Who Pays For the Tariff Wars?

Popular Economics Weekly

It’s unfortunate that we have to keep returning to the most unpleasant of topics--- higher taxes. But that’s what the White House is doing with their various Chinese, Mexican, and European tariffs. They seem to be waging an economic war with most of the world; on top of implementing N Korean, Iranian, and Russian sanctions.

Americans pay for it in the end, since it raises the price of items; particularly imports that are taxed as they enter the U.S.  But U.S. exports are also taxed by those same countries in retaliation for our tariffs.

There’s a precedent for the damage such uncoordinated actions cause (i.e., unilateral actions without coordination with allies). The Smoot-Hawley Tariff act of 1930 (also engineered by a Republican administration) taxed imports thus raising their prices and helping to precipitate the Great Depression. There were many other causes as well—record income inequality, and a Federal Reserve that then began to restrict credit with falling prices.

Sound familiar? It’s scary when such histories repeat themselves—mostly out of ignorance of the lessons. And now, an expanding body of research has found that the most recent tariffs has mostly fallen on U.S. consumers and businesses

One of the latest papers published on the topic and cited by a CNBC report, is with economics researchers from the International Monetary Fund, Harvard University, University of Chicago and the Federal Reserve Bank of Boston. “Using price data collected at the U.S. borders and at retailers, the researchers found “nearly complete pass through of tariffs” to America. In other words, little cost is falling on the Chinese manufacturers,” said the CNBC report.

The Harvard report said the Trump administration has imposed import tariffs ranging from 10 to 50 percent on goods including washing machines, solar panels, aluminum, steel, and roughly $250 billion of goods from China. In response, Canada, China, the European Union (EU), and Mexico have imposed retaliatory tariffs. On a scale not seen since the 1920s, the world’s largest economies have passed measures making it far more costly to buy goods from each other.

It is frightening, not just because it brings back memories from the Great Depression. Isn’t that also one definition of insanity, doing something over and over again, yet expecting different results?

It is partially the fault of congress that hasn’t pushed back, or authorized legislation that opposes such actions the White House says are “in the interest of national security,” when most of the tariffs are being enacted against our allies, and therefore increase the threat to national security.

In fact, it is the tariffs themselves that pose the greater danger to future growth. We are in the tenth year of the soon-to-be longest economic recovery ever, while interest rates are plunging and nervous investors rush to safe havens like Treasury securities; and restrict their spending, while corporate profits are declining.

This shouldn’t be the time to create more economic uncertainty, in other words, when we are nearing the end of the longest economic expansion in our history.

Harlan Green © 2019

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