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Great article. When you talked about tariffs vs subsidizing domestic production, One thing that I thought should have been elaborated a bit. If a country imposes tariffs, it distorts both the consumption and the production, relatively speaking. Consumption of the tariff imposed goods falls and its production rises--two distortions. But if there is a subsidy on domestic production, it will only distort production not consumption. Ceteris paribus, should the production subsidy be better (less worse) than tariffs?

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Really nicely put together article! I appreciated how well reasoned you were. A lot of it is, admittedly, quite beyond my knowledge, so apologies if my questions below don't make sense :)

Regarding South America and Chile - you remark that Chile is "a welcome exception to the trend in Latin America", but I am not following what you mean by trend. From what I can gather, tariffs have been either stable or lowering in general (outside of some specific goods?). Is there another dimension that suggests there is an anti-globalization trend in SA?

I am particularly curious about Peru. It seems like it has even lower tariffs - 2% weighted average in 2022 (https://wits.worldbank.org/CountryProfile/en/Country/PER/Year/LTST/TradeFlow/Import/Partner/all/) compared to Chile's 6% (https://wits.worldbank.org/CountryProfile/en/Country/CHL/Year/2022/TradeFlow/Import). While there do seem to be more non-tariff protection measures, they seem to be adopting more open policies - They also opened a new port late last year (https://www.aiddata.org/blog/chancay-port-opens-as-chinas-gateway-to-south-america). At the same time, the average GDP per capita in Peru was less than half that of Chile in 2022 (https://en.wikipedia.org/wiki/List_of_South_American_countries_by_GDP_(nominal)_per_capita). Does this suggest that Peru is poised for significant growth in the future? Or, is the gap entirely explained by the remaining factors you mention (quotas, non-market exchange rates, and state owned enterprises)?

Thanks for sharing your writing!

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Trend was a poor word, since that implies change over time. I meant levels.

I am, unfortunately, not familiar enough to Peru to comment. That’s something I’ll have to investigate. I would note that all else is not equal, and Peru differs from Chile in ways other than trade barriers.

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Ah, levels makes things clearer!

Thanks for taking the time to reply! After posting, I continued down my Peru-Chile rabbit hole to dig more into it. Certainly, the factors separating the two countries are extremely complex (and it's hard to map/correlate factors to outcomes), as well as temporal (one of the first things that cropped up was the timing - Chile got started in the 70s/80s, Peru not so much until the 90s). It *feels* like there should be some thesis I could construct, and evaluate if there is outsized value to capture in Peru in the coming decades, but the work feels a bit daunting haha.

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Agreed. Why is it necessary to keep repeating this. It took a while but heliocentrism was accepted and people moved on. Why are tariffs this zombie idea that refused to die?

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Great article! Curious how you would characterize the differences between Canadian and American productivity. Both share many similar economic policies (ie, free trade up until recently) but there has been a significant divergence in their aggregate productivity levels. How much of this would you chock up to management differences and what exact management strategies could be making the difference?

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Hey Nicholas, loved the post!

As someone who specialized in trade (i left academia since), here is one theory that i think is a plausible case for tariff. I had something along this line as part of my thesis, but never worked it out completely after i left academia.

basically, as you argued, if your goal is to promote domestic industry, then tariff is worse than subsidy. However, if your goal is to convince foreign countries to do FDI, and reap the benefit of technological transfer and human capital upgrades from it, then arguably tariff is better than subsidy.

why? b/c tariff disrupts the status quo immediately, and politically, it's easier to let foreign firms get the message that if they don't do FDI, the tariff (or other forms of red tapes) would simply keep increasing.

but you may say that subsidies can achieve that too! not quite. first, with subsidy, you would have an immediate "potential" gain, which, from behavioral econ, is known to be less influential than an immediate loss. in addition, it is much more expensive for the government to signal its "resolve" to keep increasing subsidy until the foreign firm complies to FDI. As a result, tariffs would turn out to be a better tool to achieve this specific purpose.

In fact, you could argue that this was exactly China's playbook in the 90s through 10s.

Now, I'm not sure that this is what the Trump administration intends to do. In addition, you could also argue on some moral ground that forced IP transfer is bad. However, I do think that there is this legitimate defense favoring the tariffs.

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TBF I do think there is a difference between tariffs as protection against free competition in other countries and tariffs as protection against a state actor who is going to subsidize export in a capital intensive industry until competition goes out of business and then raise prices.

In theory I see the appeal of engaging in subsidy rather than adding tariffs but the politics makes that hard to undo -- there is always a constituency for reducing tariffs.

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