Conversations with Tyler: Paul Krugman

"...Putting it all together, the Trump tariffs have raised consumer prices, rather than depressing foreign earnings. Some revenue has been gained, but there has also been what amounts to tax avoidance as consumers turn to other, untaxed sources of what we used to import. But this tax avoidance itself comes at a cost, so the U.S. as a whole is left poorer. Now, the numbers aren’t that big. The new paper puts the net welfare loss at $1.4 billion a month, or $17 billion a year; that’s less than 0.1 percent of U.S. GDP. But winning it isn’t. And the numbers could get a lot bigger if the trade war expands, say with a “national security” tariff on European cars...."

"...COWEN: You have a paper with Venables from the mid ’90s in the QJE. I think it’s called “Globalization and the Inequality of Nations.” It’s really a paper about history. For some reason, it’s become somewhat neglected. The notion that, as transportation costs fall very low, that nations on the periphery come back at the expense of the nations in center — do you think that’s what’s happening to the world today? KRUGMAN: I think we don’t really know. Just around the corner, Branko Milanovic has his office, and Branko has the famous elephant curve that shows income growth around the world.There’s a clear transition after the late 1980s as globalization really takes off. You start to see twin peaks: the global one percent pulling away from the rest, but also the global middle — the Chinese middle class, really — experiencing rapid growth, with a trough in between, which is the working class in advanced countries.Is that actually because of globalization? Or are common factors driving both globalization? I don’t think we really know. It’s certainly a nice story.Tony Venables and I were having some fun. We were working on economic geography and realized that one way you could cast the model would be one that would give you this U-shaped behavior in which you start from a world of high transport costs with very little globalization.Reduce them some, and the world differentiates into an advanced region and a peripheral region. Then reduce them further, and the peripheral region, with its lower costs, makes a comeback. That’s a nice story. It’s probably too simple to capture what really went on.....COWEN: If you think of the international supply chains that spread across many countries — Richard Baldwin has written on this. You have yourself. Do you think we’re now in an era where those chains are, in essence, contracting or collapsing? And what is now done in China may end up being done in Mexico or NAFTA? And that will unravel? Was it all too utopian to begin with? KRUGMAN:It wasn’t utopian. It worked. It is true that global trade really soared from about 1990 to 2010 and then sort of leveled off. It does look as if it was a one-time thing, the combination of trade liberalization in emerging markets and reduced transportation and transaction costs — because it’s not just the shipping costs, but it’s the costs of getting things on and off the ships, and all that led to it. But it looks like it was a one-time surge in trade, this value-chain kind of trade. There’s some indication that there was a little bit of overreach, that businesses, in search of saving that last penny, built international logistics chains that were just too complex, too subject to delays, disruption, and that there wasn’t advantage in moving stuff back closer to home. So there probably would have been some retrenchment anyway.Now, you tell me what’s going to happen with our trade conflict. COWEN: It’s perpetual. Supply chains will contract and become more regional. KRUGMAN: But how big? How severe? First of all, even the regional stuff — I have to say that the trade policy guy in me is, in some ways, enjoying this. It’s been, historically, for a long time, a pretty boring subject. COWEN: That’s right. KRUGMAN: World trade was almost free; nothing was happening. Now, all of a sudden, not only is stuff happening, but it’s happening in unpredictable directions. Even after the 2016 election, if you had told me that we would be making nice with Mexico but in dire conflict with Canada... I have no idea how far this goes. I suspect that... Let’s put it this way. A good guess would be that the regional trading agreements are more robust in the end, just because business has so much of a stake in maintaining them. But who knows? COWEN: Given the trends in economic geography we see, the trends and evolving technologies, do you think the two American coasts will become increasingly economically important? Or will, at some point, that trend reverse itself? KRUGMAN: It really looks as if agglomeration economies have become more important. We really do see a migration of economic activity to the areas that are already rich, and that is a little interesting. There was a debate — it still goes on a bit — there was a debate 20 years ago: With the internet, distance shouldn’t matter. Why won’t people relocate to where land is cheap and there’s no traffic? It doesn’t seem to happen. There seem to be other factors that make it more, not less, desirable to locate where the action is. As far as we can tell, it’s still going in that direction. I’m a little reluctant to be sure that it continues. Ex ante, it wasn’t at all clear which way it was going to go. To the extent that we can model this at all, which is pretty limited, it seems to be there are countervailing factors. I don’t think anyone had enough insight to know that it was going to turn out that the big metropolitan areas were going to be winners rather than losers from this trend...."
Tyler Cowen and Paul Krugman, "Conversations with Tyler: Paul Krugman,"Medium, October 10, 2018, https://medium.com/conversations-with-tyler/tyler-cowen-paul-krugman-economics-bipartisanship-politics-254dcee15b98

