#37 - I Didn't Think This Article Was Going to Be About Tariffs

Reading It Back, It Would Be Hard to Deny That It Is

Donald J. Trump will be inaugurated as the 47th president of the United States today around noon Eastern Time. It will be the second time in our nation’s history that a president has been re-inaugurated, the first taking place on March 4, 1893, when Grover Cleveland again took the oath of office at the East Portico of the U.S. Capitol.

A central pillar of Trump’s proposed economic policy is the imposition of broad tariffs (or increase of existing tariffs) on goods coming into the United States from other countries, including, most notably, China, Mexico, and Canada. On November 25, 2024, Trump announced his intention to impose additional 10 percent tariffs on China and additional 25 percent tariffs on Mexico and Canada, and indicated that these tariffs would be part of his first executive orders post-inauguration.

But what is a tariff? A tariff is a tax on imports that is paid upon the goods arriving from another country. Let’s imagine that you have come into a bit of money and you’ve decided to become a car dealer. For whatever reason, you have a grudge against Elon Musk, and you’ve set your heart on importing electrical vehicles from Chinese manufacturer BYD to compete with Tesla and other car companies that use domestic manufacturing. Author’s note: this is a hypothetical example and the prices quoted are made up for illustrative purposes. You are welcome to tell me I got the price for a BYD car wrong, but I will be grumpy about it.

There is currently a 100% tariff applicable to Chinese electric vehicles under section 301 of the Trade Act of 1974, which was originally passed to give the executive branch more authority to negotiate trade agreements and impose tariffs. Section 301 empowers the U.S. Trade Representative to investigate and retaliate against foreign countries for unfair trade practices. The 100% tariff means that, if you imported $1 million worth of BYD cars, you would also need to pay $1 million, or 100% of the amount of the $1 million purchase price, to the U.S. Treasury. The payment to the U.S. Treasury would not come from BYD or the Chinese government—it would come from you. Tariffs are paid by U.S. companies that import foreign goods, not the foreign sellers or governments.

Think about how much more you’d need to charge for your imported BYD cars than you would for a non-tariffed car of the same price. Let’s say BYD will sell the cars to you for an average price of $15,000. That means another $15,000 per car goes to the U.S. Treasury on account of the tariff. Figure another $10,000 on average per car to cover exorbitant shipping, rent, advertising, wage, and insurance-related expenses, and you’re out $40,000 before the car hits the lot. And now let’s say you have a cousin who dislikes you as much as you dislike Elon Musk and, unfortunately for you, is a rather clever businesswoman. She sets up a separate dealership on the lot next door to yours, except she doesn’t import anything from China—she buys American, baby. She pays a higher price for the same quality of car—let’s call it $25,000—but even if you say she’s also spending $10,000 on other expenses, she’s out $35,000, not your $40,000. She can sell for $39,000 and clear $4,000 per car at a price that would have you losing money. Without the $15,000 tariff, you could clear that same $4,000 by selling for $29,000.

This example (which I promise is done) is a little silly, but it gets at the primary arguments for and against tariffs. Trump is hoping that, with increased tariffs, American manufacturers will no longer be at a competitive disadvantage with respect to companies using cheaper, foreign manufacturing; they also hope that American companies who use foreign manufacturing, especially those who provide essential goods and supplies, and foreign companies from friendly nations that rely on the American market will be incentivized to build in America. Trump has spoken about making tariffs “so high, so horrible, so obnoxious,” that companies currently importing goods will move manufacturing operations to the United States rather than continue to pay tariffs.

And then, in the against column, you have the likely near-term impacts on American consumers and exporters. First, tariffs lead to higher prices on imported goods. That’s the whole point: if you’re an importer of tariffed products, you need to raise your prices or make less on every sale. That’s where the incentive to come build in the United States would come from—as tariffs force you to raise your prices higher and higher, more and more American customers may look to your competitors. Second, it’s unlikely that we will be able to raise tariffs without retaliation. That, again, is kind of how it works—the true downside scenario is a full-blown “trade war” where both sides keep raising tariffs until it hardly makes sense to trade at all. America imports more than it exports, but it still exports a lot. Flip the earlier car example and you see the issue: many American companies sell to foreign markets. If America raises tariffs and those countries reciprocate, it makes affected American products in those markets more expensive. This is a popular explanation for why the Great Depression got so bad so fast—the Smoot-Hawley Tariff Act of 1930 led to a trade war with key European trading partners, with the involved countries effectively losing access to these foreign markets. Global trade declined 65% at a time when it would have been a lot more helpful for it to go the other direction. Trump’s idea that higher tariffs will encourage more companies to build factories in the United States may work a little better in theory than practice.

And with that introduction, I want to make three points:

First, there is a difference between what Trump has said he will do, especially as part of a campaign, and what he will actually do. Are we going to annex Canada and make it the 51st state? Probably not (I think?). Perhaps Trump will dramatically increase tariffs, perhaps he won’t. Perhaps he will, but will remove them or scale them back a short time later. He is many things, but “predictable”, for better and/or worse, is not one of them. To pick a totally random example, TikTok: Trump is now planning an executive order to delay the impact of a law that was his idea. Whether you think he’s a strategic genius and master negotiator or an elderly fellow being tossed about by the wind, it might make more sense, to borrow from his proponents, to take him seriously, not literally.

