One of the centerpieces of Trump’s 2024 Presidential campaign was his promise to, once in office, enact a harsh across-the-board tariff against all Chinese imports into the US. As he repeatedly made the case in his campaign appearances, doing so would, on the one hand, restore America’s long-lost industrial base by protecting it against Chinese competition, and, on the other hand, infuse the federal budget with gobs of revenue and thus help drive down the budget deficit. In turn, these two things acting in conjunction would restore to the modern American workers the income and lifestyle enjoyed by their parents and grandparents in the US of yesteryear.
Setting aside the dubious logic of Trump’s political argument, persuasive though it has proven to be, it is useful to examine both the theoretical usage and utility of tariffs in general, and how an aggressive tariff policy viz. China might play out in particular. Because at the end of such an examination, it is clear that either Trump and his backers are openly lying about their end goals, or else they really do not quite know or understand what it is they are doing. In other words, another instance of what I would term the Milyukov Dilemma1.
For starters, what, precisely, is a tariff? Simply put, a tariff is a tax paid on imported goods or services paid to the government by the foreign merchant or producer. It can be fixed, as in a certain amount per one unit of good imported, or calculated as a percentage of the price paid by the domestic consumer. The idea is to thus raise the price of the foreign goods sold domestically, and either render them uncompetitive viz. local alternatives, or else reduce the consumption of a certain type of goods altogether.
Of course, in order for a tariff to attain its stated goals, certain things must prove to be necessarily true:
- The foreign merchants must raise the price to match the tariff, as opposed to absorbing some or all of the cost, or even obtaining a subsidy so to do from their home government.
- All imports of a particular good from all foreign sources must be taxed at comparably high rates, or else the tariff will simply advantage one importer over another.
- To the extent a tariff is intended to protect domestic industry, there must be an extant domestic alternative to compete with the taxed imports, or else a concerted effort to quickly develop and bring to market such an alternative.
- The domestic consumer must not have a preference for a specific foreign manufacturer’s wares, whether due to quality, reputation, or some other superior characteristic viz. a domestic alternative. As well, it helps if consumption of a good is discretionary – as opposed to, say, vital medications, addictive substances, or other types of goods that the consumer would seek even at a much higher price point.
- Smuggling and black market trade in the taxed import must be either eliminated entirely, or else so severely limited as to not prove a significant factor.
As can be readily perceived, a tariff existing by itself is rather less than useful. It must, instead, be paired with a coherent industrial policy as well as other initiatives such as strict imports controls, and even diplomatic pressure to prevent foreign governments from offsetting one’s tariffs via subsidies. And even then there is no guarantee against at least some of the domestic consumers continuing to prefer imported goods irrespective of their higher price point. Furthermore, the most perfectly implemented tariff constitutes no guarantee against retaliatory measures, such as counter-tariffs by foreign governments. In turn, these can hurt domestic producers even more than they might be helped by the original import tax.
All a long way of saying that trade policy is a complicated beast, and one that most certainly does not exist in a vacuum. As well, it is worth stressing that tariffs are, perhaps, one of the less efficient protectionist measures that a government might adopt, as they rely on rather imprecise price manipulation. Far easier, for example, to institute import quotas, limiting the physical availability of imported goods and enabling domestic production to fill the resulting gap in demand, or even passing laws whereby certain items must necessarily be produced domestically. The Merchant Marine Act of 1920, commonly known as the Jones Act, is one longstanding example of the latter, in that it requires that all goods transported between US ports be carried on vessels constructed in the US. The US automotive industry has also historically benefited from a partial import protection, whereby a great majority of new cars sold in the US must be assembled domestically, though individual components can still be imported from overseas.
