For the past two days, those who missed out on opportunities in the market, come over here. When analyzing the market and its future direction, ‘tariffs’ and ‘trade’ seem to have become popular words in the mouths of bloggers nowadays. However, the truth is that many interpretations of tariffs are inaccurate. This article will start from rigorous economics and show everyone the true impact of tariffs, so that we won’t be led by the nose anymore! At the same time, it will also help everyone form some systematic views on the current stage of the market.

This article is the most rigorous and academically rich piece of writing I have ever produced. We will delve into the insights brought about by the 2018 trade war, involving a lot of economic knowledge.

I know, there is a saying that when you use one more formula, you will lose 30% of your readers. But please don’t worry at all, I will definitely explain it to you in plain language. It’s totally fine if you don’t understand economic formulas. We will continue to focus on logic as always. After understanding the logic, at least you can go out and show off.

Truth 1, the Sticky prices

When it comes to tariffs, many bloggers will immediately start to analyze the exacerbation of inflation and the rise in prices. However, Wang, who understands, said at the press conference two days ago, ‘The prices of oil and energy have fallen, and almost all cost prices (groceries and [eggs]) have fallen, with almost no inflation.’

What’s going on here? Shouldn’t there be price inflation after imposing tariffs? Could it be that he’s just crazy? Or is there something wrong with our analysis?

The answer is both, Trump is indeed a spiritual old man, but the truth is, tariffs will not immediately reflect on prices. On the contrary, prices are sticky in the short term.

We see the picture above, which represents the price changes of goods within 400 days before and after the tariffs. The left side shows the absolute price trend, while the right side shows the annual inflation rate of the goods. What does inflation rate mean? It means how much the price of the goods has risen or fallen annually. Quite counterintuitively, after the imposition of tariffs, the price hardly changed in almost 100 days. When considering the natural price volatility before and after the tariffs, we can even conclude that most goods did not show significant price changes within a year after the imposition of tariffs.

This is the stickiness of prices. First, price transmission takes time (in fact, tariffs have three stages, and we are currently in the second stage, which will be discussed in detail in the next section). Second, when the price of a product rises, the prices of other goods may not necessarily rise in proportion, which creates a kind of relative price distortion. So now we can explain Trump’s statement: due to the problem of price transmission in the market economy, the Americans have not experienced a very large increase in prices, although it can certainly not be said to have fallen. So who bears the brunt of all these tariffs? Let’s look at the next truth.

The truth 2, corporate pressure: a Squid Game

Tariffs are destructive to the global economy, as we will demonstrate in detail in Chapter 3. However, this tariff is like a game of squid game, some die first, some die later, and some survive until the end of the game to win. In the special edition of the squid game in 2025, the first person to die is surprisingly a U.S. company. So Trump is a very interesting person, he even fights against himself.

It’s another very professional table, but don’t be afraid, with me here, there won’t be any surprises. We only need to look at two things, everyone look at the changes in these two columns (1) and (2). This table shows the changes in the following five data after tariffs. (1) represents the changes in prices of foreign exporters exporting to the United States after tariffs. (2) represents the quantity of foreign goods imported by U.S. companies after tariffs. The first row of data below (a bunch of negative signs and numbers followed by)*The specific change value is represented by that row).

A very counterintuitive point, we found that the export prices of Chinese exporters to the United States actually changed very little. In plain language, what does that mean? It means that the United States imposed tariffs, but the prices at which China sells to them have not decreased. What does this imply? It means that U.S. companies have almost single-handedly borne the cost of tariffs. Originally intended to collect taxes from the Chinese, the result is that the burden fell on U.S. companies themselves. Is Trump tough or not? So how do U.S. companies react to being hit by tariffs? Of course, it’s very painful, so we see in column (2) that the quantity of imports by U.S. companies has decreased.

Above is a more intuitive graph, showing the import prices of US companies after the imposition of additional tariffs. The different red dashed lines represent price changes after different dates. Ultimately, it is US companies that bear all the costs.

Okay, I said I would talk to everyone about the three stages of tariffs, the following content is based on a research report from Citibank.

Tariffs are divided into three stages, the first stage is the sprint stage, which means that before the tariffs take effect, companies will import a large amount of goods to avoid price increases after the tariffs take effect. There happens to be a graph that I will put below, between the black vertical lines is before the tariffs start, companies actually increase imports.

The second stage is the pressure on the labor market and the enterprise side. We are now experiencing this stage, which is also a very important point. The supply and demand relationship and the mid-term balance we learned in economics (Equilibrium, does it remind you of something) actually have a strong premise in contemporary society, which is that companies need to be able to survive until the day of price increase. In fact, through the imposition of tariffs on intermediate goods (such as machinery and equipment, parts, etc.), companies may encounter situations where costs become unbearable before they raise prices, making it difficult to purchase and sell goods, which can also be seen as risks to the capital chain and liquidity, and then it fails before dawn. The increase in costs on the enterprise side mentioned above refers to this risk.

