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Guest Contribution: “How Tariffs Affect China’s Exports”

Today, we’re fortunate to have Willem Thorbecke, Senior Fellow at Japan’s Research Institute of Economy, Trade and Industry (RIETI) as a guest contributor. The views expressed represent those of the author himself, and do not necessarily represent…

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Today, we’re fortunate to have Willem Thorbecke, Senior Fellow at Japan’s Research Institute of Economy, Trade and Industry (RIETI) as a guest contributor. The views expressed represent those of the author himself, and do not necessarily represent those of RIETI, or any other institutions the author is affiliated with.


Donald Trump launched a trade war with China.  On 6 July 2018 he placed 25% tariffs on $34 billion of imports from China and on 23 August 2018 he placed 25% tariffs on an additional $16 billion of imports. On 24 September 2019 he added 10% tariffs on $200 billion of imports and in 2019 and 2020 added tariffs on an additional $300 billion of imports.  Chad Bown and Melina Kolb provided a detailed timeline of the trade war (https://www.piie.com/blogs/trade-investment-policy-watch/trump-trade-war-china-date-guide ).  President Biden has left the tariffs in place.

How do tariffs affect China’s exports?  Figure 1 shows China’s exports to the U.S.  The figure only extends to 2019 to avoid the impact of the Covid-19 pandemic on exports.  The figure shows that China’s exports to the U.S. fell by almost $90 billion in 2019, after trending upwards before that.  This suggests that tariffs reduced imports from China.

 

 

Figure 1. China’s Total Exports to the U.S. over the 2011–2017 Period. Source: U.S. Census Bureau.

Benassy-Queré et al. (2021) investigated quantitatively how tariffs affect bilateral trade flows between 110 countries at the Harmonized System (HS) six-digit level (http://www.cepii.fr/PDF_PUB/wp/2018/wp2018-08.pdf ).    They reported that a 10 percentage point tariff increase reduces exports by 14 percent and that a 10 percent exchange rate appreciation reduces exports by 5 percent.  In a recent paper (Thorbecke, Chen, and Salike, 2021), we used Benassy-Queré et al.’s methodology to investigate how tariffs affect China’s exports (https://www.rieti.go.jp/jp/publications/dp/20e011.pdf ).  We found that a 10 percentage point tariff increase reduces China’s exports by 25 percent and a 10 percent renminbi appreciation reduces exports by 9.4 percent.1 The evidence thus indicates that tariff increases are 2.7 times more powerful than exchange rate appreciations in deterring exports.2

Bilateral tariff elasticity estimates may be larger than multilateral tariff elasticity estimates because countries can substitute to imports from other countries.  For instance, a tariff on machinery exported from China to the U.S. may cause importers to switch to German machinery.  However, by switching the U.S. importer also incurs higher costs.  The fact that 3,500 U.S. companies have filed lawsuits challenging the China tariffs, including Disney, Ford, and Coca-Cola, suggests that higher costs burden U.S. firms (see Williams, 2021).

The results in our paper also indicate that several sectors, including televisions, computers, and iron and steel have tariff elasticities greater than 3.  This implies that a 10 percentage point increase in tariffs on these items reduces exports by more than 30 percent.  Around the beginning of the 21st century, television manufacturers transitioned from analogue to digital technology.  As Chang (2008) noted, under analogue production the technological advantage of a frontier producer such as Sony can be unsurmountable.  On the other hand, under digital production any producer can purchase modules and assemble them to construct a television.  Televisions have thus become commoditized and tariffs that increase the cost of supplying them trigger large export losses.  The same is true of computers, with the Bureau of Labor Statistics import price index for computers (Harmonized System code 8471) falling logarithmically by more than 100 percent between 2000 and 2020 (https://www.bls.gov/web/ximpim/harmimp.htm ).  Computer makers thus have little pricing power and are forced to cut exports when tariffs raise costs.

The high elasticities for steel arise because steel is manufactured in almost 100 countries.3  Domestically supplied steel can thus replace imported steel when tariffs rise.  Excess capacity also makes it difficult to maintain price differentials on steel produced in different areas.  Supply flows can shift rapidly in response to relative price changes arising from tariffs and other factors.  Thus steel exports are especially sensitive to tariffs.

Steel exports from China to the world are also subject to many trade remedy duties arising from antidumping, countervailing duty, and safeguard actions.  This indicates that the U.S. and other countries want to limit Chinese steel imports.  Interestingly, Chinese President Xi also wants to limit Chinese steel production because of the severe pollution that the industry causes in the Beijing-Tianjin-Hebei region.  Rather than using a confrontational approach such as imposing tariffs, the U.S. and other nations could negotiate with China to reduce its steel production.

