What is in a name?
Shakespeare said the name was unimportant but in the political world what you call something does matter. Tariffs are nothing more than taxes on imported goods basically borne by the consumer. However, if President Trump said he was going to raise the sale tax on imports rather than levy tariffs, he likely would have received far greater push back. Most Americans do not understand tariffs and therefore do not perceive that basically their taxes are being raised. In fact, the conservative Tax Foundation [1] estimates that the increases in tariffs will offset the recent income tax cuts by at least 25 percent. That means for every dollar you get back from the income tax cut, you will have to pay 25 cents more in higher prices.
Since the end of World War II, the world has basically embraced the idea that free trade, unencumbered by government intervention, was good. The administration portrays the current trade situation as unfair and argues that levying tariffs will somehow “level the playing field”. The US has a large trade deficit, primary with China. This means the value of US exports to China are lower than the value of US imports from China. However, international trade is not just driven by the purchasing of goods and services between countries but also includes the flow of capital (investments in US stocks, bonds, real estate, etc.). The imbalance in the demand for goods and services is offset by Chinese investment in the US. As a result, the overall demand for the dollar and its buying power has remained relatively high. Our trade issues are really more about Chinese investment in the US than imports and exports. Some contend that having the Chinese holding a large amount of US debt puts us in a weak position. Alternatively, one can argue this situation ties us together and that we hold the cards, as defaulting is an option.
In the spirit of reactive policy making, the President has chosen to levy tariffs, rather than addressing the issue of Chinese investment in the US. These actions have been taken despite the fact that past experience has repeatedly shown that tariffs do not lead to improved employment and welfare. For example, the Bush steel tariff of 2002 led to threats of retaliatory tariffs and US International Trade Commission concluded that these short lived tariffs resulted in a welfare loss of 41.6 million[2]. Of course, in the case of the Trump tariffs, there have already been retaliatory tariffs, which means our products will cost more abroad. While the full impact this trade war is yet to be determined, one effect is clear, Americans will pay the “tariff tax” of higher prices.
[1] Taxfoundation,org Proposed Chinese Tariffs will Raise Taxes Following a Large Tax Cut, March 20, 2018
[2] United States International Trade Commission (September 2003). “Volume III: Executive Summaries and Investigation No. 332-452 (Report and Appendices).” Monitoring Developments in the Domestic Industry (Investigation No. TA-204-9) and Steel-Consuming Industries: Competitive Conditions with Respect to Steel Safeguard Measures (Investigation No. 332-452). (Publication 3632). Washington DC