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The Trade Policy Annotated Yield Curve

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Editor's note: This article was originally published on July 3, 2018, by Menzie Chinn here.

Down, down, down. 10yr-3mo at 0.86% at 2 pm today. See Jim's post for more on the spread.

Figure 1: 10 year-3 month Treasury spread (blue), and 10 year-2 year Treasury spread (green). Source: FRED, and Bloomberg for 7/2-7/3 and author's calculations. 7/3 observation for 2 pm Eastern.

Now, you might be wondering what trade policy has to do with recession/no recession as implied by the yield curve. As a recent note by Deutsche Bank ("How to think about the impact of trade frictions on US GDP," July 2, 2018) observes, there are pluses and minuses to output arising from these trade action:

[H]ow [could] these trade actions could impact the macro economy[?] The threat and/or imposition of the tariffs could have potentially significant positive effects on GDP by lowering imports, but these effects would most likely be swamped by various negative effects if the tariffs are actually implemented.

Potential positives:

1. Threat of tariffs induce negotiations. The hope is that the threat of tariffs will beget larger concessions from China in negotiations to reduce China's own trade barriers. But China may have a different view of the relative magnitude of trade barriers in the two countries. Chinese officials have said consistently that they will not negotiate under such pressure and that China will retaliate in kind to any measures the US takes...

2. Tariffs reduce imports. ...raising the total potential gain via reduced imports to 0.5% of GDP.

Negatives effects:

1. Rising prices depress consumption. The tariffs would raise the prices of imports of metals and autos from a number of countries and imports from China more broadly. The overall effect on US prices could be magnified if domestic or other foreign producers take

This article was written by

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James D. Hamilton has been a professor in the Economics Department at the University of California at San Diego since 1992. He served as department chair from 1999-2002, and has also taught at Harvard University and the University of Virginia. He received a Ph.D. in economics from the University of California at Berkeley in 1983. Professor Hamilton has published articles on a wide range of topics including econometrics, business cycles, monetary policy, and energy markets. His graduate textbook on time series analysis has over 14,000 scholarly citations and has been translated into Chinese, Japanese, and Italian. Academic honors include election as a Fellow of the Econometric Society and Research Associate with the National Bureau of Economic Research. He has been a visiting scholar at the Federal Reserve Board in Washington, DC, as well as the Federal Reserve Banks of Atlanta, Boston, New York, Richmond, and San Francisco. He has also been a consultant for the National Academy of Sciences, Commodity Futures Trading Commission and the European Central Bank and has testified before the United States Congress. _________________________________________________ Menzie D. Chinn is Professor of Public Affairs and Economics at the University of Wisconsin’s Robert M. La Follette School of Public Affairs. His research is focused on international finance and macroeconomics. He is currently a co-editor of the Journal of International Money and Finance, and an associate editor of the Journal of Money, Credit and Banking, and was formerly an associate editor at the Journal of International Economics and the Review of International Economics. In 2000-2001, Professor Chinn served as Senior Staff Economist for International Finance on the President’s Council of Economic Advisers. He is currently a Research Fellow in the International Finance and Macroeconomics Program of the National Bureau of Economic Research, and has been a visiting scholar at the International Monetary Fund, the Congressional Budget Office, the Federal Reserve Board and the European Central Bank. He currently serves on the CBO Panel of Economic Advisers. With Jeffry Frieden, he is coauthor of Lost Decades: The Making of America’s Debt Crisis and the Long Recovery (2011, W.W. Norton). He is also a contributor to Econbrowser, a weblog on macroeconomic issues. Prior to his appointment at the University of Wisconsin–Madison in 2003, Professor Chinn taught at the University of California, Santa Cruz. He received his doctorate in Economics from the University of California, Berkeley, and his AB from Harvard University.

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Comments (3)

jprizzuto profile picture
surely you could have come up with many, many more 'positive' effects on the global economy if international trade rules was a bit more balanced, fair, open and enforced.
Phil in OKC profile picture
Tariffs will induce negotiations that will result if favorable terms for the U.S. and reduce or eliminate trade deficits with other countries.
Ben Gee profile picture
Tariff will reduce world growth.
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