Reciprocal tariffs as a tit-for-tat strategy in a repeated prisoners' dilemma

Trade policy has the characteristic of a Prisoners' Dilemma game: free trade is the best outcome (no tariffs), but that is not a Nash Equilibrium because any country can do better by imposing tariffs on imports.  The Nash equilibrium is for all countries to impose tariffs on imports.

One way out of this prisoners' dilemma is to play tit-for-tat (do whatever your rival did last period) because it gives foreign countries an incentive to keep their own tariffs low:  if foreign countries put a tariff on imports from the US, their exports to the US will be treated similarly.  

However, President Trump is computing reciprocal tariffs as (Trade Deficit with US)/(Exports to the US).  This measure is determined largely by foreign investment in the US, not foreign tariffs on US goods.  For example, China sells ￥to buy $ to invest in the US to buy US Treasuries.  Such an increase in demand for $ raises the price of a $ relative to the ￥.  The stronger $ makes Chinese exports look cheap to US consumers.  This is both a US Trade Deficit (the US buys more Chinese goods than China buys US goods), and a Chinese Investment Surplus (China invests more in the US than the US invests in China).

As a result of the policy, US tariffs on foreign goods are set to dramatically increase, which will lead to tit-for-tat responses from foreign countries which will result in less trade.  From Chapter One, we know that voluntary transactions create wealth, and with fewer of them, we are all poorer.  

It might some sense to set reciprocal tariffs equal to actual tariffs on a country-by-country basis, i.e.,(reciprocal US tariffs on foreign goods) = (foreign tariffs on US goods). 

However, see: WSJ: Reciprocal Tariffs Make No Sense

The U.S. trades with roughly 200 countries. Is Washington ready to impose and manage 2.6 million individual tariff rates? The lobbying pressures for exemptions and exceptions on the U.S. side would be enormous. This would fill the swamp, not drain it.

BOTTOM LINE: Reciprocal Tariffs, as calculated, would harm the US.

HT:  Mike, Donna

Will the world run out of resources?

Only if you ask an ecologist.

"We are using 50% more resources than the Earth can sustainably produce, and unless we change course, that number will grow fast—by 2030, even two planets will not be enough," says Jim Leape, director general of the World Wide Fund for Nature International (formerly the World Wildlife Fund).

To get the right answer, ask an economist.  They will point out that when a good gets scarce, its price increases, which gives consumers an incentive to conserve or find substitutes, and producers an incentive to find more of it.

Until about 10 years ago, it was reasonable to expect that natural gas might run out in a few short decades and oil soon thereafter. If that were to happen, agricultural yields would plummet, and the world would be faced with a stark dilemma: Plow up all the remaining rain forest to grow food, or starve. 

But thanks to fracking and the shale revolution, peak oil and gas have been postponed. They will run out one day, but only in the sense that you will run out of Atlantic Ocean one day if you take a rowboat west out of a harbor in Ireland. Just as you are likely to stop rowing long before you bump into Newfoundland, so we may well find cheap substitutes for fossil fuels long before they run out.

REPOST from 2014