What are the goals of Trump's tariffs?
They can't both bring in significant revenue and protect domestic production. It's impossible.
President Trump announced Friday another pause on some tariffs on products imported from Canada and Mexico after a rocky week for equities markets trying to price in their effects. At the same, he says that tariffs could go higher than 25% in the future.
Trump’s stated reason for imposing the tariffs on the two USMCA partners is their failure to control illegal immigration and drug trafficking across their borders into the United States. Apparently, the president believes tariffs are the cure for just about anything, including illegal immigration.
But in a Q&A aboard Air Force One, Trump returned to the more traditional mercantilist arguments in favor of tariffs that he campaigned on. Asked if he is worried about a recession, Trump replied no, adding,
“All I know is this. We’re going to take in hundreds of billions of dollars in tariffs and we’re going to become so rich, you’re not going to know where to spend all that money, I’m telling you, you just watch. We’re going to have jobs, we’re going to have open factories, and it’s going to be great, and the plane is landing, and thank you for a lot of good questions. Thank you very much.”
There is a lot to unpack in that relatively short answer.
First, the president seems to believe taxing and spending are the keys to a strong economy. He tells the reporter “you’re not going to know where to spend all that money.” But it won’t be the reporter or anyone else in the private sector spending the money. It will be the government.
He also says the tariffs will collect “hundreds of billions of dollars.” As the president has also suggested tariffs could replace the income tax, it is worth noting that would require thousands of billions of dollars, not hundreds. Three thousand billion, to be exact, when counting the $500 billion in corporate taxes collected last year in addition to $2.5 trillion in personal income taxes.
But the last part of his answer carries the main foundation of Trump’s economic vision.
Candidate Trump promised tariffs would protect domestic manufacturers and their employees from cheaper foreign competition. Indeed, imposing tariffs similar to those imposed upon U.S. imports to its trading partners would cause manufacturing production and jobs lost to China and other, lower labor cost countries to return to the United States.
All this begs the question: What is the goal of the tariffs? Are they meant to collect revenue, perhaps enough to replace the income tax, or to protect domestic production? “Both!” Trump and his supporters would probably answer. It’s win-win. Americans will be so tired of winning some might be hospitalized for exhaustion. But tariffs can’t do both. It’s physically impossible.
The argument tariffs protect domestic production rests upon the assumption they won’t be collected. If a tariff is collected, that means the foreign product is still purchased and no domestic production or jobs are protected or newly created. In order for the tariff to accomplish this goal, it has to be high enough that the foreign product ends up costing more than the domestically produced product and consumers choose to buy from the domestic producer.
Thus, when Trump brags about the “billions and billions” of dollars collected by tariffs during his first term, one must remember that not one single dollar of that revenue protected a domestic job. Foreign companies still made the sales while American consumers paid the tariffs.
In order to truly protect domestic manufacturing from foreign competition, tariffs may need to be even higher than 100%. Labor costs in Mexico, China, and other low labor costs countries aren’t half labor costs in the U.S. They are a much smaller fraction. And even though there isn’t a perfect one-to-one relationship between cutting labor costs and retail price, labor makes up a large part of the costs.
Lower labor costs aren’t the only factor of production cheaper in foreign markets. The U.S. is also far more regulated than many foreign countries outcompeting it for manufacturing. Once near the top, the U.S. is no longer even in the top twenty on economic freedom indices and would be even lower if welfare spending weren’t counted as a factor. While it is perfectly appropriate to do so, it lowers the score for some countries otherwise much freer economically than the U.S.
While manufacturing output is at all-time highs, meaning most manufacturing jobs have been lost to automation, not foreign competition, those jobs that have moved overseas have done so because the U.S. government has made it so expensive to employ people in manufacturing domestically. Government-backed unions and massive regulation impose burdens that foreign competitors higher on those economic freedom indices don’t suffer.
It is also noteworthy that manufacturing output has only decreased significantly following the financial crises of 2008 and 2020, rather than following the “free trade” deals castigated by Trump and his supporters. The increasingly violent booms and busts created by the Federal Reserve are good for the investment class and bad for the real economy.
It is ironic that the MAGA version of the hoary mercantilist dream focuses on the workers, rather than the business owners. In the late nineteenth and early twentieth centuries, the argument for the income tax was that tariffs were a regressive tax upon workers for the benefit of big business. The income tax was pitched as a tax that would exclusively be paid by the rich and eliminating or drastically lowering tariffs would be a tax cut for the working class.
Even the great Grover Cleveland fell for this bait and switch during his second term, when the first peacetime income tax was passed by Congress. Cleveland did refuse to sign the bill after Republicans in Congress created the new tax without significantly decreasing the tariff. The tax became law due to Cleveland’s inaction, neither signing nor vetoing the bill. But until it was struck down as unconstitutional by the judiciary, it was collected in addition to high tariffs that provided most federal revenue.
Beware of politicians bearing gifts.
But the Republican Party has now become the working-class party, attempting to reconcile its former, highly undeserved “free market” image with decidedly New Dealish economic policies. And so, the new story on mercantilism is it’s a working-class policy. If one lives long enough, one sees and hears it all.
This strange brew of 19th century Republican protectionism for the benefit of big business and 20th century tax and spend progressivism, supposedly for the benefit of the working class, is succinctly captured in an answer comprising less than fifty words made just before the president’s flight landed. One must give Trump credit for brevity.
But again, one must also beware politicians bearing gifts. Based on his assertion that it is not Americans but foreign exporters who actually pay the tariffs, Trump isn’t just promising a free lunch. He’s promising breakfast, lunch, dinner, plus coffee and dessert, all at the expense of people in other countries. Americans will no longer pay any federal taxes at all and the federal government will shower the economy with money collected from foreigners, producing factories, jobs, and a chicken in every pot.
Be very afraid.
Tom Mullen is the author of It’s the Fed, Stupid and Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty, and the Pursuit of Happiness?