Trump’s super-tariff is dangerously simple

Trade disunity. Earlier this year, the libertarian think tank Cato Institute polled Americans to see if they thought tariffs on imported jeans would be a good idea. Six in ten said yes. Pollsters then asked respondents whether they would pay $10 more as a result of such tariffs; seven in 10 said no. The takeaway: Voters like the idea of ​​taxing foreign goods, but not the likely consequences.

That sets the stage for a big problem. Tariffs will be on the menu in the U.S. presidential election in November in one form or another, whoever wins. The current administration of President Joe Biden has kept most of the levies his predecessor Donald Trump imposed on goods and added some new ones. His vice president Kamala Harris, this year’s Democratic nominee, has said little about trade policy but favors strategic tariffs to help workers or punish trade adversaries.

But Trump has the most blunt line, as befits a decades-long proponent of trade tariffs. He has proposed a 10-20% tariff on all imported goods and a 60% tax on Chinese products. He says this will not make prices go up. The simplicity of this claim may appeal to many voters, judging by their view of a theoretical tax on jeans. The reality would be more complex and mostly detrimental to American households. The best hope is that this unintelligent idea about how to increase American prosperity will lead to better ones.

Ring of fire

The idea of ​​a tariff on all imports – which Trump has described as “a ring around the country” – is appealingly simple in conception. It could also be reasonably easy to invoke, with a little sophistry. Trump could, for example, declare that the trade deficit is a national threat justifying emergency measures. President Richard Nixon introduced a 10% tariff on US imports. All imports In 1971, frightened by the increase in imports at a much faster rate than exports, its legality is still unclear, but that did not stop it from happening.

If the goal is to hurt trading partners, tariffs work. It’s not that foreign countries themselves pay the tariffs, but the resulting increase in overall prices should reduce demand for foreign goods, which does inflict pain on their manufacturers. In China’s case, a 60% tariff would halve that amount. GDP Growth was forecast at 2.5%, according to UBS analysts, due to a drop in exports and the resulting impact on consumption and investment.

A major flaw is that tariffs are also self-defeating, because consumers pay more. And since falling demand for imports tends to push up the value of a currency, exporters also find that their products have become more expensive for foreign buyers, dampening demand. A universal tariff of 20% and 60% on Chinese goods would eliminate more than a million American jobs, according to calculations by Erica York of the Tax Foundation.

Any rise in the value of the currency would also hurt American investors holding foreign assets, as their investments would now be worth less in dollars. Anyone who lent a loan to a foreign company in dollars would have to worry that their counterparty would be less able to repay the loan. About half of the assets held by the world’s 100 largest multinationals, which include American firms such as Exxon Mobil, Apple and Pfizer, are Celebrated abroadaccording to the United Nations Trade and Development Organization.

The bigger problem is that voters don’t care much about these counterarguments, because they are mostly just an abstraction, meaning there is little that can stop tariffs from becoming a reality. More than a third of Americans believed that trade would be fine in 2022. It was a threat According to Gallup, the move is more of an opportunity than a threat. Despite abundant evidence that the cost of the tariffs Trump imposed between 2018 and 2020 was borne by American businesses and consumers, Biden’s willingness to prolong them reflects the fact that talking up free trade is not a way to win votes.

Keep it simple

On Thursday, Trump told a gathering of New York plutocrats that tariffs had made American life “sweeter and brighter,” citing the 19th-century protectionist president William McKinley. But if the theory is that tariffs will boost local industries and attract investment to the United States — rather than simply punishing foreign countries and hurting Americans, too — there is little evidence that they will succeed. If the goal is to get more productive assets to move domestically, whichever party governs the country in 2025 might want to dust off other ideas.

One idea worth revisiting is the “destination-based cash flow tax,” a tax tweak that aims to incentivize exports rather than imports. This scheme, proposed by senior Republican congressmen like Paul Ryan in 2016, would tax companies based on where consumption occurs, rather than where profits are recorded (the tax would be levied on sales after wages are deducted, making it a sort of cross between the regular corporate income tax and the value-added tax). That would mean in practice that imports would be taxed domestically, but not exports.

Taxing companies based on where they sell their products would not in itself rebalance trade, but it would give CEOs and their boards more incentive to locate their profits, and to some extent the assets that generate them, in the United States. That advantage could be enhanced by extending a soon-to-expire tax break that allows companies to deduct capital expenditures from their taxable income in advance, thereby significantly reducing their tax bill immediately, rather than spreading it out over several years. It would also simplify life for companies by eliminating complex cross-border tax rules, which should attract investment.

Admittedly, it’s an idea that requires a lot of work. Other countries might view the shift to a consumption-based tax as an attempt to turn the United States into a giant tax haven and slap retaliatory tariffs on American products, just as they surely would if the country imposed a 20% surcharge on all goods from abroad. It’s also a tricky thing to explain to voters. Companies that currently import a lot of supplies, like Walmart or Target, would have good reason to fight it.

But simplicity is not always a virtue. Trump’s idea of ​​imposing extreme tariffs, easy to explain but potentially chaotic and destructive if implemented, demonstrates this. It is better to approach new ideas that make the United States a more attractive investment destination than to wander aimlessly into an economic hole.

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