Donald Trump has flip-flopped on many issues: Today, he says he’s pro-life; in 1999, he said, “I’m very pro-choice.” Last year, he said Republicans should “never give up!” on trying to repeal Obamacare; during September’s presidential debate, he said, “I saved it.” Three years ago, he said Bitcoin “seems like a scam”; now he wants to make America the “crypto capital of the planet.”
But Trump’s desire for high tariffs has been consistent. In an interview on Tuesday at the Economic Club of Chicago, he said, “To me, the most beautiful word in the dictionary is ‘tariff.’” As president, he called himself “a Tariff Man.” In fact, he imposed substantial tariffs when in office. Those actions were, however, mild compared with the tariffs he is proposing now. He initially suggested a 10 percent tariff on all imports, but now he talks about tariffs as high as 20 percent. (In Chicago, he even mused about 50 percent.) He wants a 60 percent tariff on imports from China.
Most economists believe that this would be a terrible idea, and I share that view. I’m not a free-trade purist; I opposed the Obama administration’s proposed Trans-Pacific Partnership and have been generally supportive of the much tougher line the Biden-Harris administration has taken on trade.
But there’s a big difference between sophisticated, limited deviations from free trade and Trump’s desire to put what he called a “ring around the collar” of our economy.
It has never been entirely clear why Trump has a thing for tariffs. My guess is that he sees everything in terms of winners, losers and punishment: If we buy more from foreigners than they buy from us, that in his mind makes America a loser, and he wants to punish foreigners by making them pay for access to the U.S. market. Whatever he’s thinking, restoring the good old days of high tariffs is one of Trump’s key policy obsessions, and high tariffs are very likely to become a reality if he wins the election.
And when I say the good old days, I mean old. High tariffs were a consistent feature of American policy from the Civil War through 1933, but in 1934 we turned to a policy of reducing tariffs on other countries’ exports in return for lower tariffs on our exports.
This policy was spectacularly successful at overcoming opposition to tariff cuts. By the beginning of the 21st century, average U.S. tariff rates were down to the low single digits, with comparably low tariffs in other wealthy nations. Developing countries generally had much higher tariffs until the 1980s, but these became unfashionable with the rise of the so-called Washington Consensus, and many began slashing rates. By the time Trump took office in 2017, we were living in a world of relatively free trade.
Trump’s initial round of tariffs made only a small dent in this system, but the tariffs he’s proposing now would turn the clock back 90 years, raising overall tariffs to Smoot-Hawley levels. . . . . Trump sees tariffs as a way to reduce U.S. trade deficits and boost domestic manufacturing. Again, economists widely believe his tariffs wouldn’t achieve these goals. But before we get into the pros and cons, let’s start with some basics about tariffs and what they do.
A tariff is a tax paid on foreign goods when they cross our border. In a direct sense, the tax is usually paid by the shipping company, but neither supporters nor opponents of tariffs believe that the shippers actually bear the burden of the tax — just as nobody believes that your local grocer, who must collect sales tax, pays that tax out of his or her own pocket. In fact, the easiest way to think about a tariff is that it is a selective sales tax, imposed only on goods produced abroad.
As with any sales tax, the burden of the tax falls either on consumers, who pay higher prices, or on producers, who receive lower prices.
Economists, and, I believe, most people would agree that sales taxes are usually passed on to consumers. Take, for example, the high tax rate — $5.35 per pack — that New York imposes on cigarette sales. . . . . New York’s tax simply makes cigarettes here much more expensive than they are in North Carolina, where the tax is just 45 cents per pack.
Why, then, imagine that the story is different when a sales tax is imposed on goods produced in China? For that is what a tariff on imports from China amounts to — there’s nothing magical about collecting a sales tax at the border rather than at the cash register.
[W]hile thinking of a tariff as a sales tax is basically right, there are two complicating factors.
