President-elect Donald Trump has vowed to unleash a “golden age” for the United States. Many of his policy ideas are laudable on their face. Tax cuts and deregulation are critical to unleashing private sector investment and growth.
But Trump’s most consistently held policy view, that tariffs are a good idea, is fundamentally misguided. Trump has offered a few different iterations of what he has in mind for a second term, including an across-the-board 20% tariff on imported goods from everywhere. He has also threatened even higher tariffs on China and Mexico.
Trump recently went so far to say that “tariff” is “the most beautiful word in the dictionary.” As president, he called himself a “Tariff man” as he imposed tariffs on imports from around the world.
As an elementary matter, it is important to understand what tariffs are: taxes. Under tariff schemes, when companies import goods, they pay taxes on them. That includes American companies which import, say, raw materials for industrial uses. Companies often turn to imports because they either can’t get the goods domestically or the costs are too high.
Trump has wrongly believed that tariffs are a net positive for the United States because they encourage more companies to stay here in America and buy American, whatever the price. When a country imposes tariffs on goods from another country, that country will often retaliate with tariffs of their own. Over time, this means higher costs all around. That means companies spend more for the same thing. In turn that means higher prices for consumers and lower production overall.
This is all what happened the last time Trump imposed tariffs. According to research from the National Bureau of Economic Research, “The trade-war has not to date provided economic help to the US heartland: import tariffs on foreign goods neither raised nor lowered US employment in newly-protected sectors; retaliatory tariffs had clear negative employment impacts, primarily in agriculture.”
The nonpartisan Tax Foundation, meanwhile, estimates “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. Our estimates do not capture the effects of retaliation, nor the additional harms that would stem from starting a global trade war.”
As of June, they noted, the trade war started by Trump and continued by the Biden administration “will reduce long-run GDP by 0.2 percent, the capital stock by 0.1 percent, and employment by 142,000 full-time equivalent jobs.”
There are those who suggest that, perhaps, Trump knows these tariffs are bad but he’s using them as a negotiating tool. It has been many years since he launched his trade war and Biden continued it. Does anyone see any sign that the Chinese Communist Party has been moved to see the error in their ways?
As argued by Clark Packard at the Cato Institute, “Over the last six-plus years, those tariffs have imposed significant costs on Americans as Cato scholars have repeatedly highlighted. Perhaps those costs could be justified if the tariffs had forced a wholesale reorientation of Chinese economic policies. Instead, Americans have the worst of both worlds: tariffs continue to harm American firms and families while Beijing’s abusive practices continue largely unabated as Ambassador Tai and others—like the US-China Economic and Security Review Commission—acknowledge.”
Trump’s confused fixation on tariffs mainly hurts American workers and consumers, while failing to do what he seems to want. He should focus on policies which actually help Americans, like tax cuts and deregulation, not tariffs.