Tariff is a Stupid, Not "a Beautiful Word"

"Know when to hold them, know when to fold them, know when to walk away and know when to run"

This line from The Gambler, a famous Kenny Rogers recording, came to mind in listening to former President Trump (FPT) explain, in the debate, his tariff proposal. The former president is pledging up to 20 percent tariffs on all imports, no matter their source apart for China. For China, its 60 percent to 100 percent. FPT claims this won’t harm American households. In particular, it won’t raise prices of imports.

Instead, FPT claimed it would raise prices in China.

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.

Is FPT Right?

Not according to The Tax Foundation. In the Foundation’s view, FPT’s tariffs comprised one of the largest tax hikes in recent memory. By their calculus, FPT levied tariffs, averaging about 20 percent, on close to $400 billion U.S. imports with an estimated annual cost per American household of $625. This, plus the FPT’s proposed new tariffs would, based on The Tax Foundation’s reasoning, lower Americans’ living standards by about 3 percent.

The Tax Foundation sees the FPT’s prior tariffs and desired new tariffs as pure tax hikes, with the projected 3 percent spending power loss simply being transferred from our pockets to Uncle Sam’s. Such a tax hike would, by the way, more than undo the tax cuts provided by FPT’s Tax Cut and Jobs Act.

Don’t Underestimate a Wharton Degree

But, as FPT reminded us, he’s a Wharton grad. Whether he ever took, let alone passed, a course in international trade, I don’t know. In any case, FPT’s reasoning is surely that making the 11 percent of goods and services that we import more expensive will lower Americans’ demands for those products. This, in turn, will lead everyone exporting to the U.S. — the ones FPT says “have been ripping us off for years” — to drop their prices by 20 percent.

My $80 Made-in-China Grass Trimmer

To make this concrete, let’s take the $80 grass trimmer I just bought, via Amazon, from China. Accord to FPT, a 60 percent tariff on the trimmer would lead the Chinese to lower their price to $50. Add in 60 percent of $50, namely $30, and I end up paying the same $80. Who pays the $30 tariff? The Chinese. And they pay it straight to the U.S. Treasury. This is why FPT says, “Tariff is a beautiful word.”

The Tax Foundation’s scenario is the opposite. The Chinese continue to charge $80, leaving me to pay $128, with the $48 difference equaling 60 percent of the $80. In this case, I get nailed and end up paying the Treasury an extra $48.

Let’s Get Real

As I write, I’m on vacation in China with my wife and a Chinese-American couple with whom we are very close friends and who have an apartment in Shanghai. The husband, Steve, looked on line with me at grass trimmers. We found the same one I bought. It’s price, delivered directly to his door, is just $8!

This was quite a shock. Almost all of the difference between the $80 I paid in Providence and the $8 Steve would pay in Shanghai is going to shippers and Amazon’s bottom line. A 60 percent tariff is not going to lead Chinese producers to sell the clipper for $8 less $30 or negative $24. China has plenty of other customers, starting with its own 1.4 billion citizens and another 7 billion or so non Americans to whom it can sell its clippers. Nor are American producers going to start manufacturing my clipper at anything close to $80 let alone the dramatically lower price they need to compete with China. Yes, the U.S. constitutes China’s largest export market. But our share of total Chinese exports is only 15 percent. Moreover, China can easily circumvent our tariff by stamping Made in Vietnam on their trimmers and ship them to us via Hanoi.

But what if we tax the import of trimmers from all countries at 60 percent? Unfortunately, the market for trimmers is global and the U.S. is no longer big enough to alter the worldwide price significantly. In short, The Tax Foundation is right. FPT’s proposed additional tariffs will simply comprise a tax hike, but one that distorts our decisions on how to spend our money. I like my trimmer, but I’m not sure I would have shelled out $128 for it.

Retaliation

Even if the U.S. had enough market power to make a difference to the supply price of a specific Chinese export — a difference that wasn’t vitiated by the import substitution just mentioned, the Chinese would respond, as they did after FPT imposed his tariffs.

China, which is our major soybean customer, cut its U.S. soybean imports in half after initially cutting them to zero. China made up the difference by buying soybeans from Brazil. Many U.S. farmers, and not just those producing soybeans, were badly hurt with farm bankruptcies rising by one fourth.

Moreover, China would hardly be the only country to respond to a second round of Trump tariffs. The EU, Japan, and our other trading “partners” would surely slap 20 percent tariffs on us the minute we slapped them on them.

Make America Worse Again

FPT also reminded us in the debate that PB has maintained most of FPT’s tariffs. In fact, PB just set the tariff on Chinese electric cars at 100 percent. This was surely a bid to secure the endorsement of the UAW for VP Harris. Ugh! We need fundamental policy reforms, not opportunistic, distortionary tax hikes, disguised as harmless tariffs, that are obviously proposed to bribe voters and entice funders.

Sad to say, neither FPT nor PB have made our economy great again. In many ways its gotten worse. The U.S. share of employment in manufacturing continued to fall. It’s now at a record low 8 percent. As for median real weekly earnings, they’ve been growing, apart from COVID, at the same miserable, roughly 1.2 percent rate that we’ve seen for decades. Then there are the enormous debts, on and off the books, that we continue to pile on our kids’ heads.

The hard truth is hard to take. Our country is in trouble. And absent major reforms, both parties will end up making America worse again.