Trump’s super-tariff is dangerously simple

Trade disunion. Earlier this year, libertarian think tank the Cato Institute surveyed Americans to see if they thought tariffs on imported blue jeans would be a good idea. Six out of 10 said yes. The pollsters then asked if respondents would pay $10 extra as a result of those tariffs; seven out of 10 said no. The takeaway: voters like the idea of taxing foreign goods, but not the likely consequences.

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

Trump, though, has the punchiest approach, as befits a multi-decade fan of trade levies. He has proposed a tariff of 10-20% on all imported goods, and a 60% charge on Chinese products. This will not cause prices to go up, he argues. The simplicity of this claim might be appealing to many voters, judging by their view on a theoretical jeans levy. The reality would be more complex, and mostly bad for American households. The best hope is that this unwise idea on how to increase U.S. prosperity leads to some 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 straightforward in its conception. It could be reasonably easy to invoke too, with a bit of sophistry. Trump might, for example, declare the trade deficit to be a national menace that justifies emergency measures. President Richard Nixon introduced a 10% tariff on all imports in 1971, spooked by imports growing much faster than exports. Its legality is still unclear, but that didn’t stop it happening.

If the goal is to hurt trade partners, tariffs work. It’s not that the foreign countries themselves pay the tariffs. But the resulting rise in overall prices ought to reduce the demand for foreign goods, which does inflict pain on their makers. In China’s case, a 60% tariff would halve GDP growth to 2.5%, according to analysts at UBS, due to a fall in exports and the resulting hit to consumption and investment.

One major flaw is that tariffs inflict self-harm too, because consumers pay more. And since falling demand for imports tends to push up the value of a currency, exporters also find their goods have become more expensive to foreign buyers, which dampens demand. With a 20% universal tariff and 60% on Chinese goods, over 1 million U.S. jobs would be eliminated, according to calculations by Erica York at the Tax Foundation.

Any increase in the currency would also hurt U.S. investors who hold foreign assets, since their investments would now be worth less in dollars. Anyone who had lent to a foreign company in dollars would need to worry about their counterparty being less able to pay the loan back. Roughly half of the assets owned by the world’s biggest 100 multinationals, which include U.S. firms like Exxon Mobil, Apple and Pfizer, are held abroad, according to United Nations Trade and Development.

The bigger problem is that voters don’t much care about these counterarguments, because they’re mostly just an abstraction, which means there’s little to stop tariffs from becoming reality. Over one-third of Americans believed in 2022 that trade was a threat rather than an opportunity, according to Gallup. Despite voluminous evidence that the cost of tariffs Trump imposed between 2018 and 2020 was borne by U.S. companies and consumers, Biden’s willingness to prolong them reflects the fact that speaking up for free trade isn’t much of a vote-winner.

Keep it unsimple

Trump told a gathering of New York plutocrats on Thursday that tariffs had made life for Americans “sweeter and brighter,” quoting 19th century protectionist President William McKinley. But if the theory is that tariffs will nurture homegrown industries and attract investment into the United States – rather than simply punish foreign countries while hurting Americans too – there’s little evidence they will succeed. If the goal is to get more productive assets to move onshore, whichever party runs the country in 2025 could dust off other ideas.

One idea that deserves a rethink is the unwieldy-sounding “destination-based cash flow tax,” a fiscal tweak aimed at incentivizing exports over imports. This scheme, proposed by senior congressional Republicans like Paul Ryan in 2016, would tax companies based on where consumption takes place, rather than where profits were booked – with tax levied on sales after deducting wages, making it a kind of cross between regular corporate income tax and a value-added tax. That would effectively mean imports are taxed at home, but exports are not.

Taxing companies based on where they sell their wares wouldn’t in itself rebalance trade, but it would give CEOs and their boards more incentive to locate their profit in the United States, and to some extent, the assets that generate it. That advantage could be enhanced by extending a soon-to-expire tax break that lets companies deduct capital expenditure from their taxable income up-front, thus significantly reducing their tax bill right away, rather than spreading it over several years. Moreover, it would make life simpler for businesses by eliminating complex cross-border tax rules, which should attract investment.

Granted, it’s an idea that requires a lot of work. Other countries might see a shift to consumption-based tax as an attempt to turn the United States into an enormous tax haven and slap retaliatory tariffs on U.S. goods – just as they certainly would if the country imposed a 20% surcharge on all goods coming from abroad. It’s also somewhat complicated to explain to voters. Companies that currently import lots of supplies, like Walmart or Target, would have good reason to fight against it.

But simplicity is not always a virtue. Trump’s super-tariff idea, easy to explain but potentially chaotic and destructive if implemented, shows that. Better to tackle new ideas that make the United States a more appealing investment destination than sleepwalk into an economic hole.