Donald Trump and the trouble with tariffs
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Donald Trump says he has a panacea for the U.S. economy: tariffs. But history — including Trump’s own history with tariffs when he was president — has a different opinion.
Let’s take a ride down memory lane and a look at what would likely happen if Trump wins and imposes more tariffs on imports.
Tariff is Trump’s ‘most beautiful word’
“The most beautiful word in the dictionary is tariff,” Trump said last week during an on-stage interview at The Economic Club of Chicago. “It’s my favorite word.”
It’s also the cornerstone of his plan for the economy if he wins next month’s presidential election and returns to the White House. With tariffs of 60% on everything the U.S. imports from China and tariffs of 10% to 20% on everything else the country imports, Trump says American companies will bring their manufacturing back from overseas and foreign firms will open plants in the U.S.
“The higher the tariff, the more likely it is that the company will come into the United States and build a factory in the United States so it doesn’t have to pay the tariff,” Trump said. “We’re going to bring the companies back. We’re going to lower taxes still further for companies that are going to make their product in the USA, we’re going to protect those companies with strong tariffs.”
The problem is it just doesn’t work that way.
As Treasury Secretary Janet Yellen said last week: “Calls for walling America off with high tariffs on friends and competitors alike or by treating even our closest allies as transactional partners are deeply misguided.” In fact, she said they would have the opposite effect of what Trump says he wants. “Sweeping, un-targeted tariffs would raise prices for American families and make our businesses less competitive,” Yellen said.
Who really pays?
Trump repeatedly argues that foreign companies will pay for the tariffs. But as the Brookings Institution noted in a study of the tariffs Trump imposed when he was president, it’s American households and American firms that have paid the cost.
In fact, the Brookings report showed any gains in employment in sectors that competed with China were more than offset by job cuts in industries that relied on China for parts and industries that faced retaliatory tariffs by China. U.S. consumers paid about $817,000 in higher prices attributable to the tariffs for every job created in the washing machine industry, and $900,000 for every steel industry job. Sure, some U.S. jobs need support — but that can come in the form of domestic tax breaks, or even government contracts to struggling industries.
“While policy interventions to support manufacturing jobs may be warranted, there are cheaper ways to do so,” Brookings said.
A study released during Trump’s presidency by economists Aaron Flaaen, Ali Hortacsu, and Felix Tintelnot estimated that Trump’s tariffs on imported washing machines added 125% to 225% of the cost of the tariff to the retail price of the washing machines. In a classic knock-on effect, prices of clothes dryers, on which tariffs were not imposed, rose 12%, or $92. The study showed the tariffs brought in a scant $82 million to the U.S. Treasury while raising consumer prices by $1.5 billion.
So much for the effects of the tariffs Trump imposed while he was in office. The nonpartisan Tax Policy Center analyzed the effects of the tariffs Trump says he’ll impose if he’s elected again.
“Trump’s tariffs would significantly raise prices of imported goods since they’d mostly be passed on to consumers,” economist Howard Gleckman wrote. “That would shrink both inflation-adjusted domestic incomes and income tax revenues.”
By the numbers
Under Trump’s proposed tariffs, America’s lowest-income households would pay about $320 more in taxes, middle-income households would pay $1,350 more, and the top 0.1 percent would pay about $133,000 more, according to a study by the Tax Policy Center. Nor would Trump’s tariffs be enough to wipe out federal income tax payments. They’d replace just 8% of the $34 trillion the Treasury expects to collect in taxes over the next decade.
The nonpartisan Tax Foundation gamed out the damage Trump’s proposed tariffs would have on the economy.
“If imposed, his proposed tariff increases would hike taxes by another $524 billion annually and shrink GDP by at least 0.8 percent, the capital stock by 0.7 percent, and employment by 684,000 full-time equivalent jobs,” senior economist Erica York wrote. And that’s not all, she said: “Our estimates do not capture the effects of retaliation, nor the additional harms that would stem from starting a global trade war.”
None of this seems to penetrate Trump’s thinking on the economy.
“A tariff is a tax on a foreign country,” Trump said in August. “A lot of people like to say it’s a tax on us. No, no, no. It’s a tax on a foreign country. It’s a tax on a country that’s ripping us off and stealing our jobs. And it’s a tax that doesn’t affect our country.”
As the Tax Foundation’s York noted in another recent report, Trump’s tariffs would spike the average tariff rate on all imports to highs “not seen since the Great Depression.” She noted that tariffs are a form of sales tax on domestic consumption.
Not only do tariffs put an extra tax on imports, but they actually drive up the price of U.S.-made goods. When foreign companies raise prices to offset the cost of the tariff, that cost is passed on to the consumer. U.S. producers seeing these higher prices tend to raise their prices to just under what the imports charge, raking in huge windfall profits. David Cay Johnston, one of the foremost writers on tax policy in the U.S. and the author of a biography of Trump, explained how that works in a recent article in The New Republic.
“A fundamental economic theory is that capitalists seek to maximize profit,” Johnston wrote. “Every business and finance school teaches this bedrock principle: profit maximization.”
Assuming a 60% tariff on a Chinese-made car that was originally selling for $10,000, the same price as a similar U.S.-made car that cost $9,000 to make, he wrote: “Trump’s tariff means [the U.S. car maker] can raise the price of [their] vehicles to $16,000 and not lose any market share.” However, Johnston noted, “The Trump tariff doesn’t apply to you since you are a domestic carmaker. That means you will collect not $1,000 profit per car but $7,000, all paid by your customers.”
The Trump tariff will make people who own domestic manufacturing companies “rich beyond their greediest dreams,” wrote Johnston, and would “aggressively [redistribute] wealth and income upward in the United States.”
The instability factor
An often overlooked factor in tariff talk is stability — or the lack thereof. Above all, businesses prize long-term stability in regulation, taxes, and monetary policy. But the instability of tariffs pushes potential trade partners away. If China can get dinged for its cars, so can Mexico. And that means Mexico would seek to turn its trade away from the U.S. toward more reliable partners, like Europe or even China.
“When negotiating trade agreements, countries want partners whose policies are stable and predictable, with the goal of establishing a long-term, win-win partnership,” the Brookings report said. “Trump’s eagerness to resort to tariffs, including in relations with close allies, has made the U.S. a less desirable trade partner for other countries.”
The last time major tariffs were on the table was in 1930, at the height of the Great Depression. Congressional Republicans passed the Smoot-Hawley Tariff Act to raise tariffs as high as 59% in the hopes of reviving the U.S. economy. A thousand economists signed a letter imploring President Herbert Hoover, a Republican, to veto the bill. But Hoover feared losing the support of his party’s right wing, and he signed Smoot-Hawley into law.
The result, as the Senate Historical Office wrote, was “a disaster.”
A 2021 study by the nonpartisan National Bureau of Economic Research showed that tit-for-tat tariffs cut U.S. exports to retaliating countries by 15% to 33%. Even countries that hadn’t been targeted put up tariffs on U.S. imports in anticipation.
The depression continued until 1939, and only ended by sheer force of government spending with the New Deal that put Americans back to work in government jobs until the economy itself took off. A second bout of government spending during World War II launched the U.S. into almost a quarter-century of prosperity — and the greatest expansion of international trade and economic growth in human history. Throughout that great expansion, tariffs have remained at their lowest levels since the rise of market capitalism.
For Trump, the biggest takeaway here may be political: Hoover’s support for tariffs cemented his bond with the Republican right, but he lost the rest of his party — and the rest of the country. Franklin D. Roosevelt swept Hoover out of office in the 1932 election.