"All constitutions of government... are valued only in proportion as they tend to promote the happiness of those who live under them" – A. Smith (1759)
Confusing an algebraic exercise of hypothetical theoretical equilibrium (one might even say childishly formulated) by transforming it into economic policy can only occur in a poorly prepared mind or perhaps one trapped in a swarm of cognitive biases.
Arguments put forward
They considered an environment in which a tariff of rate τ (TAU) i is applied to country i and ∆τ_ (DELTA TAU) i reflects the change in the tariff rate. Let ε (EPSILON) < 0 be the elasticity of imports with respect to import prices, φ (PHI) > 0 be the pass-through of tariffs to import prices, m_i > 0 be the total imports of country i and x_i > 0 be the total exports.
Thus, the decrease in imports due to a change in tariffs is equal to ∆τ_i*ε*φ*m_i< 0. They assume that the offsetting effects of the exchange rate and general equilibrium are small enough to be ignored; this reciprocal tariff will result in a (miraculously balanced) zero bilateral trade balance.
To calculate the reciprocal tariffs, import and export data were used, and values for the parameters ε and φ were selected. The price elasticity of demand for imports, ε, was set to 4.
Motion of its own
A brilliant explanation by Adam Smith from 1759 suffices to summarise a destructive critique of the assumptions argued in the algebraic model presented above.
“The man of system, on the contrary… is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it… He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.”
Indeed, it is foolishly assumed that the new world order ruler (a man of system) can achieve equilibrium by moving all the pieces on the hypothetical international chessboard, without these pieces (lacking a principle of motion) being able to produce any reaction.
As is naturally and evidently not the case, all the reactions are already beginning that will lead, if they continue, to an almost immediate and abrupt decline in international trade, transportation, insurance, and tourism.
Ineffective mercantilism
Economically, the ingredients for an ineffective mercantilism would appear to be in place, since those who do not export will also be unable to import – resulting in the application of reciprocal tariffs, the (some) dreamed-of closure of economies.
Furthermore, its formulators do not seem to have considered the international financial impacts. Who are the largest holders of US public debt, or who maintains their liquid assets in that currency? What happened to the pound sterling up to and since the 20th century? What could be the consequences of a potential economic war under these circumstances?
They seem to ignore that the public spending and trade deficit they logically seek to reduce have been financed for many years through monetary issuance and debt, which would be impossible to sustain if investors tomorrow opted for alternatives to the dollar (the euro, gold, real estate investments, or start-ups in their own countries, etc.).
What will be the future of cryptocurrencies, a Ponzi scheme devoid of any backing or value per se, except for the inexplicable religious faith of its holders? What would happen if people finally realised this?
Closing of economies
If, in order to balance the trade balance, a near-total shutdown of the world's economies was not considered, we would see the emergence of an extensive application of "import substitution," where even inputs would have to be almost completely replaced.
Productive technologies are no longer the exclusive domain of a few countries. Research and development centres are now dispersed throughout most of the world. It remains to be seen whether this trend of closure and isolation can also be applied to science and knowledge, since they are considered strategic inputs (as they were in different periods of history).
Will bilateral trade agreements between countries or blocs (as in the European case) advance, abandoning the multilateralism that drives more extensive and inclusive socioeconomic development?
Returning to the title of this column, as in the game of questions and challenges, the objective will be to respond objectively and evaluate each and every possible consequence.
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