"... But there’s a pretty good case that an all-out trade war could mean tariffs in the 30-60 percent range; that this would lead to a very large reduction in trade, maybe 70 percent; but that the overall cost to the world economy would be smaller than I think many people imagine, maybe a 2-3% reduction in world GDP.....So when a tariff drives up the price of imports to consumers, leading them to buy fewer imported goods, the welfare loss will be roughly Loss = fall in imports * ½ tariff rate Now, the U.S. currently spends 15 percent of GDP on imports. Suppose we end up with a trade-war tariff of 40 percent, and (as I’ve been suggesting) a 70 percent decline in trade. Then the welfare loss is 20% * 0.7*15, or 2.1% of GDP. That’s not a small number, but it’s not that huge either: at the bottom of the Great Recession, CBO estimates that we were operating 6 percent below potential GDP. Of course that loss was temporary, while a trade war might be forever. But these net welfare costs may miss the real point, which is disruption....The U.S. currently exports about 12 percent of GDP. Not all of that is domestic value added, because some components are imported. But there’s still a lot of the economy, maybe 9 or 10 percent, engaged in production for foreign markets. And if we have the kind of trade war I’ve been envisaging, something like 70 percent of that part of the economy - say, 9 or 10 million workers - will have to start doing something else. And there would be a multiplier effect on many communities now built around export industries, which would lose service jobs too. This is just the flip side of the “China shock” story: even if you believe that the rapid growth of Chinese exports didn’t cost the U.S. jobs on net, it changed the composition and location of employment, producing a lot of losers along the way. And the “Trump shock” that would come from a trade war would be an order of magnitude bigger...."
Paul Krugman, "Thinking About a Trade War (Very Wonkish),"New York Times, June 17, 2018, https://www.nytimes.com/2018/06/17/opinion/thinking-about-a-trade-war-very-wonkish.html

Paul Krugman, "How Goes the Trade War?,"New York Times, March 3, 2019, https://www.nytimes.com/2019/03/03/opinion/how-goes-the-trade-war.html
"....Still, I think it’s worth noting that even if we are headed for a full-scale trade war, conventional estimates of the costs of such a war don’t come anywhere near to 10 percent of GDP, or even 6 percent. In fact, it’s one of the dirty little secrets of international economics that standard estimates of the cost of protectionism, while not trivial, aren’t usually earthshaking either.....a trade war that drastically rolled back globalization wouldn’t impose costs on the economy comparable to the kinds of movement we’ve seen in stock prices. But the costs to the economy as a whole might not be a good indicator of the costs to existing corporate assets.Since about 1990 corporate America has bet heavily on hyperglobalization - on the continuance of an open-market regime that has encouraged complex value chains that sprawl across borders. The notebook on which I’m writing this was designed in California, but probably assembled in China, with many of the components coming from South Korea and Japan. Apple could produce it entirely in North America, and probably would in the face of 30 percent tariffs. But the factories it would take to do that don’t (yet) exist. Meanwhile, the factories that do exist were built to serve globalized production - and many of them would be marginalized, maybe even made worthless, by tariffs that broke up those global value chains. That is, they would become stranded assets. Call it the anti-China shock. Of course, it wouldn’t just be factories left stranded by a trade war. A lot of people would be stranded too. The point of the famous “China shock” paper by Autor et al wasn’t that rapid trade growth made America as a whole poorer, it was that rapid changes in the location of production displaced a significant number of workers, creating personal hardship and hurting their communities. The irony is that an anti-China shock would do exactly the same thing. And I, at least, care more about the impact on workers than the impact on capital...."
Paul Krugman, "Trade Wars, Stranded Assets, and the Stock Market (Wonkish),"New York Times, April 4, 2018, https://www.nytimes.com/2018/04/04/opinion/trade-wars-stranded-assets-and-the-stock-market-wonkish.html

"... where does the intuition that the costs of trade war must be higher in today’s world come from? I think it comes from the combination of two things. First, imagining a literal cutoff of imports, as opposed to a mere rise in their price; second, imagining a short run in which it’s impossible to develop domestic production to replace key inputs. Something like that combination has occurred in the past, notably in the former Communist economies after the fall of the Soviet Union. But it doesn’t seem to be where we’re going right now. That said, a trade war in a supply-chain world would cause a lot of disruption, because it would lead over time to a major restructuring of industry. This would create a lot of losers, as well as some winners, perhaps more than a trade war would have in the past. But I don’t think the notion that the total loss in real income would be bigger than conventional analysis suggests holds up. Trump’s policy moves are destructive, based on ignorance, but we shouldn’t overstate their cost...."
Paul Krugman, "Supply Chains and Trade War (Very Wonkish),"New York Times, August 10, 2018, https://www.nytimes.com/2018/08/10/opinion/supply-chains-and-trade-war-very-wonkish.html