Tariff Threats as a Tool

[JohnH]

There isn't anything dishonest about it at all. By the Trump Administration's own math, these tariffs are expected to cost the average American family nearly $5,000 per year. Moreso since prices on domestic products will rise as well. Which is, in effect, a $5,000 a year sales tax or inflation on the order of 25%.

Cats and dogs are both furry, but cats are not dogs. Tariffs are not a sales tax. Tariffs may increase wages, though, empowering workers to be able to afford any goods that are briefly more expensive.

A 25% tariff will not cause an increase in prices of 25%, because America does not import 100% of the things people buy.

In fact, inflation for many items could be worse than that because we also need to factor in the inflationary aspects of Trump's immigration policies.

Trump's immigration policies won't cause inflation, because having fewer migrants in a country does not increase the money supply. It might increase wages, though.

What he really seems to be aiming for is "stagflation" which we haven't see since the 1970s. Namely a recession combined with high inflation. Which is doubly-difficult to reverse.

Tariffs do not cause inflation. Tariffs do not increase the money supply.

Tariffs do not boost unemployment, either. Generally speaking, they're understood to increase total employment.

Can you explain to us how tariffs will simultaneously increase the money supply and also increase unemployment at the same time? Particularly if tariffs are substituted for an income tax?

[JohnH]

I shop at Costco which means I have a trade deficit with Costco (I buy more from them than they buy from me).

I didn't know the Republic of Ken and the State of Costco were independent sovereign nations now.

Is that problematic or just commerce? And they are even more nonsensical because they only consider goods and not services. The US economy has an enormous surplus of services with most countries.

It's a nonsensical analogy, because your "trade deficit" with Costco is zero. Costco doesn't give you goods for free; you exchange something of value.

A better example would be if you had a store in town that let you shop entirely on credit, and you were buying goods from them faster than you were paying your credit off. Then you certainly would have a "trade deficit" with them, because they would eventually have to spend the credit you gave them, which would mean laying a claim to your assets - perhaps you'd have to sell your house off to pay the bill.

What he seems to think is that he can use tariff revenues (which will hit poor and middle class families most heavily)

Huh? Poor people buy a lot less stuff than rich people do. How does it hit them "more heavily"? And don't poor and middle class people work jobs that will be benefited by tariffs?

to fund income tax cuts which will heavily favor the wealthy.

What income tax cuts? Do you mean keeping tax rates the same they've been since 2017?

For example, in his tax negotiations he claims that his tariffs will raise $6 trillion over 10 years. That presumes he wants them to be permanent. We can do a little math, divide by 10 and that gives us $600 billion per year in tariff taxes. There are about 134 million households in the US so $600 billion divided by 134 million gives us an average cost to the average American family of $4,500 per year. And given that domestic producers will raise prices as well, that means the cost of these tariffs will average more than $5,000 per family. That is his actual stated objective. He is relying on those revenues to cut income taxes for the wealthy. So no, the objective isn't bringing down tariffs to zero around the world.

Ken, prices for the average family have gone up more than $5,000 since the COVID disaster and subsequent inflation (quite a bit more than $5,000, actually). None of those disasters did any individual families any good, either. But tariffs would actually help wages for poor and middle class people.

[Robert]

Tariffs vs taxes. Tariffs put the cost on the consumer. Taxes puts the cost on the income earner.

[Ken]

What he seems to think is that he can use tariff revenues (which will hit poor and middle class families most heavily) to fund income tax cuts which will heavily favor the wealthy.

Huh? Poor people buy a lot less stuff than rich people do. How does it hit them "more heavily"? And don't poor and middle class people work jobs that will be benefited by tariffs?

This is very basic Econ 101 stuff. Poor and middle class families spend a much higher percentage of their income on basic goods than do the wealthy. And therefore they are hit more heavily by both sales taxes and tariffs (which are indirect sales taxes).

For example, if you are a working class family and the cost of food and clothing goes up by $500 per month, that hits you much more heavily than it does Elon Musk who won't even notice.

Shifting our tax base from our progressive income tax to a regressive tariff system will most certainly hit poor and middle class families more heavily. This isn't even a subject for debate in the world of economics. It is a given.

[ken_sylvania]

I shop at Costco which means I have a trade deficit with Costco (I buy more from them than they buy from me). Is that problematic or just commerce? And they are even more nonsensical because they only consider goods and not services. The US economy has an enormous surplus of services with most countries.

I've actually known some people in life who run an overall trade deficit with the people and businesses with whom they interact. Can you imagine what kind of financial shape they are in?

