Trump Displays a Tenuous Grasp of How Tariffs Work

President Trump has a fundamental misunderstanding of who pays tariffs, explains Ryan Young in this guest post, and that matters for his policy aims. Tariffs don't just hurt exporting countries, they hurt importing countries too, by raising costs, by reducing consumption, and by shrinking available capital for entrepreneurs, startups, and homebuyers -- leading to lower wages and a higher cost of living. It's a lose-lose all round.

Trump Displays a Tenuous Grasp of How Tariffs Work

On Sunday, President Trump announced via Twitter that if he does not approve of the results of this week’s U.S.-China trade talks, he will enact a new tariff on Friday, May 10th. It would raise a current 10 percent tariff on $200 billion of Chinese goods to 25 percent. He threatened a similar tariff late last year, but backed off. China, in response, might withdraw from the talks altogether.

This week’s trade talks, set to begin Wednesday, were expected to conclude by Friday anyway, though without a hard deadline.

Hollow Tariff Threats

Trump has a history of using drastic threats as a negotiating tactic, only to quickly back off. In addition to threatening and backing away from the same China tariff last year, he has also backed off of threats to shut down the U.S.-Mexico border and to enact tariffs against European automobiles on national security grounds.

If Sunday’s tweets are just the latest iteration of an established pattern, consumers will have little to worry about. But if Trump follows through, those same consumers should be aware of Trump’s tenuous grasp of how tariffs work. His two tweets read:

To which I responded—with my apologies for a dumb grammatical error (that’s Twitter for you):

President Trump has a fundamental misunderstanding of who pays tariffs, and that matters for his policy aims. He has made this mistake before, and his advisors are apparently unable to shake him of it despite repeated “Groundhog Day” meetings.

Tariffs Hurt, Not Help, the Economy

As for tariffs helping the economy, that is also false. When people have to pay more money to get the same goods as before, they have less left over to spend on other goods or to save and invest. This means tariffs not only reduce consumption, but they also shrink available capital for U.S. entrepreneurs, startups, and homebuyers--the same capital that pays employees' wages.

Writ large, economists at the Trade Partnership advisory estimate that if President Trump goes through with the 25 percent Chinese goods tariff, and China retaliates in kind per usual, total tariffs would cost up to 1.04 percent of GDP. That comes to $2,389 per year for a family of four.

There is a policy action Congress can take immediately to prevent further tariff abuses. The China tariffs are enacted under Section 301 of the Trade Act of 1974; Congress should repeal that section. For more on that, see the trade chapter in CEI’s “Free to Prosper: A Pro-Growth Agenda for the 116th Congress.” For more on the larger case for free trade, see Iain Murray’s and my study “Traders of the Lost Ark.”

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Ryan Young is the Competitive Enterprise Institute's fellow focusing on regulatory and monetary policy and financial regulation. He also hosts CEI’s weekly podcast and writes the popular “Regulation of the Day.”

This article is republished with permission from the Competitive Enterprise Institute.

[Hat tip FEE. Image Credit: Flickr-The White House | CC BY 2.0 (https://creativecommons.org/licenses/by/2.0/)]

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