Trump's Tariffs are Magic!

During last week's Presidential "debate," Vice President Harris characterized former President Trump's plan to increase tariffs on a wide variety of goods--especially those coming from China--as a tax that would fall on American consumers. In response,  Trump repeated his frequent claim that foreign countries, not American consumers, pay the tariffs. That is false--both as a technical matter and as a substantive matter.

As a technical matter, when goods are subject to tariffs, the party seeking to import the goods--typically a U.S. distributor, wholesaler, or integrated business--pays the tariff. But anyone with the slightest bit of economic sophistication understands that the important question with respect to any kind of a tax, including a tariff, is not who hands the money over to the government, but what the incidence of the tax is--that is, who ultimately bears the burden of the tax. For tariffs, the usual answer is that tariffs increase costs for consumers.

VP Harris and President Biden have been highly imperfect messengers for that message, because, for mostly political reasons, Biden has left in place the Trump tariffs on China. In addition, in his potential bid to block Nippon Steel's acquisition of U.S. Steel, Biden can be accused of favoring protectionism more broadly. To be sure, the Biden administration has been--and a potential Harris administration would be--far less sweeping in the imposition of tariffs than Trump has promised in a second term. But the kind of nuance needed to explain the difference is difficult to condense into a sound bite, a debate zinger, or even a passage in a stump speech.

Fortunately, Biden and Harris are not the only actors available to criticize tariffs. Although this blog frequently features strong criticism (much of it from Professor Buchanan but occasionally from me) of the press for its coverage of both politics and economics, journalists have generally done a reasonably good job of calling attention to the fact that tariffs are taxes. But if you think I'm going to stop there, think again.

Unfortunately, the press have utterly failed to notice or comment on another glaring problem with Trump's promotion of tariffs. He touts tariffs (or at least his tariffs) as having the magical ability to simultaneously create numerous American manufacturing jobs and raise enormous amounts of revenue. Here is Trump's closest-to-coherent statement (during the "debate") about the revenue his tariffs raised in the past and would raise going forward:

China was paying us hundreds of billions of dollars and so were other countries and you know if she doesn't like 'em they should have gone out and they should have immediately cut the tariffs but those tariffs are there three and a half years now under their administration. We are gonna take in billions of dollars, hundreds of billions of dollars.

At the same time, of course, Trump also touts tariffs as the way to stimulate domestic job creation. For example, last year he released a campaign video (no longer available but quoted in the NY Times) in which he asserted that, as a result of increased tariffs in a second Trump administration, the U.S. "will quickly become a manufacturing powerhouse like the world has never seen before."

The most thorough and careful study of the impact of Trump's import tariffs found that they "neither raised nor lowered US employment in newly-protected sectors; retaliatory tariffs had clear negative employment impacts, primarily in agriculture; and these harms were only partly mitigated by compensatory US agricultural subsidies." Why didn't the tariffs boost domestic manufacturing of the kinds of goods subject to them? The authors conclude that the most likely explanation is that U.S. importers simply switched from Chinese suppliers to other foreign suppliers. There is also evidence that some Chinese firms "trans-shipped" their goods to third countries, whence they came to the U.S. tariff-free or subject to substantially lower tariffs.

In principle, tariffs could boost U.S. manufacturing if they applied universally to foreign goods, as Trump has been proposing. Such universal tariffs would be bad for the economy because they would lead to retaliatory tariffs--and even apart from that, a universal tariff on imported goods would apply to component parts and materials used by U.S. manufacturing firms. Let's set all of that aside. It is at least possible in theory that high enough tariffs on all imported goods would make such goods so expensive that consumers would seek substitutes produced by domestic manufacturers.

But if that were to happen, then the tariffs would not raise much revenue. This is the simple logical point that the press have failed to articulate: Tariffs can shift demand away from foreign goods and thus (in theory) boost domestic manufacturing or they can generate substantial revenue if consumers are willing to pay higher prices for the imported goods and thus the government collects the tariffs, but they cannot do both. If tariffs raise a great deal of revenue, then demand is not shifting to domestically produced items. And if demand is shifting, then we are importing much less of the goods subject to tariffs and thus not collecting much revenue in the form of tariffs. There is at best a tradeoff between tariffs as a revenue-raising mechanism and tariffs as a boost to domestic production.

Suppose a journalist were to ask Trump how a tariff can magically raise hundreds of billions of dollars of revenue and also suppress demand for the goods subject to the tariff so much as to turn the U.S. (quickly, no less) into "a manufacturing powerhouse like the world has never seen before." No doubt he would: a) not understand the question; b) not answer the question; c) simply reassert the self-evidently false proposition as a fact that "everybody knows;" and/or d) tell the journalist that she (it's always a she in these circumstances) is a very nasty person and an enemy of the people.

However, it's not necessary for journalists to ask Trump anything. Just as journalists now sometimes refer to the most blatantly false of Trump's statements as "lies," they could, whenever covering tariffs as a campaign issue, not only remind the audience that tariffs are taxes that ultimately fall on U.S. purchasers but also explain that tariffs cannot possibly be a gigantic source of revenue and a gigantic boost to the economy. I won't hold my breath.