Why Not?: Tariffs

This is the first in a series of posts on the reasons I will not be voting to return the former president to the White House. My focus here is not to support his opponent but instead to explain why I believe that Donald Trump is manifestly unqualified for the role.

For someone who graduated from the Wharton School (albeit graduating with a Bachelor of Science in Economics rather than an MBA), Mr. Trump has little or no understanding of how tariffs actually work.

Let's start simple: a tariff is a tax on foreign goods, not on a foreign country. The Chinese government is not paying the tariff to the American government... despite what the former president asserts:

We're doing tariffs on other countries. Other countries are going to finally, after 75 years, pay us back for all that we've done for the world. And the tariff will be substantial in some cases. I took in billions and billions of dollars, as you know, from China. [Donald Trump from the presidential debate on Sept. 10]

The tariff is paid to the U.S. government by the importer of the item(s) - not the exporter. That cost is most often passed on to American consumers & businesses. (Occasionally, the exporter will choose to reduce the wholesale cost of the item(s) to the importer in order to keep from raising the price in the American market, but they are not required to do so.)

Tariffs don't lead naturally to lower prices - in fact, they can do the opposite:

...high or unpredictable tariffs can reduce potential supply and give domestic producers more market power over U.S. consumers who, thanks to the tariff, have fewer alternatives, and this can and often does increase the prices of the American-made goods even higher than they were before the tariff. These kinds of price-boosting effects are precisely why U.S. manufacturers—like this guy—lobby for tariff protection. [Scott Lincicome in his Capitolism newsletter on Sept. 11]

Important safety tip, courtesy of Professor Don Boudreaux (George Mason University):

Tariffs protect domestic producers from foreign competition only if and insofar as they raise the prices that consumers pay for imports, for only by raising imports’ prices are consumers incited to purchase more domestically produced goods. It’s not merely that, as Mr. Stuttaford writes, “the importer may, if its competitive position allows, pass on that cost to its customer.” A protective tariff serves its purpose only if the importer passes on at least part of that cost to its customer. The very purpose of tariffs is to increase demand for domestically produced goods by raising the prices that consumers pay for imports. A tariff that doesn’t raise prices paid by consumers doesn’t protect domestic producers. [post on Cafe Hayek on June 19]

So, if you want to protect American industries/businesses, using tariffs will end up raising costs to American importers, who will - in all likelihood - pass that cost onto businesses, retailers, and consumers.

Of course, that's not how Mr. Trump sees it. When asked about tariff costs being passed onto consumers during the debate, he answered:

They aren't gonna have higher prices what's gonna have and who's gonna have higher prices is China and all of the countries that have been ripping us off for years. I charge, I was the only president ever China was paying us hundreds of billions of dollars and so were other countries and you know if she doesn't like 'em they should have gone out and they should have immediately cut the tariffs but those tariffs are there three and a half years now under their administration. We are gonna take in billions of dollars, hundreds of billions of dollars. [Donald Trump from the presidential debate on Sept. 10]

Honestly, a single sentence in this statement is one of the few moments where I will agree with the former president. The Biden administration left tariffs in place that the Trump administration started... which undercuts them making an argument about tariffs. However, it's not my job to defend the Biden administration.

On the other hand, Mr. Trump's assertion that we are hurting China and "all of the countries that have been ripping us off for years" coupled with the assurance that "they aren't gonna have higher prices" doesn't pass the smell test. Remember, China isn't paying the tariff (though large tariffs affect businesses in their country) - Americans are.

Please understand - this is a highly over-simplified discussion of a complicated economic problem. But even at this level, it's easy to see that the former president either (a) is willfully lying to the public about how tariffs affect American consumers & businesses as well as other countries on whom we impose tariffs, or (b) isn't able to actually understand the effects himself.

The primary concern here is that the power to enact tariffs - given to Congress in the Constitution but delegated to the President under Section 232 of the Trade Expansion Act of 1962 in cases of "national security" - is one that can be exercised without much oversight. If, as I posited above, Mr. Trump doesn't understand (or doesn't care) about the effects of extensive tariffs, giving him that power is unwise.

I'll give Scott Lincicome the last word from his excellent Dispatch newsletter:

An intellectually honest pro-tariff case would go something like this: Yes, U.S. tariffs have real and significant economic and geopolitical costs on net, but those costs are a necessary price Americans must pay to achieve a core federal government objective (typically national security). I do occasionally see this argument when it comes to China, but in general it’s most definitely not what most American protectionists are offering today. Instead, tariffs are a magical policy that’s all benefits and no costs. They protect American jobs and security, boost industry and innovation, and advance our strategic interests abroad with both enemies and allies alike. We can use them to solve any problem—even child care and the national debt!—and, perhaps best of all, foreigners will foot the bill.

You don’t need a Ph.D. to see some of the flaws in these claims. Think about this stuff for more than a second, and problems emerge: If tariffs make us money and boost the economy, why stop at 10 or even 20 percent? If tariffs don’t raise prices here, then how do they protect American workers from “predatory dumping” or “cheap labor” (or whatever)? If tariffs achieve Real Free Trade, then why do we still have so many in place, some for literally centuries? And on and on. Most of the myths shrivel in the dimmest of sunlight, yet they persist if not flourish. [Scott Lincicome in his Capitolism newsletter on Sept. 11]

For much more detailed reading on tariffs, I recommend the previously linked articles as well as the Cato Institute's extensive Separating Tariff Facts from Tariff Fictions report.