Making Sense Out of Donald Trump’s Tariffs

By Antonius J. Patrick

As he promised throughout the seemingly interminable 2024 election cycle, President-elect Donald Trump is apparently going to make good on his promise to use tariffs as both an economic and political weapon against America’s most important trading partners. Trump is calling for a 25% tariff on all goods coming from Mexico, which is America’s largest trading partner, and Canada unless they toughen their border security.

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Trump is also threatening China by adding an additional 10% levy on Chinese imported goods unless it cracks down on fentanyl smuggling. During his first term, Trump imposed tariffs on more than $360 billion worth of Chinese products.

While tariffs were one of the few meaningful issues discussed in the campaign, it was rife with all sorts of misconceptions, fallacies, and downright ignorance. Trump, who actually said “tariff” is “the most beautiful word in the dictionary,” is poised to ignite a harmful trade war despite a moribund U.S. economy which is still suffering from high inflation that tariffs will only exacerbate.

The president-elect mistakenly believes that American consumers do not pay taxes on foreign products. This, of course, is nonsense, and shows considerable ignorance of basic economic principles. Economists, of nearly every persuasion, and most non-MAGA financial pundits, understand that tariffs are paid by domestic consumers of foreign goods. This is true for Americans, as well as consumers in China, Japan, Germany, etc., who buy imported goods that are subjected to taxes.

While many have focused on Trump’s economic illiteracy, there is a deeper and often unseen negative effect that tariffs, as do all sales and excise taxes, have on economic life. Not only has the mainstream financial press missed this aspect, but it is often overlooked by conservative and market-oriented commentators.

When tariffs are discussed, most assert that the tax is “passed on to consumers” as businesses simply shift the cost on to consumers in the final price. While this, on the surface, seems plausible, industries that are subjected to tariffs are hurt indirectly from tariffs.

If the price of a good rises, consumers will purchase less of it. A tariff increases prices, so consumers cut back on spending for the good, which reduces a company’s revenues. The higher the tariff, the less consumers will buy, and the greater loss for business. Thus, businesses that sell imported goods are also injured by tariffs.

There are also “trickle down” effects from tariffs as businessmen who see a loss in revenue for their products will cut back on employment. Instead of protecting domestic industry and employment, tariffs do the opposite. And, if Trump has his way on tariffs, whole industries may be destroyed.

Trump has floated the idea that tariffs could replace the income tax to fund the government. Right now, tariffs bring in about 2% of revenues collected by the government annually, while imports to the U.S. currently are about $3.2 trillion. According to the Tax Foundation, at the current level of spending, tariffs would have to be raised by 75% on imports to replace the income tax.

Whether to increase tariffs or repeal the income tax is really a diversion from the real problem that confronts the U.S. which Trump has still not spoken about since his victory over Kamala Harris—out-of-control spending and the exploding deficits. The only viable and practical but politically untenable solution to this crisis is to radically cut government spending.

The president-elect is delusional if he thinks that a government of this size can be funded with tariffs. If Trump really cared for the nation’s financial well-being and future generations, who will be burdened with paying off the profligate spending of their parents and grandparents, he would be proposing spending cuts.

Tariffs, especially the levels that Trump is proposing, have always heightened tensions between nations, causing retaliatory actions, sometimes involving armed force. Trump, who labeled himself the “peace candidate” during the campaign, and berated Liz Cheney as a warmonger, would be going back on his pledge by using tariffs as a political weapon.

Talk about tariffs highlights another disturbing aspect of the American economy—dependency on foreign goods—which confirms that America’s days as an economic powerhouse have long since past. Trump tried to encourage manufacturing as president by eliminating regulations through executive fiat. Most of these, however, were reinstated by the Biden administration as the United States still remains an unfavorable business environment.

Making America great through tariffs, which are taxes, will not work. Instead, Trump needs to eliminate agencies and departments that stifle business. This will only take place once he is disavowed of his wrongheaded belief in the efficacy of tariffs.

Moreover, he should not conflate the issue of tariffs with border security or fentanyl. These two are separate issues that should be dealt with by other means.

Antonius Patrick in the nom de plume of a freelance writer based in the Washington, D.C. metro area who wishes to remain anonymous to avoid possible professional cancellation. See his previous article on tariffs in issue 45/46, 2024, page 21.