The Problems with trump's Tariffs

This week's trumpian chaos focused a lot on his threat to impose broad and heavy tariffs on three of our major trade partners of Canada, Mexico, and China, something that the economic experts warn would trigger more inflation than U.S. voters realize and escalate retaliation and trade wars across the globe.

In the days following, there had been a good amount of punditry and pushback on the matter, during which trump's people walked back the comments or tried to reframe the topic. There are think pieces about how trump might be "bluffing," that he's trying to force the likes of Mexico and Canada to the negotiation table - much like how trump shredded the existing NAFTA deal to force a new USMCA agreement that barely changed anything - to gain more concessions he didn't get then.

My view on all this is to consider taking trump at face value when it comes to tariffs. he's had a long history of loving the concept of them, and he had spoken - early and often - that trade wars are "good and easy to win". And it's not even a trade war trump seems focused on: he talked during the 2024 campaign about the McKinley Tariffs of 1890 and how such tariffs could replace income tax as the government's main source of revenue.

There's no chess game here: trump genuinely wants to increase tariffs because he views them as win-win.

trump - and his pro-tariff allies in his transition team - refuse to see the larger historical trends surrounding tariffs, trade wars, and their impacts on economic stability. The non-profit Tax Foundation published Erica York's report looking into how other factors in the 1890s countered the negative economic impacts of the McKinley Tariffs... factors that were NOT in play during the later tariffs of the 1930s:

As a review, tariffs are a type of excise tax (a narrowly targeted consumption tax) applied to domestic consumption of foreign-produced goods. Since the depths of the Great Depression and the collapse in global trade after the 1930 Hawley-Smoot tariffs, US policy shifted away from restrictive tariffs in favor of multilateral cooperation to reduce tariffs (as economist Douglas Irwin explains in his book Clashing Over Commerce).

That shift in policy sent the average tariff rate on a downward path, from highs of 59.1 percent on tariffed goods and 19.8 percent on all imported goods during the Great Depression to an average of 4.7 percent on tariffed goods and 1.4 percent on all imported goods in 2017...

As Chairman of the House Ways and Means Committee, McKinley shepherded the Tariff Act of 1890 into law. At the time, the federal government was running a budget surplus of nearly 50 percent, and tariff revenues substantially outpaced government spending. The McKinley tariff was designed to fix that problem, moving sugar (which accounted for a large share of revenues) to the “duty free” list, providing direct subsidies to sugar producers (to replace the benefit of tariffs and increase spending), and raising tariffs on a variety of other imports.

The McKinley tariff and higher government spending brought a swift backlash, earning the Republican-controlled Congress the nickname of “Billion Dollar Congress,” and leading to Republican defeats in the 1890 midterm elections (McKinley himself lost his reelection). In 1892, while monetary and banking policies were larger issues, Democrats ran heavily against the protectionist tariffs and the “Billion Dollar Congress,” and won unified control of government.

Democrats did not get to make good on their promises to address protectionist tariffs immediately, because the nation fell into a deep recession (caused by monetary policies). In late 1893 and early 1894, Democrats took up the tariff issue, but as the bill worked its way through Congress, it strayed from its original goals: a House amendment added an income tax, Senate amendments added back many protectionist tariffs, and ultimately, President Cleveland allowed the law to take effect without his signature.

Dissatisfaction with the broader state of the economy, still in a monetary-policy-related downturn, led to a Republican sweep in the 1894 midterm elections and the election of Republican President McKinley in 1896. Just four months after convening, Republicans sent a new tariff bill, the Dingley Act of 1897, to McKinley, raising protective tariffs even higher than the Tariff Act of 1890.

Many at the time credited tariffs for the economic recovery that soon took shape. Likewise, Trump often credits these high tariffs with the industrial growth of the US during the period.

But as economist Doug Irwin explains, around the same time as the new tariffs were enacted, the global supply of gold began to increase, easing the monetary conditions responsible for the economic downturn and bringing about a recovery.

Further, many economic historians have cautioned that impressive growth in the late 1800s and early 1900s cannot be explained by high tariffs. Instead, labor force growth and capital accumulation—neither of which have strong links to tariffs—are responsible for America’s fast growth during this period. If anything, it is possible that the high protective tariffs of the late 19th century somewhat hindered America’s economic growth.

Ironically that period saw a massive increase in immigration, which fueled that labor force growth. Something that trump and his anti-immigrant allies are going to undermine the same time they'll push their tariffs plans. York and Irwin both point out how our gold reserves expanded - that Klondike Gold Rush by the by - back in a time when the gold standard established our currency's value. We won't have those resources today to balance out the economic chaos that trump's tariffs will unleash.

trump's agenda to replace our current income tax system - which would be a massive boon to the uber-rich - with tariffs would be a disaster all its own. Kimberly Clausing and Maurice Obstfeld at the Peterson Institute for International Economics - a nonprofit think tank - looks at the numbers on that:

To be sure, when Trump vents before friendly audiences, one has to take it with a large grain of salt. But a partial substitution of tariffs for income tax revenues is nearly inevitable under a Trump presidency. He has repeatedly proposed increased tariffs, including a 10 percent across-the-board tariff on all trading partners as well as 60 percent or higher tariffs on goods from China. He has also called for extending the tax cuts enacted in 2017, which are due to expire next year, a step that could easily cost as much $5 trillion over ten years. And Trump has suggested further cuts, particularly on the corporate side...

Can tariffs replace the income tax?

Simply put, NO. Tariffs are levied on imported goods, which totaled $3.1 trillion in 2023. The income tax is levied on incomes, which exceed $20 trillion; the US government raises about $2 trillion in individual and corporate income taxes at present. It is literally impossible for tariffs to fully replace income taxes. Tariff rates would have to be implausibly high on such a small base of imports to replace the income tax, and as tax rates rose, the base itself would shrink as imports fall, making Trump’s $2 trillion goal unattainable.

A recent Peterson Institute policy brief calculated that revenues from Trump’s 10 percent/60 percent tariff proposals would total about $225 billion per year in current dollars. This figure is certainly an overestimate because it does not account for lower economic growth due to the inevitable economic shocks caused by retaliation against US exporters and the losses suffered by the import-dependent manufacturing sector. Exporters would also be hit by an appreciating dollar...

Another consideration that comes into play is that the United States already raises about $50 billion from tariffs on imports. That amount reduces the revenue potential of new tariffs relative to figure 1. In addition, a tariff as large as 50 percent would create very large distortions in Americans’ economic activity (moving resources away from sectors where the United States has a comparative advantage and toward sectors where it is less efficient), while increasing tax avoidance and evasion (including shopping abroad, smuggling, lobbying government officials for exemptions, etc.)...

trump is looking to replace an established - and deep - means of revenues for our federal government and installing a revenue source that's neither deep nor reliable. If we want to talk about "running government like a business," this is akin to price-hiking your goods or services to where you lose your customers who refuse to pay even if you're the only business in town.

Now you can see how trump kept driving his own casinos into bankruptcy.

If there's any good news about all this tariffs speculation is that for anything tariff increase on a large scale, trump could be stymied by the existing USMCA agreement as well as a Congress - even one that's Republican-controlled - that's not about to commit political suicide like this.

However, we exist in a new reality where the Supreme Court expanded presidential powers to where trump could get away with ANYthing without Congressional approval under the umbrella of "official acts." And given how he'd unilaterally forced tariffs during his first term, he's going to want to do that again, this time with more devastating results.

Thanks again, 75 million voters. You unleashed this economic chaos on us. I only hope the Tariff Leopards eat you first.