Why Trump's Plan to Raise Tariffs Has So Many Haters

(Bloomberg) — The U.S. taxed imports heavily for much of its history before largely abandoning that policy, starting in the 1930s when government leaders embraced the idea of free trade. High tariffs made a comeback during the presidency of Donald Trump, who imposed them in an effort to revive U.S. manufacturing and counter what the U.S. sees as China’s unfair trade practices. Trump’s successor Joe Biden kept the trend going.

Now Trump says that if he is re-elected president on November 5, he will dramatically increase taxes on imports and put them at the center of his economic policy. His pledge has reignited the debate over whether tariffs are a valuable tool to compete with economic rivals or a policy weapon with a checkered past that is likely to backfire.

What is Trump proposing?

He has proposed raising tariffs to 60% on goods imported from China, and to 20% on goods brought in from the rest of the world. The US currently imposes tariffs at that level and higher on certain categories of goods, but imposing them at that level across the board would be a radical change. Currently, the country applies a trade-weighted average tariff of 2% to imported industrial goods, which make up 94% of U.S. merchandise imports by value, according to the Office of the U.S. Trade Representative. That figure can be calculated by dividing the total value of imports by the total tariff revenue. Half of industrial goods enter the US duty-free. According to a Bloomberg Economics analysis published in October, Trump’s tariff proposals would “push average U.S. tariffs above 20%, a level not seen since the early 20th century.”

Can Trump unilaterally raise tariffs?

Yes, although in some cases it would be necessary to first obtain a finding from one of the federal agencies reporting to the President. Through a number of statutes, Congress has given the U.S. President the authority to change tariffs to address a variety of problems. These include a threat to national security, a war or emergency, damage or potential damage to a U.S. industry, and unfair trade practices by a foreign country. While companies could try to fight higher rates in court, due to the deference given to presidential power in the past, such challenges would be “steeply uphill,” according to an article from the Center for Strategic & International Studies and co- author of Warren. Maruyama, former general counsel of the Office of the U.S. Trade Representative.

How do rates work?

A rate, also called an excise tax or levy, is usually calculated as a percentage of the value of the good, but can also be charged as a fixed amount per item. Goods crossing borders are given numerical codes under a standardized nomenclature called the “International Harmonized System.” Rates can be assigned to specific product codes such as truck chassis or to broad categories such as electric vehicles. Customs authorities collect tariffs on behalf of governments.

Who pays the rates?

The tariffs are actually paid by the importer, or by an intermediary acting on the importer’s behalf, although the costs are usually passed on. Trump argues that ultimately exporters pay for the tariffs. Research has shown that the load is more diffuse. The foreign company that makes the product may decide to lower prices to appease the importer. Or it could spend significant sums to build a factory elsewhere to avoid tariffs. Or an importer — Walmart and Target are among the largest in the U.S. — could raise the prices consumers pay at the checkout.

How have views on tariffs evolved in the US?

The first American tariffs – a 5% tax on all imports – were signed into law by President George Washington in 1789. The purpose was primarily to raise revenue for a fledgling government and secondarily to protect America’s emerging manufacturing industry from foreign competition in order to diversify the American economy, which was largely agricultural.

Until about 1900, tariffs represented more than half of U.S. government revenue. As other types of taxes took their place, they became less essential. (Even with the increases in recent years, the tariffs today represent a slice of Uncle Sam’s income.) Moreover, the tariffs were considered harmful.

The consequences of the Smoot-Hawley Act of 1930 became the textbook example of tariffs. The law was initially intended to protect American farmers, but was broadened as other industries lobbied for inclusion. According to an article by trade historian Douglas Irwin, this led to an average increase in import duties of about 20%. Smoot-Hawley provoked retaliatory tariffs from foreign governments, resulting in a decline in world trade and a deepening of the Great Depression.

In 1934, President Franklin D. Roosevelt signed the Reciprocal Trade Agreements Act, which initiated a new pattern of tariff reductions based on the belief that strengthened international trade would fuel the American economy. The law paved the way for the 1947 international General Agreement on Tariffs and Trade, a series of agreements aimed at eliminating trade barriers between countries. In this post-World War II era, support for free trade among Western countries was fueled by the belief that trading partners would be less likely to go to war against each other.

GATT was the predecessor to the World Trade Organization, founded in 1995. Based in Geneva, the WTO has 166 members that account for 98% of world trade. Although the WTO’s overall goal is to reduce trade barriers, it has rules for imposing tariffs, for example when large quantities of products are ‘dumped’ on the market or when goods are produced with the help of state subsidies.

How does China play into all this?

During those years, the belief in free trade was supported by bipartisan consensus in the US and by multinational corporations seeking access to cheap and efficient supply chains abroad. But the rise of China as a global economic power broke the consensus. When China was admitted to the WTO in 2001, it gained greater access to global markets, even as critics say it has violated the letter and spirit of free trade rules, for example by subsidizing its industries and banning foreign companies operating in China to force them to give up their knowledge. How. A number of researchers have concluded that competition from China caused a decline in U.S. employment among manufacturers that faced a surge in imports.

The Trump administration imposed new tariffs on Chinese imports worth about $380 billion in 2018 and 2019. The Biden administration kept these duties in place and raised more this year on goods worth another $18 billion. The new enthusiasm for tariffs has spread to the European Union. In early October, the country voted to impose tariffs of up to 45% on electric vehicles from China, which in turn has threatened to retaliate against European products.

During the 2024 campaign, Trump has argued that across-the-board import taxes would have benefits beyond defending domestic industries: They would flood the Treasury with billions in revenue, encouraging companies that don’t produce goods in the U.S. to do so , and allow the US to extract concessions from trade allies and rivals alike. Trump’s Democratic opponent in the election, Vice President Kamala Harris, has criticized his proposed rate increases as a “national sales tax” that would hurt consumers. But she has not formulated her own trade agenda.

How have the tariff increases affected the US so far?

It can be difficult to understand the economic effects of tariffs. They can boost employment by attracting investment, while companies try to avoid tariffs by moving factories to the taxing country. At the same time, they could trigger retaliatory tariffs that cost jobs in other parts of the economy.

In a highly regarded article published by the National Bureau of Economic Research, authors David Autor, Anne Beck, David Dorn and Gordon Hanson concluded that the 2018-2019 Trump tariffs failed to increase jobs in the protected sectors , while harming jobs in the targeted sectors. by retaliatory tariffs, especially on agriculture.

Economists are still unraveling the inflationary effects of Trump’s initial tariffs, which stem from a much larger shock to supply chains and economic activity that began not long after the start of the US-China trade war: the Covid-19 pandemic.

In February 2019, the Federal Reserve Bank of San Francisco estimated that the rates added 0.1 percentage point to consumer price inflation and 0.4 percentage point to a measure that measures the costs companies incur to invest. Erica York, senior economist at the nonpartisan Tax Foundation, estimates that the Trump-Biden rates will increase the average annual household tax bill by $625.

Additionally, York estimates that the increases will eliminate 142,000 full-time jobs and reduce gross domestic product by an average of 0.2% over the long term. Critics of Trump’s proposal to dramatically increase tariffs worry it would have the same kind of effects, on a much larger scale.