There is a saying that “To a man with a hammer, everything
looks like a nail.” When it comes to tariffs, Donald Trump is a man with a
hammer. Tariffs seem to be his tool of choice to (attempt to) fix any problem.
The most recent example is illegal immigration. Yesterday,
President Trump threatened to impose tariffs on Mexican imports on an
escalating basis. The president said that tariffs would begin on June 10 at a
five percent and rise periodically to 25 percent in October unless Mexico stops
“ illegal migrants” from entering the US.
Let’s think about the profound illogic of this plan for a
moment. First, Mexico has shown itself to be unable to stop the migrant caravans
from crossing its own southern border. We all remember the pictures of
thousands of migrants streaming across bridges and overwhelming Mexican border
security forces.
On the other hand, the migrant caravans were stopped cold
when they reached the US border. After marching across Central American and
Mexico for weeks, the majority of migrants stopped in Tijuana and waited for
their turn to ask for asylum in accordance with US law.
The inability of the Mexican government to stop the caravans
and to track down and detain smaller groups of migrants is a problem, but it
does not seem that the problem is due to lack of trying from the Mexican
government. In fact, the larger, richer, better-equipped US government has the
same problem when confronted with migrants traveling in small groups.
Second, how are tariffs on Mexican imports, supposed to
resolve the issue? As
we
have established before, “tariff” is a fancy word for a tax on trade. Like
any tax, such as a sales tax or tax on cigarettes or soft drinks or even increases
to the minimum wage, the cost of the tariff tax is passed along to the end
user, which in this case is the American consumer. When we acknowledge the
reality that tariffs are taxes, Donald Trump quickly becomes one of the
biggest
tax increasers in American history with much of the burden falling on the American
middle and lower-income classes.
Of course, Trump’s hope is that the increased cost of
Mexican goods will make Americans stop buying from Mexican companies. Tariffs
are intended to raise prices on American consumers, hurting them to eventually
hurt foreign companies. But again, it isn’t clear that Mexico could be doing a
lot to stop illegal immigration that it isn’t doing already. If there are additional
steps that Mexico could take, hurting the country’s economy may not be the best
way to encourage them to spend more money on border security. Damaging the Mexican economy would likely result in more illegal immigrants, not fewer.
There is also the question of how the new tariffs will
impact the president’s new US-Mexico-Canada trade agreement, which has yet to
be ratified. The replacement deal for NAFTA may be endangered by the president’s
capricious use of tariffs to try to leverage Mexican cooperation. The real
danger for the US economy is that the free trade deal will implode, resulting
in higher taxes and more regulation on trade with Mexico, which is an important
part of the supply chain for many American companies.
President Trump’s tweets suggest that he favors tariffs for
their own sake. The protectionist president has called himself “
a Tariff
Man” and has repeatedly shown a misunderstanding of the economics of
tariffs and international trade. He fails to accept the fact that the cost of
his tariffs is being borne by American taxpayers and not multinational corporations.
There are signs that Congress, which is now reaping the
bitter harvest of tariff laws that
delegated
too much congressional authority to the executive branch, is starting to resist
the president’s tax increases. Justin Amash (R-Mich.) in the House and Chuck
Grassley (R-Iowa) in the Senate have been particularly outspoken against the
president’s trade policies.
“Trade policy and border security are separate issues. This
is a misuse of presidential tariff authority and counter to congressional
intent,” Grassley said in a
statement,
adding that the tariffs “would seriously jeopardize passage of USMCA.” Grassley
has suggested in the past that ratification of the USMCA be tied to the removal
of tariffs, but, at this point, it is not clear that President Trump values his
free trade deal more than his tariffs.
“I support nearly every one of President Trump’s immigration
policies, but this is not one of them,” Grassley added.
Meanwhile, markets are roiled as a front on the trade war
that was deemed quiet has suddenly flared up again. The economy has been one of
Donald Trump’s top strengths and his supporters hold out hope that it will be
the key to his re-election, but most of the current weakness and instability in
the economy can be traced back to the president’s trade war. It is entirely
possible that Trump’s insistence on interfering in international trade will
weaken the economy just in time for the election.