[Ken]

I shop at Costco which means I have a trade deficit with Costco (I buy more from them than they buy from me). Is that problematic or just commerce? And they are even more nonsensical because they only consider goods and not services. The US economy has an enormous surplus of services with most countries.

I've actually known some people in life who run an overall trade deficit with the people and businesses with whom they interact. Can you imagine what kind of financial shape they are in?

In the real world, I have a trade deficit with Costco. They provide me with more goods than I provide them.

At the same time, I have a trade surplus with my employer. I provide them with more services then they provide me.

At the end of the month, I'm fine, Costco is fine, and my employer is fine. Even though when the individual transactions are separated it looks like there are deficits and surpluses.

That is the way every economy works, both internally and externally. The fact that the US economy was growing (at least before Trump took office) means that it was working. We exported the goods and services that we are efficient and good at making. And we import the goods and services that others are more efficient at making.

Let's take Canada. The only reason that the US has a trade deficit with Canada is because Canada has an energy surplus (oil and electricity) that they export to the US. That was what the Keystone Pipeline was all about (shipping Alberta tar sands oil to refineries in Oklahoma and Texas). Likewise, Quebec and Ontario have a surplus of electricity from hydro projects in the north of those provinces that is exported south to the upper Midwest where it replaces highly polluting coal fired plants. We could erase our trade deficit with Canada by cutting off imports of oil and electricity from Canada and all that would accomplish is raising gas and electric prices in the US. The fact that we buy lots of oil and electricity from Canada is what Trump is calling "Canada taking advantage of us". Which is just another sign that he doesn't understand economics at all.

Does that mean there is no need for any industrial policy in the US? Of course not. We do that all the time, for example, with the CHIPS Act and the Inflation Reduction Act which provided incentives to companies to shift chip manufacturing to the US as well as EVs, solar, and battery technology. And there are all manner of other tax laws and regulations that either encourage or discourage offshoring. But worldwide tariffs isn't any of that.

[Thomas_muntzer]

On the other hand, Australia has different standards for things often for no reason, like auto window glass and tires. They don’t even make cars there anymore, and Asian markets now make the glass and tires. But it’s an obvious barrier to trade with America.

It is fine for a country not to want agricultural imports to protect their ecosystem - they may have to then adjust to facing tariffs on exports.

Very true, with this tariffs thing we are reviving economic debates from the 19th century that many had considered resolved, such as the issue of mercantilism and the trade balance. We are probably heading towards a multipolar world where different blocks of civilizations will interact in different ways, often in a warlike manner, as Bastiat said: when goods do not cross the border, armies will.

[Dan Z]

Trump's tariff policy feels like a manufactured crisis to me (not a manufacturing crisis). We were the world's strongest and largest economy, with inflation finally in check, strong international relationships in place, and almost fully employed. Where was the crisis?

I'm not saying trade imbalances or uneven tariff policies among trading partners did not need to be addressed, but unilaterally launching a global trade war seems irrationally reckless to me. This has the potential to be quite costly both relationally (already) and economically. It represents a radical shift away from global economic cooperation (to isolationist glee), and I don't see it playing out for the good of the US economy - even less so for much of the developing world.

I hope I'm wrong.

Frankly, I wish I was not so close to retirement (4-5 years). Normally, I feel insulated from Washington's choices, and I'm content to ignore the DC circus - but I feel vulnerable. I think the US economy is quite resilient, but this approach just might spark a return of inflation and trigger a recession, which, coupled with investment losses, may force me into a few extra years of full-time work. Worse yet is what it might do to the world's marginalized economies.

[JohnH]

I'm not saying trade imbalances or uneven tariff policies among trading partners did not need to be addressed, but unilaterally launching a global trade war seems irrationally reckless to me. This has the potential to be quite costly both relationally (already) and economically. It represents a radical shift away from global economic cooperation (to isolationist glee), and I don't see it playing out for the good of the US economy - even less so for much of the developing world.

Virtually the rest of the world has high tariffs. Would you say the rest of the world lives in isolationist glee?

Frankly, I wish I was not so close to retirement (4-5 years). Normally, I feel insulated from Washington's choices, and I'm content to ignore the DC circus - but I feel vulnerable. I think the US economy is quite resilient, but this approach just might spark a return of inflation and trigger a recession, which, coupled with investment losses, may force me into a few extra years of full-time work. Worse yet is what it might do to the world's marginalized economies.

I see this put forward quite often that tariffs will somehow cause "inflation". I remain completely puzzled how people are coming to this conclusion - before the Trump era, no serious economist proposed that raising tariffs would cause inflation. Some were worried it would actually cause deflation. Inflation is caused by increasing the money supply. Tariffs don't increase the money supply.

[Bootstrap]