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Will Trump’s Tariffs Make America Great Again?

The economics say no, but the politics say something different.

by | Sep 29, 2024 | Articles, Opinion, Politics

Former President Donald Trump is locked in on tariffs more than he was during his first term in the White House. The Republican presidential candidate recently threatened to hit John Deere with 200% tariffs, even as the company has invested billions in US factories since 2019. This adds to his other proposals: 60% levies on Chinese imports and a universal, across-the-board 10% tax on all goods entering the United States. Trump has even expressed interest in abolishing the income tax in favor of tariffs. The consensus, from the economic literature to today’s economists, is that this trade policy would rekindle inflation, slow growth, and function similarly to a national sales tax. Is this a reasonable conclusion?

The Good, the Bad, and the Ugly of Tariffs

First, what are we talking about anyway? Tariffs are taxes on imported goods. While proponents assert that they are paid by the exporting country (China, for instance), the importer (Walmart, for example) pays the levy. Because companies face higher costs, they will pass them on to consumers through higher prices. The purpose is usually to achieve a political objective, primarily shielding domestic industries from foreign competition. It can also be a revenue generator.

Until the income tax arrived in 1913, tariffs had been the federal government’s primary source of revenue. For many years, tariffs accounted for 95% of all receipts. Adopting a similar tax structure would be financially impossible due to today’s deteriorating and out-of-control fiscal health. A $200 trillion bomb awaits Uncle Sam in his old age.

The economic literature dictates that tariffs affect economic growth, trigger inflationary pressures, and cost job creation. Legendary economist Ludwig von Mises asserted that tariffs prevent consumers from buying through more efficient competitors at a lower price. Additionally, he wrote that tariffs are political privileges given to a small minority of special interests. Some economic observers will compare the policy pursuit to price controls.

Tariff supporters, on the other hand, will complain that other markets slap tariffs on US goods. This is accurate. The European Union, for instance, imposes tariffs on billions of dollars worth of American goods, such as apparel, automobiles, food, and tobacco. The policy essentially creates an unlevel playing field in the European car market since US auto manufacturers cannot sell their vehicles overseas. Over the years, politicians on both sides of the aisle have engaged in reciprocal negotiations to reduce tariffs. The US and Japan established the US-Japan Trade Agreement (USJTA) to decrease or eliminate tariffs on many American products.

Eminent economist Milton Friedman addressed this in his 1962 book Capitalism and Freedom, championing the idea of unilateral free trade. “Our tariffs hurt us as well as other countries. We would be benefited by dispensing with our tariffs even if other countries did not. We would of course be benefited even more if they reduce theirs but our benefiting does not require that they reduce tariffs. Self-interests coincide and do not conflict,” he wrote.

However, politicians want to appeal to working-class voters by convincing them that trade protection, whether for steel (George W. Bush) or tires (Barack Obama), will protect the US industry. While steelmakers benefit from tariffs, domestic companies that consume the metal do not enjoy the same prosperity. It can also have the unintended consequence of domestic companies forcing foreign markets to explore other nations or even bolster their production. This occurred during the 2017–2020 trade war when China, Europe, and India launched schemes to increase domestic soybean output in response to Trump’s tariffs, which is why the federal government subsidized US farmers.

Before and during Trump’s presidency, experts warned that tariffs would unleash an inflation bomb. As the protectionist endeavor raised consumer prices, they were hardly noticed in the consumer price index (CPI) and the producer price index (PPI). Or, at the very least, their effects on prices paled compared to what the American people have endured over the last three-plus years.

The Cato Institute recently compiled a comprehensive list of studies by groups and economists assessing the Trump tariffs. For instance, a 2020 study by the non-partisan Congressional Budget Office (CBO) showed that tariffs implemented between January 2018 and January 2020 resulted in lost output and higher consumer prices, costing households nearly $1,300 in 2020. A 2022 study by a pair of economists showed that tariffs slapped on Chinese imports resulted in a 0.16% decrease in real (inflation-adjusted) wages (0.16%) and income (0.14%).

Times have significantly changed since Trump’s initial foray into presidential politics. If his newest policies are enacted, will the latest prognostications come to fruition?

Inflation, Growth, and the Nudge

Projections of Trump’s tariffs vary. Goldman Sachs economists say that higher tariffs on cars from China, the European Union, and Mexico would raise core inflation. Tax Foundation analysts forecast that import taxes would result “in a reduction in real incomes” because “tariffs reduce the amount of revenue businesses have to compensate their workers and shareholders.” Morningstar projects Trump’s tariff hikes would subtract a cumulative 0.2% from its GDP growth forecasts over the next five years.

The positive outcome, however, might be for America’s budget deficit. According to the Tax Foundation, if Trump imposed a universal tariff on all goods and a 60% tax on Chinese-made products, the federal government’s revenues would soar more than $2 trillion. Of course, this is absent of any tit-for-tat retaliation.

Here is a chief problem with the revenue side of the equation. Trump campaign officials and Republican lawmakers contend that tariffs can be used as a negotiating tactic, prompting other countries to lower their tariffs or establish new trade agreements. However, if these levies are reduced, the revenues will not fill government coffers as projected. On the surface, this would be a positive development, but that is assuming Capitol Hill answers to shrinking receipts by cutting the $7 trillion budget.

Conservatives and libertarians have long argued against utilizing tax policy as a nudge. Indeed, it is a big government ploy. In a 2011 Wall Street Journal op-ed, Obama White House official Cass Sunstein asserted that the government can nudge the public in specific directions, essentially manipulating individuals to do what politicians and bureaucrats want. Both Republicans and Democrats have embraced this mantra, including the current tickets. Trump has offered lower tax rates to companies embracing Made in America but promised to punish them with higher tariffs should they offshore jobs or build products overseas.

Market Principles

Progressives have suddenly appeared from their caves and howled at the moon that tariffs raise prices, though they were quiet when President Joe Biden kept the Trump-era levies in place and doubled down on them throughout his term. They were also eerily silent when Obama introduced and hiked tariffs.

Are conservatives doing an about-face? Casey Mulligan, an economist and author who led Trump’s Council of Economic Advisers from September 2018 to August 2019, estimated a 10% tariff would add a quarter percent a year to inflation spread over four years. The Peterson Institute for International Economics noted that Trump’s tariffs would raise prices by at least $500 billion annually. Peter Schiff, the global chief economist at Euro Pacific Asset Management, succinctly asked: “Why don’t Republicans realize that tariffs are taxes?”

Ultimately, many right-leaning think tanks and economists have maintained the same message: Tariffs would cause more harm than good.

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Liberty Nation does not endorse candidates, campaigns, or legislation, and this presentation is no endorsement.

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