First, because domestically produced goods aren’t subject to a tariff, tariffs can encourage American production that competes with imports. This may sound like a good thing, but the reason some domestic producers benefit is that a tariff lets them raise prices, which in turn means that the burden on consumers can be considerably bigger than the taxes collected on imports.
The second factor is subtler: If a tariff reduces imports, it reduces U.S. demand for foreign currencies to pay for these imports, and hence reduces the dollar value of those currencies. . . . a stronger dollar hurts American exporters. Furthermore, the dollar might not rise if other countries retaliate by imposing their own tariffs — which would also hurt American exporters.
We began systematically using tariffs to protect industries from foreign competition during the Civil War. However, Franklin D. Roosevelt made a fundamental break with previous tariff policy. It was widely agreed that extremely high tariffs had become counterproductive.. . . So in 1934, Roosevelt signed the Reciprocal Trade Agreements Act, under which Congress gave the president authority to negotiate tariff deals with other countries — cutting U.S. tariffs in return for lower tariffs on U.S. exports. This American system then became the template for a global trading system, the General Agreement on Tariffs and Trade.
[I]n a world in which Russia invaded Ukraine and China might invade Taiwan, there’s a good case for using tariffs to retain domestic capacity in strategically important industries. But this is an argument for highly selective protection, not for Trump’s notion of a 20 percent tariff on basically everything.
So what would Trump’s tariffs do? You don’t want to take the numbers Trump has thrown out on tariffs too literally — they’re more like concepts of a plan. Still, it’s a useful exercise to estimate the effects if he were, in fact, to go with those numbers.
The simplest, clearest effect of a tariff hike would be higher prices. . . . . Tariffs would mainly hit the prices of goods rather than services, and the share of a family’s expenditures that go to goods is inversely correlated with that family’s income. For example, lower-income families spend most of their food dollars on groceries, while high-income families eat out a lot — and much of the cost of eating at a restaurant comes from the services provided by cooks, servers and so on.
As a result, tariffs would raise the cost of living more for middle- and lower-income families than the average. An estimate by the Institute on Taxation and Economic Policy, which assumes a 20 percent tariff, finds that it would reduce the real income of families in the bottom fifth of earners by 5.7 percent, of middle-income families by 4.6 percent, but of the top 1 percent by only 1.4 percent. . . . . Trump’s 2.0 tariffs would in effect be a strongly regressive tax increase, imposing a serious burden on most families.
Trump — who denies that tariffs would raise prices — also believes that tariffs would reduce the trade deficit and boost American manufacturing. Is he right? Probably not. Among economists recently surveyed by The Wall Street Journal, 59 percent said that Trump’s tariffs would reduce domestic manufacturing employment, while only 16 percent said the reverse.
[T]wo reasons tariffs might backfire: They could lead to a stronger dollar, making our goods less competitive on world markets, so any fall in imports would be offset by declining exports, and they’d also provoke retaliation by our trading partners. A third reason, emphasized in a 2018 study published on a blog of the New York Fed, is that American manufacturing relies heavily on imported components, so tariffs would substantially raise manufacturing costs.
A 2019 International Monetary Fund working paper on tariff hikes around the world found that they generally led to higher unemployment, while having “only small effects on the trade balance.”
A simulation analysis published by the Peterson Institute suggests that Trump’s tariffs would actually increase the trade deficit.
What the tariffs would do is shrink our economy. They would cause us to sell less of the goods we currently export — that is, stuff we’re relatively good at producing — and more stuff we aren’t that good at producing. The effect would be to make the economy less efficient and poorer.
Furthermore, the Trump tariffs would rip up the agreements that keep worldwide tariffs relatively low, inspiring both retaliation and emulation that would fragment world markets.
So, what’s the bottom line on the pros and cons of Trump’s tariff proposals?
Cons: The tariffs would impose large burdens on middle- and lower-income families. They probably wouldn’t significantly reduce the trade deficit and might actually hurt American manufacturing. And unilateral U.S. tariff action would wreak havoc by fracturing the world trading system.
Pros: I can’t think of any.
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