As threatened, President Trump allowed a 25 percent tax on $200 billion of Chinese imports to go into effect today. The increase in tariffs, which is another name for taxes on international trade, took effect despite the fact that US and Chinese negotiators are still conducting trade talks. China says that it will retaliate for the tax increase but has not yet announced what measures it will take.
In a tweetstorm this morning, the president played it cool, saying, “Talks with China continue in a very congenial manner - there is absolutely no need to rush - as Tariffs are NOW being paid to the United States by China of 25% on 250 Billion Dollars [sic] worth of goods & products.”
Of course, the president once again misses the fact that China is not paying his tariffs. Americans are. As with a sales tax, which is ostensibly levied on retailers, the actual cost of the tax is borne by American consumers and companies. When consumers buy Chinese products or companies import raw materials, the tariff is added to the cost of their purchase.
Even if consumers choose to buy domestic products instead, the effect is the same. They pay higher costs due to decreased competition. Either way, consumers have fewer dollars left in their pockets.
Trump’s tweetstorm continues as he shows his plan for big government interference in markets to plan out the new economy. “With the over 100 Billion Dollars in Tariffs that we take in, we will buy agricultural products from our Great Farmers, in larger amounts than China ever did, and ship it to poor & starving countries in the form of humanitarian assistance,” he writes. What President Trump is proposing is a massive intervention in markets that results in both a subsidy to farmers and, in a sudden reversal, increased foreign aid.
Trump’s proposal combines a number of typically Democrat ideas. The president is proposing a transfer of wealth from American consumers and businesses to farmers. This wealth transfer will supposedly undo the damage to farmers that Trump’s own trade policies are wreaking. Then, since the US government has no real need of all the food that it is going to buy at taxpayer expense to prop up farmers who can’t sell to China because of Trump’s tariff war, the government is simply going to give the food away. In one series of tweets, we have a tax increase, transfer payments, a government expansion, increased government spending, government subsidies, government handouts, and expansion of executive authority.
Ironically, Trump’s tax increases on trade came on the heels of tax reform. The average tax cut for the middle fifth of wage earners was estimated to be only about $1,000 annually so it’s likely that Trump’s tax increases on imports will eat up the middle-class tax cut and then some.
Republicans inherently understand that income tax cuts on businesses and individuals put more money in their pockets, but the party is a bit schizophrenic when it comes to taxes on trade. Many Republicans deny that tariffs are taxes at all while others somehow take on the progressive view that tariffs can somehow tax America into prosperity.
The great economist Milton Friedman explained that this mistaken view is due to the fact that the jobs protected by tariffs are easily visible but the jobs and businesses killed by trade taxes are often hidden from view because these losses occur in other parts of the economy. (Milton Friedman’s interview with Phil Donohue is available on YouTube and is an entertaining and informative lesson on trade economics. It’s well worth the time it takes to watch it. Donohue, a famous liberal of the day, sounds a lot like Trump today.)
With today’s internet news sources, the hidden damage done by protective tariffs is more apparent than ever. America’s farmers have been among the hardest hit by the trade war with farm income dropping so drastically since Trump’s election that it weighed down personal income growth for the entire country. This was despite a $12 billion farm subsidy passed last year to bail out farmers from the trade war damage.
The damage from tariffs doesn’t stop with farmers, however. A number of companies, such as Harley Davidson, have moved production outside the United States to escape the tariff war. Earlier this week, Polaris announced that it would consider moving production of its recreational vehicles from Minnesota to Mexico if Trump followed through on more tariffs. Because the tax increases on steel imports make manufacturing more expensive, companies such as Mid Continent Nail of Missouri are losing money and on the verge of bankruptcy.
Of course, trade wars hurt both sides. Trump’s obvious strategy is to wage a war of attrition against China in the hopes that the US economy can stave off disaster longer than the Chinese economy. A possible miscalculation here is that the US is a mostly free nation and China is authoritarian. Chinese leaders don’t have to wait until the US economy crumbles, they only have to wait until unhappy voters send President Trump the message, “You’re fired,” next year. It’s unlikely that any candidate other than Bernie Sanders would continue Trump’s trade policies.
Trump also faces potential resistance from Congress and the courts. Trump’s initial tariffs on steel and aluminum were based on questionable national security determinations, but his authority to apply tariffs to other imports is even more uncertain. A US trade court upheld the steel tariffs earlier this year but similar suits based on his other tariffs may be more successful. Even congressional Republicans are speaking out against the trade war and there may be an attempt to tie ratification of Trump’s new trade deal with Mexico and Canada to repeal of the tariffs.
So far, markets have been remarkably stable in the face of the looming escalations in the trade war. “Investors seemingly continue to try to cling to hope that policymakers on both sides opt to deescalate,” Deutsche Bank's research strategist Jim Reid said on CNBC. As tariffs increase and profits fall, markets will react sooner or later.
President Trump is betting his reelection on his statement from two years ago at the onset of the trade war. As prices rise and exports fall, Mr. Trump is doubling down on his mistaken belief that, “Trade wars are good and easy to win.”
Neither of those beliefs seems to have held true.
Originally published on The Resurgent