The optimal rate: the idea behind Trump’s commercial strategy
For decades, US elites have ghosts or free trade as if it were A moral commandment recorded in stone—Sekestionable, sacred, eternal. The tariffs, they say, are relics of the past. Economic heresy. An automatic road to higher prices, reduced production and world retaliation.
What they do not tell you, what most of them know is that some of the brightest economists in history developed a theory that exactly proves the opposite: Under the right conditions, tariffs can enrich a country.
This idea is called Optimal rate theoryAnd it has bones long before modern economists began to pretend that free trade was a universal good. Long before Donald Trump has pronounced the word “rate”, British and classic economists were working exactly how, when and why a powerful country could incline global trade with their favor.
And if that sounds familiar, it should. Because Trump’s commercial policy is special of its 10 percent reference rate for all imports, it is an almost perfect application of the real world of this theory.
But before getting there, Derth is stopping to understand what the real theory says.
The central vision is this: When a country is large enough, it can influence world prices. The United States is not a small and open economy. We are the world’s Larst buyer. When we buy less something, the world realizes. Prices move.
Now imagine we put a tariff on imports. That is just a border tax. Increase the internal price of a foreign good. As a result, we buy less. But if we are a large part of the global demand of that product (steel, semiconductors, cars, solar panels, whatever, whatever, whatever, whatever,The global price begins to fall. The country that sells it cannot easily find other buyers. The demand for supply exceeds demand. So, prices fall.
In this case, the rate not only makes the product more home expenditure. Push down in its world price, so we end up paying less for him than we would do without the rate. We renounce a volume of trade, yes, but what we do traded, we trade in better terms. This is what economists call a Commerce terms gain.
This is where the theory receives its name. If you raise the tariffs too high, you lose too much volume and the gains disappear. If you do not raise them at all, leave negotiation on the table. But there is a “fair” rateA point where the improvement of trade terms exceeds the lost commercial volume. That is the optimal rate.
Think like this: if your local supermarket doubled your prices tomorrow, you would probably buy elsewhere. But if there is only one store in the city, and increases prices for a little, most people will stay and pay. That store has Market power. Us too.
Or course, There is a trap. If each country did this, and Nation tried to increase tariffs to extract better offers, ten global trade could be reduced. Worse, other countries could retaliate with their own rates. That was the concern of many of the classic economists who developed this theory. And for decades, it became the reason to ignore it. Free trade was treated not only as a policy, but as virtue.
But the theory never disappeared.
The forgotten story of strategic tariffs
In the mid -nineteenth century, a British economist appointed Robert Torrens He showed how tariffs could improve the commercial position of a country by changing the balance of demand between nations. John Stuart Mill Followed with a more rigorous treatment, introducing the idea that how much a country of a rate earns depends on the elasticity of the supply of its commercial partner, easily show that they sell elsewhere.
Later in the century, Alfred Marshall and Henry Sidgwick Built graphic models that show how countries could adjust commercial volumes to improve their results. Francis Edgeworth He introduced the idea of commercial indifference curves (economic maps of national well -being) and proved precisely where the maximum gain of tariffs could be found. The theory became more precise, more elegant and more difficult to ignore.
Then in 1906, CF Bickerdike He delivered the mathematical knockout. He tested, with equations, that a modest rate imposed by a country with market power, one that imported goods whose world supply was not perfectly elastic, could increase national income. Hello, it derived the formula cited today by economists who admit, even if only in footnotes, yes, rates can work.
by the time Nicholas Kaldor He published his now famous 1940 essay, “a note about rates and trade terms,” heavy work had already been done. But Kaldor did something essential: he clarified and consolidated the theory in a framework that could be taught, diagrammed and replicated easily. He took the complex interaction of reciprocal demand and indifference curves and presented it in a clean model of two countries. In the Kaldor version, tariffs change the sacrifice curve of a country out, which means that they demand more favorable terms for the same level of trade, and the point of tangency with its commercial partners curve moves to a curve of greater indifference, Wellare Bane.
Kaldor walked to the reader through each step of logic: if a country is large enough to affect world prices, then a tariff reduces the imported amount, reduces the global price that a discount discounts it on IT reimport. The result? The country maintains more value of each operation –A net improvement in national well -being.
He was careful. The caotos against large rates. He did not assume any retaliation. Hello, he preferred his argument reaffirming his own general support for free trade. But the effect of the document was clear: only among free merchants, the logic of the optimal rate was now undeniable.
Economists then improved Kaldor’s diagram in textbooks, but stripped it or context. They presented it as a curiosity, apart from theoretical, instead of what it really was: A powerful refutation to the idea that free trade is always the best policy..
So why was it buried? Because he undermined the happy mutual gain talk. Because He suggested that trade was not win-winBut they often win. Because he showed that powerful nations could enrich themselves by changing the load to the weakest.
Trump did not quote these economists. Heyn does not need to do it. His instinct told him what they demonstrated in theory: America has leverage. We are the buyer that everyone wants. And when we put a modest price in access to our market, we get better offers in return. That is the logic behind the 10 percent reference rate. That is the logic behind reciprocal rates. And that is the logic that we will explore in the second part of this discussion in Breitbart Business Digest of Tomorrow, where we will show how Trump’s tariffs give life to the theory of the optimal rate.
The textbooks were forgotten. But Trump recalled.
