FACT: Trump campaign proposes the highest U.S. tariff since 1937.
THE NUMBERS: U.S.’ “trade-weighted average tariff”* –
| 2022 |
2.8% |
| 2016 |
1.5% |
| 1990 |
3.3% |
| 1960 |
7.2% |
| 1937 |
15.6% |
WHAT THEY MEAN:
The
2024 election’s core questions are more basic than policy choices. Such
as: Can a person who has attempted to overthrow a settled election and
called for “termination” of unspecified parts of the Constitution live
up to an oath to “faithfully execute the office of President of the
United States” and “preserve, protect, and defend the Constitution”? Or:
Does the American public endorse a campaign based, as PPI’s President
Will Marshall memorably put it
last week, on “slandering America as a chaotic hellscape only he can
rule”? But this point made, policy choices still have consequences. So
here’s one:
The
Trump campaign proposes to create a 10% worldwide tariff and a 60%
tariff on Chinese goods, probably through a sort of decree. What should
we expect from this? A bit of historic perspective, then a pretty
definite result, a very unlikely rationale, and a worst-case scenario:
Context: Highest Tariff Rate Since the Depression: The
U.S. International Trade Commission records U.S. trade-weighted tariff
averages — that is, “revenue from tariffs divided by goods import value”
— going back 134 years, to 1890 and the administration of Pres.
Benjamin Harrison. Their most recent figure, for 2022, has $91 billion
in tariff revenue and $3.23 trillion in imports for a 2.8% average. This
is about twice the 1.2% to 1.5% range before the Trump administration’s
“301” and “232” tariffs, imposed in 2018 and 2019. Earlier rates rise
steadily as time flows backward, from 3.3% in 1990 to 7.2% in 1960 and
higher further back, to a peak of 19.8% as Herbert Hoover left office in
1933. Rates began to decline as the Roosevelt administration cut
tariffs through its Reciprocal Trade Agreements program, to averages of
16.8% in 1936 and 15.6% in 1937. Assuming the campaign’s 10% is (a)
added on top of the existing tariff system rather than replacing it, and
(b) that its 60% China tariff wouldn’t entirely wipe out U.S.-China
trade but leave some continuing under very high taxation, the resulting
rate would likely be somewhere around 15%, meaning the highest rate
since the late 1930s.
1. Will Happen: Shift of Taxation Toward Goods-Buyers:
One result is very clear. Tariffs are taxes on physical goods brought
in from overseas and collected at the border. Tariff-payers are American
companies and individuals who buy them. This means a U.S. tax system
that relies more heavily on tariffs — in particular if, as campaign
literature has suggested, they are used to “offset” revenue losses from
lower taxes on corporate and upper-income individuals — would shift some
of the tax burden around. Industries that earn money through financial
transactions (e.g. real estate, law firms, financial services) would pay
less; families shopping for goods and businesses that buy and sell
goods or use them to make things (e.g. retailers, manufacturers,
restaurants, building contractors, repair shops, and farmers) would pay
more. The cost effect for families is magnified, since tariffs generally
enable competing local producers to raise their own prices as well.
2. Not Likely to Happen: Policy Rationale Unsupported by Experience:
What is the purpose? Essays by former Trump trade officials Peter
Navarro in the Heritage Foundation’s “Project 2025” policy book in 2023
and Robert Lighthizer in the Economist magazine this past
February assert that higher tariffs would do two things: first, raise
manufacturing output and employment, and second, reduce U.S. trade
deficits. Both individuals argued for Trump’s 2018 tariffs on the same
grounds. Based on the experience then, their hopes are very unlikely to
materialize. To the contrary, with these policies in place
manufacturing shrank as a share of GDP, factory employment growth
slowed, and trade deficits grew sharply. Here are some data:
a. U.S. manufacturing sector share of GDP:
Manufacturing, having been 10.9% of U.S. GDP in 2018, was down to 10.3%
in 2021 and likely 10.2% in 2023 pending a final determination by the
Bureau of Economic Analysis later this year.
b. U.S. manufacturing employment:
Manufacturing job growth averaged 103,000 net new jobs per year in the
last five years of the Obama administration, and about half that —
54,000 per year — in the five years since 2018. Note of course a large
upheaval in 2020-21 during the Covid pandemic and recovery — a big
employment drop in 2020, a big jump in 2021 — so the post-2018 average
has some question marks around it.
c. Trade balance:
The overall U.S. goods/services trade balance was $479 billion in
deficit in 2016. This deficit rose steadily throughout the Trump
administration (again with a temporary downturn during the COVID
pandemic) to $842 billion in 2021 and $951 billion in 2022 before
dropping last year to $773 billion. The manufacturing deficit
specifically rose from $0.65 trillion in 2016 to $1.1 trillion in 2022,
then $1.05 trillion last year.
3. And a worst-case scenario:
In sum, the proposal is to restore late Depression-era trade policy,
and shift some taxation away from financialized sectors and upper-income
services industries to households and goods-producing or goods-using
sectors, in the probably unrealistic hope this would push investment and
hiring into manufacturing. To speculate about likely economy-wide
results:
Depression-like
trade policies need not bring Depression-type outcomes. Modern economic
historians tend to view the tariff hike in the Hoover administration as
making the Depression somewhat deeper and longer, but view the main
causes as rooted other ill-starred ideas: central bank passivity in
crisis, refusal to rescue failing banks and lack of deposit insurance,
unambitious fiscal policy in the early years, international currency
conflicts amplified by the gold standard. With this as a guide, the most
likely "macro" outcome of a big contemporary tariff increase might be a
UK-post-Brexit-like result, with somewhat slower growth and somewhat
higher inflation. Those interested in really dire forecasts, though,
can turn to a very well-placed observer on the spot in 1936. Here’s
then-President Roosevelt at the “Inter-American Conference on the
Maintenance of Peace” in Buenos Aires, reminding us that even if policy
choices are not this November’s core questions, they can still matter a
lot:
“[T]he welfare and prosperity of each
of our Nations depend in large part on the benefits derived from
commerce among ourselves and with other Nations, for our present
civilization rests on the basis of an international exchange of
commodities. Every Nation of the world has felt the evil effects of
recent efforts to erect trade barriers of every known kind. Every
individual citizen has suffered from them. It is no accident that the
Nations which have carried this process farthest are those which
proclaim most loudly that they require war as an instrument of their
policy. It is no accident that attempts to be self-sufficient have led
to failing standards for their people and to ever-increasing loss of the
democratic ideals in a mad race to pile armament on armament. It is no
accident that, because of these suicidal policies and the suffering
attending them, many of their people have come to believe with despair
that the price of war seems less than the price of peace.
“This state of affairs we must refuse to accept with every instinct of
defense, with every exhortation of enthusiastic hope, with every use of
mind and skill. I cannot refrain here from reiterating my gratification
that in this, as in so many other achievements, the American Republics
have given a salutary example to the world. The resolution adopted at
the Inter-American Conference at Montevideo endorsing the principles of
liberal trade policies has shone forth like a beacon in the storm of
economic madness which has been sweeping over the entire world during
these later years. Truly, if the principles there embodied find still
wider application in your deliberations, it will be a notable
contribution to the cause of peace.” |