The president has a plan to make the world pay the US protection money. \u00a0Frances Coppola explains.<\/p>\n
Tariff Man is back. And he\u2019s on a mission. President Trump wants to eliminate the US\u2019s gaping trade deficit. To this end, he has imposed a baseline 10% ad valorem tariff on imports from every country on earth, irrespective of the trade balance; an additional import tariff on countries with a trade surplus vis-\u00e0-vis the US, calculated as their trade surplus divided by their imports from the US, subject to the 10% tariff floor; and specific tariffs on certain products, such as cars, on which he has imposed a blanket 25% ad valorem import tariff.<\/p>\n
This adds up to the most draconian set of import restrictions since the Smoot-Hawley tariffs of 1930. Perhaps more importantly, it is also the most enormous tax hike on American consumers and producers in US history. But underlying it is a radical dream. Mr. Trump wants to reshape the global economic landscape \u2013 and he believes tariffs are the way to bring this about.<\/p>\n
Import tariffs are taxes on imports. Mr. Trump has talked about replacing income tax with tariffs, saying that instead of taxing Americans, his administration will tax foreigners. But foreigners don\u2019t pay import tariffs. Import tariffs are initially paid by domestic importers, which are of course American businesses. Who eventually pays depends on the extent to which importers can pass the costs on to suppliers and customers. If customers are not particularly price-sensitive \u2013 for example, if the goods are luxury goods, or essential goods for which there are few domestic substitutes \u2013 importers may be able to pass the entire tariff on to customers.<\/p>\n
Suppliers might export elsewhere instead of cutting their prices to absorb the tariffs. So importers may have to eat their margins.<\/p><\/blockquote>\n
Realistically, though, there\u2019s some elasticity in demand for most goods, so importers are unlikely to be able to pass on the entire cost. And suppliers might export elsewhere instead of cutting their prices to absorb the tariffs. So importers may have to eat their margins. This would mean lower returns to shareholders and smaller wage rises for employees. Some importers might lay off staff. Some might even go out of business.<\/p>\n
Clearly, tariffs are both inflationary and deflationary. Inflationary, to the extent that they can be passed on to end customers; deflationary, to the extent that they cause importers to eat their margins.<\/p>\n
The chairman of the Federal Reserve, Jay Powell, has indicated that the Fed will respond to rising inflation. But the Fed has a dual mandate. It must also respond to rising unemployment. If the margin-eating causes growth to slump and unemployment to rise, the Fed will be under pressure to cut interest rates despite rising inflation. The phenomenon known as \u201cstagflation\u201d, last seen in the 1970s, is looming on the horizon \u2013 and the Fed is facing a double bind.<\/p>\n
If he goes ahead, then these tariffs will be the biggest wealth transfer from ordinary Americans to the rich since the 19th century.<\/p><\/blockquote>\n
Mr. Trump might help the Fed by doing some fiscal stimulus. He\u2019s talking about tax cuts – for the rich. If he goes ahead, then these tariffs will be the biggest wealth transfer from ordinary Americans to the rich since the 19th<\/sup> century. But he\u2019s playing a long game. Although American importers and consumers will feel pain in the short-term, Mr. Trump expects that the combination of high import tariffs with tax cuts and deregulation will benefit American businesses, leading to more and better jobs for American workers and lower prices for American consumers.<\/p>\n
Hard-working Americans are not Mr. Trump\u2019s target. His tariffs aim to force the countries that he believes have been ripping off the US by running persistent trade surpluses to change their ways. He wants not merely to close the US\u2019s aggregate trade deficit, but all its bilateral trade deficits, including those with the poorest countries on earth. In future, everyone must buy from the US at least as much in US dollar terms as they sell to it.<\/p>\n
And it doesn\u2019t end there. Mr. Trump wants every country to pay a levy for the privilege of trading with the US, or \u2013 since his tariff list includes countries that don\u2019t trade with the US, or even with anywhere at all \u2013 simply for the privilege of existing. Tribute, we might call it. That\u2019s what the 10% baseline tariff is.<\/p>\n
Mr. Trump has no intention of shifting on this. He thinks he has already been generous enough \u2013 after all, it\u2019s only 10%.<\/p><\/blockquote>\n
Those who think this can be negotiated down are deluding themselves. Mr. Trump has no intention of shifting on this. He thinks he has already been generous enough \u2013 after all, it\u2019s only 10%. He\u2019s keen for countries to negotiate, but they need to understand that the purpose of negotiations is to stop him from raising it.\u00a0<\/p>\n