Not long ago I mentioned that a joint export subsidy and import tax would be offset by an appreciation of the real exchange rate. It’s worth pondering whether such results are the same for fixed and floating rates.

In the simplest model, the choice of exchange rate doesn’t matter. The real terms of trade adjust to the subsidy/tax mix under either regime, with the same final equilibrium.

That said, you might think that goods prices in international trade are nominally sticky in a way that exchange rates are not. Indeed you would be right, noting we don’t have a completely clear idea how much delivery lags and service quality changes sub in for some of (not all) the real price movements.

But there is a subtler difference as well. In a world of floating exchange rates, terms of trade move around more, in real terms, than if exchange rates were fixed. Call it noise, bubbles, or whatever, but sometimes nominal exchange rates have a “mind of their own,” and real exchange rates move much of the way with them.

For that reason, companies that engage in international trade have to be more robust to possible “taxes” — which include unfavorable exchange rate movements — than under the fixed rate regime. As a quick shorthand, I would say those companies need to have more market power to put up with the exchange rate volatility, though you can give the required corporate properties a few different twists, typically involving fixed costs, sunk costs, option values and the like rather than just market power in its simplest conception (it’s complicated.)

In other words, floating exchange rates, especially when there is a historical experience of ongoing real exchange rate volatility, will mean companies are more tariff-robust.

This is one reason why the Trump protectionist talk, while it is 110% bad, and bad for American foreign policy as well, and bad for uncertainty, and bad bad bad bad bad, and sometimes connected to bad bad bad people as well (did I say bad? It’s BAD!), won’t quite have the negative economic impact that many people think.

Think back to the mid-80s, when the USD went from 3.45 Deutschmarks to 1.7 Deutschmarks in what, less than two years’ time? That was the equivalent of a huge tax on Mercedes-Benz as an exporting firm. Did Mercedes like that? No. Did they manage? Well, mostly, sort of. Of course they had a fair amount of market power at the time, they would have less today.

A five percent tariff, relative to the built-in adjustments possible in light of changes in floating exchange rates, is for the most part manageable, at least on narrow economic grounds. Much of that five percent ends up as a tax on the monopoly profits of exporters. You can google and read up on “exchange rate pass-through.”

You will note that some of this argument draws on earlier research by Paul Krugman, though I am not suggesting he necessarily agrees with my application or interpretation; here are his recent remarks.

The foreign policy and presidential signaling and uncertainty-related issues, not the narrow economics, are still the main problem with a five or ten percent trade tax, and they are reason not to go down this route. But it is worth being clear on the economics. The oversimplified statement of the neglected insight here is “floating exchange movements tax trade all the time.”