Trump's tariffs: both good and bad

Gordon L. Weil

Many years ago, I found myself in the middle of an international war.

As tough as each side was, I was fortunate that the ammunition was not bullets.  It was chickens.

The U.S. was the major supplier of chickens to Europe, but the organization now called the EU or European Union wanted to promote its own production, mainly in Germany.  So, it increased its tariff on imported chickens.  American producers protested, and the government retaliated by raising U.S. tariffs on several products.  The result was the “Chicken War.”

The most important U.S. tariff was placed on trucks with the aim of cutting imports of VW vans.  But trucks from all over the world were affected.  Eventually, tariffs on other items, including chickens, were either dropped or lost importance.  But the tariff on trucks remains, decades later, though some foreign producers learned how to dodge it.

As the sole American on the EU staff, my role was to improve understanding between the U.S. and Europe and help defuse the conflict.  Eventually, EU President Walter Hallstein met with President Lyndon Johnson.  Acting on behalf of the Europeans, I had the unusual opportunity of negotiating with the State Department the joint statement of the two presidents.

The moral of the story is that tariff wars have consequences.  Trucks are probably more expensive in the U.S. today thanks to the surviving tariff and because American producers could raise their prices when faced with less competition from abroad.   The Chicken War was hardly just chicken feed.

President-elect Trump likes tariffs.  He sees them as both a threat and a promise.  He seems reluctant to accept that they drive up prices and are likely to bring retaliation that will reduce U.S. exports.  Because other countries can sometimes sell Americans essential products or have lower costs of production, he claims the U.S. is subsidizing them.

Beyond economics, Trump clearly would use tariffs as an instrument of foreign policy.  If he wants a country to halt the flow of immigrants or drugs or even to increase its own military spending, he uses the tariff threat to force change.  Trump’s surprising style, untethered to tradition, can cause others to take his threats seriously. 

Aside from the impact on exports and imports and on consumer prices, the liberal use of tariffs may bring political and economic change.  Trading partners will look for alternatives and not merely submit.

He threatens both Canada and Mexico with higher tariffs unless they stop illegal immigration.  As a result, they may take action even before he takes office.  But the U.S. depends heavily on Canadian crude oil.  If a 25 percent tariff were added, U.S. refineries and their customers would pay more.  And Canada can redirect some sales to Asia.

Trump may do a lot to boost European unification.  Europe is equal to the U.S. as a market, so it could absorb much of its production that can’t enter the U.S.  Higher world prices created by the Trump tariffs would be an incentive for the Europeans to step up their own production to displace American imports.

The aspect of tariffs that holds promise for Trump is that new federal revenues would be collected at the border.  His assumption must be that imports will not be slowed by higher tariffs, so they could create the income necessary to finance the federal government, which meanwhile would be cutting income taxes.

For the moment, that’s pure theory.  Tariffs drive up prices unless foreign suppliers swallow them.  In practice, imports decline when imported goods cost more. Lower imports may produce lower tariff revenues. The revenue effect is greater when the tariff increase is greater. So, tariffs may not be quite as magical as Trump seems to believe.

Yet good reasons exist for raising some tariffs.  That happens when Americans are willing to pay more for goods through a tax disguised as a tariff to achieve national policy goals. 

If the U.S. is concerned about excessive dependence on imports of essential goods, aiding domestic producers or ensuring worldwide environmental standards, greater tariff protection may make sense.  Labor unions oppose trade deals because jobs may be shipped abroad.  But helping workers comes at a price.

China profits from exploiting its own labor and using its polluting coal to produce low-cost goods for American merchants.  Its gains pay for increased Chinese military spending used to expand its influence, threaten Taiwan and to menace the U.S. and its allies on the seas. 

It makes sense to cut China’s sales to the U.S. to level the playing field and reduce its funds for military expansion.  Customers may willingly be taxed for this effort.

Trump’s tariff threats may sometimes work, but their effect goes well beyond raising consumer prices.  Higher tariffs have both economic and political effects, sometimes long-term and often not obvious.