Trump’s Tariffs Would Smother His Economic Successes

A minimum 10% levy on all goods would hike domestic prices, reduce wages and invite foreign retaliation

By Phil Gramm and Donald J. Boudreaux. Excerpts:

"The decline in economic growth caused by tariffs—along with reduced wages and income-tax collections—would at least partially offset any additional customs revenues. Implementing the tariffs would also likely trigger a trade war"

"After Mr. Trump’s regulatory and tax relief boosted real economic growth from 1.8% in 2016 to a 13-year high of 3% in 2018, tariffs stunted growth. That was as the Congressional Budget Office predicted, with growth slowing to 2.6% in 2019, the first full year of the tariffs. Employment in manufacturing continued falling as a percentage of total employment at the same rate as the previous decade. Before the tariffs were imposed, manufacturing jobs were 8.5% of total employment. The figure fell to 8.4% by the end of 2019 and 8.1% today. Manufacturing output, after rising 2.5% during the first three quarters of 2018, fell when the tariffs fully kicked in. By the end of 2019, the inflation-adjusted value of manufacturing output was 6.2% lower than when the tariffs were imposed."

"An across-the-board tariff would stimulate U.S. production of goods that we now import more cheaply. To produce these goods at home, American workers and capital would be drawn away from producing other goods and services that we produce more efficiently. Productivity, wages and the return on capital would fall as we produce things at home that we could buy more cheaply abroad. This would simultaneously reduce production in industries for which our labor productivity and capital returns are higher. Moreover, because half of our imports are component parts used by U.S. producers, tariffs would further increase our production costs and reduce our competitiveness at home and abroad. 

The retaliation by our trading partners would compound tariffs’ costs by reducing U.S. exports in the industries where wages and capital returns are highest."

"the Smoot-Hawley tariff, which reduced the volume of world trade by approximately 14"

"A half-century ago nearly 25% of American workers were employed in manufacturing, down from the all-time high of 39% in 1943. This percentage continues to fall because of technological advances, not trade. Modern technological prowess allows American industry to produce nearly 2.5 times as much manufacturing output as in 1974 with a fraction of the labor force."

"10% across-the-board tariffs would shave a full percentage point off U.S. GDP growth. An additional 0.8% of GDP would be lost from the 60% duty on Chinese imports, raising the yearly cost per household of the tariffs to almost $4,000."

"a consistent theoretical and empirical finding in economics is that domestic consumers and domestic firms bear the burden of a tariff, not the foreign country"

"The burden of the tariff would be regressive, too, considering lower-income households spend a larger share of their income on consumer goods."

"the tariffs Mr. Trump has proposed would impose disproportionately large losses on these households. Those in the bottom income quintile would find their purchasing power reduced by 4.2%, while households in the middle-income quintile would lose 2.7%. Highest-quintile households would lose less than 1%."

"Inflation-adjusted average hourly compensation a half-century ago was only about half of what it is today. Two-thirds of American households now have real incomes that in 1967 would have put them in the top quintile of earners."

Five Myths About Tariffs

By Michael Munger.

"We have been hearing a lot about tariffs lately. Some of it is accurate and useful. But not much. Here are five dangerous myths about tariffs.

1.  Tariffs are a “sales tax”

A sales tax is (usually) an ad valorem levy imposed at the point of final sale, and added to the listed price of the item. So, a 5 percent sales tax on a $10 widget means the consumer pays $10.50. In the US, sales taxes are transparent, itemized separately on the receipt. A tariff is imposed when the widget enters the country; the cost is nowhere itemized, and consumers are unaware that a tariff is built into the price they pay. Further, tariffs are often imposed on inputs, not on final products. This raises the costs for manufacturers and producers, but is again not reflected in an itemized receipt as a proportion of the costs.

But tariffs do resemble sales taxes in one way: the tax is usually paid by the consumer and not the producer, depending on the responsiveness of sellers to changes in price. For example, even though the importing wholesaler writes the check to pay the tariff on steel at the port, the actual costs are ultimately almost fully passed on to consumers in the form of price increases in all the products made with that steel.

