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donald trump believes that tariffs have magical properties. He even stated in his speech at Economic Club of New York last month that stopped “wars with the threat of tariffs (…) wars with two countries of great importance.” So great is his faith that he proposed increasing tariffs to 60 percent for imports from China and 20 percent for those from the rest of the world. He even suggested a 100 percent rate for countries threatening to move away from the dollar as their preferred global currency.
Can such disruptive policies be defended? In an article in TheAtlantic, Oren Cass, a contributing editor at the Financial Times, argues that economists criticizing Trump’s proposals ignore the benefits. In particular an important “externality,” that consumers who buy foreign goods “won’t consider the broader importance of making things in the United States.” Tariffs can offset this externality by convincing people to buy local products and employ Americans.
However, as Kimberly Clausing and Maurice Obstfeld write at the Peterson Institute for International Economics, it is not enough to argue that some benefits can be derived. To justify Trump’s proposals, it is necessary to evaluate the costs of the measures, the scale of the supposed benefits and, above all, whether these measures will be the best way to achieve the desired objectives. Unfortunately, the costs are enormous, the benefits dubious, and the measures inferior to options.
Tariffs are a tax on imports. Trump seems to believe that foreigners will pay for it. Some argue, in support, that the inflationary effects of the rates were impossible to identify. That is very debatable. In any case, the new proposals, in the words of Clausing and Obstfeld, “will apply to more than eight times as many imports as their last round (around $3.1 trillion based on 2023 data).”
If the cost of the tariff were borne by foreign suppliers, the price for American consumers would not be affected. If so, why should the tariff trigger a revival of US import-competing companies? All it will do is reduce the profits and wages of foreign suppliers.
And what are the benefits? The 19th century French economic journalist Frédéric Bastiat spoke of “what is seen and what is not seen.” In trade policy, this distinction is vital. A tax on imports is also a tax on exports. This is only partly because tariffs are a burden on exporters who rely on importable inputs. Also because the demand for foreign currency will fall and the dollar exchange rate will increase if tariffs reduce imports, as expected. That will make exports less competitive. Therefore, the extremely high tariffs proposed by Trump will be inclined to expand less competitive import substitution industries, but will contract highly competitive exporters. That seems to be a bad business. Foreign retaliation against American exports will exacerbate this damage.
It is crucial to add that the american economy is now close to full employment. Therefore, any transfer of labor towards the import substitution industry will be at the expense of other activities. In fact, this is one of the most important differences from the 1890 McKinley tariff that Trump loves. After 1880, rural populations flooded into urban areas as industry expanded. Furthermore, between 1880 and 1900, almost 9 million immigrants entered the United States, a little less than a fifth of the initial population. This is equivalent to 60 million immigrants in the next 20 years. Now there is no such new labor supply. Trump proposes eliminating millions of undocumented immigrants.
Trump himself appears to believe that high tariffs and lower imports will improve US external deficits. But the latter is partly the mirror image of capital inflows. One of the reasons for this entry is that foreigners want to use the dollar, something Trump is desperate to maintain. Another reason is excess domestic demand, which today is largely the counterpart of the fiscal deficit, which also seeks to continue.
Finally there are the supposed benefits of these high tariffs for the working class. One proposal Trump put forward is that tariff revenue could replace the income tax. That’s nonsense. If the attempt were made, programs of great importance to ordinary Americans, such as Medicare, could collapse. According to another article by Clausing and Obstfeld, the 50 percent revenue-maximizing tariff will only generate $780 billion, less than 40 percent of income tax revenue.
Trump’s tariffs are, in short, a grotesque idea: they will help the least competitive sectors of the economy, while they hurt the most competitive ones; They will harm many of their own supporters and cause serious damage to international trade, the global economy and international relations.
Yes, there are reasons for targeted industrial interventions, but Donald Trump’s tariff walls are just the opposite. It will be much better to have specific and transparent subsidies. We must hope that this new trade war never begins.