The implication of the results reported here is that tariffs are powerful instruments.  They impact not only Chinese exporters but also U.S. retailers, automakers, and other companies relying on Chinese imports.   Tariffs disrupt supply chains. In addition they raise costs to U.S. firms at a time when businesses are warning the Federal Reserve of intense cost increases that they will pass on to consumers (https://www.federalreserve.gov/monetarypolicy/files/BeigeBook_20210602.pdf ).  It is important that grownups in both countries handle the U.S.–China trade war rather than politicians seeking to foment conflict.

Footnotes

1. The exchange rate elasticity is similar to those reported by Cheung et al. (2012) (“Are Chinese trade flows different?”).

2. The disruption to trade caused by tariffs is multiplied by the uncertainty that accompanies trade wars and protectionism. Bloom (2009) reported that uncertainty hinders investment. Investing in physical capital and in research and development is crucial for the electronics industry, given its short product cycles and volatile consumer demand.

3. I am indebted to Anthony de Carvalho for the ideas in this paragraph. He is not responsible, however, for any errors.

References

Bénassy-Quéré A, M. Bussière, and P. Wibaux, 2021, “Trade and currency weapons,” Review of International Economics, forthcoming. DOI: 10.1111/roie.12517 .

Chang, S., 2008. Sony vs Samsung: The Inside Story of the Electronics Giants’ Battle for Global Supremacy, John Wiley & Sons, Hoboken, NJ.

Cheung, Y. W., M. Chinn and X. Qian, 2012, “Are Chinese trade flows Different?” Journal of International Money and Finance, Vol. 31, No. 8, 2127–46.

Thorbecke, W., C. Chen and N. Salike, 2021, “China’s Exports in a Protectionist World” RIETI      Discussion Paper No. 20-E-011, Research Institute of Economy, Trade, and Industry, Tokyo. Available at: https://www.rieti.go.jp/jp/publications/dp/20e011.pdf

 


This post written by Willem Thorbecke.

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Spread & Containment

COVID-19 may never go away, but practical herd immunity is within reach

It is unlikely that we will reach full herd immunity for COVID-19. However, we are likely to reach a practical kind of herd immunity through vaccination.

The level of immunity needed — either through vaccination or infection — for practical herd immunity is uncertain, but may be quite high. (Shutterstock)

When people say that we won’t reach “herd immunity” to COVID-19, they are usually referring to an ideal of “full” population immunity: when so many people are immune that, most of the time, there is no community transmission.

With full herd immunity, most people will never be exposed to the virus. Even those who are not vaccinated are protected, because an introduction is so unlikely to reach them: it will sputter out, because so many others are immune — as is the case now with diseases like polio and mumps.

The fraction of the population that needs to be immune in order for the population to have “full” herd immunity depends on the transmissibility of the virus in the population, and on the control measures in place.

It is unlikely we’ll reach full herd immunity for COVID-19.

For one thing, it appears that immunity to COVID-19 acquired either by vaccination or infection wanes over time. In addition, SARS-CoV-2 will continue to evolve. Over time, variants that can infect people with immunity (even if this only results in mild disease) will have a selective advantage, just as until now selection has mainly favoured variants with higher transmission potential.

Electron micrograph of a yellow virus particle with green spikes, against a blue background.
The B.1.1.7 variant of the SARS-CoV-2 virus. Over time, variants of concern will likely continue to emerge. NIAID, CC BY

Also, our population is a composition of different communities, workplaces and environments. In some of these, transmission risk might be high enough and/or immunity low enough to allow larger outbreaks to occur, even if overall in the population we have high vaccination and low transmission.

Finally, SARS-CoV-2 can infect other animals. This means that other animal populations may act as a “reservoir,” allowing the virus to be reintroduced to the human population.

Practical herd immunity

Nonetheless, we are likely to reach a practical kind of herd immunity through vaccination. In practical herd immunity, we can reopen to near-normal levels of activity without needing widespread distancing or lockdowns. This would be a profound change from the situation we have been in for the past 18 months.

Practical herd immunity does not mean that we never see any COVID-19. It will likely be with us, just at low enough levels that we will not need to have widespread distancing measures in place to protect the health-care system.


Read more: COVID-19 variants FAQ: How did the U.K., South Africa and Brazil variants emerge? Are they more contagious? How does a virus mutate? Could there be a super-variant that evades vaccines?


