Will Trump's proposed tariffs be negative for Americans?

Peterson Institute says yes; that answer is too simplistic

The Peterson Institute for International Economics, a non-partisan group, published an estimate of the cost to American consumers of the 10% across-the-board tariff increase proposed by Trump and found the cost to each American household of several hundred dollars per year. The study is classical for modern economic analyses - oversimplified, effectively partisan despite claims of objectivity, and palpably wrong.

The study assumes the full price of tariffs is paid for by American consumers and has no effect on the prices exporters to the U.S. charge for their goods. That assumption implies consumers will just merrily pay more for the same goods, a denial of the laws of supply and demand, and that the exporting firms trying to sell into the U.S. market will not attempt to meet competition by lowering their prices by enough to offset the tariff or at least a portion of it. That is nonsense. If the American consumers were willing to pay 10% more for the imported items as implied, the exporters to the U.S. market would already be charging more.

Competition is ignored in the study, which also assumes the American competitors just pocket higher prices, calling the tariff an effective subsidy. But American suppliers don’t just compete with those foreign companies selling into the American market, they also compete with one another. The companies who try to hold prices higher than needed to earn their target return will find their domestic competitors will eat their lunch.

Higher tariffs more likely result in lower imports and little change in the price American consumers are willing to pay for the goods they need. It is interesting to see a non-partisan group of economists saying a subsidy of domestic manufacturers is bad for consumers, while lauding the massive subsidies the Biden administration has piled on so-called “green” suppliers of domestic producers of wind and solar farms, electric vehicles and semi-conductors. Domestic subsidies at least in theory give domestic suppliers more ammunition to compete with imports and are devoid of benefit if they don’t.

U.S. imports run about $3.3 trillion annually, and an across the board 10% tariff would raise $330 billion if the volume of imports did not change, the landed price of the imports subject to the tariff did not change, and there were no competitive response. None of those are likely outcomes. A better guess (and most economists would privately agree economics is at best a guess) is somewhere in between and the tariff itself would raise government revenue by somewhere around $150 billion annually as the volume of imports fell. At the same time, American suppliers would fill the gap in demand and enjoy an increase in revenue of about $1.5 trillion. On average, American industry earns somewhere around 5% net income to sales after paying taxes of 28%. Profit of American corporations is likely to rise under the tariff wall, not owing to higher prices but owing to greater demand. In round numbers, $1.5 trillion added revenue implies $75 billion increased profits after paying an incremental $29 billion in corporate taxes.

There is little doubt the proposed tariffs would add to inflation in the first year, but since they would be part and parcel of the costs of doing business in subsequent years, they do not compound. The impact on consumers in aggregate would be materially less than Peterson estimates. Increased prices of $150 billion across 340 million Americans amounts to about $440 per person. Domestic jobs increasing to support higher domestic output of $1.5 trillion. Average revenue per employee in the United States varies by industry but seems to average about $1,000,000 and the increased demand will create about 1.5 million new jobs. Each of those workers pays an average of about $17,000 annually in taxes. That comprises another $25 billion into federal coffers.

Trump’s across the board tariff plan is going to upset globalists, upset international trade norms, and possibly lead to opposing tariffs by companies that import from United States. Those are the real negatives and hard to estimate.

But taken on their own and using the same methodology as Peterson adjusted to reality, Trump’s tariff proposal should add over $200 billion to federal revenue, reduce unemployment by a measurable amount, and have a salutary effect on corporate profits, at least until trading partners react in kind.

Economist David Ricardo years ago demonstrated that free trade benefits all parties, and tariff wars are like all wars, destructive to the opposing parties. But Trump is right that in a trade war, the American economy will be the winner. I think a trade war will hurt the world economy and benefit the U.S. economy. Tariffs should not be dismissed out of hand by the next Administration.

If tariffs were as damaging as Peterson argues, no Administration should have ever applied them - not across the board, not targeted, and not at all. The reason they do exist is because they do work and anti-dumping tariffs are critical to protect domestic industries from unfair competition. The only question that one should apply to the Trump tariff proposal is whether Asian exporters benefitting from the massive American economy’s demand are in effect “dumping”. I don’t think Peterson addresses that issue effectively.