This is the stage we should be most concerned about now, the corporate crisis.

The third stage is the increase in consumer costs. At this point, take out the macroeconomic quantity equation: PQ=MV

P refers to price, Q refers to quantity, M refers to currency, and V refers to velocity. Have you all remembered this equation? Well, if you have remembered it, you can forget about it. We only need to understand one thing, which is that the reshaping of the supply and demand relationship of price and quantity will begin after the tariff policy has gone through the first two stages, and currency and velocity will also affect it. This reshaping stage is called the base period effect. You can remember this term so that you can show off in front of the ladies in the future. As for the pre-base period effect, it is what we call the second stage in the spiral of deflation, which poses a major crisis to the cost and profits of companies. After this stage, there is also a dangerous recovery crisis. Companies whose capital flow and intensity cannot keep up will be squeezed out by their strongly growing peers. Let’s leave this topic for now and talk about it next time if we have the chance.

Why do I say the second phase is very important? Because personally, I estimate that according to the current stance of the Federal Reserve, after the second phase, they may take action. What they are most concerned about now is the labor market. As Chapter 1 mentioned, the price index has some lagging indicators. If the labor market shows signs of entering a recession, they will take action, so the rebound may start before the third phase.

This part is the most important take of this article. In point 3, we will briefly talk about self-defense techniques, discuss the principles of tariffs and the economy, not to be fooled by others, and not allow my fans to be shown in a mess by others.

Truth 3, losers winners: yes, no, debatable?

Tariffs will definitely damage the economy. Is this statement correct? Next time you meet someone who seems to know a lot about macroeconomics, ask them this question. Ask them whether, purely theoretically, imposing tariffs will definitely harm the economy of a country. If they answer yes, it may indicate that person only has some hearsay knowledge. If they give you a complex analysis that you cannot understand, you may have encountered someone who truly understands.

The table above is very professional, but I don’t want to use this table to disgust everyone. After all, you may not have been in college for a long time. Why should I drag you back to this terrible place? So this section will briefly introduce the parameters. If you are interested, you can read it, and if you are not interested, you can skip to the next section. Before you leave, simply remember that this table represents the change in total economic benefits before and after tariffs. D is demand, S is supply, SIt is the original supply, S(1+ a Greek letter) is the equivalent supply with tariff, P0 is the equilibrium price without tariff, P1 is the actual equilibrium price with tariff, P1It is the price under the original supply curve corresponding to the balance of tariffs and actual supply-demand. You may not understand, but remember this, p1-p1Just how much money the tariff added. The area under this curve represents total surplus, A+C is the revenue brought to the government by the tariff, A+B is the loss to domestic consumers, and C-B is the net gain obtained by the country. Well, those who can read up to here are extraordinary.

In summary, whether a country’s tariff revenue is positive or negative depends mainly on the size of areas C and B. The direct conclusion is that when foreign export supply is elastic, it will be a net loss for the domestic country, but it may be a net gain if the opposite is true. Going further into analysis, fans really need to be careful. In the end, the question is whether a country benefits more than it loses from imposing tariffs? It depends, but in the modern world, it’s basically always a loss.

After talking about the United States for so long, what about the countries subject to tariffs?

Of course, there are disadvantages as well, but I won’t do too much analysis. This article is long enough. The only thing I want to share with everyone is something very interesting. For China, many data are not authentic. The data from the customs side should be relatively useful because it is independent of the National Bureau of Statistics. Other data may contain errors. In fact, including some other countries in the world, due to some systemic issues, we may not be able to obtain real data. So what can we do? The Economist will find some awesome ways. Here is an example for you to show off in the future when you go out.

This dark image is a satellite image of the nighttime lighting brightness in Suzhou in 2018. Yes, economists have estimated the changes in Suzhou’s production and demand by analyzing the nighttime lighting brightness in various areas of Suzhou. It is obvious that the brightness of the technology industrial parks and industrial areas in 2019 is weaker than that in 2018, indicating that domestic actual production has been affected by the imposition of tariffs.

Answer the first question for us, who is the loser and who is the winner? The answer is, overall, in the short term, there are no good results. In the long term, further analysis is needed on a case-by-case basis.

Finally, thank you all for reading this far. The article references quite a few research reports and papers. It takes a lot of patience to read through, but it’s okay to skip around. I always believe that logic is more important than numbers. Most importantly, after reading this, we will understand some counterintuitive truths about tariffs. When faced with complex macroeconomic market information, we can have a general idea. I won’t let my dear fans be misled by others.

The truth is always one!

But for the market, there is more than one truth.

or maybe

The truth of the market has never existed

Okay, there are really a lot of exams to deal with in the next two weeks, so I may write some things slowly.

I am Dave, I hope this article is helpful to you, welcome to like, comment, and follow with one click, see you next time

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