2.  The higher the tariff, the less it costs

A dialogue, one that has actually happened many times:

Advocate of tariffs: “Low tariffs are good, but high tariffs are even better, because they cost less!”

Me: “How can that be?  Tariffs are an increase in the cost of stuff people want to buy, or in the cost of inputs that producers need to make stuff. Even if you think the benefits of “protection” are large, the cost of tariffs has to be related to the size of tariffs.”

Advocate: “Ah, but if the tariff is high enough, the revenue starts to fall. That means people are paying less, right? And for very high tariffs, there is zero revenue. That means, zero cost!” 

Me: “Look: the cost of tariffs is partly—and for high tariffs, entirely—the artificially high price of products made in the US! There is no necessary relation between the cost of the tariff and the amount of revenue.”

Advocate: “(contemptuous stare, unconvinced)”

The US government could tax people, and then pay subsidies to producers it likes, and whose unions will support them at the ballot box. Tariffs do the same thing, but trade protection “cuts out the middleman”! Instead of the government taxing consumers, and then giving the money to favored producers, the government forces consumers to give an artificial bonus to domestic producers directly, in the form of higher prices caused by foreclosed competition from abroad.

Now, you may think the benefits of such protection are high enough to justify this cost. I disagree, but that’s not the myth I’m dispelling here. The myth is that higher tariffs cost less: in fact, whatever the benefits, higher tariffs cost more, even if amount of the artificial price increase is hard to measure, because consumers don’t realize the higher domestic prices are caused by keeping cheaper foreign products out.

3.  Tariffs raise a “wall of protection” for US producers, and workers

At some level, this claim has to be true, but protection is actually bad: that’s why we have antitrust laws! Capitalism requires market power to be disciplined by competition, or the threat of competition, from other producers or other workers. It is the knowledge that others are trying to make their products better, cheaper, and more convenient that leads to improvements and innovation.

A firm that is protected from competition by contracts in restraint of trade, or by mergers that “protect” their market power and margins, is (quite rightly) subject to legal sanction. But then why is that kind of illegal protection not only allowable, but desirable, in the case of foreign firms? If we want protection, then why don’t we repeal the antitrust laws?

The difference might be that tariffs “keep the profits, and the wages, at home” in the United States, rather than benefiting firms, and workers, in other countries. But a mountain of academic research has shown that the costs of “protecting” domestic market power dwarf the benefits; it’s not even close. The costs to consumers are almost always larger—and may be much larger, three or four times larger—than the profits and wages that are “kept home.” For example, a steel mill job that pays $80,000 that is “protected” by tariffs and trade barriers likely costs consumers and the American economy at least $160,000, and maybe more, in increased prices and reduced innovation and improvements in production processes.

4.  Tariffs are a classic “American System” policy:  Tariffs protect domestic producers, and are paid by foreigners, a win for everyone. In fact, tariffs were once the main source of revenue for the federal government, and can be again, which would “enable the US to get rid of the income tax.” Best of all, “tariffs do not cause inflation,” and so they are not a problem.

Well, where to start. It is true enough that the US federal government was once mostly financed by the tariff, before the income tax was enabled by the Sixteenth Amendment. Before the income tax, tariffs and other taxes imposed on transactions at ports accounted for eighty percent or more of total federal revenues. But in 1900, total federal revenues were less than $20 billion in 2024 dollars! There have been estimates that tariffs today, even assuming no reduction in imports, would raise no more than $250 billion, as a way of financing a federal budget of $6.5 trillion.

It seems like that just requires higher tariffs, but as I discussed earlier the problem with tariffs is that rate increases quickly begin to cause revenue decreases. It’s like the “Laffer Curve,” only more so. To achieve the (dubious) desired objectives of offering protection to domestic industries, the rates would have to be high enough to reduce imports. But that would cut tariff revenues sharply. Using a tariff to increase federal revenues might be defensible, but then one cannot use those same tariffs for protection; it’s logically impossible.

