Letter from Chip Northrup

‘Tarrifying’ Repercussions

The Wharton School of Finance at the University of Pennsylvania has an undergraduate school that the current occupant of the White House attended, and a graduate program, where I went. The graduate program requires that you either have worked in business or served in the military to enroll and you have to pass a calculus test. The undergraduate program is basically a trade school. A good one, but one that does not get into the technicalities of macroeconomics like, for instance, reciprocal tariffs.

That other guy, the Wharton undergrad, has consistently misled people about who actually pays a tariff, implying that the other country pays the tariff. He even proposed creating an “External Revenue Service” to collect the tariff tax overseas. Alas, it doesn’t work that way. The importer pays the tax to the (defunded) IRS and passes the cost along to the manufacturer, retailer, and consumer.

The Wharton undergrad in the White House, the one that didn’t work, serve in the military or pass the calculus test, evidently doesn’t know how to calculate a tariff tax—which is the cost differential of producing a product in the U.S. versus the cost of producing it in another country. That difference in production costs is added to the imported product as a tax in order to make it more costly than the U.S.-produced product, so that the U.S.-made product costs less than the import. The net effect is that it drives the price of the product up by the extra cost of making the product in the U.S. That’s why real tariffs—not MAGA Dream Time Tariffs—vary by product, such as steel, aluminum or automobiles, as well as by source country.

This is all evidently too complicated for the Wharton undergrad to comprehend. His tariff formula is a simple function of the gross trade imbalance between the U.S. and the other country, such that if the U.S. imports more than it exports to a country, the tariff is based on the percentage of the relative trade imbalance, not on the relative cost of manufacturing the product—or whether the product is made in the U.S.

Ostensibly, this is intended to equalize trade imbalances—to force foreigners to buy more U.S. products to increase U.S. exports and/or to make the foreign products more expensive in the U.S., reducing imports. As a practical matter, this protectionist approach won’t work because foreigners will not buy U.S. products that they don’t want or can’t afford and U.S. consumers will pay more for products that are not made in the U.S. as well as for products that cost more to make in the U.S.—which is about everything except soybeans, guns, and monster trucks.

To put it rather uncharitably, his followers have no clue about the negative economic impact of the Wharton Undergraduate Tariff Formula. The tariffs were set at the highest number he could dream up—in order to extort money and favors from companies in exchange for tariff relief, grant tariff relief to political favorites, and shake down a foreign country for a golf course deal. The net effect will be higher prices and supply chain disruptions. The trade-weighted average of the Trump Tariff Tax is 22.5 percent. The trade-weighted average of the Smoot-Hawley Tariff, which precipitated the Great Depression, was 20 percent. Wharton evidently didn’t teach tariff history to undergraduates.

Chip Northrup
Cooperstown