Why Trump's Tariff Plan Won't Work
And why it will line the pockets of the already wealthy at the expense of consumers
Several times in recent days Vice President Kamala Harris spoke of a “twenty percent national sales tax” proposal by presidential candidate Donald Trump that would cost U.S. families “$4,000 per year.” This has confused some people. Harris isn’t speaking about a specific sales tax; instead, she is referring to Trump’s plan to impose widespread tariffs across the economy. Tariffs are a fancy word for a tax imposed on goods entering or exiting a country. And, like all taxes, they will raise prices.
Suppose that we tax producers of new automobiles, perhaps a $10,000 tax on every new car sold in the country. Car dealers won’t simply accept this tax and pay it themselves. Instead, they will attempt to pass it on to their customers. Of course, the customers won’t accept a direct $10,000 increase in their price either – there will be an implicit bargaining process where consumers and producers each end up paying some percentage of the $10,000. Consumers will see their split as inflation.
Now suppose that we only tax Japanese automobiles but not U.S. automobiles. The price of Japanese automobiles will surely increase. But, the U.S. manufacturers are likely to take advantage of the situation. They will raise their prices too. Further, it may give producers from other countries an opportunity to enter the U.S. market who were not present before. Perhaps a new Indonesian automobile producer can now sell cars profitably in the U.S because of the increased price level of Japanese and U.S. automobiles. Some people may view these price increases as an acceptable tradeoff. More jobs and perhaps higher wages for U.S. workers if the U.S firms pass on some of the price increase to the folks working at the auto plant. This is the story that Donald Trump peddles on the campaign trail. A win for everyone in the U.S..
However, we have a wealth of data that reveals a more complete story of how this will play out and who will actually benefit from tariffs like those that Trump proposes. In 2009 the Obama administration attempted to save US jobs in the tire industry by levying a 35% tariff on Chinese tire imports. (This tariff dropped to 30% and then 25% over the next two years.)
After the tariff was implemented, Chinese tire imports fell by 67% and the tariff saved about 1,200 US jobs. President Obama was pleased enough with the result that he mentioned this success during his 2012 State of the Union address. These jobs amounted to about $48 million added to the US economy (about $40,000 per job). President Obama, stopped here in discussing the effects of his policy. On the campaign trail, President Trump stops here too. Neither former president mentioned the large costs of tariffs on the rest of society and the economy as a whole. If you are old enough to recall Paul Harvey’s 1970s and 1980s radio show you will know, it is now time for, “the rest of the story.”
As expected, the price of tires in the US increased – significantly. Over three years U.S. consumers paid an extra $1.1 billion for tires due to the inflation created by the tariff. If this extra money somehow landed in the pockets of U.S. consumers or workers we still may be pleased. But, it didn’t. $800 million went to foreign tire producers (mostly in Mexico, Indonesia, and Thailand) who moved more strongly into the U.S. tire market while the tariff was in effect. The remaining $300 million stayed in the U.S. but it didn’t reach U.S. workers either. $250 million went into the pockets of the owners of U.S. tire firms. Consumers of tires paid $1.1 billion dollars and only $48 million went to U.S. workers. (See a 2012 Peterson Institute for International Economics report on the effects of the tariff for the data and calculations within this paragraph. The American Enterprise Institute wrote a shorter summary of this report as well.)
When Vice President Harris speaks of tariffs equating to a tax on American consumers this is what she means. Former president Trump wants to implement large scale tariffs like this across all goods entering the U.S. from abroad. These costs will be far larger than just $1.1 billion dollars. Most of these costs will fall upon U.S. consumers and working class families. Yes, it will hurt Chinese and other foreign goods producers. Yes, the tariffs may save a sliver of jobs in the U.S. But saving these jobs will come from the pockets of US consumers and will almost certainly benefit the owners of US firms far, far more. According to economic studies, it will amount to about $3,800 per U.S. family. Implicitly, this will be a wealth transfer from consumers to the already wealthy owners of firms.
Now, to be clear, I care about U.S. jobs. A thriving economy with good secure jobs up and down the spectrum of U.S. workers helps everyone. But tariffs are not the way to achieve this. Tariffs are a temporary stop gap that won’t bring permanence and long-term security to American workers and families in a global economy.
For a moment imagine an alternative. During the three years of the tire tariff, we paid $1.1 billion to save 1,200 jobs – that’s a bill of about $900,000 per job charged directly to US consumers. Instead of spending $900,000 per job to save jobs that likely disappeared shortly after the tariff expiration, what if we had invested some of that same money into training workers for new 21st century occupations and technology? To be overly simplistic, we could have skipped the tariff and paid these 1,200 workers their $40,000 per year salary for two years and given them a stipend of $50,000 to attend community college or to get training in a new technology or a stable trade. This would cost $156 million dollars in total, certainly a large sum. Yet that total is one-seventh of what U.S. consumers paid as a result of the tire tariff. Further, it provides these workers with additional skills to compete, long-term, in a 21st century global economy. Now, a plan like this is likely too costly to implement widely in our society – just imagine the uproar from the GOP! Yet, widespread tariffs are likely to be even more costly and do far less good long-term. They will shift money from U.S. consumers to the pockets of the already wealthy owners of foreign and U.S. firms and drive us toward even higher levels of inequality. At this point it should be no surprise that President Trump favors a plan that leads to lining the pockets of his cronies at the country club.
There is no questioning the complexity of globalization and an evolving 21st century economy. There aren’t simple solutions to the economic problems we face – particularly the rising income and wealth inequality in our country. However, it is clear that we can’t simply use tariffs to magically create U.S. prosperity for all. We need to be wiser than this and reach to the future by creating new cutting edge industries and re-training workers who are falling behind. Instead of looking backwards we need to invest in our future. President Trump’s plan for tariffs simply takes us backward toward a yearning for manufacturing jobs that no longer exist. We need to be bolder than this and reach to the future with a plan for a 21st century economy and 21st century jobs. That is where true prosperity lies.
Troy Tassier is a professor of economics at Fordham University and the author of The Rich Flee and the Poor Take the Bus: How Our Unequal Society Fails Us during Outbreaks.