Michael Hicks of Ball State points us to an important bit of news regarding the current Administration’s strategy of using tariffs as a billy club:
The landed cost of U.S. beans in China is currently similar to Brazilian soybeans even with the 25-percent tariff, but Chinese crushers are reluctant to take U.S. supply as they fear authorities may not approve cargoes and that tariffs could climb further.
Game Theory 101 (prerequisite is Trade 101): Reduce volatility over the long run by trading with more stable and predictable partners. Signaling through ‘crazy’ behavior, with uncertain payoffs is higher risk.
And while the Chinese may be the ones primarily reducing their imports, this can affect other US trading partners as well. Once solid allies like Canada, Mexico, South Korea, and the EU suddenly find themselves targets of tariff aggression. If the behavior of your trading partner’s government is erratic, you face increased costs in dealing with them. Higher costs, ceteris paribus, mean less quantity demanded. All firms, then, likely face costs of the tariff, not just the immediate industry facing the tariff.
An erratic tariff regime can be seen as akin to political instability. Economic actors (buyers and sellers) like certainty. Countries with greater political uncertainty, where things are more governed by arbitrary legislation rather than principled actions, tend to see weaker economic performance and less economic dynamism as these actors have to take into account these increased costs.
Trump’s supporters may hail his behavior as “4-d chess” and “superior negotiating,” but it comes at a real cost.