Second, none of this happens in a vacuum. During the campaign, Vice-President-until-approximately-noon-Eastern Harris repeatedly claimed that a “Trump sales tax,” or “20% tax on everyday goods that you rely on to get through the month,” would result in costs for American families increasing by $4,000 per year on average. Now, the framing was pretty misleading in a key respect—as of 2022, only 15.6% of all U.S. goods and services were imported, so, assuming we didn’t radically change our buying habits over the last couple of years, a 20% tariff would leave unaffected about 84.4% of everything we buy—but the punchline was pretty fair, especially for a campaign: the Center for American Progress (liberal) concluded costs would go up $3,900 per year if Trump imposed a blanket 20 percent tariff on all imports; the National Taxpayers Union (conservative) put the number at $4,000 for just a 10 percent universal tariff; the Peterson Institute for International Economics estimated the impact would be around $2,600; and the Urban-Brookings Tax Policy Center predicted a worldwide 10 percent tariff and 60 percent tariff on Chinese goods would lower average after-tax incomes of U.S. households in 2025 by about $1,800.

Now, Trump’s tariff increases may end up being a little more modest—his November proposal was for a 10% increase on China and 25% increase on Mexico and Canada, which together account for 43% of U.S. imports—but none of that sounds great, and I’m not aware of an analysis that comes out the other direction—with aggressive tariffs directly decreasing costs for the average American household. However, these projections, along with just about everything we say about the future of the economy or of, well, almost anything, should probably be taken with a grain of salt. It’s not that they shouldn’t be taken seriously, but costs for American households are affected by far more than just trade policy, and unanticipated—-and unanticipatable (should be a word)—changes in other areas may result in decreases or much more significant increases either in costs or median income. A quick example: have we yet seen the full impact of the spending the government did over the last few years or has in the pipeline? Everyone noticed—and was very annoyed by—the inflation, yes, but that wasn’t the only thing that happened: in January 2011, annualized construction spending on U.S. manufacturing was at $30 billion. It had risen to $73 billion when Trump took office, and was at $74 billion when he left. As of November, that number was at $236 billion. What is all that building going to lead to? Tough to say for sure, but it’s not hard to imagine Biden sitting at home punching and biting pillows as Trump enjoys the credit for something Biden reasonably thinks was his doing.

Third and finally, I think it’s worth restating what a departure this is from the last 50 years of Republican trade policy. As Reagan declared in 1986, “[o]ur trade policy rests firmly on the foundation of free and open markets. I recognize…the inescapable conclusion that all of history has taught: the freer the flow of world trade, the stronger the tides of human progress and peace among nations.” This isn’t just a debate between Republicans and Democrats, but Republicans and Republicans: chapter 26 of the Heritage Foundation’s now-extremely-famous Mandate for Leadership: The Conservative Promise, better known as Project 2025, contains “The Case for Fair Trade,” by Peter Navarro, the former White House director of trade and manufacturing policy, and “The Case for Free Trade,” by Kent Lassman, president of the Competitive Enterprise Institute. The two men could hardly disagree more if they tried.

Lassman’s views match the once-dominant orthodoxy: in addition to the negative impacts tariffs have on jobs—he argues Trump’s steel tariffs “cost about 75,000 manufacturing jobs while creating only about 1,000”—“trade creates peace,” and if China weren’t so reliant upon trade with the U.S., it would be “much more unstable and dangerous.” He believes, as have prior administrations, that American influence in China can “play a vital role in helping to turn China from an authoritarian threat into a freer and less hostile power.” Navarro, on the other hand, believes our current trade policy “suppresses the real wages of American blue-collar workers and denies millions of Americans the opportunity to climb up the rungs of the ladder to the middle class,” and also “raises the specter of a manufacturing and defense industrial base that…will not be able to provide the weapons and matériel that would be needed should America enter another major world war.” He wants us to decouple our economy from China’s, not deepen our engagement.

These debates are worth having: it’s worth thinking about whether our policies do or should prioritize consumers or workers, and what each path would entail; it’s worth asking, and repeatedly, why trust in the government is so low, and whether there was a policy-related cause and remains a policy-related solution.

Today marks the changing of the guard. I don’t know what these next four years will bring. I don’t think anyone knows what these next four years will bring. Some fear the worst; some hope for the best. Let’s hope the latter are right.

Addendum #1 - A Question of Authority

Originally, the tariff power belonged solely to the legislative branch—the Constitution reserves for Congress the “power to lay and collect taxes, duties, imposts and excises”—but Congress has passed a number of laws over the years that delegate to the president the ability to impose tariffs under certain circumstances. For example, section 338 of the Tariff Act of 1930 allows the president to impose new tariffs up to 50% upon a finding that a foreign country has taken unreasonable or discriminatory actions that disadvantage U.S. commerce.

