Donald Trump has repeatedly proclaimed his love for tariffs, even dubbing himself “Tariff Man.” While Trump clearly does not understand how tariffs work, some of the discussion in the media has been off target as well. It’s worth trying to get the basic story straight.
First, it has been widely pointed out that Trump is wrong in thinking that China or other targeted countries are paying tariffs to the U.S. Treasury. To make it simple, a tariff is a tax on imports.
It can be thought of as being like a tax on cigarettes or alcohol. The buyer is the one who most immediately pays the tax on Chinese or other targeted imports. However, the tax will generally not be borne entirely by the consumer.
The seller — in this case, producers in the countries subject to the tax — will typically lower their price to maintain their market share. So, some of the burden of the tariff will be borne by China or other targeted countries. (An important exception is a financial transactions tax, where the financial industry will bear almost the entire burden of the tax.)
It is also important to point out that part of this burden is likely to come through fluctuations in currency prices, an issue that has been almost completely ignored in media reports on tariffs. The classic economics story is that if the U.S. puts a tariff on Chinese or other imports, the value of the dollar will rise relative to the Chinese yuan and other currencies.
The logic is that since the U.S. is supplying fewer dollars on international currency markets, because tariffs reduce our demand for imports, the price of the dollar rises. This means, other things being equal, U.S. imports cost somewhat less than they would otherwise because a dollar buys more yuan, yen, etc.
In fact, the dollar is up more than 20 percent from where it was five years ago. While tariffs have likely played a role, most of this rise actually occurred when President Obama was in the White House. For all the talk of how the trade war has hurt U.S. farmers, the high dollar has almost certainly been a more important factor in depressing farm incomes.
A high dollar means that wheat, corn and other farm commodities will sell for a low price in dollar terms. The dollar price is what U.S. farmers care about.
While tariffs mean higher prices for consumers in the United States, they are not always bad. They can be an important part of an industrial strategy. The United States, like all other wealthy countries, used tariffs to protect key industries from foreign competition until they became strong enough to compete internationally.
Tariffs can also be an effective weapon to get other countries to change trade practices that are hurting the U.S. economy. The idea is that the tariff imposes more pain on our trading partner than it does on the United States. It can then be used as a negotiating chip in getting other countries to change their practices.
It is difficult to tell either of these stories about the Trump tariffs. If his tariffs are somehow part of a coherent industrial policy strategy, Trump has been very effective in keeping this strategy a secret.
The tariffs were originally put in place explicitly as part of a trade war, but the objectives in this war constantly keep shifting. Originally his trade war with China was supposed to be about getting it to raise the value of its currency against the dollar.
This goal has largely disappeared from public discussion. Instead, the latest version of the war seems to be about protecting the intellectual property claims of Boeing and other large U.S. companies. That is not a war that most American workers have an interest in fighting.
The latest set of tariffs against Mexico, over its policy on allowing people to seek asylum in the United States, seems completely off the rails. After negotiating a new trade deal with Mexico for over a year, Trump now seems prepared to jettison it because he doesn’t want people coming to the border and applying for asylum.
In prior decades we sanctioned countries because they did not allow freedom of movement; now we are sanctioning them because they do. This doesn’t make a great deal of sense. Furthermore, having a president who imposes tariffs on a whim certainly undermines business efforts at long-term planning.
Another classic argument against tariffs that has received insufficient attention is that they can lead to corruption. The idea is that politically favored businesses will get protection, while others will be stuck paying higher prices.
Corruption is a real cause for concern even with a well-run government. However, when we have a president who openly uses his office to enrich himself and his friends, it is a huge problem.
There is little reason to doubt that Trump will use tariffs and their application as a tool to reward friends and punish his political enemies. After all, vengefulness is the one principle that Trump has adhered to consistently.
In short, tariffs may not always be bad, but Trump‘s tariffs are.