edward rotterman
None of Donald Trump’s economic proposals has sparked more controversy than his proposal to impose a 10% tariff on all imports and a 60% tariff on imports from China.
Unfortunately, U.S. media coverage of this campaign has fallen into a commonplace and misleading debate: “Who will pay more, Chinese or American families?”
President Trump has claimed that “China” will pay “everything” without any explanation as to who exactly in China “pays everything” or what exactly “pays everything” means. are. Either way, Trump is completely wrong.
But so is the seemingly economic opposite view.
Fact-checking journalists say Americans will pay the tariffs through higher prices on imported goods. MSNBC’s Lawrence O’Donnell went to the extreme, arguing that “tariffs are imposed by the United States and paid for by the people of the United States, and no one else.” This is just as stupid and vague as Trump’s claims.
Both sides fall into a “false dichotomy,” the fallacy of logic that assumes there are only two possible answers to a question, one of which is right and the other wrong. In fact, in this case, there are a lot of them.
The relevant economic question here is not “Who pays?” but “Who benefits or is better off because of the tariff?” Who will lose, or will things be worse? ”
There are countless different groups in the United States, China, and other countries that would be affected by increased U.S. tariffs. Many people will be affected in more than one direction, often in opposing directions. Their achievements range along a spectrum from large pure gains to large pure losses, but most fall somewhere in between. That applies not only to us, but also to China and other countries of the world.
And certainly the losses to society will outweigh the benefits. However, a deeper understanding of the dynamics that will unfold is essential.
Start by understanding that the imposition of significant import duties by the world’s largest economy has an impact on the entire global economy. The relative prices of inputs and outputs change everywhere. All economies will need to adapt to these new realities.
If a 60% tax on imported goods goes into effect, the prices of consumer goods in our country will rise sharply. But Americans won’t continue to buy the exact same set of products they used to. Spending, however small, will shift from tariff-covered items to non-tariff items.
Moreover, production will increase in third countries, even those facing 10% tariffs from the United States. Production of products that require low-skilled, low-wage labor will increasingly shift from China to other developing countries. Such a transition is already occurring in Southeast Asian countries such as Vietnam, Malaysia, and Myanmar, but also in Central American and now West African countries. Across many products, an exorbitant wall against China would benefit rapidly growing India.
Similarly, production of the affected products in our country will be increased or restarted. There will be more employment sectors producing imported substitutes, and factories will use more of the other American products they need. So life could be better for some people here and in third countries. Many Chinese people may be in a much worse situation.
Such adjustments take time. Short-term reactions will be limited and extreme price spikes may occur initially. Product prices will go up, but not by 60%.
Economists generally agree with President Trump that tariffs will increase domestic production. But only by making prices higher. The extent to which output increases or decreases in response to a change in price is determined by the elasticity of supply, or the percentage change in output in response to a given percentage change in price. In the short run, the supply of most goods is “inelastic.” Even if prices rise, production does not increase much. However, as the adjustment period progresses, production increases with higher plies, although the degree of increase varies widely from product to product.
Almost all media discussions are about the price of finished consumer goods. But the 10% and 60% Trump tariffs also apply to “intermediate goods” such as steel, glass, and plastics, as well as parts used to make finished products, such as computer chips, motors, switches, valves, and pumps. Ru.
We have extensive experience in steel tariffs. When more expensive steel increases domestic steel prices, U.S. production increases. On the supply side, factory employment is increasing. They use more ore, electricity, and other inputs.
However, higher prices for steel mean higher costs for industries that use it as a raw material. They have to charge more for what they produce, like washing machines and cars. The quantity that can be sold will decrease.
But let’s consider the products that we don’t buy that have a high proportion of steel in their total production cost. Agricultural machinery, construction equipment, and locomotives are prime examples of products whose prices increase even when there are little or no imports. Additionally, all of these finished products from business to business are important exports for the United States. As our costs increase relative to the costs of our foreign competitive producers, such foreign sales will necessarily decline.
U.S.-based companies themselves may make the transition. Caterpillar and John Deere both manufacture here and export from here. But Deere also has factories in at least 25 other countries. Cat has many factories overseas, including several in Brazil, and employs 5,000 people at its main factory in São Paulo.
These products are almost entirely produced for the regions in which they are located or for non-industrialized importing countries, rather than being shipped home. So, in the end, if these U.S. multinationals face higher costs for materials at U.S. factories because of President Trump’s tariffs, production here will decline. Instead of exporting from our country, they serve overseas customers from overseas factories. Therefore, new U.S. tariffs will make Brazilian workers better off, but American workers worse off.
All this considering that other countries around the world would surely react to a unilateral increase in US tariffs in exactly the same way as they did with the disastrous Snoot-Hawley Tariff of 1930. do not have. They will impose reciprocal import duties on the products we sell to them. . The idea of ”normal trading relations” that treats all other countries equally will be abandoned. Other countries will tax our exports while not imposing tariffs on products from other parts of the world. That would put the US at a disadvantage.
So, in addition to paying more for aluminum and components, Boeing will face a price difference from competitors due to tariffs. U.S.-made aircraft would be subject to tariffs not imposed on Europe’s Airbus, Canada’s Bombardier and Brazil’s Embraer.
Similar adjustments could impact medical devices. Higher prices for chips and other electronic components currently sourced overseas could force some production for customers around the world to move to overseas factories.
Agriculture is an interesting case. Over the past 50 years, the U.S. sector has benefited most from increased global trade freedom. Exports account for a very large portion of total sales. However, agricultural products are “substitutable.” Customers don’t care whether a bushel of soybeans or corn comes from Iowa or Paraná, Brazil. So when Trump imposed tariffs on China when he was president (Joe Biden left them in place), China bought less agricultural products from the United States and more agricultural products from its competitors. But our corn, beans, wheat, and cotton went to importing countries that would buy it from the countries that currently sell to China. Global consumption, quantities, and prices remained largely unchanged.
Much more can be said. Some Americans will benefit from the tariffs, and others will lose. People who are happy to get a job at a new steel mill will also pay higher prices for clothing and household goods. But economic theory and historical experience are very clear. The gain for one person will be less than the loss for another. The U.S. economy as a whole will use resources less efficiently. Therefore, “dead weight loss” occurs. The same could be said of China and the rest of the world.
The question of whether a president can impose such large import taxes on his own is a critical but largely undiscussed question. Constitutionally, the president cannot mandate any taxes, and tariffs are taxes. However, Congress ceded customs authority to the executive branch in some special cases. Trump may be able to use these loopholes to escape bullying.
There’s also the question of how the corporate and financial sector donors who poured millions of dollars into the Trump campaign will view this major upheaval in the global economic snow globe. I think they’ll look suspicious. But whether you like it or not, you get what you pay for. These and other issues must await future consideration.
St. Paul economist and author Edward Lotterman can be reached at stpaul@edlotterman.com.