Finally, the claim that tariffs don’t raise the general price level is true enough, but then the whole point of “protection” is to increase the prices of imported goods compared to domestic goods, a relative price change. In a country that depended on imports for almost all its consumer goods, that might look like inflation, but in the US the effect would be to cause people to substitute away from imports.

One might respond that income taxes also have distortionary effects, but as was discussed above the costs of the distortions caused by tariffs are large and permanent, because “protection” insulates industries from the scolding winds of competition. If tariffs were ever part of a valid “American System,” that time has passed.

5.  Tariffs are not a tax at all, but a way to create “a level playing field!” Other countries subsidize their producers, and then “dump” their output at prices below their cost in US markets.

Sweden can grow pineapples, in hothouses (seriously), but it costs a lot of electricity. Better to buy pineapples from someplace with a warmer climate. The US could make all its own socks, but the area of China around Datang (“Sock City”) has developed specialized machines and skilled labor that can produce socks at about half the cost required in the US.

The pineapple example is comparative advantage; the socks example is division of labor. Those two factors tell us why international trade is so useful, and how it creates so much wealth: nations that pursue their comparative advantage specialize in what they do can do at relatively lower cost, and then use the value that creates to exchange for all the other products they need. There is quite a bit more stuff in the world, and everyone is wealthier as a result.

Well, not quite: sock manufacturers in the US, and would-be pineapple-growers in Sweden, have a problem, because their costs are much higher than their competitors in other countries. That brings up the hard-to-define concept of “dumping,” which has two very different meanings:

i.        Country A sells its products in country B below the costs of country A, because A’s producers are subsidized by the government of A

ii.  Country A sells its products in country B below the costs of country B, because A’s producers have a comparative advantage in selling those products.

Situation (i) is certainly possible, and some countries do subsidize some of their industries such as steel, shipbuilding, and agricultural products. Still, if someone gives you a discount, that means you get cheaper products. Dumping, unlike tariffs, really is a levy on the foreign taxpayers who have to pay the subsidies. But you can see why this might upset US producers, because the cost of the products are being kept artificially low.

The problem is that the more common situation, by far, is (ii). It’s upsetting to me when my competitors have lower costs than I have, but the solution can’t be tariffs. The solution is for me to find ways to lower my costs to be competitive, or to reinvest my productive assets into some other business, one where the US does have a comparative advantage. Again, our earlier example makes this clear: Swedish pineapple producers could demand tariffs on those Hawaiian pineapples, with their “unfair” levels of warm climate and sunshine. But the high costs of growing pineapples in Sweden is a sign that those assets should be employed in some other activity.

---

The poorly informed arguments for trade protection remind me of the fifth, or twentieth, movies in the Terminator series: you think the monster is dead, but it seemingly can’t be killed, only suppressed until the next bad movie. Given the tightly focused political and economic benefits, targeted on key industries or powerful labor groups, perhaps this is understandable. I have tried to outline five of the most egregious myths, because there is no reason to be taken in by old, debunked claims."

The Data Don’t Lie, and Tariffs Don’t Work

Economic freedom produced the economic miracle of the 19th century—and it can do so again

Letter to The WSJ. 

"In responding to our op-ed “No, Tariffs Don’t Fuel Growth” (Oct. 17), Robert Lighthizer has a big problem. His protectionist policies were put to the test starting in the middle of 2018, and they failed even on their own terms. The economic growth rate slumped in 2019, exactly as the Congressional Budget Office predicted. Manufacturing employment as a share of total nonfarm employment continued to decline. The promised reduction in the trade deficit didn’t happen. Evidence has consistently shown that the wages paid to workers whose jobs were “saved or created” by recent tariffs are only one-tenth the cost the tariffs have imposed on the economy.

Desperate for evidence that protectionism can generate prosperity, something it failed to do in the 20th and 21st centuries, Mr. Lighthizer and other protectionists claim that tariffs in the 19th century caused the American economic miracle. Left out of their story is that the federal government couldn’t tax income prior to 1913 and an excise tax on whiskey caused a rebellion. Tariffs were the dominant source of federal revenues for the entire 19th century, funding more than three-quarters of the federal government. Mr. Lighthizer says he doesn’t want to argue about data because in the 19th century the economy grew faster when tariffs were falling.

