Yes, tariffs can be too low

Having done all this and concluded that automotive tariffs are already around their optimum, we find we’ve been chasing shadows. The Commission’s new modelling is different. The cold shower effect remains missing in action. And the Commission has halved its preferred responsiveness of export demand. It chooses a figure that would normally generate an optimal tariff of around 11 per cent.

Now there’s a new deus ex machina. Cheaper cars lower the cost of investment and, in the Commission’s new modelling, tariff cuts induce an investment surge so big that it not only recovers the cost of undershooting the optimal tariff, it produces economy wide gains about the size of the revenue the tariff cuts forego.

If we believe all this we can get much more bang for our buck by lowering the cost of investment directly - by cutting company tax collections by the same amount.

But that’s a big “if”. This looks like another model in which we should forget free trade and just subsidise imports. Almost invariably modelling the overall economic effect of a half billion dollar switch in revenue collection from tariffs to some other tax will net out the transfers from losers to winners leaving a small fraction of that amount as the net economic cost or benefit.

But not here.

I suspect that if we investigate, we’ll find ourselves chasing more shadows.