And now we turn to the proposed tariffs on Chinese imports. The first question is – what will the Chinese do in response? Will the manufacturers simply absorb the tax owing to their much lower labor costs than for their US competitors? Will the Chinese government provide an internal rebate of some kind to at least the most vital, or perhaps the most well-connected, of their exporter firms, so that they could avoid raising prices? Will there be some retaliatory measures, counter-tariffs against certain American imports to China? Will Chinese exporters re-label their goods as having been made elsewhere – or even physically move their manufacturing to other countries to enable such re-labeling?
And speaking of moving manufacturing elsewhere. If the US imposes tariffs only against goods imported from China, would this not essentially give a leg up to producers in other countries – Mexico, Malaysia, Vietnam, whatever – to correspondingly increase their exports to the US? If the point of the anti-China tariffs is to protect American industry, should the US not extend similar tariffs to all imports from all overseas jurisdictions? Otherwise, the US would essentially be giving a preference to non-Chinese imports, which would certainly have a negative impact on China’s economy – and, perhaps, that is the real purpose of the anti-China tariffs – but would hardly stimulate domestic industrial development.
Will some Chinese exporters simply pass the tariff through to US consumers and businesses via higher prices? This is what neoclassical economics suggests ought to happen, and moreover, this is what is likely to happen in areas where there are no readily available substitutes, whether domestic or foreign. For example, a majority of rare earths utilized in the US have for many years been imported from China, and unless America is prepared to invest billions of dollars into developing alternative sources, any tax on these imports will ultimately just be “eaten” by US businesses and US consumers.
Would a tariff really spur America’s re-industrialization? Its de-industrialization was a decades-long process that not only drastically altered the logistics of production chains, but also reset both consumer prices and corporate profits to correspond to much lower production and labor costs outside the US. And in the interim, much of the human capital in the form of both skilled industrial workers and, just as importantly, production and design engineers, were essentially permitted to die off. Who would make the enormous investments in physically reconstructing the factories that had long ago been shipped to Mexico or, yes, to China? Who would make the concomitant investments to train the staff for these facilities? Then there is the question of production costs, which would automatically be much higher in the US than overseas due to, among other things, higher worker salaries, thus necessitating higher consumer prices. As not all Americans would immediately obtain high-paying manufacturing jobs to match this price inflation, how would the rest of the economy perform during this “catch-up” phase, and who, if anyone, would step in to manage the process?
Certainly we cannot expect individual firms to do any of this, at least not on a significant enough scale. Nor is the US government at present showing any signs of being able to forcefully manage any kind of a broad industrial policy, not the least as the country’s economic elites do not wish for any type of a forceful government lest it decides to curtail their profit-making in some way. To wit, this is the government that, after several years of the proxy war in Ukraine, is still somehow not managing to increase artillery shell production to even begin to match that of Russia, never mind the disparity in the two countries’ GDP even when measured on a PPP-adjusted basis. How can we expect this government to suddenly shift to implementing Keynesian “New New Deal” kind of policies, as would be required by any meaningful re-industrialization?
Finally, there is the question of whether an anti-China tariff would have any substantive effect on the US federal budget deficit. Specifically, if the tariff really were effective in reducing Chinese imports, whether due to substitution from other importers or increased sales of domestic alternatives, then this would also limit the tax revenues raised. In the extreme case, if all Chinese imports were stopped, then the resulting tariff revenue would be zero. To be sure, a hypothetical domestic re-industrialization should eventually produce increases in domestic corporate and personal income tax revenues, though forecasting these with any precision is somewhat of a fool’s errand. The main point here, however, is that the policy objectives of reducing foreign imports and raising tax revenues via tariffs are, to a greater or lesser extent, mutually exclusive.
So where does all of this leave us?
Realistically, the real-world outcomes of a blanket tariff on Chinese imports will likely either raise prices for US consumers, becoming a kind of a regressive tax of the sort that conservatives here have sought for decades; or simply rebalance America’s imports portfolio between non-Chinese sources. As well, while some domestic producers will clearly benefit – electric cars are a good example, with Chinese models being priced far more competitively than either their American or European equivalents – others, for instance soybeans farmers, may well suffer the consequences of China’s retaliatory measures. The net economic impact to the US thus ranges somewhere between neutral and significantly negative, particularly for individual consumers and smaller businesses. Meanwhile, there would certainly be some negative effect on Chinese exporters, however at present it would be difficult to estimate the precise magnitude of this, especially given China’s progressive re-orientation away from US trade towards, for example, BRICS and BRICS-adjacent nations.
