Trade Cases

Leibowitz: Trump's 10% threat and its potential impact

Written by Lewis Leibowitz

Trade is not the major focus of the campaigns for the 2024 elections, either at the presidential or congressional level. But it is there as a live issue for business.

And last August, former President Trump suggested a 10% tariff on virtually all imports as a “ring around the collar” of the US economy. The imports that might be exempt are still in development. Could such products as semi-finished steel and primary aluminum be among them?

Whatever might happen, tariffs remain taxes – so this proposal would increase federal taxes by about $300 billion per year. That’s because in 2022 and 2023, US imports totaled more than $3 trillion.

At the same time, the once and perhaps future president would extend the 2017 tax cuts, which expire in 2025. So, the net result would be a shift in tax burdens from income earners to consumers. Unlike the progressive income tax, which increases rates as incomes rise, the tariffs would be regressive. Like state sales taxes, the rate would not change with the income level of the payer. Like most tariffs, this new one would operate as “Robin Hood in reverse.”

There have been several analyses of the 10% plan by economists, and most of the reviews are not positive. The “welfare” loss to the US economy would be significant, especially if one assumes that our trading partners would retaliate against US exports at the same 10% level. Reasonably reliable economic models (including one from the American Action Forum) set the welfare loss from these proposed tariffs at about 0.3% of total US output (GDP), or a bit over $62 billion per year.

The real game here is not economic development, but politics. Who in the economy would feel better, and who would feel worse? In the Trump analysis, the same people who felt good in 2018 would feel good again. (Recall that Section 301 tariffs on Chinese goods and Section 232 tariffs on steel and aluminum went into place in 2018.)

There might be more workers who felt better with a broader tariff. But at 10%, the number of jobs saved would be small. Still, workers in declining industries – who largely blame their decline on foreign, “unfair” trading – would appreciate the government’s thumb on the scales in their favor.

Other countries would likely do the same thing and would get similar appreciation from their constituents. Based on that consideration, the universal 10% tariff might be one of several new trade-related measures that Trump would pursue should he be elected in November.

The tariff rate quotas (and the absolute quotas on steel and aluminum from South Korea and Brazil) have similar effects on the US economy. The difference: the benefits of exclusions from tariffs benefit Americans, while the economic benefits from quotas go to foreign exporters (and producers) of those artificially scarce products.

Voters naturally feel good about people who cater to them and their desires. But many voters also support leaders who take them where they didn’t know they wanted to go.

In that latter sense, President Franklin D. Roosevelt was a good leader. He played a bit on the failures of the monied class that led to the Great Depression. And later, with the start of the Second World War, he played to the fears of isolationists (“Your boys are not going to be sent into any foreign wars,” the president said at a 1940 campaign speech in Boston.). But in both cases, he pursued policies that took the country to a different place, because he felt—he knew—that was necessary.

President Biden and his Cabinet have, predictably, criticized the Trump proposal as bad for American consumers. And it clearly would hurt more people than it would help. Most economists agree with Biden and disagree with Trump. The negative effects of the tariffs on Chinese goods as well as the steel and aluminum tariffs have not affected the public as much as was predicted. But they still resulted in a net loss to the economy. However, the relatively few people who benefited felt that the measures were just, because they had been harmed by trade.

For workers in declining industries (textiles, steel, and aluminum are examples), tariffs delay the inevitable. But the decline will continue. Since the 1980s, steel industry employment has declined about 80%. Aluminum industry employment has declined more. Technology and attendant productivity improvements, not unfair trade, account for almost all of that decline.

The answer for workers in those industries over the long run is to retrain and rely on free enterprise to maintain a vibrant and dynamic economy that will offer new opportunities. Elizabeth Zott said in Lessons in Chemistry, a novel and now an Apple TV series, “The only constant variable in a chemical reaction is change—the unexpected.” That holds true for successful economies too.

Unfortunately, that idea does little to convince a voter to support a candidate in this year’s election. Politics and good economic policy are to that degree locked in conflict.

One issue about the Trump proposal that has been little discussed is this: How will the 10% tariff be accomplished? Tariffs are taxes, and Congress normally passes legislation. Whether a newly elected President Trump could push a new tariff though Congress is doubtful. Would he try to use Section 232 or Section 301 to accomplish it?

These statutes are not conducive to a general tariff that applies to allies as well as to adversaries. A general tariff does not address a threat to national security by increasing imports of “an article” of commerce. Nor do it address specific acts or practices that could be addressed in a Section 301 investigation. But we will need to wait and see how the new administration, if it takes office, might proceed.

Lewis Leibowitz, SMU Contributor

Lewis Leibowitz

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