The quote is from President Trump as recounted by Peter Coy. Then Trump added: ““It will be a lot of money coming into the coffers of the United States of America.” That’s scary stuff for any student who has taken international economics. As Menzie Chinn points out these statements highlight that “(1) Mr. Trump has no understanding of how tariffs work, or (2) he does understand, and he’s lying.”
As a simple application of the partial equilibrium framework, who is paying for the tariffs? China or…..
As another simple application of the partial equilibrium framework, who is generating the “money coming into [the US government’s] coffers”?
The extra credit question relates to the “large country” case that Menzie Chinn refers to. It would require a substantial decline in Chinese export prices which has (to date) not been observed. EVEN IF a dramatic decline in export prices from China could be observed (because it lost the US as its export market), basic principles of international economics highlight that it is the value added not the absolute value of exports that matter. To the degree that prices would fall, Chinese producers would only be affected to the degree that they add value added. But what do we know about the US or foreign share in value added of Chinese exports?
