Trump’s Economic Fantasies
| Jay R. Mandle The New York Times describes Donald Trump’s economic proposals as “Tariffs, Taxes…and Musk.” Each of these, if adopted, would be economically damaging to the country. On the one hand, he seeks a massive reduction in corporate taxes, a reduction that would exacerbate this country’s already very high level of income inequality. He also wants Elon Musk to head a commission that would cut federal spending by “trillions of dollars.” Trump is either indifferent or unaware that cutbacks of this magnitude would result in dramatically reduced output as well as depression-levels of unemployment. The third component of Trump’s plan – raising tariffs – would, like his other proposals, be detrimental. But in addition, his promotion of tariffs allows us to see just how little Trump knows about how an economy actually functions. What he has to say about tariffs is totally bogus and constantly reveals his ignorance. At an August campaign stop in Wilkes-Barre Pennsylvania for example, he told his audience that “a tariff is a tax on a foreign country… A lot of people like to say it’s a tax on us. No…it’s a tax that does not affect our country.” Later in Wisconsin he elaborated, “it’s not a tax on the middle class…it’s not going to be a cost to you, it’s going to be a cost to another country.” All of this is simply wrong. Tariffs are not taxes on a foreign country. On the contrary, tariffs are paid by importing businesses when those firms purchase products from another country. To be clear: tariffs imposed by the United States government are paid by United States companies – not either by the government or the people of the country from which imported products come. As a CNN report on the subject correctly put it, “When the US puts a tariff on an imported good, the cost of the tariff usually comes directly out of the bank account of an American buyer.” When a tariff is imposed by the American government, it is the US importers who incur the additional costs. Facing those additional costs, those businesses have two options. Both give the lie to Trump’s claim that tariffs do not result in economic damage to American business or to consumers in this country. One such option is for US importing firms to raise their prices when selling imported goods. In this way, importers can try to ensure that their sale of the product remains profitable, despite the increased cost to the firm caused by the tariff. This option is particularly attractive for big firms that face few competitors. Big businesses can anticipate that, even when they raise their prices in response to tariffs, their loss of customers will be minimal. Contrary to Donald Trump’s imagination, in this scenario it is American consumers who are harmed by being forced to pay higher prices for imported goods. A second option in response to tariffs is for importing businesses to absorb the increased costs themselves. Faced with many competitors, small importers are likely to be reluctant to raise prices, concerned that doing so would result in a damaging loss in sales. But that puts those businesses themselves at risk. Without the option of raising their prices in response to tariffs, those firms would encounter declining profits. The very survival of those small importing businesses is threatened as rising costs bump against stable prices. Empirical studies by researchers on the impact of tariffs are all but unanimous in confirming these negative outcomes. Tariffs both raise consumer prices and damage small importers. Trump could not be more wrong. The fact is that tariffs do create negative economic consequences for the country that imposes them. But this is not to say that tariffs should never be employed. There are cases in which their use is justified, despite the harm that they inflict. For example, the use of tariffs can be an important part of an industrial policy whose goal is to achieve economic transformation. This has been the case in the development of the South Korean automobile industry. There, the government helped to create the emergence of a world-class automobile industry. In pursuing that goal, it provided financial resources and incentives to its fledgling car industry. But more was needed. Before Korean firms could compete successfully in global markets, they needed the time to learn how to produce high quality automobiles at reasonable prices. To give them that time, the Korean government raised tariffs on automobile imports. With those tariffs, the price of imported cars to Korea increased and their sales declined. This allowed Korean producers to benefit by selling their cars in the domestic market. As they did so, they moved up the learning curve. When ultimately Korean manufacturers attained world-class production and marketing status, the justification for continued tariffs disappeared. Korean tariffs on automobile imports were largely dismantled in 2007. Needless to say, Donald Trump’s advocacy of tariffs has nothing to do with the goal of promoting economic development. Instead, his fantasies about foreign countries paying for US tariffs exposes his dangerous economic illiteracy. ABOUT THE AUTHOR Jay Mandle is the Emerita W. Bradford Wiley Professor of Economics, Emeritus,at Colgate University. His many books include Change Elections to Change America: Democracy Matters Students In Action, and Creating Political Equality: Elections As a Public Good,. Mandle’s regular monthly editorials, Money On My Mind, appear on the Democracy Matters website, and explore the role of private money in politics and other critical social issues. The views expressed in Money On My Mind are those of the author, (not necessarily those of Democracy Matters, and are meant to stimulate discussio |