Trump's Proposal of a Universal 10 Percent Tariff Is Economic and Political Idiocy

If a presidential candidate said that they would increase your taxes by 10 percent, odds are that you would not vote for that person. Yet in spite of being barraged with criminal charges, that is exactly what former President Donald Trump did. Earlier this month during a Fox News interview, Trump proposed that if re-elected, he would impose a 10 percent tariff on all consumer goods entering into the United States. 

Trump justified the tariff by saying "that money would be used to pay off the debt." Trump opined that the tariffs would not be so onerous that it would dissuade foreign companies selling goods to the United States, but it would be enough to raise a lot of money. He also thinks that it would "put a ring around the economy" in the hopes of boosting domestic production. It sounds like a win-win, right? Not when you look at the economic effects of a tariff....

Let's start with the fact that a tariff is a tax imposed on the import or export of goods between countries. These taxes are most typically used to encourage or safeguard an industry. Trump's rationale used in the interview has to do with collecting tax revenue for the government. We bought $3.2 trillion of goods and services last year. With a 10 percent tariff, it would mean a tax revenue of about $320 billion, which would hardly make a dent in the U.S. debt of $32.8 trillion. Domestic producers also see a bit of a boost in business. 

Who ends up paying for the tariff? Yes, foreign producers indirectly pay in that they have less business. However, it is domestic consumers pay for the tariff in the form of more expensive consumer goods. Then there is the deadweight loss, which is a loss of economic productivity as a result of the inefficiency of taxation. In short, the politically connected producers and government coffers benefit at the expense of the American taxpayer. You can read more from my 2016 analysis of the adverse economic effects of tariffs from when Trump first proposed tariffs. 

This is not mere economic theory. We have already seen what happened when Trump previously imposed tariffs. I worried about this in 2017 with Trump's tariffs on aluminum and steel, in no small part because U.S. steel tariffs imposed in 2002 cost 200,000 U.S. jobs. History repeated itself with Trump. There were 6,000 jobs added to the steel industry, but at what cost? According to the Wall Street Journal, at the cost of declining steel demand, higher prices, and 75,000 U.S. manufacturing jobs. The higher metal prices ended up costing the American people $11.5 billion annually. That was only aluminum and steel. The Section 301 tariffs imposed on China caused a reduction of U.S. real income by $1.4 billion per month (Amiti et al., 2019). 

What was the total effect of Trump's tariffs? The American Action Forum calculated that these tariffs have cost the American people $51 billion annually. The Tax Foundation projects that the cost of Trump's tariffs are a GDP lowered by 0.21 percent, wages reduced by 0.14 percent, and 166,000 fewer full-time equivalent (FTE) jobs. 

What about Trump's new tariff proposal? According to the Tax Foundation, a 10 percent universal tariff would cost $300 billion a year, eliminate 505,000 full-time equivalent (FTE) jobs, and reduce the size of the U.S. economy by 0.7 percent. To put that cost into context, such a tax would be the largest tax increase since the end of World War II, or a $2,600 tax hike per household. 

It is not merely the economic factor that is worrisome. Imposing such a tax would be declaring a trade war on every country, including our allies. Trump would be in violation of numerous trade agreements. Not only would it erode global trust in the U.S. government, but it could plausibly trigger an escalation of global economic chaos. In 1930, President Hoover passed the Smoot-Hawley Tariff Act to protect the U.S. economy. I would argue that it was one of the worse public policy decisions made during peacetime...at least before the COVID lockdowns. It was so oppressive and catastrophic that the tailspin from the retaliatory tariffs led to the economic downturn of the Great Depression. 

We do not have to go that far back in economic history to imagine how other countries would respond. We have already seen how deleterious it can be with Trump's tariffs. The U.S. Department of Agriculture released a report (Morgan et al., 2022) regarding the retaliatory agricultural tariffs in response to Trump's aluminum and steel tariffs. USDA found that from mid-2018 to the end of 2019, the U.S. lost more than $27 billion in agricultural exports. That does not even factor in the trade war that has escalated with China since Trump was elected into office, although it did very little to push U.S. firms out of China or nothing to accelerate foreign direct investment outflows (Vortherms and Zhang, 2021).  

We know from decades of economic data that tariffs reduce employment, economic productivity, and output, as is illustrated by a report from the International Monetary Fund (Furceri et al., 2019). Trump continues to show us that he is clueless as to how international trade works. Hopefully, this is only campaign rhetoric to drum up voters because actually implementing this tariff would hurt the voters he purports to help. Yet his past record with tariffs suggests otherwise. Sadly, President Biden is not much of an improvement. Biden either extended most of Trump's tariffs or swapped them out for different trade restrictions. While I will not hold my breath, I hope that the next president of the United States is capable of understanding the importance of having liberalized markets and minimizing trade restrictions.