How intelligent must AI be?

Alex Tabarrok has a post on Marginal REVOLUTION about AI on Tariffs, where he argues that there’s no problem using AI to help inform policy, but that the White House should have also asked the following:

“Suppose the US imposed tariffs on other countries in an effort to reduce bilateral trade deficits to zero using the formula for the tariff of (exports-imports)/imports. What do you estimate would be the consequences of such a policy?”

You can read the full answer of O1 Pro on the original post.

I wonder if you need a frontier model like O1 Pro, and an expensive one at that, to get a similar answer. So, I asked the same question to Gemma 3 13B model, a small open weights model that can be used for free on Google AI Studio and even run locally. Here’s the answer:

Okay, let’s break down the potential consequences of the US imposing tariffs across the board, aiming to eliminate bilateral trade deficits using the formula you provided: (Exports - Imports) / Imports. This is a very aggressive and unusual policy, so the consequences would be significant and complex. I’ll structure this response into sections: 1) Understanding the Formula & its Implications, 2) Immediate Economic Consequences, 3) Longer-Term Economic Consequences, 4) Geopolitical/Diplomatic Consequences, and 5) Overall Likelihood & Feasibility.

1. Understanding the Formula & its Implications

• The Formula’s Logic: The formula (Exports - Imports) / Imports calculates the tariff rate needed to theoretically balance trade within a specific bilateral relationship. A trade deficit means imports exceed exports (Exports - Imports is negative). The formula essentially says: “To offset the deficit, you need a tariff high enough to reduce imports to the point where they equal exports.” Example: Let’s say the US has a trade deficit of 50 billion with Country X (Exports = 20 billion, Imports = 70 billion). (20 - 70) / 70 = -50/70 = -0.714 or -71.4% This would mean the US would need to impose a 71.4% tariff on all goods from Country X to theoretically eliminate the deficit.
• Bilateral vs. Global: The crucial point is this is bilateral. The US would calculate a different tariff rate for every trading partner. This is vastly different from a uniform global tariff.
• Zero Deficit Goal: The goal of eliminating all bilateral trade deficits is extremely ambitious and likely impossible in practice due to factors like differing production costs, consumer preferences, and exchange rate fluctuations.

2. Immediate Economic Consequences

• Massive Tariff Increases: As the example shows, many countries would face tariffs exceeding 50%, and potentially over 100% in some cases. This would be unprecedented in modern times.
• Price Shocks & Inflation: Imported goods would become dramatically more expensive. This would directly increase prices for consumers and businesses that rely on imported inputs. Inflation would likely spike.
• Supply Chain Disruptions: Global supply chains are incredibly complex and integrated. These tariffs would shatter those chains. Businesses would struggle to find alternative suppliers, leading to shortages and production delays. “Just-in-time” inventory systems would collapse.
• Retaliation: Other countries would almost certainly retaliate with their own tariffs on US exports. This would trigger a trade war.
• Reduced Trade Volume: Trade between the US and its trading partners would plummet. The high tariffs would make many goods uncompetitive, regardless of their underlying quality or value.
• Economic Slowdown/Recession: The combined effects of price shocks, supply chain disruptions, and reduced trade would likely trigger a significant economic slowdown, potentially leading to a recession in the US and globally.
• Impact on Specific Sectors:
  • Consumers: Higher prices for everything from electronics to clothing to food.
  • Manufacturers: Increased costs for imported components, potentially forcing them to reduce production or raise prices.
  • Agriculture: US farmers rely heavily on exports. Retaliatory tariffs would devastate the agricultural sector.
  • Retail: Disruptions to supply chains and higher prices would hurt retailers.

3. Longer-Term Economic Consequences

• Reduced Competitiveness: US businesses would lose access to cheaper imported inputs, making them less competitive in global markets.
• Innovation Stifled: Reduced trade and competition can stifle innovation.
• Currency Fluctuations: The tariffs and trade war could lead to significant currency fluctuations, further destabilizing the economy. The US dollar might initially strengthen due to safe-haven demand, but could weaken later as the economy slows.
• Reshoring Challenges: While the policy aims to encourage domestic production (“reshoring”), it’s unlikely to be a quick or easy fix. Building new factories, training workers, and establishing new supply chains takes time and investment. Furthermore, many goods require specialized inputs that are not readily available domestically.
• Damage to US Reputation: The US would be viewed as an unreliable trading partner, damaging its reputation and potentially leading other countries to seek alternative trade arrangements.
• Shift in Global Trade Patterns: Countries would actively seek to reduce their reliance on the US, leading to a reshaping of global trade patterns. Regional trade blocs (like the EU, CPTPP) would become more important.
• Potential for Protectionism to Become Entrenched: Once tariffs are in place, they are politically difficult to remove, even if they are economically damaging.

4. Geopolitical/Diplomatic Consequences

• Strained International Relations: This policy would severely damage US relationships with its allies and trading partners.
• Weakened International Institutions: The US would likely disregard or undermine the World Trade Organization (WTO) and other international trade bodies.
• Increased Global Instability: Trade wars can exacerbate geopolitical tensions and contribute to global instability.
• Loss of Leadership Role: The US’s credibility as a global leader would be significantly diminished.
• Formation of Counter-Blocs: Countries would likely band together to counter US protectionism, potentially creating new trade blocs that exclude the US.

5. Overall Likelihood & Feasibility

• Extremely Unlikely: This policy is highly unlikely to be implemented in its entirety. The economic and political costs would be enormous.
• Politically Difficult: Even advocating for such a policy would be politically challenging, given the widespread opposition from businesses, economists, and many consumers.
• WTO Incompatibility: The policy would almost certainly violate WTO rules, leading to potential legal challenges and sanctions.
• Economic Suicide: Most economists would argue that this policy would be economically self-destructive for the US. While reducing trade deficits might be a stated goal, the costs would far outweigh any potential benefits.
• More Targeted Tariffs are Possible (but still problematic): While a blanket application of this formula is improbable, more targeted tariffs on specific goods or countries are sometimes used as a tool in trade negotiations. However, even these are often met with retaliation and can have unintended consequences.

Disclaimer: This is a complex issue with many potential nuances. This analysis provides a general overview of the likely consequences. The actual outcome would depend on a variety of factors, including the specific details of the policy, the responses of other countries, and the overall state of the global economy.

Even a small LLM can produce a reasonable answer to this question. I agree with Alex – the problem isn’t using AI.

Unfortunately, it’s not that current AI models aren’t intelligent enough. Regardless of how intelligent an AI is, it’s difficult to compensate for a user’s baseline.