Thursday, March 21, 2019

Trump: Tariffs Are Here To Stay

“Trade wars are good and easy to win,” President Trump famously tweeted in March 2018 as he fired the first shots in a tariff war heard round the world. “It’s easy.”

A year later, the president is singing a different tune. While Mr. Trump’s trade strategy has resulted in some minor changes to NAFTA that may actually make the trade agreement worse for American companies, the Trump Administration has been at loggerheads with America’s largest trading partner, China. Although the Chinese did come to the table, a deal has proven elusive. Now President Trump is holding out the possibility that tariffs on Chinese imports may not be removed even if a deal is reached.

“We're not talking about removing them, we're talking about leaving them for a substantial period of time,” Trump told reporters on Wednesday. “Because we have to make sure that if we do the deal with China that China lives by the deal because they've had a lot of problems living by certain deals.”

The president did not specify when the Administration would consider removing tariffs or whether negotiations are being delayed by Trump’s desire to keep the tariffs in place. Some members of the Trump Administration have favored the idea of removing the tariffs in stages and reapplying them if China fails to follow through on the deal. Trump’s original tariffs on steel and aluminum were applied under a law that allows the president to tax imports for national security reasons, but the president also did not address whether these national security concerns were being resolved by the talks.

US trade negotiators are due to meet with the Chinese in Beijing next week and Chinese representatives will come to Washington in April to continue the talks, but keeping tariffs in place will probably be a hard sell for the Chinese. 

In some cases, the Trump Administration’s trade victories are illusory. In December 2018, when President Trump touted China’s reduction in auto tariffs from 40 percent to 15 percent, he failed to note that they had only increased the tariff on US autos to 40 percent after the Trump Administration had increased the tariff on Chinese autos from 2.5 percent to 27.5 percent. The Chinese concession was limited to three months.

Underlying the entire tariff issue is the misunderstanding that the tariffs are being paid by the Chinese. Tariffs, which are just another way of saying “taxes on trade,” are no different than any other tax in that they are shifted from the seller to the end users, who in this case happen to be American consumers and businesses who use Chinese products. The situation is no different than a sales tax or Obamacare’s tax on medical devices.

Even though sales taxes are technically paid by businesses who sell things, in reality, the business merely serves as the government’s tax collector. When the business sells a widget for $1, it collects the cost of the item plus the associated taxes from the customer, who is out of pocket about $1.06, depending on tax rates where the transaction takes place.

The situation is the same with tariffs except the numbers are much larger. Mr. Trump’s tariff rates on Chinese goods from range as high as 50 percent. Depending on the item, for every dollar that Americans spend on Chinese goods, they now must pay up to $1.50. State and local sales taxes still apply also. Items affected include a wide range of products from clothing to beer to washing machines to solar panels to cars.

The negative effects of the tariff war have not been limited to the Chinese. When China placed retaliatory tariffs on US farm exports, the Trump Administration pledged $12 billion in aid to farmers. However, since the US government already spends more than it takes in, the farm bailout contributed to a ballooning deficit and national debt. In effect, the Trump Administration borrowed from China to pay off US farmers who couldn’t sell to China due to the trade war.

In addition to the higher prices on imported goods or American-made goods with imported components, the trade war has also caused many companies to close doors, lay off workers, or delay growth. Harley Davidson’s decision to move some production to Europe is one of the most well-known examples, but there are many other stories that are known only to economists, workers, and their families. For example, Mid Continent Nail Corp. of Missouri has been crippled by Trump’s steel tariffs and may be driven out of business, killing more manufacturing jobs.

Ironically, much of the benefit of President Trump’s tax reform is being offset by his tax increases on trade. The president’s trade war and his crackdown on immigration at a time when the US is experiencing a labor shortage may push many voters toward the Democrats for more business-friendly policies.

Mr. Trump’s recent comments indicate that the pain for American consumers, businesses and workers will not be going away soon. President Trump’s warning may be aimed at the Chinese, but it will also be heard by the Americans who are footing the bill for his trade war.

Originally published on The Resurgent

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