Economic freedom, not protective tariffs, produced the economic miracle of the 19th century. If we will give it a chance in the 21st century, it will do it again.

Phil Gramm and Prof. Donald Boudreaux"

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."

No, Tariffs Don’t Fuel Growth

Rates were high in the 19th century, but the economy boomed most when the rates were at their lowest

By Phil Gramm and Donald J. Boudreaux. Excerpts:

"It’s true that America had high tariffs throughout the 19th century and experienced substantial economic growth. But tariffs were the nation’s primary revenue source until the ratification of the 16th Amendment—which authorized income taxes—in 1913. Alexander Hamilton, who supported industrial subsidies that Congress rejected, was skeptical of high tariffs since no tax revenue is collected on goods that tariffs keep out of the country and tariffs funded about 90% of the government.

Not until 1816 was a tariff enacted with any serious protectionist intent, according to Dartmouth economist Douglas Irwin. Protectionism peaked in 1828 with what came to be known as the Tariff of Abominations, which raised average tariff rates on all merchandise imports to an all-time high of 57.3%. During those years of rising tariff rates, U.S. industrial output grew at an average annual rate of 4%.

With the election of Andrew Jackson and rise of the Democratic Party in a political backlash to the 1828 protectionist policy, tariffs were reduced. By 1860 the average tariff on all imports was 15.7%, having fallen by 73% over three decades. During that same time frame, the average annual rate of growth in industrial output was 6.7%—more than 40% higher than during earlier years when average tariff rates were rising.

By 1860 industrial output was 563% greater than it was in 1830. This far outpaced the 144% U.S. population growth during the same period. Mr. Irwin describes the few decades preceding the Civil War—when average tariff rates were falling—as a period of “rapid industrialization.” He writes that between 1839 and 1859 the manufacturing sector expanded from about 15% to 21% of gross domestic product.

During the Civil War, the U.S. government hiked tariffs to raise revenue for the war effort. By 1870 the average tariff stood at 44.9%. But from 1870 to 1890, average tariff rates on all merchandise imports fell again, this time to an average of 29.6%, a 34% decline. As average tariff rates fell during those two decades, industrial output grew at an average annual rate of 6%—one-third faster than during the rising-tariff-rate era of 1816 through 1830. In 1890 the Republican-backed McKinley Tariff raised industrial tariffs to nearly 50%, but in the 1890 and 1892 elections Democrats swept into power and reduced industrial tariffs. While America’s economy grew throughout the 19th century, the most rapid periods of industrialization occurred when average tariffs were falling."

"In 1903, reflecting on his trip [to the U.S.], [Alfred] Marshall wrote: “I found that, however simple the plan on which a protective policy started, it was drawn on irresistibly to become intricate; and to lend its chief aid to those industries which were already strong enough to do without it.”"

"Growth was unleashed in a country whose citizens had more economic freedom than any people who had ever lived. It was this freedom that fueled entrepreneurship and productivity."

A Deere in Trump’s Political Headlights

A tariff is the former President’s solution to every economic problem these days

WSJ editorial. 

"Hard to believe, but Donald Trump is giving U.S. companies a reason to think Kamala Harris might be better for their business. On Monday he gave her an assist by threatening tariffs on Deere & Co. for shifting some of its U.S.-based production to Mexico.

“As you know, they’ve announced a few days ago that they are going to move a lot of their manufacturing business to Mexico,” Mr. Trump said in Pennsylvania. “I am just notifying John Deere right now that if you do that, we are putting a 200% tariff on everything that you want to sell into the United States.”

The back story is that Deere this summer said it plans to move manufacturing of compact construction equipment to Mexico from Iowa. The company is also laying off more than 2,000 workers after bulking up during the pandemic recovery. It blamed “lower commodity costs, lower order volumes and a softening construction market.”

