The Return of Tariff Man

Just when Scott Miller and I and our Trade Guys podcast were resting comfortably once again in the business section of your local newspaper, Tariff Man has returned, catapulting us back onto the front page. Trump’s tariffs were a big reason we started the podcast in the first place, and his relentless pursuit of tariffs during his administration gave us plenty to talk about—and make fun of. Starting in 2021, however, we experienced the relative calm of the Biden administration, which is, essentially, not negotiating anything important on trade with anybody. As our listeners know, we’ve managed to find topics to discuss anyway, but it hasn’t been the same without the drama.

Now, thanks to Donald Trump, drama is back. Last week he proposed a universal baseline tariff of, notionally (he didn’t seem committed to a specific number), 10 percent. It appears this would be applied to all products and all countries. Let’s take a quick look at the merits of the proposal, leaving aside the fact that there are many steps before it could actually happen—Trump would have to win the election, take office, develop a more detailed proposal, and figure out a legal way of implementing it (Congress would no doubt have something to say about that).

Looking at proposals like this from a macroeconomic perspective, which is the correct way, since the tariffs would apply across the board, you would be hard pressed to find an economist who thinks they make any sense. They would add significantly to inflation, raising the price of most everything, since domestic producers of competing goods would almost certainly take advantage of the situation by raising their prices as well. Businesses would be affected along with consumers since their imported parts and components would become more expensive, leading to price increases on their finished products and making them less competitive globally.

Harder to quantify but nonetheless certain is the impact of the inevitable retaliation on U.S. exports. The tariffs would certainly violate WTO rules, which would permit the other members to retaliate against the United States. Trump’s response would probably be to withdraw from the organization, which would not only be a significant blow to the rules-based trading system, but it would also free other countries to take whatever actions they wished against us. In that situation, the Trump response would be to hit back, drawing the United States into a full-scale trade war.

So, it is hard to see anything good in this proposal and very easy to outline the bad things that would happen if it were implemented. Some may also try to generalize the argument into an attack on all tariffs in all situations, which would be a mistake. The right to impose tariffs on unfairly traded goods is firmly established in U.S. law and international rules, as is the concept of “safeguard” tariffs—temporary actions intended to give domestic industry time to adjust to a surge of imports. The United States is not the only country that has successfully used these laws, but it now faces something of a dilemma at the microeconomic level over Tariff Man’s presidential legacy—the tariffs he imposed on China, in particular the tariffs on automobiles, which are 25 percent plus the “normal” tariff of 2.5 percent, or 27.5 percent total.

Trump imposed these as part of his strategy to force China to change its economic policies, which didn’t work, and he probably did not give a lot of thought to the particular consequences in specific sectors. He also did not likely envision the transition to electric vehicles (EVs), which has forced auto manufacturers everywhere to develop new plans and new supply chains. China is playing a leading role in that transition, not just on batteries and other parts but on finished vehicles. CSIS senior fellow Ilaria Mazzocco has pointed out that last year 35 percent of all exported EVs came from China, 10 percentage points greater than 2021. Most of them went to Europe, which is now facing a challenge because the domestic manufacturers are not making competitive EVs (although they are among the companies exporting from China). The United States, in contrast, does not yet have this problem, largely because of the Trump tariffs. That may not last, as Chinese EVs are very price competitive. Mazzocco points out that last year 20 percent of the EVs for sale in China were less than $15,000, while there were no EVs in the United States or the European Union for less than $20,000.

Thus, it is only a matter of time before we face the same problem from Chinese EVs that Europe is facing now and that we faced from Japanese auto imports in the 1980s. Our advantage this time is we can see it coming. The United States has tools, including the trade laws, since the Chinese autos are benefitting from subsidies, but in the short term, the best defense is the existing Trump tariff. Ironically, Tariff Man may have unknowingly done us a favor, or at least bought us some time. It is now up to the Biden administration to decide what, if anything, it wants to do in support of the domestic auto industry.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.