The Truth about Tariffs

There has been a lot of debate about tariffs in this presidential campaign. Simply put, tariffs are taxes imposed by one country on goods or services imported from another country. Trump has told audiences that “a tariff is a tax on a foreign country. A lot of people like to say it’s a tax on us. No, […] it’s a tax that doesn’t affect our country.” Harris has said that Trump “intends to enact what in effect is a national sales tax…that would raise prices on middle-class families by almost $4,000 a year.”

Trump has proposed imposing minimum tariffs of 20% on all imports, 60% on imports from China, and 100% on imported cars. Trump claims the tariffs will increase production and employment in the U.S., reduce federal deficits, pay for the few social programs he supports, and allow further cuts in corporate and individual income taxes.

Trump is correct in that tariffs would be paid by the countries that continue to export products to the U.S. However, the tariffs would represent added costs for producers in the exporting countries which they would likely cover by raising prices to U.S. importers. Importers would pass these higher prices on to U.S. consumers. Thus, consumers would end up paying for the higher costs of imports made necessary by tariffs.

Harris claims that tariffs are essentially sales taxes because American consumers will be forced to pay higher prices for imported products to offset the tariffs. Taxes that raise consumer prices, such as sales taxes, impose the greatest burden on lower-income consumers who are forced to spend most of their money to make ends meet, rather than save or invest it. Harris claims Trump’s tariffs are just another way to raise taxes on middle-class and low-income consumers for the benefit of corporations and the wealthiest Americans.

Trump argues that foreign companies exporting to the U.S. will absorb the tariffs by taking smaller profits. However, profit margins on exports are not 20% to 60%, even if other countries are willing to take less profit to maintain U.S. exports. Many U.S. consumers are willing and able to pay higher prices for specific imported products they prefer. The logical scenario is that other countries would reduce their exports to the U.S. until market prices rise high enough to cover the added costs of tariffs.

Reduced imports would mean smaller supplies of the imported products, allowing U.S. producers of similar competing products to charge higher prices. Consumer prices in the U.S. would rise until prices for U.S.-produced products reestablished their previous price relationship with similar imported products. Prices for both imported and similar domestic products would increase enough to offset the tariffs. Tariffs essentially impose the equivalent of a sales tax on U.S. products that compete with imports in addition to the tax on imported products.

The basic difference between tariffs and sales taxes is that sales taxes are paid to directly the government by buyers on consumers and tariffs are paid to the government by foreign sellers of taxed products. In the case of sales taxes, sellers add taxes to the prices charged to consumers. Sellers do not benefit economically from collecting sales taxes from their customers.  Exporters forced to pay tariffs or taxes on exports to the U.S. don’t benefit economically from raising their prices enough to cover the costs of tariffs. However, the U.S. producers who benefit from the higher prices resulting from tariffs on imports do not pay anything to the U.S. government. They are the primary beneficiaries of tariffs.

U.S. producers who compete with taxed imports are free to raise prices and increase profits to take advantage of tariffs without any obligation to the government or taxpayers who are forced to pay higher prices. The “Trump Tax” is not only the equivalent of a sales tax on American consumers but is also a license for U.S. corporations to raise prices and increase profits without any obligation to the government or U.S. consumers.

In addition, whenever the U.S. places tariffs on imports, the exporting countries often retaliate by placing tariffs on products imported from the U.S. This imposes an added cost on U.S. exports, forcing exporters to raise their prices, which results in reductions or total loss of export markets. For example, the Trump administration paid U.S. farmers $28 billion, taxpayer dollars, to compensate them for the loss of agricultural exports resulting from Trump’s tariff/trade war with China. There is no way to estimate the taxpayer costs of potential new trade wars triggered by Trump’s new tariff proposals.  

There is room for disagreement about how the U.S. might use the increased taxes collected from tariffs. There is also room for disagreement on just how much the Trump Tax would cost American consumers. Regardless of the dollar amounts, there is no doubt that U.S. corporations and wealthy individuals would receive the benefit, and U.S. consumers would pay the costs.

There is a legitimate place for tariffs in overall national economic policy. The complete elimination of tariffs would leave nations with no means of protecting their economic sovereignty, which is essential for authentic free trade. Economic sovereignty requires that nations be free to choose how much of the things they need that they produce domestically and how much they are willing to rely on imports.

For example, nations that rely on imports bought in world markets to meet their basic food needs have no economic sovereignty. Tariffs on agricultural imports are a legitimate means of keeping agricultural prices high enough to incentivize a nation’s farmers to produce enough to ensure domestic food security. The government can use the revenues from tariffs to ensure that the basic food needs of all are met, even at prices higher than world-markets prices. Countries that can't produce enough food domestically, need long-term security agreements with other countries that do not depend on world markets.

Biden kept Trump’s tariffs in place on computer chips, solar panels, electric cars, and a few other items he considered essential to the future economic sovereignty of the nation. This was a legitimate use of tariffs. Trump’s proposed across-the-board tariffs of 20% and tariffs of 60% and 100% on selected countries and items make no economic sense.

Perhaps Trump intends to isolate the U.S. economy from the rest of the world. But who wants to go back to the days when the “big three” automobile manufacturers dominated the U.S. market? The engine oil had to be changed every 1,000 miles, everything started falling apart at 50,000 miles, and engines and transmissions that lasted 100,000 miles were a rarity. High-quality imports forced U.S. automakers to improve their production methods to compete.

Imports are good for countries, when competition is needed, and tariffs are good for countries when protection from competition is needed. However, tariffs used for isolation, retaliation, a show of strength, or raising taxes while claiming not to raise taxes, make no economic sense. This is not a conclusion based on some ivory-tower economic theory. It is simply the truth about how producers and consumers respond to changes in costs and market prices.

John Ikerd

https://www.cnn.com/.../donald-trump-tariffs/index.html

https://www.theguardian.com/.../trump-tariffs-price-hikes...

https://www.forbes.com/.../trump-tariff-aid-to-farmers.../