Harvard Data Science Review Podcast Summary
Episode: What Are Tariffs and How Do They Impact Us? Another Conversation with Andrew Lo
Release Date: May 30, 2025

Introduction

In this insightful episode of the Harvard Data Science Review Podcast, hosts Liberty Vidert and Shali Meng engage in a comprehensive discussion with Professor Andrew Lo, the Charles and Susan Harris Professor of Finance at MIT and Director of the Laboratory for Financial Engineering. The conversation delves deep into the multifaceted world of tariffs, exploring their economic implications, historical contexts, and the role of data science in shaping effective tariff policies.

Understanding Tariffs

Defining Tariffs and Their Purpose

The episode begins with a foundational understanding of tariffs. Shali Meng opens the discussion by posing a fundamental question about tariffs:

[00:56] Shali Meng: "So let's just dive into the right of way, as you know. Well, tariffs are one of those economic tools that spark huge debates. So we wanted to start off giving listeners a broad understanding of their use. What is a tariff and how does it meant to work?"

Andrew Lo responds by defining tariffs and their intended functions:

[01:13] Andrew Lo: "Basically tariffs are taxes on imported goods and they're designed to protect domestic industries from foreign competition. They also raise government revenues and they are also meant to try to respond to trade imbalances."

He further explains the economic rationale behind tariffs, referencing Adam Smith's concept of the "invisible hand":

[01:44] Andrew Lo: "You're using Adam Smith's invisible hand of changing prices artificially by imposing these taxes so that consumers will, instead of buying foreign goods, they'll buy more domestic goods."

Economic Impact of Tariffs

Who Bears the Cost of Tariffs?

Shali Meng raises a critical question about the true burden of tariffs:

[01:53] Shali Meng: "But one question for lots of people, myself included, is who actually pays this tariff in the end?"

Andrew Lo elucidates the distribution of tariff costs over time:

[01:53] Andrew Lo: "Initially, the tariffs are going to be paid by the consumers that want to buy more expensive goods. And eventually what you're going to see is society, the country itself ends up paying for those tariffs... both countries end up paying higher costs for the kinds of goods that they were previously trading with each other."

Tariffs as a Double-Edged Sword

The discussion highlights the paradox of tariffs turning potential win-win scenarios into lose-lose situations due to retaliatory measures and increased costs for consumers.

Historical Context and Economic Theory

Comparative Advantage and Global Trade

Andrew Lo provides historical insights into international trade theories, referencing David Ricardo's Principles of Political Economy and Taxation:

[03:06] Andrew Lo: "David Ricardo... came up with the idea of what is now called by economists the theory of comparative advantage."

He explains how comparative advantage fosters globalization and mutual benefits through specialization:

[05:06] Andrew Lo: "Even if the first country is better at both than the second country, it's actually still sensible for... the first country to specialize in cloth and for the second country to specialize in wine and then for them to trade."

Political Realities and Tariffs

The conversation transitions to the intersection of economics and politics, emphasizing how political pressures from affected industries often drive the imposition of tariffs:

[07:05] Andrew Lo: "Tariffs come from the population of winemakers or cloth manufacturers that don't want to compete with other countries."

Common Misconceptions About Tariffs

Shali Meng probes into prevalent misunderstandings regarding tariffs:

[07:14] Shali Meng: "What would you say are the biggest misconception people have about economic impact of the tariffs?"

Andrew Lo identifies several key misconceptions:

1. Protection of Specific Industries:

   [07:14] Andrew Lo: "Tariffs will actually help the particular industry that's being protected... eventually... the industry you're trying to protect will actually be hurt by the tariff."

2. Job Preservation:

   [07:14] Andrew Lo: "Tariffs always protect jobs... in downstream industries, those jobs may actually be lost."

3. The Rarity of Tariffs:

   [07:14] Andrew Lo: "Tariffs are used from time to time in the current world because people are concerned about the political aspects of international trade."

