Tariffs are on the Menu. Who’s Eating Them?

Trade is not usually a major issue in a national election. Poll data has consistently shown that while people have views on trade, it is far down the list of things they care about when they vote. Former president Donald Trump, however, manages to put it on the front page in all his campaigns. He has one narrative; the United States is a victim of foreigners (including immigrants) stealing our jobs and undermining our economy and security; one metric, the bilateral trade balance; and one tool—tariffs.

He has been talking about tariffs for nearly 40 years and brought them up again early in his current campaign with proposals for an across-the-board tariff of 10 percent, later increased to 20 percent, and now 60 percent or more tariffs on Chinese imports. Recently, in the wake of widespread criticism and a probing interview with John Micklethwait, editor in chief of Bloomberg News, Trump has doubled down on tariffs and has also begun to explain more clearly why he likes them, how he thinks they would work, and what he hopes to accomplish with them.

His arguments, however, conflict with the facts and sometimes get in the way of each other. He sees tariffs serving two purposes—protecting U.S. companies from foreign competition and giving foreign companies an incentive to move to the United States. He responds to the obvious argument that tariffs will increase prices by saying repeatedly that foreign companies will pay them. On that point, analysts have overwhelmingly argued that it is not true.

While importers or foreign manufacturers sometimes eat part of the tariff by not passing all of it along to consumers, that is generally a small part of the total. Consumers have to eat the rest. An average of several different analyses is that the proposed tariffs would cost households nearly $4,000 annually, or more depending on the size of the tariff. That number is large primarily because Trump has proposed tariffs on everything from all countries. This sledgehammer across-the-board approach contrasts with the Biden administration’s more selective use of tariffs that focus on specific critical technology sectors. It would also be directly felt by consumers because it covers everyday items like coffee and bananas that are not grown in the United States (except in Hawaii). Those cost estimates also do not take into account the inevitable retaliation from our trading partners. In fact, U.S. manufacturers would be hit twice. Their component imports would be more expensive because of Trump’s tariffs, and their exported finished products would be more expensive because of the retaliation.

More recently, he has also argued that if tariffs are high enough, they will persuade foreign companies to move to the United States, which would mean they would not have to pay tariffs since their production would be in the United States. Micklethwait pointed out that even if that happened, it would take years—factories don’t spring up overnight—but Trump argued that if the tariff was high enough, they would move faster, meaning that 10 percent was not high enough.

At this point, the arguments begin to contradict themselves. Earlier in the campaign, Trump talked enthusiastically about how much money the tariffs would raise and how they could finance his proposed tax cuts, ignoring the fact that the revenue estimate from the tariffs is only about one-fourth of the estimated cost of his tax proposals. At one point he expressed his admiration for William McKinley, a high-tariff president at the turn of the twentieth century, and observed that tariffs then covered most of the federal budget (this was before the income tax amendment to the Constitution), not mentioning that federal expenditures at the time were a fraction of what they are now.

The contradiction is that the higher the tariff, the less the revenue because prohibitive tariffs end up blocking trade by making it no longer economic. This is the inverse of the Laffer Curve, which argued (erroneously) that lower taxes would produce more revenue. The reality in this case is higher tariffs will produce less revenue because there will be less trade.

All of Trump’s arguments are based on a fundamental principle: access to the U.S. market is so attractive that foreigners will pay handsomely to obtain it, either by eating the tariffs to maintain their market share or moving to the United States. This is an old U.S.-centric view of the world, but we are no longer the indispensable power. As the United States drops out of trade agreements, as Trump did with the Trans-Pacific Partnership, and fails to pursue new ones, which describes Biden’s policy, the world is discovering that economically it can get along quite well without us. Global trade is growing again post-Covid-19; countries are negotiating new trade arrangements, and the United States is just watching. As I wrote in an earlier column, “Tweedledumb and Tweedledumber,” the Biden administration’s trade policy has been a litany of missed opportunities while Trump’s tariffs would make things worse.

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

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William Alan Reinsch
Senior Adviser, Economics Program and Scholl Chair in International Business