Tariff Madness - Rob Horowitz

Tariff Madness - Rob Horowitz

The announcement of the full brackets for the men’s and women’s NCAA championship basketball tournaments on Sunday, signaled the beginning of March Madness, which provides enjoyment for even casual sports fans each year.  This March, unfortunately, we also have a different and economically destructive kind of madness playing out: President Trump’s tariff madness.

 

Tariffs are not a form of mystical economic magic that will do wonders for the American economy. Contrary to President Trump’s repeatedly false claims, the nation that is exporting products to the United States does not pay the tariff; the American importer does. The costs are then passed along to the American consumer in the form of higher prices.  

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In other words, tariffs are essentially a national sales tax: just the full implementation of a portion of Trump’s announced tariffs, the 25% tariff on Mexico and Canada and the 10% tariff on China will directly cost the average American $1,200 a year, according to the Petersen Institute of International Economics. This is before you get to the indirect costs, such as other companies who are not impacted by the tariffs raising their prices as well because they can and still remain competitive on cost. 

 

The high and broad tariffs Mr. Trump continues to proudly proclaim are also inflationary. Additionally, our trading partners are beginning to respond with tough retaliatory tariffs that will cut into American exports, creating a negative drag on our economy.

 

The far less sweeping tariff regimen that the president put in place during his first term resulted in a .13% decrease in GDP and a net revenue loss to the US economy of $25 billion in the years 2018 and 2019 alone, according to the Quarterly Journal of Economics. In Trump’s first term, except for the tariffs on imported steel, “U.S. consumers have borne the entire incidence of U.S. tariffs,” documented the Quarterly Journal of Economics.

 

Adding to the economic harm resulting from the sweeping nature of Mr. Trump’s second term tariffs is their erratic, start and stop implementation.  This is creating a high level of uncertainty, dampening business investment, and contributing to a significant downturn in the stock market.  

 

The several different iterations of the truly dumb tariffs on Canada and Mexico, for instance, with a series of shifting monthly deadlines for final implementation are contributing to a worldwide crisis of confidence in President Trump’s ability to manage the American economy.  The across-the-board 25% tariffs violate the United States-Mexico-Canada Trade Agreement (USMCA), which was a signature accomplishment of the 1st Trump Administration, contributing to job creation and economic growth in all three nations. The recent reportedly temporary adjustment to exempt goods covered by that agreement still violates its spirit.

 

Mr. Trump’s repeated attacks on Canada and his multiple and shifting reasons justifying the tariffs on that nation are particularly head-scratching.  Since less than 1% of the fentanyl that enters the United States comes in over the Canadian border, that is little more than an excuse to provide a still questionable legal justification for the tariff.  More to the point, Trump’s continuing to talk about a $200 billion subsidy we provide Canada that doesn’t exist and saying that our relationship with Canada “only works" if it is our 51st state is not only dishonest and juvenile: it has served to unify the Canadian people and its political leaders in fighting back against the tariffs fiercely, taking American products off their shelves and announcing a 25% tariff on a subset of American goods that will continue to expand, depending on American actions.

 

It is the case that there is a cogent argument for the limited and targeted use of tariffs to protect and build up strategically important domestic industries.  Mr. Trump’s sloppy, erratic and indiscriminate approach to tariffs, however, are already causing significant harm to what at least in macro-terms was the solid economy he inherited. 

 

This is not a president who has ever demonstrated much learning behavior. But one can hope that the series of recent national polls, giving him poor marks on his economic performance, the precipitous drop in the stock market and the mounting push back from business leaders will bring about a course correction.