Tariffs: game theory vs. reality
Last post, I left you with some bread crumbs and a pair of conundrums, and presented the game theory considerations. I also suggested that history has a lower precedence than game theory (GT). That should have had you scratching your head. Shouldn’t we take actual history over a philosophical exercise?
The objective of GT is to identify how people calculate value and respond to options. The law of supply and demand is Wikipedia’s poster child for GT, and it makes a great example of how something complicated can be broken down into comprehensible rules. In my mind, the difference between magic and technology is whether you can industrialize the results. GT is reliable enough for people to spend billions of dollars every year on advertising guided by it.
“Don’t candy-coat it,” Hadrian chides. "“It’s a distillation of history, not psychohistory. Tell them the downside.”
The gold standard of science is the ability to predict how poking reality *here* results in a reaction *there*. GT isn’t quite up to that standard. Its primary flaw is that it describes what will happen under unbiased, homogenous conditions, and suffers badly under chaotic conditions. GT’s MO is to figure out which patterns apply, and then identify how the messy details change that outcome. Often people will argue about which pattern to start with.
You were talking about washing machines?
Almost there. Understanding the washing machine tariffs requires some basic economics. If you’re already an economics wonk, skip over this section, or skim over it to see if you can catch me at getting something wrong.
The Invisible Hand (IH) is supply and demand’s younger, scarier brother. It gets pulled out when economists want to go all Yoda, or don’t actually understand something themselves.
“The Invisible Hand is like Boyle’s Law,” Hadrian says. “It’s only applicable under ideal circumstances. The world is never that clean.”
Boyle’s law is the one that describes how pressure and/or volume will increase if you heat up a gas, or how temperature and pressure will drop if you expand the volume. It’s a good starting point for saying what should happen, after which you can research why it didn’t exactly work that way.
“Also,” he interrupts again, “you can’t just use the term willy-nilly. People use it to imply that capitalism has a divine providence that governments shouldn’t get in the way of.”
Memetic firewall axiom: Attributing a behavior to mysterious forces is destructive to understanding. No exceptions. I want to take the power out of that usage by nailing the term down with a definition.
The Invisible Hand, in the context of a memetic firewall, is all of the bits of human nature that provide negative feedback mechanisms within economics.
Supply and demand is a part of IH. Instead of air pressure, it uses competitive pressure. Competitive pressure increases, prices fall. Supply decreases, prices rise. IH also states that competitive pressure also induces innovation. You can’t quantify innovation like you can prices, so it’s technically invisible. Innovation also usually causes prices to drop.
A tariff is like putting your thumb on a scale. It decreases competitive pressure internally and increases it externally. Thus, without special circumstances, prices rise internally and drop externally.
What is a special circumstance? A few smart guys at the Becker Friedman Institute provided this detailed description of how trade policy in the last decade influenced washing machine prices. I’ll paraphrase.
In 2012, Whirlpool insisted that Korean companies (Samsung and LG) were dumping washing machines onto the US market below fair market value. US Trade Commission (USITC) put a tariff (a.k.a., antidumping duty) on Korean washing machines. Samsung and LG innovated by moving their production out of the tariff-impacted zone, into China. That innovation resulted in a drop in prices of washing machines in the US, which probably isn’t what Whirlpool was looking for.
In 2016, the Trade Commission tariffed washers from China, and prices kept dropping as the Koreans moved their factories to Vietnam and Thailand.
Why did prices drop if the market had to bear the cost of building new factories? That’s actually the primary topic of the aforementioned paper. The math in that paper is quite intimidating. It’s the kind of thing that gets waved around when people are trying to convince you that you should just trust them about supply side economics.
When faced with walls of mathematics, it’s helpful to identify the circumstances that the math describes. Ask someone with stronger math if the math adds up, then and identify if it supports the paper’s conclusions. Does the paper say that tariffs make prices drop? Not at all. It says that tariffs targeted at an individual country aren’t effective against country-hopping multinational corporations.
The USITC only has a mandate to tariff specific products from specific countries. The Korean companies were moving their factories as fast as we could legislate. Faced with an urgent need to protect Whirlpool’s shareholders, Trump’s administration came up with a new tactic.
Trump’s administration used laws intended for protecting America against wartime enemies and decided that all those words meant he could do whatever he wanted. The details are better left for lawyers, to be honest. The whole “is it legal” conversation is a smoke screen. Legality is the domain of he who tells the best story, and all things are legal if you can buy the judges. What we want to know is if it was in any way beneficial to you, me, or anyone else who is likely to read this analysis.
In 2018, Trump’s administration issued a tariff on all washing machines built outside of the US, plus the parts, and then added steel and aluminum into the mix. This finally had the effect that Whirlpool was looking for.
The rough outcome
If there were no competitive pressure at all, the natural price of a washing machine is at least a thousand dollars just from laundromat savings. The difference between current price and the maximum consumers would pay is called consumer surplus.
With a proper collar placed on Whirlpool’s competition, it shouldn’t surprise anyone that washing machine prices rose. They had a lot of consumer surplus to work with. The key take-away here isn’t that some Americans are selfish enough to take advantage of this situation. Selfishness is a feature of the system. It’s the real driver behind the invisible hand.
“Don’t just leave them hanging,” Hadrian insists. “Keep following the money. Tell them the other side, too. You don’t just stop when you find the answer you’re looking for.”
The claimed value of the tariffs was that it would increase American jobs. Did it? If so, will more tariffs make more jobs?
Next up: What did the manufacturers do with that money? How did the foreign manufacturers respond? Was it worth it?