Edward Conard

Top Ten New York Times Bestselling Author

  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “There are an amazing number of good ideas and interesting points made in Unintended Consequences. The thinking underlying it, and the obvious depth of understanding of the author, are very impressive.” - Steven Levitt, coauthor of Freakonomics; 2004 John Bates Clark Medal
Upside of Inequality Oxford Unintended Consequences

AI Summary. The author argues US tariffs were imposed mainly on intermediate rather than final goods, producing negative effective protection for downstream activities and discouraging domestic manufacturing. The tariffs did not reduce the trade deficit or reverse the decline in manufacturing employment, which the author attributes largely to saving-investment imbalances rather than asymmetric protectionism.

Paul Krugman City University Of New York
Date Posted:
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@PaulKrugman notes that Trump’s trade war failed due to a design flaw where tariffs were imposed on intermediate rather than final goods, potentially discouraging domestic manufacturing.

Do tariffs on intermediate goods discourage domestic manufacturing?

Core argument: Tariffs imposed mainly on intermediate rather than final goods produced negative effective protection for downstream activities, a design flaw that may have discouraged domestic manufacturing.

The failure of Trump's trade war can be attributed to a design flaw where tariffs were primarily imposed on intermediate rather than final goods, potentially discouraging domestic manufacturing. This approach did not achieve the intended reduction in the trade deficit or reverse the decline in manufacturing employment. The focus on intermediate goods resulted in negative effective protection for downstream activities, undermining the policy's goals. Additionally, trade deficits are largely driven by saving-investment imbalances, not asymmetries in protectionism, suggesting that the trade war's impact on the U.S. deficit was limited. Despite the radical policy shift, the structure of the tariffs was poorly designed, failing to leverage potential benefits from reduced capital imports due to rising protectionism. This misalignment highlights the complexity of using trade policy to influence macroeconomic outcomes.

Takeaways by Macro Roundup® AI

  1. Tariffs imposed mainly on intermediate rather than final goods produced negative effective protection for downstream activities, a design flaw that may have discouraged domestic manufacturing.
  2. The tariffs did not reduce the U.S. trade deficit or reverse the decline in manufacturing employment.
  3. Trade deficits are largely driven by saving-investment imbalances rather than asymmetries in protectionism, which limited the trade war's effect on the U.S. deficit.

Critique from Krugman of recent American trade policy, it could have worked in theory but there was a design flaw in that tariffs were largely focused on intermediate rather than final goods, with a net effect of potentially discouraging domestic manufacturing

His question"...the interesting question from an economic point of view, I’d argue, iswhy the trade war appears to have failed. I don’t mean that the burden of tariffs appears to have fallen on U.S. consumers rather than foreign exporters, which was widely predicted. Nor do I mean that the net effect of the trade war on U.S. real income was probably negative, which is also what almost all economists would have predicted. What I mean instead is that the trade war doesn’t seem to have achievedTrump’s stated aims — aims that the rest of us may consider ill-advised, but which should nonetheless have been achievable. Protectionism, it turns out, didn’t reduce the trade deficit, either overall or in manufacturing. It also doesn’t seem to have reversed the ongoing decline in manufacturing as a share of total employment...."

Why Did Trumps Trade War Fail? Notes toward a proper paper: Extended Excerpt Image 1


Paul Krugman, "Why Did Trump’s Trade War Fail? (Notes toward a proper paper)," City University Of New York, October 2020, https://www.gc.cuny.edu/CUNY_GC/media/LISCenter/pkrugman/tradewarfail.pdf

Here is the specific mechanism (see Figure 8)“…The decline of import-substituting industrialization as an economic policy has reduced interest in the details of protectionism — in particular, in the differing effects of tariffs on final versus intermediate goods. But there used to be an extensive literature on “effective protection,” on how the incentives to engage in different stages of the production process depended not only on the overall level of tariffs but on their structure. One main insight of that literature was that developing country tariffs often provided much higher effective protection than the headline tariff rates might suggest. If you put a 20 percent tariff on imported cars, but imported parts accounted for 80 percent of the cost, you were providing 100 percent effective protection to the activity of auto assembly. Another, less emphasized insight was that tariffs on imported inputs provided negative effective protection to downstream activities. And that’s what seems to have happened with the Trump trade war. Tariffs were largely focused on intermediate rather than final goods: The net effect, then, may actually have been to discourage manufacturing!...”

“….One of the insights drilled into every student of international finance is that the current account balance is a macroeconomic phenomenon; trade deficits aren’t caused by asymmetries in protectionism or export subsidies,they are the result of saving-investment imbalances. This is an important insight, but one needs to be careful about its implications. No, asymmetric trade policy doesn’t explain persistent U.S. trade deficits. But that doesn’t mean that a trade war can’t reduce the U.S. deficit in manufactured goods and expand manufacturing employment. There are two key reasons trade policy could, in principle, have affected manufacturing trade and employment. First, while it’s common in textbooks (including mine!) to make the simplifying assumption that savings-investment imbalances are exogenous to trade barriers — that we should write S-I => XM, treating the equals sign as a causal relationship — that isn’t really right. As Obstfeld and Rogoff (2000) argued, barriers to trade in goods and services also have the effect of limiting international capital mobility…since the United States is a persistent capital importer, rising protectionism should, other things equal, reduce those capital imports and hence reduce the trade deficit…. So it’s a mistake to extrapolate from the proposition that trade deficits are a macroeconomic phenomenon to the conclusion that trade policy can’t affect deficits….”

He argues the tariffs were poorly designed, “…How can we explain this lack of any visible effect from a fairly radical break in policy? In my discussions with economists, I generally hear three stories: 1. General equilibrium: Trade balances are determined by the savings-investment balance, so trade policy shouldn’t have an effect. 2. Cross-cutting policies: The 2017 Tax Cut and Jobs Act was supposed to bring about large inflows of capital — which, by a simple accounting identity, should have increased the trade deficit (although it’s unclear whether the Trump team understood that). 3. The structure of the Trump tariffs was poorly designed, even from his own point of view. In what follows, I’ll make the tentative case for (3)…”

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