Trump's Tariffs are Good Politics but Bad Economics
Is Good Politics more important than Bad Economics?
Tariffs have been the core measure of Donald Trump’s economic policy during the campaign trail. Prior to becoming the forty-seventh President of the United States, Donald Trump vowed to impose tariffs on all imported goods as a measure to protect domestic manufacturers and benefit domestic consumers. While this policy may seem great on paper, I have a strong contention with it because it will have nefarious consequences on domestic consumers and on the U.S. economy in general.
Most conservatives agree with this policy. Their agreement with this policy, however, is not based on sound economic reasoning but rather on political reasoning. Indeed, many of them have bashed me for criticizing this policy as they strongly believe that Trump’s tariffs are good for the country. Their major argument rests on the fact that this measure will protect domestic producers, which is a form of patriotism as Trump’s political trademark has always been “America First”—prioritizing the needs of Americans over those of America’s allies and the rest of the world. Hence, conservatives see tariffs as protecting America’s national interest against China, which has become America’s main economic rival since the demise of the Soviet Union. Such a reasoning is clearly political, not economic.
Sound economic reasoning would reject tariffs, however, as the solution to stimulate economic growth. That’s because a tariff is a tax imposed on imported goods that makes goods and services less affordable for domestic consumers. For example, in 2018, when Donald Trump was president, he imposed tariffs on imported washing machines and dryers. Eight months after this tax policy was enforced, prices increased significantly, especially for dryers. During President Trump’s first term, tariffs cost a decline of 0.2% GPD, a decline of 0.1% of capital stock, and a loss of 142,000 jobs to the U.S. economy even though the economy performed rather well under his presidency, overall.
In fact, I believe it is important to make a precision about the success of Trump’s economic policies prior to the pandemic. Tariffs did certainly not contribute to the success of Trump’s economic policies pre-Covid. The bulk of the success of his economic policies was the series of deregulations and tax cuts he implemented.
What those who support tariffs fail to understand is that they assume that domestic producers won’t change their prices but they do. Tariffs can raise the cost of parts and materials, which would raise the price of goods using those inputs and reduce private sector output. This would result in lower incomes for both owners of capital and workers. They increase their price because it becomes costlier to produce them domestically. Thus, domestic producers factor this increase in the cost of production into wholesale prices as a way to make profit and recoup their investment, and the consumer now has to purchase these goods at a higher retail price.
Major retailers such as Walmart have already warned the general public that prices will increase as a result of Trump’s forthcoming tariffs. As a matter of fact, the Tax Foundation conducted a study showing the impact of Trump’s new tariffs on the economy. U.S. GDP is expected to shrink by 0.8%, capital stock is expected to also shrink by 0.7%, pre-tax wages will remain stable while the labor force is expected to incur a loss of 684,000 jobs.
Trump’s tariffs show us that good politics is bad economics. Indeed, these tariffs may be politically sound as they reinforce the conservative grip on nationalism and patriotism, but they present a recipe for economic decline. If the goal is to create economic growth and make life more affordable for consumers, then tariffs are certainly not the way to achieve such an outcome. Free trade has always been the way to strengthen a country’s trade policy.