Deere is trying to stay globally competitive after striking a costly labor agreement in 2021 with the United Auto Workers that included a 30% raise over six years, cost-of-living adjustments, $8,500 signing bonuses and paid parental leave. Deere also provides health coverage with no premiums, deductibles and coinsurance, plus defined-benefit pensions.

At the time Deere had a $14.8 billion order backlog. But demand for its equipment has cooled amid a slump in commodity prices and rising interest rates. Deere’s rising labor costs have become more of a burden. Laid-off workers can thank their UAW leaders.

What Mr. Trump fails to understand is that U.S. manufacturers compete in global markets. Many customers aren’t in the U.S. and don’t care if a product is stamped “made in America.” Chinese equipment makers are increasingly vying for business in those markets.

Deere’s competitors are also expanding south of the border. Caterpillar has nearly doubled its workforce in Latin America since 2016. Farm equipment manufacturer CNH plans to shift work from Racine, Wis., to Mexico. Bobcat last year announced a $300 million investment in Mexico for compact construction equipment.

Mr. Trump thinks he can bully Deere as he did Carrier, which in 2016 wanted to move air-conditioning manufacturing from Indiana to Mexico. He threatened to impose tariffs on Carrier imports. Carrier scaled back U.S. job cuts after Indiana dangled subsidies.

But Washington and the states can’t afford to subsidize every U.S. manufacturing job, and slapping tariffs on imports from Mexico would violate the USMCA trade agreement. It would also raise U.S. prices. Meantime, his threats help Democrats argue that Ms. Harris would be friendlier to business.

On Tuesday Mr. Trump promised to personally recruit foreign companies to move manufacturing to the U.S., which plays into his self-image as an expert deal-maker. But businesses fundamentally make decisions based on costs and expected return on capital.

That’s no easy feat given the punitive Biden-Harris regulatory and tax policies, and it’s political malpractice for Mr. Trump not to highlight how the Administration’s green-energy agenda harms U.S. manufacturers. Or how Ms. Harris’s proposed increase in the corporate tax rate to 28% from 21% would hit American workers. He sometimes talks about deregulation and extending his 2017 tax reform, but he doesn’t explain how they will help U.S. manufacturers invest more at home and raise wages.

The former President’s biggest selling point is the first-term economy his supply-side policies helped promote. But these days he’s making tariffs his highest priority, and that won’t help the economy if he wins."

The impact (of tariffs) from the traditional import protection channel is completely offset in the short-run by reduced competitiveness from retaliation and especially by higher costs in downstream industries…[the] net effect is a relative reduction in manufacturing employment

See  Tariffs Hurt Manufacturing from Alex Tabarrok.

"In Disentangling the Effects of the 2018-2019 Tariffs on a Globally Connected U.S. Manufacturing Sector (forthcoming) Aaron Flaaen and Justin Pierce of the Federal Reserve Board write:

The unprecedented increase in tariffs imposed by the United States against its major trading partners in 2018-2019 has brought renewed attention to the economic effects of tariffs. While vast theoretical and empirical literatures document the effects of changes in trade policy, it is not clear how prior estimates apply when there are virtually no modern episodes of a large, advanced economy raising tariffs in a way comparable to the U.S. during this period. Further complicating estimation of the effects of tariffs is the rapid expansion of globally interconnected supply chains, in which tariffs can have impacts through channels beyond their traditional effect of limiting import competition.

Another important feature of these tariffs is that they were imposed, in part, to boost the U.S. manufacturing sector by protecting against what were deemed to be the unfair trade practices of trading partners, principally China. Thus, understanding the impact of tariffs on manufacturing is vitally important, as some may view the negative consequences of tariff increases documented in existing research—including higher prices, lower consumption, and reduced business investment—as an acceptable cost for boosting manufacturing activity in the United States.

…On the one hand, U.S. import tariffs may protect some U.S.-based manufacturers from import competition in the domestic market, allowing them to gain market share at the expense of foreign competitors. On the other hand, U.S. tariffs have also been imposed on intermediate inputs, and the associated increase in costs may hurt U.S. firms’ competitiveness in producing for both the export and domestic markets. Moreover, U.S. trade partners have imposed retaliatory tariffs on U.S. exports of certain goods, which could again put U.S. firms at a disadvantage in those markets, relative to their foreign competitors. Disentangling the effects of these three channels and determining which effect dominates is an empirical question of critical importance.