Data Science and Real-Time Economic Analysis

Leveraging Data for Dynamic Tariff Policies

The conversation shifts to the role of data science in shaping tariff policies. Shali Meng questions the feasibility of dynamically adjusting tariffs based on real-time economic data:

[09:12] Shali Meng: "Do we have enough real time economic data? Can we actually learn from what's going on and adjust them dynamically?"

Andrew Lo affirms the potential, citing the Billion Price Project as an example:

[09:16] Andrew Lo: "...Roberto Rigabone and his former student Alberto Cavallo... measured inflation on a minute to minute basis by scraping online prices."

However, he underscores the current limitations in economic models and funding to implement such dynamic policies effectively:

[09:16] Andrew Lo: "We don't yet have the economic models and the funding to be able to do that in real time."

Economic Models and Their Limitations

Traditional vs. Modern Economic Models

Andrew Lo delves into the tools economists use to analyze tariffs:

[11:41] Andrew Lo: "The traditional tools of economists are, not surprisingly, supply and demand... computable general equilibrium models... input-output analysis."

He critiques these models for their inability to incorporate risk and uncertainty, particularly relevant in global trade dynamics.

Emergence of Advanced Models

Lo discusses newer models that attempt to integrate risk and uncertainty:

[11:41] Andrew Lo: "Stochastic general equilibrium models as well as agent-based analysis... become computationally intractable."

He anticipates a future advancement in economic modeling that can better handle the complexities introduced by tariffs and global trade uncertainties.

Behavioral Economics and Market Dynamics

Adaptive Markets Over Rational Models

Shali Meng connects traditional economic theories with behavioral insights:

[15:13] Shali Meng: "Am I correct that these traditional models are probably a lot more based on everybody being very rational?"

Andrew Lo agrees, emphasizing the limitations of rationality in current market analyses:

[15:13] Andrew Lo: "Markets are not rational... they're adaptive... emotionally and politically driven."

Agent-Based Modeling

Lo introduces agent-based models as a means to simulate complex economic interactions:

[17:45] Andrew Lo: "You begin by assuming that agents have certain kinds of behaviors... let them interact and you see what happens to the economy."

He illustrates how these models can predict outcomes like trade wars, ultimately leading to mutual economic losses and political repercussions.

Historical Lessons: The Smoot-Hawley Tariff

Case Study of Economic Impact

Reflecting on history, Lo references the Smoot-Hawley Tariff of 1930:

[19:54] Andrew Lo: "They imposed widespread tariffs on all foreign goods. And what happened was that that drove the economy into a much, much deeper depression."

He draws parallels to contemporary tariff policies, cautioning against similar economic downturns:

[19:54] Andrew Lo: "If we were to play that out, we would see something along those lines."

Alternative Economic Tools

Beyond Tariffs: Quotas, Subsidies, and More

Shali Meng inquires about other economic instruments available to policymakers:

[21:37] Shali Meng: "Assuming politicians really learn from the data, but they still want to protect domestic industry, what are the alternative economic tools?"

Andrew Lo outlines various tools, differentiating between short-term and long-term strategies:

• Short-Term Tools:
  Quotas, subsidies, export controls, tariffs

  [22:29] Andrew Lo: "In the short run, it can look like some of those tools are working... but there are unintended consequences."

• Long-Term Tools:
  Investment tax credits, industrial incentives

  [22:29] Andrew Lo: "Such as South Korea and Taiwan... using a combination of these tools... to achieve long-term success."

Political Systems and Tariff Policies

Influence of Governance Structures

The discussion explores how different political systems impact tariff policies:

[24:51] Andrew Lo: "Democratic governments have finite terms... it's very difficult to engage in truly long-term policy... whereas in more centralized governments, leaders can afford to engage in strategies that may cost more in the short run but benefit long-term."

Lo emphasizes the need to consider the type of government when analyzing tariff strategies:

[24:51] Andrew Lo: "We have to be very aware of who we're competing against and the kind of governments that they have at their disposal."

