When President Trump began talking about tariffs as a means of balancing trade with other nations and eliminating our trade deficit, making such claims as "We're going to have so much money we won't know what to do with it...", a question mark popped into my head. Wait a minute, what am I missing? That's not how it works, I thought. One of the things I remember from my study of economics at Texas A&M some years ago was that tariffs are paid by the importer, which would be us. Consumers and firms in the US would be on the hook for tariffs on imported goods, not foreign exporters. Tariffs are an import tax added to the price of the goods. Trump insists that other nations or foreign companies will pay the full costs of the tariffs that the US collects on imports. "It's a tax on another country," he says.
The way things have worked in the past, for a very long time, is tariffs are paid by the importer. There are actually three possibilities for who will ultimately pay, or share, the tariffs. The foreign exporter could reduce their cost to cover the tariff to maintain their previous volume of sales to the importer. If the exporter adds the tariff to his selling price, the importer could absorb the price. They could maintain their prices and accept a lower margin. If between them, if the exporter and importer absorb the tariff, the cost would not fall on the consumer. However, in practice, that's not how it works according to studies of real-world impact of past tariff increases. In a paper on the Trump tariff regime of 2018 published in the Quarterly Journal of Economics, economists analyzed the effect of the tariffs from Trumps' first term. The review found that for steel, exporters actually dropped their prices to US importers fully offsetting the tariffs. However, steel was an outlier. Overall, prices for targeted goods rose 22% on average. The study found that excluding steel, US consumers paid all of the costs of tariffs. For cars and food items consumers shouldered a 100% pass through of the tariff tax.
A second analysis of the Trump first term tariffs from the National Bureau of Economic Research reached a similar conclusion. In most sectors of the economy, they found that tariffs has been completely passed on to US firms and consumers.
Though Trump hasn't explicitly claimed that tariffs would accelerate economic growth, the laws of economics say they won't. From Trumps first term, tariffs did stimulate increases for domestic producers in sales. But they would have benefitted much more if not for lost sales due to retaliation from foreign producers. On the bottom line, tariffs decreased the annual GDP from 4.9% to 4.75%. The tariff increases from 2018 were a fraction of what Trump is proposing today, as would be the resulting effects.
As far as reducing the trade deficit, the Presidents' plan does not align with a basic law of economics. The annual trade deficit must match the difference between all US savings and all US investment. For years, American taxpayers and businesses haven't been saving nearly enough to support the demand for stocks and privately issued bonds, new factories, data centers, housing projects, and other profit-generating ventures. The reason they haven't, gigantic budget deficits. The government is 'taking' a huge share of America's savings that would otherwise flow into private investments to pay for the deficit. Last year, the shortage of savings to investment was equal to the trade deficit. The trade deficit, which is money in the hands of foreign nations, send that money back to the US to fund the investments we can't cover. The big influx of cash from abroad allows the US to spend a lot more than if we had to balance our own federal budget. We are in effect, financing our deficits with money from abroad. This allows us to consume more than we produce. So Trump's theory of foreigners causing our trade deficits by taking advantage of us, not true. Any country posting a savings-investment deficiency will post a trade deficit the exact same size.
Tariffs will not shrink the federal budget deficit. Estimates say the Trump tariffs would raise around $300 billion in 2026 and shave about $2 trillion from what the annual GDP would be without them. That drag on economic growth would reduce tax receipts more than the tariffs would collect. Tariffs are known to not raise much revenue unless they are high. And high tariffs encourage smuggling. Yet another problem...
Trumps' view that we are being taken advantage of by trade partners profiting from Americas' markets doesn't align with the data. While it is true that foreign nations have high charges and technical barriers to protect certain products. But the US does the same. Prior to Trumps' second term, the EU charges an average of 1% on US imports, the exact same rate we charge. Last year the EU bloc collected $3 billion in tariffs from the US, less than half what we charged the EU.
The facts dont support the Presidents' position on tariffs, assuming that he doesn't change the laws of economics. The long term costs of Trumps' tariffs will be immense, in terms of impact to the nations' GDP. GDP is the big cahuna. When it suffers, so does economic growth, employment, investment, tax revenue, and the federal deficit. You might want to take another long, hard look at it, Mr. President...
#trumpstariffs #budgetdeficits #politico #tariffs #tradedeficit #GDP
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