What level of immunity (either through vaccination or infection) we need for practical herd immunity is uncertain, but it may be quite high. The original strain of SARS-CoV-2 was highly transmissible and transmission is thought to be higher still for some variants of concern.

Empty vials of Pfizer's COVID-19 vaccine
To achieve two-thirds immunity, 90 per cent of the eligible population would need to be vaccinated or infected naturally. (AP Photo/John Locher)

The amount of immunity we need will also depend on what level of controls we are willing to maintain indefinitely. Continued masking, contact tracing, symptomatic and asymptomatic testing and outbreak control measures will mean we will require less immunity than we would without these in place.

Some estimates suggest that we may need two thirds of the population to be protected either by successful vaccination or natural infection. If 90 per cent of the population is eligible for vaccination, and vaccines are 85 per cent effective against infection, we can obtain this two thirds with about 90 per cent of the eligible population being vaccinated or infected naturally.

The United Kingdom has already exceeded these rates in some age groups. Higher rates are even better, because there is still uncertainty about the level of transmissibility and vaccine efficacy against infection (although research shows they are very good against severe disease). We don’t want to discover that we do not have enough immunity through vaccination and have another serious wave of infection.

Emerging variants

A sticker reading 'I'm COVID-19 vaccinated' from Vancouver Coastal Health
Booster vaccinations will hopefully allow us to maintain long-term practical herd immunity against future variants of COVID-19. THE CANADIAN PRESS/Jonathan Hayward

Higher vaccine uptake will mean there are fewer infections before we reach practical herd immunity. The remaining unvaccinated individuals will be safer, protected indirectly by the immunity of those around them. Outbreaks will be smaller and rarer, and there will be fewer opportunities for vaccine escape variants to arise and spread.

That said, variants of SARS-CoV-2 will continue to emerge, and selection will favour variants that escape our immunity. Vaccine developers will continue to broaden the spectrum of the vaccines that are available, and boosters will hopefully allow us to maintain long-term practical herd immunity.

It’s possible that an immune escape variant will emerge that is severe enough, and transmissible enough, that it will cause a new pandemic for which we do not have even practical herd immunity. But barring that, while we may not be free of COVID-19, we can be confident that in the not-too-distant future it will be manageable when we return to near-normal life.

Caroline Colijn's research group receives funding from the Natural Sciences and Engineering Research Council of Canada, Genome British Columbia, the Michael Smith Foundation for Health Research, the Public Health Agency of Canada and Canada 150 Research Chair program of the Federal Government of Canada.

Paul Tupper's research group receives funding from the Natural Sciences and Engineering Research Council of Canada.

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Stocks

Citadel Settles Suit Alleging Former Senior Trader Shared Its Algorithmic “Secret Sauce”

Citadel Settles Suit Alleging Former Senior Trader Shared Its Algorithmic "Secret Sauce"

Citadel has reached a settlement with the British hedge fund it accused of trying to plunder one of its senior traders in an effort to get to its algorit

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Citadel Settles Suit Alleging Former Senior Trader Shared Its Algorithmic "Secret Sauce"

Citadel has reached a settlement with the British hedge fund it accused of trying to plunder one of its senior traders in an effort to get to its algorithmic "secret sauce".

GSA Capital Partners LLC and Citadel announced the settlement late last week after Citadel accused the fund of obtaining "closely guarded" trading strategies when it hired the employee in question, Vedat Cologlu, according to Bloomberg. 

GSA said of the settlement that the two firms “recognize and respect the importance and value of the other’s rights over their confidential information and intellectual property.”

We first documented that Citadel was suing British hedge fund GSA Capital in January of 2020, after GSA attempted to hire Cologlu, allegedly in hopes of accessing the quant secrets at the core of Citadel's "ABC" automated trading strategy. 

Recall, we wrote back in November of 2020 that Citadel was seeking around $40 million over claims that GSA was able to obtain information on the strategy via texts and WhatsApp.

Citadel argued late last year that GSA "can't unsee" and can't forget the information that was taken from Citadel's secret algorithm. Citadel is also moving to try and block GSA from using their trading model. GSA has argued that they found no "secret sauce" from a high-level description of the structure of a trading algorithm. 

David Craig, a lawyer for Citadel Securities, said in late 2020: “GSA’s most senior managers now know where and how Citadel makes hundreds of millions of dollars in annual revenues. They cannot forget that information, or put it out of their minds.”