Wait—1930? Like, the Smoot-Hawley Tariff Act of 1930 passed during the early stages of (and generally considered to have exacerbated) the Great Depression? The one and the same. Here’s the thing: laws don’t magically disappear. If Congress passes a law, it will generally remain a law unless (a) Congress passes another law to amend or repeal the original, (b) the Supreme Court declares the law to be unconstitutional and invalid, or (c) the law contains a sunset provision or other similar mechanism that provides that the law will cease to be effective after a specified date; the same is generally true at the state and local level. Sometimes, the results are funny—it’s illegal to eat ice cream at a counter on Sunday in Winona Lake, Wisconsin, or educate a dog in Hartford, Connecticut—and sometimes, they’re pretty impactful: though Trump has pushed and will push for the passage of the Trump Reciprocal Trade Act, he already holds fairly broad authority to impose and increase tariffs pursuant to a spider’s web of laws passed during the Hoover, Kennedy, Nixon, and Carter administrations. Absent congressional action, laws passed in response to specific circumstances will remain applicable long after those circumstances have changed.

Addendum #2 - Tariffs as a Revenue Source

Tariffs once accounted for a significant portion of the federal government’s total revenue (here is a fun PDF with lots of historical data if you’d like to take a look). In 1882, for example, the U.S. Treasury collected a total of $403.5 million in revenue, $220.4 million (54.6%) of which was attributable to various customs duties, including tariffs. Incidentally, the federal government, which was dramatically smaller at that point, ran a surplus in excess of $145 million.

If you fast-forward to 1945, the last year of World War II, things had changed a bit: the government collected total receipts of $46.5 billion, only $354.8 million (around 0.8%) of which came in from customs. Over 90% of the government’s income was now collected by the Internal Revenue Service, the bulk of that contribution deriving from income and profits taxes.

The backlash to tariffs began during the early years of the Great Depression after tariffs instituted pursuant to the Smoot-Hawley Tariff Act led to reciprocal actions by America’s major trading partners. In 1934, Congress passed the Reciprocal Tariff Act, which authorized the executive branch to negotiate bilateral tariff reduction agreements with other countries. The prevailing view at the time—which, over time, came to dominate—was that trade liberalization may stimulate economic growth. We often speak of free trade as if it began with Reagan, but that’s not exactly right. It is true that free trade is often seen as—and genuinely was—a key tenet of Reagan’s economic policy, but the U.S. began making major efforts to reconstruct world trade and reduce tariffs clear back in the aftermath of World War II. On October 30, 1947, the U.S. and 22 other countries signed the General Agreement on Tariffs and Trade (GATT), the purpose of which was the “substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis.” The GATT remained in effect until January 1, 1995, when it was succeeded by the World Trade Organization (WTO); where the GATT began with 23 members, the WTO now has 166.

For what it’s worth, the Tax Policy Center projects that a 60% tariff on imported Chinese goods and 10% tariff on all other imported goods would yield a $2.76 trillion increase in net revenue for the Treasury over the next decade.

Addendum #3 - Branding

Harris’s full quote from the presidential debate is that Trump had “a plan that I call the Trump sales tax, which would be a 20% tax on everyday goods that you rely on to get through the month. Economists have said that Trump’s sales tax would actually result for middle-class families in about $4,000 more a year because of his policies and his ideas about what should be the backs of middle-class people paying for tax cuts for billionaires.”

Trump responded, “First of all, I have no sales tax. That’s an incorrect statement. She knows that. We’re doing tariffs on other countries. Other countries are going to finally, after 75 years, pay us back for all that we’ve done for the world.” The answer went a little cursive from there, but that’s the important part.

You can see what each of them is trying to do—Harris and her team have decided Americans don’t understand tariffs, which is probably fair, so she ends up just rebranding them (inaccurately) as an across-the-board sales tax on everyday goods, which gives Trump the opportunity to gleefully deny (accurately) that he is proposing a sales tax, and then describe tariffs in his own terms (inaccurately).

In season two, episode seven of the American classic Arrested Development, former therapist and aspiring actor Tobias Fünke and his daughter Maeby drive to the movie studio lot for Tobias’s audition. When Tobias nearly backs out and turns the (stair)car around, Maeby tells him he can’t do a u-turn on his dream: he needs to get on the lot and get the Fünke name out there. Short story shorter, that’s exactly what Tobias does: “That Fünke is some kind of something”, “Boy, this Fünke is all anybody is ever talking about”, “I’m so sick and tired of hearing about how brilliant that Fünke is. Overrated!”, all said around the literal water cooler before he spills water everywhere.

Then, he shows up for the actual audition and introduces himself as Tobias.

Point is, maybe Harris should have used the word “tariff.”

Random Recommendation

Arrested Development seasons 1-3.

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A fully-manned aircraft carrier can have up to 6,500 people on board. Remarkably, Royal Caribbean’s largest cruise ship, the Icon of the Seas, can have up to 9,950—a crew of 2,350 and 7,600 passengers at maximum capacity.