…Our results suggest that the traditional use of trade policy as a tool for the protection and promotion of domestic manufacturing is complicated by the presence of globally interconnnected supply chains and the retaliatory actions of trade partners. Indeed, we find the impact from the traditional import protection channel is completely offset in the short-run by reduced competitiveness from retaliation and especially by higher costs in downstream industries…[the] net effect is a relative reduction in manufacturing employment.

Most famously, Whirlpool predicted that tariffs on washing machines would be great for Whirlpool profits, but their pleasure turned to dismay when they  realized that steel and aluminum tariffs would raise their input prices."

The Case for Trump’s Tariffs Doesn’t Persuade

They may be emotionally resonant, but they’re at odds with economic theory and mountains of evidence

Letters to The WSJ. 

"In “The Case for Trump’s Tariffs” (op-ed, Sept. 20), John Paulson asks, “Isn’t it better to tax foreign entities for entering the American market than impose new taxes on American families?” His question is emotionally resonant but at odds with economic theory and mountains of evidence.

As every economist can tell you, and as my introductory economics students will learn over the next few weeks, tariffs are “new taxes on American families.” Free trade became “orthodoxy” among economists in response to compelling theory and overwhelming evidence. This time isn’t different: American consumers, not foreign producers, will bear any tariff’s brunt.

Prof. Art Carden

Samford University

Birmingham, Ala.

Mr. Paulson’s defense of former President Donald Trump’s protectionism is seriously flawed. As documented by economist Michael Strain and others, wages haven’t “stagnated” since 2000. Real average hourly earnings of production and nonsupervisory workers are today 25% higher than in 2000. Nor has the merchandise trade deficit “been devastating for U.S. industry.” American industrial capacity is at an all-time high and 17% greater than in 2000, while industrial production is 1% shy of its historical peak in September 2018.

One reason the merchandise trade deficit hasn’t devastated U.S. industry is that nearly 80% of American gross domestic product is produced in the service sector. It’s unsurprising Americans import more merchandise than we export—and export more services than we import. Further, more than half of our imports are intermediate goods used by U.S.-based producers. American industry is helped, not harmed, by this net inflow of goods from abroad.

Finally, Mr. Paulson errs by describing tariffs as taxes on foreigners. Tariffs protect domestic producers only insofar as they raise prices that consumers pay for imports. In other words, U.S. tariffs are taxes paid by Americans who purchase either imports or domestically produced outputs, the prices of which are artificially raised by tariffs.

Veronique de Rugy

Mercatus Center, George Mason U.

Arlington, Va.

Mr. Paulson joins the chorus propagating the debunked belief that the “smart use of tariffs” will “restore American manufacturing.” Nothing could be further from the truth. But don’t take my word for it—ask Donald Trump’s own Council of Economic Advisers from when he was president.

In its 2019 report, signed by Mr. Trump, the council details that the tariffs he enacted failed to achieve any beneficial changes in other countries’ trade policies. Quite the opposite: “Canada, China, the EU, Mexico, Russia, and Turkey imposed retaliatory tariffs.” That same year, the Federal Reserve released its own report on Mr. Trump’s tariffs. The result: “U.S. manufacturing industries more exposed to tariff increases experience relative reductions in employment.” This comports with more recent research, which finds that “the costs of US tariffs continue to be almost entirely borne by US firms and consumers” and U.S. tariffs imposed on China are accompanied by “an overall welfare loss of 0.12 percent of GDP.”

Tariffs are a rotten deal for America and its people. We need fewer barriers to trade, not new ones.

David Hebert

American Inst. for Economic Research"

Why “Buy American” is not such a great idea

By Tyler Cowen.

