With President Trump’s return to office after the Biden interregnum, we can be sure of one thing: tariffs are going to be a major part of his policy. He has touted tariffs as revenue generators, as ways to bring back manufacturing, and as negotiating tactics. The trouble is that all of these are in tension with each other, and none are particularly effective at what they purport to do. Indeed, their likely failure will result in harm to the people Trump claims to care for the most — working-class families.
It has become commonplace among tariff supporters to point out that the US government used tariffs as its main source of revenue in the nineteenth century, implying that we would do well to replicate that model and perhaps even abolish the income tax. The latter ideas are fanciful, but even regarding the amount of revenue that could be raised from tariffs, the idea that tariffs will be a significant source of revenue is inaccurate. As the Tax Foundation explains in its detailed analysis of the revenue effects of the Trump tariff proposals, a 10 percent universal tariff will raise $2.7 trillion in customs revenue and a 20 percent tariff will generate $4.5 trillion over a 10 year period (2025 to 2035.) Income taxes, by contrast, contribute $2.2 trillion annually.
This is why the idea that tariffs could replace income taxes is fanciful. The spending cuts required would be wonderful to see, as any free-market economist will tell you, but in a political reality where getting any spending cuts at all is more painful than pulling teeth without anesthetic, it requires purely wishful thinking to imagine them happening.
But even those revenue figures for tariffs miss the mark. Because the costs of tariffs are ultimately borne by American consumers (a point tariff supporters seem unable to grasp), they reduce income and therefore spending, which means fewer imports, which means less tariff revenue. After accounting for this, revenues fall to $1.7 trillion and $2.8 trillion for the lower and higher rates respectively. The higher rate has a greater effect and therefore a larger reduction in revenue.
Nor do tariffs occur in a vacuum. Countries generally respond to higher tariffs with retaliatory tariffs on American exports. These, too, would reduce consumer income and therefore tariff revenues, knocking those figures down by around $190 billion over the decade.
Because tariffs are ultimately paid by consumers, it is worth considering which households bear the brunt of those costs. Research has repeatedly found that because lower-income households typically spend a larger share of their income on tradable goods (such as everyday household items) than higher-income households, those poorer households end up bearing a disproportionately large share of the cost increases. In other words, the tariffs hurt the working class household more. As revenue generators go, tariffs are regressive.
Moreover, as suggested above, revenue is not the only purpose attributed by their supporters to raising tariffs. Another purpose that is frequently cited is that tariffs will cause industries to re-shore their operations to maintain sales, thus bringing good manufacturing jobs back to the United States and thereby increasing household income.
Yet if this happens, then import revenue will be reduced. If all goods that can be produced in the United States are, then revenue will fall accordingly. Tariffs bringing jobs back and tariffs providing a consistent revenue stream are mutually incompatible.
Moreover, tariffs are at least as much a threat to manufacturing as they are an opportunity. Much that America imports is not finished goods, but inputs, i.e. raw materials and parts, that domestic manufacturing needs to operate efficiently. With tariffs, fewer of these inputs will be imported, or the price of finished goods will go up. With fewer imports, American manufacturing jobs will suffer. With higher prices, American middle class households will see their standard of living fall. Neither is good for the American middle class.
Of course, tariff proponents will say that these duties will cause American industries to onshore supply chains, which means more jobs for Americans. Up to a point, Lord Copper, as Evelyn Waugh would put it. Some things must be sourced offshore as either lack of natural resources or things like American environmental law make them impossible to be sourced domestically. For those things that could be made here, the price differential will have to be addressed. In most cases that means that automation is the best option to keep labor costs down, which means once facilities are constructed, they will have few jobs. And the industrial robots that will staff those factories are mostly made in Japan, Germany, or Switzerland.
The idea that tariffs will bring back jobs and therefore benefit the middle class is one that puts the interests of citizens as producers ahead of the interests of citizens as consumers. Yet while all producers are consumers, not all consumers are producers. Consider that tariff supporters often say that they want wages to be high enough to support a worker and his family – in this case, the housewife is a non-producing consumer, who will be motivated to keep costs low. This was why Margaret Thatcher often pitched her economic reforms directly at the housewife.
This is the problem that Adam Smith recognized as being the main flaw of the mercantilist system when he wrote in Book IV of The Wealth of Nations,
Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer. …. But in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.
In other words, the misconception that economic policy should be focused on producers is not a new idea, but one that resurfaces again and again. Just as with Britain’s corn laws or the Smoot-Hawley tariffs that worsened the Great Depression or what is happening in countless countries like Nigeria, it will be the working class that suffer the most from the imposition of tariffs that are supposed to help them.
Yet what about the other justification – that tariffs are useful tools in negotiations? Once again, a moment’s thought will reveal that this isn’t compatible with the other justifications. If tariffs are just a negotiating tool, they won’t bring in significant revenue and nor will that re-shore massive amounts of industry. Even the respectable academic argument for “optimal tariffs,” which suggests that large countries can drive down the price of imports through tariff policy, puts them in the low single digit range once other factors are accounted for, and they are about lowering import prices, not revenue generation or reshoring.
Those other factors include the fact that the other party in the negotiations is rarely a vassal. They may make countermoves in the negotiation, which might be conciliatory, in which case the threat worked, or might be retaliatory, in which case both sides suffer. Sadly, the history of trade wars proves that retaliatory action is by far the most common. We are still stuck with the “chicken tax” on imported light trucks because of a trade war in the 1960s, where America was the party to retaliate.
The most comprehensive analysis of the effects of American trade restrictions that were aimed at pressuring foreign countries was written back in 1994 just as the real era of open trade was starting. It found that in only 17 percent of cases did America actually achieve its objectives.
This certainly appears to have been the case with the recent rounds of Trump-Biden tariffs.
American export growth slowed in the face of retaliation, which demonstrates that demands for reciprocity are usually heeded in the shape of reciprocal tariffs. This hurts both sides, and, as always, it is the working-class family that suffers the most in terms of reduced income and higher prices.
There are other factors, too. Do we really want to antagonize allies, for instance (although the answer to this appears to be depressingly often yes)? What are the cascading effects on other supply chains? And so on.
All these are why the major nations after the Second World War collectively agreed to stop using tariffs to advance parochial interests. There is a reason why the precursor to the World Trade Organization was called the General Agreement on Tariffs and Trade. Tariffs are self-defeating as a negotiating strategy, despite their attractiveness to politicians in need of an electoral boost.
To sum up, the three arguments for tariffs can only seriously be advanced by someone suffering from advanced cognitive dissonance. They are poor revenue raisers, they cause net harm to manufacturing, and they backfire as negotiating tools. These three objectives are mutually exclusive, and ineffective even when taken individually. A better policy would focus on reducing costs to the consumer.