For all his talk about “Make[ing] America Great Again,” Trump’s two man proposals, limiting trade (via punitive tariffs on “unfair” or “cheating” nations) and limiting immigration (via walls and watch lists) stand in direct opposition to that goal. This blog post will focus on the first item (trade) and a follow-up post will focus on immigration.
Donald Trump’s tariff plan cannot make America great again. In fact, it can only harm American businesses, workers, and the economy in general. Further, by the nature of tariffs, they cannot force countries to trade more with us, buy more of our exports, or make American businesses more competitive in the global marketplace.
Tariffs are a tax on imported goods. By increasing the relative price of the imported goods, tariffs encourage more consumption of domestically-produced competing goods. Anyone, whether they be an individual or firm, who purchases goods made with imported elements, now face higher prices. Their purchasing power, and thus their standard of living, has been reduced.
Secondly, by reducing imports into the nation, it reduces the flow of dollars to the other nation. Since those dollars come back to the US economy via foreign direct investment (purchases of assets or loans) or as purchases of US exports, reduction in imports necessarily means a reduction in FDI and/or exports. One cannot, as Mr Trump and his followers believe, increase US exports to the target nation by levying tariffs or other punitive measures against that nation, even if there is not a resultant trade war!
Thirdly, tariffs cannot make American businesses in general more competitive or more profitable. Since tariffs, by their nature, shut out or limit the most economically efficient means of accomplishing a goal, tariffs make American firms less competitive in the global marketplace. Firms that rely on imported goods now face higher prices for their inputs, thus squeezing profit margins. Further, they are competing against other companies (German, British, Russian, etc) who do not face such restrictions or taxes. As a result of the tariff, American products are now relatively more expensive in the global marketplace, making other countries’ goods more attractive, and harming US exports as a whole.
To emphasize the title of this post, it’s not that Trump’s tariff bluster won’t make America great again. It’s that tariffs cannot make America great again.
Addendum: A common response I hear to the above is “well, if Trump reduces other rules and regulations and taxes, then so what if he blusters about trade? It could still be a net win!” Perhaps there would be a net positive (depending what other rules and regs he attacks), but if his goal is to make America great again, why not just eliminate the rules and regs without the tariff blustering to begin with? That way, the net positive would be maximized! Any tariff actions he takes (and it needn’t be an actual tariff. The threat of one is good enough) would necessarily reduce any good done by reducing other taxes and regulations. Remember thy broken windows!