He noted that only 15 of Citadel's 3,000 employees ever had access to the "strategic logic" of the strategy. One of those employees was Cologlu, a 2007 Wharton grad and self-described "stat arb trader", who helped operate and administer the models whose "returns were notably high given the low level of risk it took on."

Citadel has claimed its "ABC" quant strategy cost more than $100 million to develop. In its lawsuit, Citadel alleged that the UK fund wanted Cologlu to hand over confidential information about the strategy:

GSA asked for sensitive information on his equity-trading including his profits and the speed of the trades. And then Cologlu handed over a plan that Citadel argues was based on its own confidential model, including the way the algorithm made predictions.

And there's good reason for the information to be coveted. Citadel Securities has been wildly profitable: the company posted a record $6.7 billion in revenue in 2020. This was almost double the previous high in 2018. The blockbuster result came after some of its traders moved from Chicago and New York to set up shop in a Palm Beach hotel in late March 2020 as the pandemic upended lives and markets across the globe. The results of the privately-held company were released in presentation to investors as part of a $2.5 billion loan Citadel Securities was seeking.

The Citadel securities trading arm started as a high-frequency market-maker in options before pushing into equities. Today, the firm dominates that realm and has had a very close relationship with the likes of the millennials' favorite trading platform, Robinhood. We documented back in September 2020 that Citadel now controls 41% of all retail trading. 

GSA was spun out of Deutsche Bank AG in 2005 and manages around $7.5 billion. Citadel’s legal filing names GSA founder and majority owner Jonathan Hiscox as a defendant, alongside other officials including the chief technology officer.

Back in January 2020, we noted the full details of Citadel's lawsuit. 

Tyler Durden Sat, 06/12/2021 - 14:00

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UK Government Adviser Says Mask Mandates Should Continue “Forever”

UK Government Adviser Says Mask Mandates Should Continue "Forever"

Authored by Paul Joseph Watson via Summit News,

A UK government adviser and former Communist Party member Susan Michie says that mask mandates and social distancing should…

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UK Government Adviser Says Mask Mandates Should Continue "Forever"

Authored by Paul Joseph Watson via Summit News,

A UK government adviser and former Communist Party member Susan Michie says that mask mandates and social distancing should continue “forever” and that people should adopt such behaviour just as they did with wearing seatbelts.

Michie, who is a Professor of Health Psychology at UCL and a leading member of SAGE, said such control measures should become part of people’s “normal” routine behaviour.

"Vaccines are a really important part of pandemic control but it is only one part. [A] test, trace and isolate system, [as well as] border controls, are really essential. And the third thing is people’s behaviour. That is, the behaviour of social distancing, of… making sure there’s good ventilation [when you’re indoors], or if there’s not, wearing face masks, and [keeping up] hand and surface hygiene."

"We will need to keep these going in the long term, and that will be good not only for Covid but also to reduce other [diseases] at a time when the NHS is [struggling]… I think forever, to some extent…"

"I think there’s lots of different behaviours that we have changed in our lives. We now routinely wear seatbelts – we didn’t use to. We now routinely pick up dog poo in the parks – we didn’t use to. When people see that there is a threat and there is something they can do to reduce that [to protect] themselves, their loved ones and their communities, what we have seen over this last year is that people do that."

Michie’s comments once again emphasize how many scientific advisers have become drunk on COVID-19 power and never want to relinquish it.

“Unsurprisingly, Channel 5 News made absolutely no effort to scrutinise these claims. The programme’s presenter raised no objection to the idea that mask-wearing and social distancing could continue “forever”, resorting only to friendly laughter,” writes Michael Curzon.

“Professor Michie’s co-panellist, a fellow scientist at UCL, Dr Shikta Das, said:

“I think Susan has made a very good point here,” adding that the vaccine roll-out has created a “false sense of security”.

She concluded:

“I don’t think we are yet ready to unlock.”

How’s all that for balance!

Perhaps unsurprisingly, Michie is known to be a long-time Communist hardliner and was so zealous in her beliefs she garnered the nickname “Stalin’s nanny.”

Her sentiment echoes that of fellow government adviser Professor Neil Ferguson, who once acknowledged that he was surprised authorities were able to “get away with” the same draconian measures that Communist China imposed at the start of the pandemic.

“[China] is a communist one-party state, we said. We couldn’t get away with [lockdown] in Europe, we thought… and then Italy did it. And we realised we could,” said Ferguson.

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Tyler Durden Sat, 06/12/2021 - 11:30

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