April 6 seems like a century ago. Such is life in the thrill-a-second Trump II administration. But that’s when I wrote an article explaining Trump’s tariffs. This article will extend what I wrote there with more examples and a (perhaps) meaningful discussion of this equation:
Peter Navarro and his band of clowns assumed ε and φ were equal to 4.0 and 0.25 respectively. As we saw in my previous article, estimates of the two parameters give this:
| Elasticity | 1.08 | 2.225 | 3.37 |
| Elasticity x Passthrough | 0.994 | 2.047 | 3.100 |
The question I want to raise here is what this implies for the tariff equation.
Recall the example I used:
This equation calculates the tariff that makes the balance of trade equal to zero assuming the quantities do not change due to the tariffs. In this case, the tariff is 10%. This is easy to see. Imports are 100. Suppose we have a 10% tariff assuming ε and φ are 4.0 and 0.25 respectively. Since the product of those two is 1, a 10% tariff will reduce import quantities by exactly 10%.
100 – (10% * 100) = 90.
But what if we use the values above instead? Let’s use the first example where ε*φ = 0.994. In that case, the tariff becomes
In other words, the tariff should be 10%*(1 + 0.006) = 10.006%.
At this point, it’s tempting to say, “Well, that’s not a very big difference.” Patience, grasshoppers. The good stuff is next.
Consider the case where ε*φ = 2.047. In that case, the tariff should be 10%*(1 + 1/2.047) = 14.88%. And if ε*φ = 3.100, the tariff should be 10%*(1 + 1/3.100) = 13.22%.
The point is that elasticities matter when you’re calculating tariffs. They may matter a lot. Get some good statistical economists before you try estimating things like ε and φ.
