Why Trump's Tarriffs Are Fucking Stupid

Lately, I've been thinking about how to explain tariffs to a five year old. Or a 78 year-old with the emotional development of a five year old. Here's a metaphor that I think is clarifying.

Let's say you are a farmer who grows carrots. You have a little produce stand where you sell the carrots that you grow.

One day, some of your customers come by. They want to buy some carrots, but they also want to know if you could sell them some flowers. You don't know anything about flowers. The soil on your farm isn't the best for growing flowers. If you grew flowers on your farm, they would take space away from your carrot patches. They whole thing would be a money-losing endeavor.

But you know that on the other side of town, there's a gardener who is great at growing flowers. He's got a little stand by his garden gate where he sells flowers, and he does quite well for himself. The only problem is that since he's on the other side of town, he's far away from where your customers are. It would be super inconvenient for them to go all the way across town to buy flowers, and then make a separate trip to your stand to buy carrots.

Ah ha. You have a great idea. You go to the gardener and you work out a deal. You'll buy flowers from him and sell them to your customers at your produce stand. He says "that's funny, some of my customers were just asking if I sold carrots, but I don't know anything about growing vegetables." He agrees to buy some of your carrots and sell them from his stand.

This is a great situation for everyone. The customers for both stands get what they want. You and the gardener both make more money than you would without your deal.

There's just one problem. Or at least you think it is a problem. You notice that your customers are buying 30% more flowers than the gardener's customers are buying carrots. You know that both you and the gardener are making more money than you were before, and you should be fine with this. But something about it feels unfair. Shouldn't the gardener have to sell as many carrots as you are selling flowers? You think about whether you should cancel the deal and start growing your own flowers. But you remember that your soil is bad for flowers, and you don't know anything about flowers anyway. You do some calculations are realize that it would be more expensive to grow your own flowers than to just buy them from the gardener and resell them. But it still sticks in your craw.

Until one day you have an idea. You'll raise the price of the flowers by 30%. That way, your customers will buy fewer flowers, and maybe you'll solve this flowers-carrots trade imbalance that feels so unfair to you.

That's a tariff.

There are several ways in which this is stupid.

For one, you picked a 30% tariff because you are selling 30% more flowers than he's selling carrots. But there's no guarantee that a 1% price increase equals a 1% decrease in demand. In fact, there's exactly one shape of price-demand curve where that's true-- a linear demand curve that is 1:1 sensitive to price. But in the real world, demand curves have all sorts of shapes. For things that are absolutely mandatory-- that you'll die without-- demand stays about the same for a wide range of prices (astute readers may notice that this is why for-profit health markets always go off the rails in disastrous ways). For total luxuries, maybe any increase in price will cause customers to stop buying entirely. There are even special classes of goods where price increases drive more demand, because it increases their luxury status. All in all, using a 30% tariff to close a 30% trade deficit is pure rectal algebra.

But there are other reasons your flower tariff is a bad idea. For one, you were making more money by selling flowers than not selling flowers. Your price increase may make customers stop buying flowers entirely, and then you are back to where you started. Also, now your customers are worse off because they want flowers and they can't afford them. Also, the gardener is pissed at you. He's probably going to increase the price of your carrots. Now you aren't just taking losses on flowers, but on carrots too. And you aren't invited to the gardener's parties anymore, because you were being a dick. Word gets around town that you are an unstable, petty business partner. The green grocer cancels his order.