Advice for Individual Investors

Navigating Investment Strategies Amid Tariff Uncertainties

As the conversation shifts towards personal finance, Shali Meng seeks investment advice for listeners:

[27:05] Shali Meng: "...you know, we have a retirement account... What other general advice do you have for our listeners?"

Andrew Lo provides general guidelines, emphasizing self-awareness and professional guidance:

[27:05] Andrew Lo: "Understand yourself... know your goals, your flexibility in bearing losses, and the time frame for your investments."

He advises diversification and risk management, particularly in volatile economic environments influenced by tariffs:

[30:27] Andrew Lo: "Diversify across various different assets and asset classes and be able to manage your risk... pay attention to what's going on in the world and manage your risk carefully and dynamically."

The Role of AI and Large Language Models in Financial Advice

Cautionary Insights on AI-Driven Financial Guidance

Shali Meng transitions to discussing the integration of AI tools like ChatGPT in financial planning:

[31:33] Shali Meng: "...you wrote an article about Can ChatGPT to help your financial... What your advice there for lots of listeners?"

Andrew Lo advises caution when using Large Language Models (LLMs) for financial advice:

[31:33] Andrew Lo: "Proceed with caution... LLMs are good at gathering information and summarizing... but you need to verify the information and consult certified financial advisors for implementation."

He envisions a future where LLMs could provide trusted financial advice, pending advancements and regulatory standards:

[34:47] Andrew Lo: "We can create LLMs that can provide trusted financial advice... we're within striking distance of that reality."

Recent Developments in AI

Exponential Growth and Future Implications

Reflecting on AI advancements since his last appearance, Andrew Lo highlights the rapid evolution and increasing computational capabilities:

[35:17] Andrew Lo: "The speed with which AI is evolving is accelerating... innovation happening at a much more rapid pace than we fully appreciate."

He warns of potential disruptions and emphasizes the importance of addressing AI's downsides proactively:

[35:17] Andrew Lo: "We have to pay attention to the negatives and prepare for it... bad actors using AI for nefarious goals."

Designing a Perfect Data-Driven Tariff Policy

Magic Wand Scenario

In the concluding segment, Shali Meng poses a hypothetical scenario to envision an ideal tariff policy:

[37:36] Shali Meng: "If you can wave the magical wand, design a perfect data driven tariff policy, what would be the key features and would it be."

Andrew Lo outlines his vision for a balanced and strategic tariff policy:

1. Identification of Critical Industries:

   [37:36] Andrew Lo: "Identify industries critical for our benefit and long-term survival."

2. Temporary Protection Through Tariffs:

   [37:36] Andrew Lo: "Impose tariffs carefully to provide temporary protection, not to be punitive."

3. Incentives and Industrial Policy:

   [37:36] Andrew Lo: "Couple tariffs with incentives to help industries reinvent themselves and become globally competitive."

He emphasizes the integration of data science to meticulously adjust these policies for optimal outcomes:

[37:36] Andrew Lo: "Using data science to collect and change these policies carefully to produce the best outcome."

Conclusion

The episode wraps up with a reflection on the complexities of tariff policies and the indispensable role of data science and adaptive economic models in navigating the global trade landscape. Professor Andrew Lo provides a nuanced perspective that bridges traditional economic theories with contemporary challenges, offering listeners a comprehensive understanding of how tariffs impact economies and individual financial strategies.

Notable Quotes:

• Andrew Lo on Tariffs' Long-Term Impact:

  "[07:05] "You get into this kind of a arms race where people are going to be ratcheting their tariffs... both countries end up paying higher costs."

• Andrew Lo on AI and Financial Advice:

  "[31:33] "Proceed with caution... never take large language model advice at face value."

• Andrew Lo on Designing Tariff Policies:

  "[37:36] "Impose tariffs carefully to provide temporary protection, coupled with incentives to make sure that protected industries reinvent themselves."

This episode serves as an essential guide for listeners seeking to understand the intricate dynamics of tariffs, their economic and political ramifications, and the future pathways enabled by data science and artificial intelligence.