"That is the topic of my latest Bloomberg column, here is one excerpt:

Then there is the money. European and South Korean infrastructure companies, for example, tend to be much less expensive than US firms. The Buy American Act often prevents them from bidding on US contracts. And when the federal government is spending more on contracts for US suppliers, it has less money to invest elsewhere.

And:

Under current law, as has been supported by the administrations of both Donald Trump and Joe Biden, the domestic-content requirement is slated to rise to 75% in 2029. That is likely to raise the cost of Buy American provisions even more, especially in a world where more countries are entering the market as cost-effective producers. Furthermore, the higher that percentage, the more likely it is that the US is protecting sectors that spend their money on capital goods, rather than on US labor. Job creation or job protection is likely to dwindle accordingly. In the future, use of the program may cost between $154,000 and $237,000 per job.

The column draws on this NBER working paper by Matilde Bombardini, Andres Gonzalez-Lira, Bingjing Li & Chiara Motta."

Here is the abstract of that paper:

"The latest resurgence in the U.S. of policies aimed at reducing imports and bolstering domestic production has included the expansion of Buy American provisions. While some of these are new and untested, in this paper we evaluate long-standing procurement limitations on the purchase of foreign products by the U.S. Federal Government. We use procurement micro-data to first map and measure the positive employment effects of government purchases. We then calibrate a quantitative trade model adapted to include features relevant to the Buy American Act: a government sector, policy barriers in final and intermediate goods, labor force participation, and external economies of scale. We show that current Buy American provisions on final goods purchase have created up to 100,000 jobs at a cost of between $111,500 and $137,700 per job. However, the recently announced tightening of the policy on the use of foreign inputs will create fewer jobs at a higher cost of $154,000 to $237,800 per job. We also find scant evidence of the use of Buy American rules as an effective industrial policy."

How Do Import Tariffs Affect Exports?

By Erica York & Nicolo Pastrone of The Tax Foundation. 

"In his first term, President Donald Trump began a trade war by imposing nearly $80 billion worth of new import taxes, or tariffs, on a broad range of goods Americans buy from overseas businesses. Now as a candidate, Trump has proposed even more tariffs that would potentially apply to every single import purchase Americans make. What do tariffs mean for American consumers and businesses buying foreign goods, and what about American businesses selling their own products to foreigners?

Import tariffs are taxes levied on goods entering a country. They are collected at customs and are paid by the importing business or individual. So, when Americans import goods from foreign countries, they pay foreign exporters for the goods and pay the US federal government an additional tax based on the “tariff rate” assigned to that specific import.

Sometimes politicians impose tariffs to try to protect domestic businesses, because making imports more expensive through a higher tax also makes domestic goods comparatively more desirable. However, tariffs have significant consequences. Higher prices for American businesses and consumers are just the tip of the iceberg. Counterintuitively, placing a tax on imports is economically like placing a tax on exports. We identify four ways import tariffs can hurt exporters: misallocation of resources, higher production costs, currency appreciation, and foreign retaliation.

How Do Tariffs Affect Resource Allocation?

Tariffs make domestic products more attractive by raising the prices of foreign products. To the uninitiated, that might sound like a good thing. Won’t that create more jobs here because it increases production at home? Not so fast.

Placing a tax on imports absolutely shifts more business toward domestic companies that formerly struggled to compete with lower-priced imports. But that shift toward higher-priced domestic goods comes at a cost to others. What if we posed the tax question another way—should we place a tax on the products US firms export to the rest of the world? This probably sounds like a bad idea. Won’t it hurt jobs and production? What if we told you a tax on imports and a tax on exports ultimately have a similar effect on the US economy?

Economist Doug Irwin illustrates the sameness of both taxes through an example of a clothing manufacturer and an aircraft manufacturer. Placing tariffs on clothing imports would cause domestic clothing prices to rise. At higher prices, more domestic firms would be attracted to producing clothing, and more investment would flow toward domestic clothing manufacturing. That would pull resources away from the aircraft manufacturing sector, which becomes relatively less attractive than the tariff-protected clothing sector. Now, imagine instead of a tariff applied to clothing imports, the government placed an export tax on aircraft: the same reallocation away from aircraft manufacturing and toward clothing would also happen because the policy has the same effect—changing the relative profitability across industries.

