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Donald Trump has just decided to make all Americans poorer through the imposition of tariffs of 25% on certain goods from China. And yes, afraid so, this makes all Americans poorer, even though some will gain relative to others. For there are two effects to tariffs – the imported goods themselves become more expensive, but also domestic production of those goods and their close substitutes do so as well. That’s enough to affect everyone, make all poorer. There’s also something important to understand about who pays tariffs – the consumers behind the tariff barriers of course:

President Donald Trump is sharply escalating a confrontation with China over trade.
The United States will impose a 25% tariff on $50 billion of Chinese exports, the president said early Friday. China vowed to retaliate immediately and said the United States had “launched a trade war.”

Imagine that you are mistaken about trade – as Peter Navarro and Robert Lighthizer, unfortunately Donald Trump’s two major trade advisers, are – and think that tariffs harm exporters. So, this action by Trump on imports into the US is going to cause retaliation, that retaliation by China is going to harm US producers, isn’t it?

Imagine that you’ve got the right ideas about trade, that tariffs hurt those who have to pay for them, the people who buy imports, then those tariffs upon Chinese goods hurt American consumers, don’t they?

Economists estimate that the tariffs will hurt GDP by less than half of a percentage point. But the measures could also lead to higher prices and job losses in some industries.

Half a percent of GDP is actually a huge number. And the point about higher prices? That’s actually the point of tariffs themselves, isn’t it? So the “could” there is pretty superfluous.

The Chinese government said it would respond in kind to the US tariffs, which will apply to roughly 1,100 exports and will target China’s aerospace, robotics, manufacturing and auto industries.

OK, so let’s take the example of auto parts. The tariffs of 25% will, presumably enough, make Chinese auto parts 25% more expensive in the US. So, US consumers will have to pay 25% more for their parts. This isn’t known to make them better off really, is it?

Now, the next stage of the argument is that Chinese producers will, in order to maintain their sales, swallow some of that tariff. Lower profit margins or whatever. Thus some of the cost of the tariff is really a tax on those foreign producers. That’s good, right? We get to tax foreigners to pay for our government, Huzzah!

But if we’re going to get into second iterations and all that then we need to add one more stage. All American producers of such car parts can now – and they will, they will – raise their prices in the absence of those Chinese competitors. All car parts become more expensive inside the US. Making all car parts buyers worse off – and the Chinese producers are paying a very small part of that overall extra burden.

So, tariffs make everyone worse off except, perhaps, those making the specific parts protected. But if we’re putting tariffs upon 1800 different parts, there’s no one who does make all 1800 of them, is there? In fact, even those in the industries specifically being “protected” will end up making more on 1 product and the other 1799 will cost them more. It’s possible that some few will come out ahead overall but there’s absolutely no one who will not face price rises as a result of these tariffs.

And to reiterate, the prices of all, from all producers domestic and foreign, of these products “protected” will rise, meaning that the incidence will be well above 100%. That is, the price rises will be very much larger than the tax revenue received. It’s not even good as a method of gaining revenue.

Trump’s just made Americans poorer there. Well done, well done.

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TDTim WorstallDennis The PeasantQuentin VoleRhoda Klapp Recent comment authors

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Spike
Member

I would hate to be Kudlow, tirelessly telling Republicans that these taxes on goods imported into the US are an “initial negotiating stance” and not the desired end product, but waking up every morning to discover that the Chief has set another fire that Kudlow will have to extinguish.

Philip Scott Thomas
Member
Philip Scott Thomas

Tim –

A little while back you quoted a economist who said something about when your enemies throw rocks in their harbour you don’t throw rock in your harbour. I’d like to use that quote. Can you remind me who it was, please?

Quentin Vole
Member
Quentin Vole

I think it may have been Tariffs: The Case Examined by a Committee of Economists Under the Chairmanship of Sir William Beveridge, K.C.B. (1931). Good luck finding a copy!

Rhoda Klapp
Member
Rhoda Klapp

I note that there isn’t a major trading nation that doesn’t plan to retaliate, so evidently none of them believe your premise, do they?

TD
Member
TD

How sophisticated do you expect politicians to be in their thinking?

Dennis The Peasant
Member
Dennis The Peasant

Good to see the commentariat – including economists- looking back at events 90 years ago to try to make sense of events today. You now, those who don’t know squat about negotiating are doomed to misunderstand the process when they see it.