If Donald Trump is president again, one of his first actions will take money out of his pocket, just as a tax increase would.
Trump has not outlined a major economic program, but he has promised to impose a massive increase in tariffs on imports from almost every foreign country, from bananas and baby formula to computer chips and machine parts.
And that's the equivalent of a tax increase, because the costs of the tariffs are paid almost entirely by buyers of imported goods, whether they are Walmart buyers or American companies that rely on foreign components.
Trump boasts that the tariffs he imposed in 2018 and 2019 brought billions of dollars to the Treasury and promises a similar revenue increase in a second term. “America will make an absolute FORTUNE,” his campaign website says.
Here's the problem: Contrary to what the former president seems to think, tariffs are not paid by foreign companies or governments. They are initially paid by U.S. companies that import the products, but those importers almost always pass the cost on to consumers in the form of higher prices.
This time, Trump proposes a “universal” 10% tariff on goods from all countries in the world. He has also mulled the 60%-plus mega-tariffs he wants to impose on China in hopes of forcing Beijing to reduce its tariffs and treat American companies fairly.
Economists say any of the proposed tariffs would lead to price increases and raise inflation.
That's why traditional free-trade Republicans like Nikki Haley and Mike Pence think Trump's proposal is a bad idea, as do nearly all practicing economists.
“It's crazy,” said Adam Posen, president of the Peterson Institute for International Economics.
But wait, there is more.
Those increased costs would hit low-income people the hardest, because they spend a larger share of their income on goods.
“If baby formula goes up 25%, low-income people will feel it more than people on Wall Street,” Posen said. “The burden of the tax falls disproportionately on the poor.”
And when the United States imposes tariffs, the targeted country almost always reciprocates.
“They're not just going to roll over,” Posen said. “And they are going to be strategic; “They will choose industries where the United States will lose enormous market share, because retaliatory tariffs will drive up the price of American goods.”
We have recent experience with all of these problems, thanks to Trump's previous tariffs. Take California almonds, the state's most valuable export crop.
Until 2018, China bought almost all of its almonds from California. But after Trump imposed tariffs on a range of Chinese goods that year, China retaliated with tariffs on American agricultural exports, including walnuts.
Almond sales in California plummeted and Australian growers rushed to fill the void. In a report for the Giannini Foundation for Agricultural Economics at UC Davis, economists Sandro Steinbach and Colin A. Carter estimated that the episode cost the state's almond growers about $875 million in lost revenue.
Other U.S. exporters to China, from soybean farmers to truck makers, suffered similar hits.
Those costs might have been tolerable if the tariffs had achieved their primary goal, which was to protect and promote American manufacturing jobs.
But they didn't. A series of economic studies found that Trump's tariffs had little or no positive effect on the industries they were intended to protect, and that the negative consequences for the economy resulted in a net loss of jobs.
“Import tariffs on foreign goods neither increased nor reduced American employment in newly protected sectors,” a team of economists led by MIT's David Autor reported last month.
For example, Trump wanted to protect steel industry jobs from foreign competition, but his tariffs on foreign-made steel didn't help much. By the end of his presidency in 2021, the steel industry had lost several thousand jobs.
Meanwhile, those tariffs hurt larger jobs in industries that buy foreign-made steel, including auto and appliance makers.
“For every job in steel production, we have about 80 jobs that consume steel,” said Erica York of the conservative Tax Foundation. “All of those industries were hit by higher costs and many of them lost jobs” — about 75,000 positions in total, according to one study.
But Trump's tariffs had a major side effect, Autor and his colleagues reported.
“Although the trade war failed to generate substantial job gains, it appears to have benefited the Republican Party” in the Rust Belt, the economists wrote.
Trump “may have won support from voters who were skeptical about the favorable economic consequences of the tariffs, but who appreciated [his] intention to confront Chinese competition and protect American jobs,” they wrote.
Trump has long described himself as a “tariff man,” convinced, in his words, that protectionism “will always be the best way to maximize our economic power.”
That's where you're wrong.
The new tariffs he has proposed will not save the economy. But they can help Trump win industrial states like Pennsylvania, Ohio, Michigan and Wisconsin, and that may have been the point all along.
