing surpluses to resolve their domestic demand weaknesses are not in very strong bargaining positions. Their very large and very competitive manufacturing sectors are...
Read 8 tweets
Mar 31
1/9
It may be exciting to view the global rise of trade conflict as wholly a Trump-Xi thing, and many do, but in fact the conflict between the US and China is only a small part of the rise of global trade tensions.

via @ftft.com/content/c4bce4…
2/9
As Joan Robinson argued decades ago, spreading trade conflict is the inevitable consequence of large, beggar-thy-neighbor trade imbalances that externalize the cost of weak domestic demand in trade surplus economies.

This FT article shows what this means in practice.
3/9
"Beijing." it says, "was the subject of 198 trade investigation cases at the WTO in 2024, double its tally the previous year and accounting for nearly half of all disputes lodged at the global trade body, according to research by Peking University economist Lu Feng."
Read 9 tweets
Mar 28
1/20
The views of Maurice Obstfeld (and other American economists) on the relationship between the internal and external accounts of the US are finally starting to evolve.

brookings.edu/wp-content/upl…
2/20
From insisting that the the US external account is wholly driven by domestic imbalances, and that the only sustainable way the US can reduce its trade deficit is by reducing the fiscal deficit, he now accepts that the reality is "more nuanced".
3/20
But in getting there he now argues that people like me are wrong to insist that only external factors matter. Of course neither I nor anyone else has ever made that argument. What I've long argued is that the US plays a special role in absorbing global savings imbalances.
Read 20 tweets
Mar 27
1/9
WSJ: "Over the past month, economists at HSBC, ANZ and Citi raised projections for China’s gross domestic product growth to 4.8%, 4.8% and 4.7% from previous estimates of 4.5%, 4.3% and 4.2% respectively."

via @WSJwsj.com/economy/chinas…
2/9
"That brings their expectations," WSJ continues, "closer to the ambitious target of around 5% growth Beijing has set for the year."

In fact these estimates shouldn't be taken at face value. GDP growth this year will be 5% – i.e. the growth target – just as it was last year.
3/9
Because we know what China's GDP growth will be this year (or we should know), rather than project GDP growth for the year, bank analysts and the IMF/World Bank should really be discussing the expected "quality" of GDP growth.
Read 9 tweets
Mar 26
1/6
According to SCMP, China's Economic Daily, a state-owned newspaper, is warning that "Inefficient investments continue to be a drain on...
scmp.com/economy/china-…
2/6
China’s economy, and debt-laden local governments need to ensure that the projects they back are actually needed in their communities. Over the decades, local governments have relied on big construction projects to drive...
3/6
short-term regional growth, often disregarding actual local needs. Many of these projects were poorly planned, resulting in a lot of waste and debt for the governments."

We've known this to be true for a while, but its rare for it to be proposed so openly.
Read 6 tweets

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