Trump’s Tariffs and Economic Risk

How much would his border taxes offset his pro-growth policies?

WSJ editorial. 

"Donald Trump said recently that “tariff” is the most beautiful word in the dictionary, except “faith” or “love,” and in this belief he seems consistent. So it’s worth taking seriously Mr. Trump’s campaign promise to impose a universal baseline tariff of 10% or 20% on all imports to the U.S., plus 60% on China.

A first question is whether Mr. Trump really would do this, since it would dwarf his last tariffs. The average tariff rate on all U.S. imports is currently about 2%, the Tax Foundation says, and Mr. Trump’s plan could raise it to “highs not seen since the Great Depression.” That was under the infamous 1930 Smoot-Hawley tariff.

Mr. Trump started his first term with pro-growth deregulation and tax reform. He began his tariff wave in 2018, with targeted levies on steel, aluminum, washing machines, solar cells, and a variety of goods from China. He held off adding a tax of up to 35% on foreign autos, even as his Commerce Department wrote a report calling them a national-security threat.

The evidence is clear that the tariffs had real costs and reduced the growth spurred by his other policies. Other countries retaliated, hitting U.S. producers of everything from apples to whiskey. The government paid farmers billions in compensation. Harley-Davidson had to shift production for its overseas customers to Thailand to stay competitive.

There was no great boom in manufacturing employment. More jobs involve using steel than making it, and one study said higher steel prices led to 75,000 lost manufacturing jobs. Consumers paid more for many products, as companies passed on tariff costs. The economic studies on these points are copious, and it’s worrisome that Mr. Trump and his advisers dismiss them.

The next question is whether Mr. Trump has the power to impose a universal tariff. The Constitution grants Congress, not the President, authority over trade. It’s unlikely that Congress would pass a new broad-based tariff on all imports, though protectionism has been gaining support in the Trump era.

But Congress has already ceded considerable power to the President, especially provisions against “unfair” trade practices (Section 301) and “national security” threats (Section 232). Mr. Trump used these powers in his first term, and he was aggressive in exploiting 232 in particular, as he no doubt would be again.

The bigger danger is that Mr. Trump might use the International Emergency Economic Powers Act (IEEPA). This law gives the President broad authority, after declaring an emergency, “to deal with any unusual and extraordinary threat” from abroad. IEEPA has been used to freeze Venezuelan assets and stop exports to Iran. It has never been used to impose tariffs. Mr. Trump threatened Mexico with it in 2019 but stood down amid a deal to expand the “Remain in Mexico” migrant policy.

Yet it’s hard to believe Mr. Trump could legally get away with declaring all imports from everywhere an emergency to impose a tariff. That would transform IEEPA from a sanctions law into a grant of limitless presidential power over trade. Progressives love the idea of a carbon tariff. Could President Biden impose one unilaterally by declaring foreign emissions to be an emergency?

If Mr. Trump tries it, he may find himself in court, perhaps the Supreme Court. The current Justices have struck down similar efforts to abuse presidential power, such as Mr. Biden’s $400 billion student-loan forgiveness.

Mr. Trump sometimes says he sees tariffs merely as a means to gain trade reciprocity: If Japan had zero tariffs on U.S. goods, the U.S. would do the same. But the process of getting to zero is likely to be messy if it is even achievable. Once imposed, tariffs build business and union constituencies that won’t easily give them up. The current 25% U.S. tariff on foreign trucks was imposed in 1964.

Yet at other times Mr. Trump sounds like a true believer in high tariff walls for their own sake—as the way to return manufacturing to the U.S. and protect it from foreign competition. This seems to be the view of his chief trade adviser, Robert Lighthizer, and perhaps running mate JD Vance.

Known as import substitution, this model of economic growth kept India globally uncompetitive for decades. It would guarantee higher consumer prices and the slow erosion of U.S. business competitiveness. Our guess is that financial markets would signal their disapproval if Mr. Trump goes this far.

Another risk, and a special case, is trade with China. Mr. Trump’s first-term tariffs didn’t change Chinese behavior, but he seems more determined than ever to raise the stakes. China’s mercantilism and IP theft have caused foreign firms to reduce their investment in China, which is the prudent move. Strategic economic decoupling is warranted. But an all-out trade war with China would have significant costs for America too.

Mr. Trump’s overall economic agenda is superior to Kamala Harris’s model of tax, spend, mandate and regulate. But his tariff agenda is an anti-growth wild card that poses considerable economic risk in a second term. We’d have to hope financial markets and Congress deter the worst."