Bottom line: When the government imposes a tariff, it redistributes resources away from consumers and unprotected industries toward the protected industry.

How Do Tariffs Affect Production Costs?

We often hear that American consumers will have to pay more for tariffed goods, and that is true. But when we think of American consumers, we shouldn’t just think of a typical person. Many American consumers are businesses. Businesses purchase capital goods, like machinery and tools, as well as intermediate inputs, like steel and wood.

Applying import taxes to intermediate and capital goods has a negative impact on downstream industries—or industries that use such materials to produce their own goods. So while protection may deliver higher production and employment in one industry, it may directly raise the cost of doing business in another industry.

More than half of the US tariffs on imports from China apply to “intermediate goods” used for the production of other goods and services. Higher production costs mean businesses must accept lower profits, increase their prices, or choose a combination of the two, all of which leave businesses worse off and less able to compete in international markets.

In the case of the 2018-2019 tariffs, economists estimated nearly one-fourth of US exporters were subject to tariff increases on at least one product, and those exporters represented more than 80 percent of all exports and 65 percent of manufacturing employment. The implied tax increases from the tariffs amounted to $900 per worker overall and about $1,600 per worker in the manufacturing sector. The researchers found that companies more exposed to import tariffs saw lower export growth, amounting to an export tax of nearly 1.5 percent at the average exposure level, and up to 4 percent for the most exposed firms.

Likewise, a review of the steel and aluminum tariffs found that while production and employment increased for steel and aluminum makers, production and employment decreased by a larger amount in downstream industries that had to pay more for steel and aluminum inputs.

Bottom line: When the government imposes a tariff, it may be trading jobs and production in one part of the economy for jobs in another part of the economy by increasing production costs for downstream industries.

How Do Tariffs Affect Currency Values?

Another way to think about the link between imports and exports is through the foreign exchange market. When tariffs raise the after-tax price of imported goods, demand for the imported goods falls. Lower demand for foreign goods means lower demand for foreign currencies, making the US dollar stronger as a result.

A stronger US dollar may partly counteract the tariffs by making imported products relatively more affordable pre-tax, but it also makes US exports relatively more expensive in international markets, lowering demand for US goods abroad.

Indeed, a study that looked at 151 countries from 1963 through 2014 found that tariff increases lead to real exchange rate appreciation.

Bottom line: Foreign exchange markets link imports and exports, so that when a country imposes a tariff to reduce imports, it also reduces its exports.

How Do Foreign Countries React to New US Tariffs?

When tariffs are imposed on a foreign country, that country commonly retaliates with tariffs of its own. For example, in response to US tariffs imposed in 2018 and 2019, foreign jurisdictions— including Canada, Mexico, China, the EU, India, Russia, and Turkey—imposed tariffs on US exports. Retaliatory tariffs raise the after-tax price of US goods sold internationally. Thus, foreigners are discouraged from purchasing US exports.

Retaliation in response to the 2018-2019 tariffs has had especially negative effects on the agricultural sector, which experienced significant reductions in exports and employment from the trade war. In fact, nearly all of the increased tariff revenue from 2018 through 2020 was used to compensate producers who lost income because of the retaliation.

Bottom line: Retaliatory tariffs may further increase the cost of US exports in foreign markets, costing more jobs at home.

What Should Lawmakers Do?

When lawmakers propose a tax on imports, they should understand that they are indirectly proposing a tax on exports. Reallocating resources toward import-competing sectors, raising costs of production, increasing the value of the dollar, and inviting retaliatory tariffs all burden US exporters and limit their ability to compete in international markets."

Imposing tariffs results in a substantial portion of the tariffs being borne by consumers of the country that enacts the tariffs, through price increases

Tweet from Scott Lincicome.

"43 of 45 (95%) of economists recently surveyed by  agreed that "Imposing tariffs results in a substantial portion of the tariffs being borne by consumers of the country that enacts the tariffs, through price increases." (The only "disagree" actually said "it depends")"