Given this, here is my guess at what Trump’s backers and advisers might actually be thinking on the China tariff issue:
- Possibility One – We Will Hurt China. It is worth mentioning that Trump’s early cabinet appointments include some noted anti-China hawks, in particular Michael Waltz as National Security Advisor. A blanket anti-China tariff could then be seen as a sort of an alternative to the Democrats’ failed Trans-Pacific Partnership effort, a way to restructure America’s trade relationships to exclude China – thus deeply hurting Chinese exporters, perhaps to the point of initiating regime change, or at least limiting China’s global aspirations. The trouble here is that, just as had happened with sanctions against Russia, the US runs the risk overestimating its potential to harm an adversary’s economy while also assuming that said adversary will simply sit there and take his beating without employing any countermeasures.
- Possibility Two – the Elon Musk Protective Tariff. It is quite conceivable that at least some of Trump’s backers amongst the US capitalist elite are simply looking out for their own interests. Musk in particular must be terrified of the mere thought of cheap Chinese electric vehicles flooding the US market and crowding out his much more expensive Teslas. And if the soybean farmers, or the American consumers, happen to take it on the chin as a consequence, well, that is certainly none of Musk’s personal concern.
- Possibility Three – Regressive Taxation. As already mentioned above, changing the US tax system from at least moderately progressive to one that is heavily regressive – in other words, to shift the tax burden away from the wealthiest segment of the population and to the working people and the poor – has been a policy priority for conservatives for quite a long time. The idea of a flat income tax has been around for decades; so has that of switching from an income tax to a national sales tax, or at the very least of coupling the two2; and in this context, a blanket tariff is, in a way, a backdoor way of imposing a national sales tax, at least on a limited basis.
- Possibility Four – All Sturm and No Drang. There is, of course, always the chance that Trump simply hit upon an effective campaign talking point that, in the end, will amount to not very much of any actual policy. Here one recalls his fabled wall on the US-Mexico border, which, when push came to policy shove, ended up covering only roughly a quarter of said border’s actual length, and constructing even that much was quite like pulling teeth. Perhaps, then, the actual implementation of anti-China trade measures will end up being far less impactful than threatened – especially as, barring some truly extraordinary circumstances, this will be Trump’s last presidential term and thus his last political campaign.
- Possibility Five – Blind Leading the Blind. Unfortunately one cannot discount the chance that Trump and his advisers simply do not know what they are doing, having somehow absorbed the top line slogan about tariffs stimulating domestic industry without actually bothering to investigate the issue in any detail. One must also note that a number of Trump’s cabinet picks announced thus far have little to no experience in their respective policy areas, and that Washington as a whole sometimes acts, even starting entire wars, without possessing any kind of a clear understanding of the possible consequences.
I suppose we will just have to wait and see what the Trump Administration actually does before settling on one or more of the foregoing explanations of the matter. But no matter what their intent or line of thinking, it bears worth reiterating that, while I myself am no free-trade fanatic, this particular tariff proposal, especially if not paired with an industrial development policy, looks to do rather more harm than good to both the American economy and the American consumer. If it is implemented at all, of course.
Footnotes:- This comes from Milyukov’s famous 1916 speech entitled “Stupidity or Treason”. Now that I think of it, I reference the concept often enough for it to merit its own entry in the “Definitions” category in the not too distant future.[↩]
- Here one cannot fail to recall Herman Cain’s “9-9-9 plan” – a 9% flat income tax, a 9% national sales tax, and a 9% corporate tax – from the 2012 Republican Presidential Primary.[↩]