The US elections ended painlessly swift and clear. House, Senate and the US administration are now Donald Trump’s pliant instruments for absolute rule. In stark difference to Trump’s first term, nominations for all governmental departments and quangos come in swift succession, with only minor congressional objections.
Senators are perhaps still hesitating when a tattooed TV star with an alcohol problem is suggested to head the Department of Defence, or whether the anti-vaxxer Kennedy should lead Health, but by and large, Trump already started to govern.
His top foreign, industrial and fiscal policy tool, as we all well remember from his first presidency and heard him crow ad nauseam since, is tariffs ‒ “the most beautiful word in the dictionary”. Tariffs, generally speaking, are taxes on imports, like VAT.
Goods coming from outside the customs territory will only be cleared and released to the recipient once duty or additional tariffs are paid. While VAT only reimposes a tax the exporter has been refunded at home, tariffs are a tax to alter trade flows.
An additional, punishing levy on imported tomatoes, for example, will make them more expensive than those locally grown. While buying local has an environmental advantage, as transport emissions are reduced, it may not be welcomed by consumers: imported tomatoes may have been cheaper, or better, or both. Pricing out imported veggies now gives local farmers the opportunity to hike prices, or compromise on quality. Nice for the farmer, not so nice for shoppers.
Economists generally agree that all forms of tariffs are economically harmful. They emphasise the importance of David Ricardo’s 19th century theory of “comparative advantage”: a country should focus always on making the things they are ‘relatively’ best at making, while buying from other countries the things they are not as good at making. Thus, trade does not only benefit the cheapest, but all those willing to trade.
To blame Trump alone for the (excessive) use of tariffs is not fair. President Biden not only refused to take back any of Trump’s introduced tariffs, he upped the ante by permanently ratcheting up import levies, mostly aimed at China, in tandem with ever growing export restrictions, to ensure US “supremacy”, whatever that may signify. The EU too has followed along that path, as have others.
What is somewhat different with Trump’s proposals is their threatened breadth and totality. Trump initially wanted to levy tariffs of 60% on China and 10% on the rest of the world. Recently he threatened a 25% tariff on all Mexican and Canadian imports.
Usually, tariffs are “targeted”. They want to a achieve some policy outcome, not necessarily for economic gain. Biden imposed a 100% tariff on Chinese EVs, to help prop up US car makers, which seem hapless even when large subsidies are showered on them. In light of the above it is clear that this will make US cars neither cheaper nor more competitive – but is deemed economic damage worth paying.
The EU is adamant to introduce a carbon tax on all imports, to ensure that ever stricter emission controls within the EU will not disadvantage local manufacturers, which would become uncompetitive otherwise. Yet Trump, the mercantilist, wants to impose tariffs on the rest of the world to reduce America’s chronical trade deficits.
Most observers assume that given the absurd scope of Trump’s threatened tariffs on all and sundry they may not be much more than a “bargaining chip”. I think this underestimates Trump. He says what he means. He has to be taken seriously and literally. Trump is convinced of the wholesomeness of tariffs. He thinks foreigners will pay for it, to the extent that soon in the future even income taxes can be abolished. Only when real-life consequences start to bite will he change tack.
Economists generally agree that all forms of tariffs are economically harmful- Andreas Weitzer
Or perhaps, one day someone will point out to him that the recorded US trade deficit, so shocking for Trump, is distorted by tax avoidance and perhaps not more than a quarter of its statistical size. All sales (and profits) routinely booked by US corporations in tax heavens like Ireland are “exports” of those tax havens, not the US. They are physically US exports, but statistically foreign. If those past profits are ever repatriated, because of tax pardons, or lured by Trump’s lower corporation taxes, they will be accounted for as “investment gains”, not restated as exports.
It is therefore Trump’s tax projects that may shrink the “trade deficit” in future, not his tariffs. (Note: The economic consequences of a further fiscal deterioration are ignored here. Further note that de minimis imports, the import of goods worth less than or equal to $800 per item arriving by post is not taxed or even checked at all. No duty, no VAT, no health and safety checks. One billion de-mininis parcels arrive every year in the US from e-commerce traders like Temu or Shein per year, 70% of it apparel. These massive imports are not accounted for in the trade balance.)
Why a trade deficit financed by vast capital imports is such a problem is hard to understand for most economists. The US, essentially, gets all the stuff it wants in exchange for dollar-denominated IOUs, produced at will. Economists also point out that tariffs may reduce imports via lower consumption, with all the economic consequences this may entail, but it will equally hamper exports. Input costs will rise for US exporters, but not for manufacturers elsewhere.
The trade gap will not go away. The US consumes more than it earns. But the culprit is not the US consumer, or corporations, but the chronical, perennial US budget deficit, currently running at 6.7%. Trump’s planned tax cuts in combination with tariffs will not help.
Recently, the president-elect has found other worthy objectives to justify tariffs, like halting immigration and drug trafficking (Canada, Mexico). I see a chance for China here: if Xi Jinping offered to pick up the 11 million illegal immigrants Trump wants to deport, I am sure a large chunk of the threatened China tariffs will disappear.
Most of Trump’s critics point out that it is not foreigners who pay for tariffs, but US consumers. This is technically correct as already mentioned, but economically disingenuous. Tariffs can be paid for by importers sacrificing their resale margin; by workers, when importing manufacturers pay less for labour; or by foreign exporters who see their market shrinking.
Think of Malta’s tuna fish farms. They had until recently only one buyer, Japan. If Japan imposed large tariffs on Malta and Japanese consumers would therefore buy cheaper tuna from Italy or Spain, Maltese fish farmers would have to pick up the tariff bill in full.
Usually, when tariffs are introduced, it is a mix: higher import prices will in part be paid for by domestic consumers, local importers, and the foreign exporter, who may not easily find alternatives to the US market. It is hard to pin down who will have to carry the biggest burden, as each tariffed item comes with a set of unique economic circumstances. Inflationary impulses will be felt in most cases – the share the consumer has to carry. It is also possible that both importers and consumers will remain unscathed.
As imports decrease, the US will spend less on foreign currency. As a consequence, the dollar will strengthen against all other currencies. Neither exporters nor importers will have to sacrifice. The appreciating dollar (or the devalued Renminbi!) will make imports cheaper, perhaps fully compensating for higher tariffs. The bill will then be paid in full by America’s exporters. The stronger dollar will price them out of all markets. The trade deficit, real and statistical, will not improve.
Andreas Weitzer is an independent journalist based in Malta.