Former President
Donald Trump
recently pledged to enact a universal 10%
tariff
on all imports if he regains the presidency. His adviser Larry Kudlow
argues
the revenue would pay down the national debt, level America’s tariffs with those of other countries, and counter Chinese currency manipulation.
None of these arguments are compelling because the tariffs Trump and President
Joe Biden
have already enacted have sparked trade wars, throttled supply chains, and slowed the recovery from the pandemic. More of the same is the last thing America needs.
HOW EUROPE’S CRACKDOWN ON BIG TECH COULD AFFECT THE UNITED STATES
First, the national debt argument. America imported about $3.3 trillion of goods last year. Ten percent of that would be $330 billion in tariff revenue. That is a big number because it is in the same ballpark as President Joe Biden’s proposed revenue from tax increases. It is also a small number because it would cover fewer than nine months of just interest payments on the national debt. The $32 trillion of principal on the national debt would remain untouched.
Actual revenues would be even less. The point of tariffs is to discourage imports. So if the universal tariff works as planned, the government would take in 10% of a smaller number than $3.3 trillion, and its debt relief would be that proportionally less.
A second universal tariff goal is symmetry. America has lower tariffs than most other countries. Trump and Kudlow think they should be the same. There are two ways to do this. One is for other countries to lower their tariffs. The other is to raise ours.
The first option has been slowly but steadily working for about 75 years, starting after World War II. When the General Agreement on Tariffs and Trade was founded in 1947, the
average
worldwide tariff was 22%. Today, it is closer to 5%. It’s a slower process than many politicians and economists prefer, but it works when people let it.
Trump instead prefers raising tariffs to match global levels and then using that leverage to convince trading partners to lower their rates. We would then lower our rates to match in return. That’s just the GATT/World Trade Organization negotiation process but with more steps. And those extra steps sabotage the whole process.
Trump has said that his long-term goal is for both the U.S. and its trading partners to have zero tariffs. He said something similar as president. The self-proclaimed
Tariff Man
didn’t mean it then, as evidenced by his first term, and he doesn’t mean it now.
Trump already tried the “raise rates to lower them” strategy with China through four rounds of tariff increases. China did lower its tariff rates — toward other countries. It raised them in retaliation against the U.S. because that is what countries nearly always do. We have known this since at least the Smoot-Hawley tariffs of 1930 that worsened the Great Depression.
Expanding a failed China tactic against the entire world would spark worldwide tariff retaliation, with no guarantee that it would stop with 10% tariffs from each side. If it goes multiple rounds, as with China, the universal tariff could set off a global trade war that would raise prices for everyone, choke supply chains, and risk a global recession. The Tax Foundation estimates that just the 10% universal tariff, and not any of the likely retaliation, would
cost 0.7%
of America’s long-term gross domestic product, or more than $1,400 per household per year.
Kudlow’s third argument is that a 10% universal tariff would counter Chinese currency manipulation. A problem with this is that China’s government has been desperately
trying to strengthen
a falling yuan — the opposite of what Kudlow alleges.
China’s official data are untrustworthy, so it is hard to get an accurate picture. But whenever America’s inflation rate is lower than China’s, the yuan will weaken from natural causes, regardless of any trade policy actions.
If the goal is to stop Chinese currency manipulation, no tariffs are needed. The U.S. need only keep inflation low. If the larger goal is to outcompete China, President
Xi Jinping
need only continue his existing program of national conservative and progressive-style industrial policy. China’s economy will continue to decline compared to market-based countries because top-down industrial policy always
causes
markets to underperform.
A 10% universal tariff might just be campaign talk. But it would cause harm far worse than what we have already experienced from the Trump and Biden tariffs of the last several years.
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Ryan Young is a senior economist at the Competitive Enterprise Institute, a free market public policy organization based in Washington, D.C.
