Donald Trump has been all over the map on tariffs. When he was president, his primary tariff efforts were on steel and aluminum in general and his “trade war” with China. Taxing basic inputs to U.S. production such as steel and aluminum was bad for manufacturing firms and caused net job losses. The trade war with China has done little to change China’s behavior and has denied American exporters market access.
Perhaps the strongest indictment of Trump’s trade policies is that Joe Biden looked at them and thought they were worth continuing.
Now on the campaign trail, Trump has talked about a 10 or maybe 20 percent tariff on all imports, with higher rates on Chinese imports and certain other specific goods, such as electric vehicles. That last item is copying Biden, who announced higher tariffs on electric vehicles earlier this year.
“Our Trade deficit in goods has grown to over $1 Trillion Dollars a year,” Trump’s platform says. Of course, it has to say trade “in goods,” because the U.S. has a roughly $270 billion trade surplus in services. And nowhere in Trump’s platform does he mention the deficit that actually matters, the $2 trillion budget deficit.
Trump has said in the past that tariff revenue would help to offset the budget deficit, or maybe replace the income tax entirely. More recently, he has said tariff revenue would instead go into a newly created sovereign wealth fund.
The sovereign wealth fund is another idea he shares with Biden, whose administration has been toying with creating one. The appeal for Democrats is obvious: It would give them a new way to fund green-energy projects with public money without having to bother passing legislation in Congress.
The idea that the world’s largest and most diversified economy needs a sovereign wealth fund to direct investment — on top of all the government direction of investment that already takes place through other channels — is preposterous. Countries such as Norway or the United Arab Emirates have them because they have small populations, oil wealth, and otherwise nonexistent economies. Countries such as Saudi Arabia and China have them because they are authoritarian. Neither should be a model for the U.S.
Trump’s platform says the tariffs would be levied “on Foreign Producers,” and vice-presidential nominee J. D. Vance has been making the rounds saying that because inflation was low during Trump’s presidency, that proves that tariffs don’t cause inflation.
Tariffs don’t cause inflation, strictly speaking, because inflation is caused by an increase in the money supply, something tariffs have nothing to do with. Tariffs do, however, cause price increases for the things on which they are levied because — follow this next part carefully — they are taxes. And tariffs on all goods from all foreign countries would cause much more significant price increases than the already existing tariffs on steel and aluminum and goods from one foreign country.
Make no mistake: Protectionists want tariffs to cause price increases. Trump’s platform says the purpose of his trade policy is to “protect American Workers, Farmers, and Industries from unfair Foreign Competition.” If tariffs don’t cause price increases, because foreign producers lower their prices to compensate for the tax, then domestic producers aren’t protected by the tariff, because the price for the foreign good will be the same one Americans are already willing to pay.
The Trump administration’s trade representative, Robert Lighthizer, has been open about his desire to increase prices. In a speech outlining his trade philosophy at a 2022 conference, he said, “We need to change the focus of our policy away from price optimization,” and, “Our primary objective should be policies that will build strong American families and communities and create productive high-paying jobs. That should be our goal, not cheap stuff.” In the Q&A that followed, he said, “The best way to fix consumerism is to raise prices.”
While Trump says foreigners pay tariffs, Vance said that actually American businesses would pay tariffs, but only the ones he doesn’t like. “We need to lower taxes on corporations that are creating jobs in this country and raise tariffs on corporations that are shipping jobs overseas,” he said. How the government would levy tariffs only on certain corporations, or how the tariffs would undo the outsourcing, was left unsaid.
In this projected reworking of U.S. tax policy, the Trump campaign has not consistently been able to explain who would pay the tax, what it would be levied on, what the rate would be, how the revenue would be used, or what the economic effects would be. Other than that, it’s a fine idea.