The reelection of Donald Trump as U.S. president has returned several ideas and initiatives to the front lines of U.S. political and economic policies. The president-elect and his allies have promised massive deportation of illegal immigrants, an assault on the federal bureaucracy, and an almost-immediate end to the conflicts in Ukraine and the Middle East.
From a China-U.S. perspective, the most important issue is Trump's pledge to slap high tariffs on Chinese imports to the United States. This serves as red meat to Trump's nationalist base, but the secondary consequences of such a policy will likely haunt both the new administration and the pocketbooks of ordinary Americans. Protectionism, the president-elect's favorite and most public economic policy, is largely a shell game where gains and losses are offset or reshuffled to give the impression of prosperity and productivity.
An analysis of international trade by the Census Bureau estimated the U.S. import of goods totaled $3.1 trillion in 2023, up from $2.3 trillion in 2017. During his first term, Trump imposed tariffs on Chinese goods, but the percentage of imports from China remained steady. On reflection, two factors should be underlined.
First, Americans' demand for lower-priced foreign goods has remained consistent, especially as inflation has eroded the value of the dollar. Second, many companies have moved production to other manufacturing centers, such as Mexico, Vietnam, Taiwan, and Malaysia. One recent report points out that:
Last year, products coming from China made up 14% of all imported goods, the lowest share in nearly two decades. However, many of the goods arriving from factories in Mexico and Vietnam still include components that originate in China.
Similarly, in 2023, smartphone imports from India, South Korea, and Vietnam increased 23 percent over the previous six years. Laptop and tablet imports from these sources likewise increased.
Many goods, including toys, sports equipment, and nearly 70 percent of lithium-ion batteries and videogame consoles remain sourced from China. A desire to curb both Americans' demand for lower-priced imports and the consistent inflow of Chinese goods has remained at the forefront of the incoming administration's political-economic agenda. This may underpin Trump's rationale for imposing additional tariffs on China as well as 25 percent tariffs on Mexico and Canada, the top two U.S. trading partners. This is especially concerning given that, according to the U.S. Department of Agriculture, Mexico accounted for 69% of vegetable imports and 51% percent of fresh fruit imports to the United States in 2022.
Behind Trump's pledge to reduce the tax burden on average Americans by imposing tariffs is a disingenuous sleight of hand. Tariffs, to put it bluntly, are a tax on American consumers. Taxes on foreign goods will inevitably increase their prices, so the consumer pays. And domestic producers of the same goods can increase prices to match those of imports, and again, the consumer will pay.
Trump's political ally Elon Musk no doubt favors tariffs on Chinese electric vehicles. A 60 or 100 percent tariff on Chinese EVs would effectively crush his competition. The income from the tariffs might even serve to fund further subsidies to companies like Tesla. But again, American consumers will pay the bill.
As with higher taxes, those with greater wealth will have an easier time absorbing the cost. The poor and the middle class will feel the effect of the tariffs more.
Protectionism is sold on the premise that it will increase domestic production and employment by shutting out foreign competitors. Unfortunately, while this may be true for some producers in the short run, there are negative secondary consequences. For instance, the approach makes imports more expensive to both consumers and domestic producers who use imports as inputs. In fact, the same manufacturers who stand to benefit from tariffs may find their own costs climbing, as most rely on the international division of labor to supply their inputs. This is one effect of declaring a trade war on the whole world: it becomes harder for buyers of foreign inputs to compete.
In 2002, for example, the Bush administration placed tariffs on steel imports, which increased domestic steel prices by an estimated 30 percent. Domestic producers did initially increase output and employment. However, consumers of steel, such as truck, automobile, and heavy appliance manufacturers, faced higher costs to produce these goods. As a result, they found it harder to compete with lower cost producers abroad, which forced some to lay off employees.
Additionally, because foreign producers will likely sell fewer goods in the U.S. if faced with new tariffs (as foreign steel manufacturers did in 2002), they will have fewer dollars with which to buy American goods, causing American exports to fall.
Trump essentially sees tariffs as a source of income for the federal government and a way to fight inflation. Inflation, however, is caused by the artificial expansion of the money supply to support deficit spending. Despite promising to reduce the national debt, Trump's first administration increased deficit spending exponentially—and not only due to the pandemic. A 2021 report from ProPublica estimated that:
The national debt has risen by almost $7.8 trillion during Trump's time in office. That's nearly twice as much as what Americans owe on student loans, car loans, credit cards and every other type of debt other than mortgages, combined, according to data from the Federal Reserve Bank of New York. It amounts to about $23,500 in new federal debt for every person in the country.
ProPublica also reported that while some tariffs were used to offset tax cuts and other policies Trump had pledged to carry out, they brought other negative consequences as well:
The tariffs did bring in additional revenue. In fiscal 2019, they netted about $71 billion, up about $36 billion from President Barack Obama's last year in office. But although $36 billion is a lot of money, it's less than 1/750th of the national debt. That $36 billion could have covered a bit more than three weeks of interest on the national debt—that is, had Trump not unilaterally decided to send a chunk of the tariff revenue to farmers affected by his trade wars. Businesses that struggled as a result of the tariffs also paid fewer taxes, offsetting some of the increased tariff revenue.
Having to subsidize farmers and other producers to offset trade war consequences is another example of Trump's sleight-of-hand economics, through which costs are merely transferred or reshuffled from one set of producers and consumers to another. The tariffs paid by consumers were used to compensate the farmers and other producers affected by reciprocal trade barriers. This is the shell game played by advocates of protectionism and tariffs.
It may prove impossible to curtail Trump's promises to build a tariff wall around the U.S., but the inevitable negative consequences of such policies will descend on American producers and consumers as surely as water runs downhill.
