Former President Trump claims that he can force foreign companies or their governments to pay U.S.-imposed tariffs on goods they export to the U.S.
This idea is absurd. If tariffs worked this way, every government in the world would cut taxes on its citizens and stick foreigners with tariff charges to pay for such things as a national child care plan, as Trump may have been trying to suggest in a recent speech.
Far from gleefully snatching billions in revenue from foreign trading partners, the Trump tariff plan is an extreme exercise in self-inflicted economic damage, magnifying the harm from his earlier tariffs across thousands of traded goods and all U.S. trading partners.
The “billions and billions” that would supposedly flow into the Treasury would not come from foreigners but from U.S. consumers. It would be a new national sales tax, imposed on U.S. citizens, and collected on every item imported into the country.
Trump’s proposed across-the-board 20 percent tariffs (60 percent for China) would be collected at U.S. ports of entry by Customs and Border Protection. They must be paid by the importer of record before the products can clear customs and be delivered to their U.S. market destinations. No tariff bill is ever sent to foreign producers for goods exported to the U.S.
At this point, the tariffs have become additional costs to America’s sellers and must be paid by the nation’s customers who want to buy them. In most cases, economists found in studying Trump’s tariffs from his first term, the final U.S. price of the imported product rises by the full amount of the tariff. Meanwhile, U.S. companies typically raised their own product prices as the tariffs reduced import competition.
Higher prices make consumers poorer. Trump’s washing machine tariff in 2018, for example, raised the product’s domestic price by about 12 percent, approximately $90 per unit. The increased price had a greater negative impact on poorer families, who must spend a larger portion of their income on consumption.
In addition, the increased windfall profits for U.S. producers from the tariffs also make their companies less competitive, as they are not forced to upgrade their products and modernize their plants. Poorer U.S. consumers and less efficient U.S. production lower the nation’s GDP.
Like many protectionists, Trump still argues that America gains from tariffs because they increase domestic employment. Yet a number of factors will offset any jobs “saved” in protected industries.
Among U.S. customers for imports are local businesses sourcing input goods from abroad. Tariffs on the inputs raise their production costs, making their final products less competitive, especially when they must compete in foreign markets where suppliers aren’t burdened by the same input tariffs.
The resulting loss in export business for these firms often means U.S. workers lose their jobs. On balance Trump’s 2018 tariffs cost more American manufacturing jobs than they saved.
Foreign retaliation increases job losses. Trump’s tariffs, if courts allow them, would break international trade rules and agreements set by treaty. Foreign countries would retaliate with tariffs of their own, as they did after the 2018 Trump tariffs. U.S. exports would fall, along with employment in that sector. Trump’s new tariff proposal would massively expand retaliation, as a full-blown trade war would spread to virtually all traded products and trading partners.
Trump’s insistence on chaos by turning the trading system upside down with unilateral tariffs would reduce U.S. and global business investment, which relies on trade policy stability. Like a pandemic contagion, Trump’s trade war would harm all countries’ economies as it spreads by vicious circles of closed markets, investment collapse and retaliation.
The likely result: increases in price levels, lower GDP and a possible recession — or worse — at home and abroad.
Trump’s new tariff plan is the most extreme protectionist proposal since the Great Depression, a regressive sales tax that would reduce U.S. competitiveness and lower the nation’s standard of living. It would be an economic disaster.
Kent Jones is a professor emeritus at Babson College.