Trump speaks as though does he not understand tariffs. He claims that putting a tariff on Chinese goods means that the Chinese will pay the US billions of dollars in tariffs. That’s not how tariffs work:
- An import tariff means that the American importer pays the tariff, not the Chinese producer.
2. If the importer pays the tariff, he will immediately pass the increase on to the consumer. That is INFLATION! Trump is proposing huge inflation.
3. Or maybe the importer decides not to pay the high tariff and not to import the product at all. That way, the American consumer must shop around for some other similar product, almost certainly at a higher price. Again, INFLATION!
4. Consumers will buy more American-made products, but at higher prices than they had previously been paying for the imported goods.
5. Other countries, especially China, will surely reciprocate with their own tariffs on American goods. That will result in fewer American exports and therefore fewer American jobs. Is that good for the American economy?
Trump’s previous tariffs had precisely the above effects. Of course, he blames his inflation on Biden, since it was only during the Biden administration that the inflation kicked in.
The Smoot-Hawley Tariff of 1930
One of the most famous American tariffs was the Smoot-Hawley Tariff of 1930. It was similar to Trump’s proposed tariffs, although with at least one important difference. It is useful to compare the two.
- In the 1930s, other countries quickly retaliated with their own tariffs on American products. That had the effect of lowering American exports in a time of economic depression.
- However, one aspect of the Depression was the lowering of prices, that is, DEflation. The tariffs may have even helped to keep prices up. Thus, inflation was not the issue.
- When I was in school, the Smoot-Hawley Tariff was thought to have caused or at least deepened the Great Depression, but today, most economists agree that its effect was only minimal.
All in all, I think we can say with some certainty that the proposed Trump tariffs will cause inflation. Trump’s talk of controlling inflation is idle talk; he is proposing a lot more inflation. His tariffs will reduce American exports as well as imports. It will, however, force America to become more self-sufficient, albeit with higher costs and prices.
The top exports of the United States are:
- Refined Petroleum
- Crude Petroleum
- Cars
- Integrated Circuits
- Vehicle Parts
- Mineral fuels including oil
- Machinery including computers
- Electrical machinery, equipment
The United States exports mostly to Canada, Mexico, China, Japan, and Germany. If those countries retaliate with tariffs on the above products, the above-listed areas of the American economy will be the hardest hit. Thousands, maybe millions, of jobs will be lost.
Another difference between 2024 and 1930, which Trump apparently doesn’t understand, is the complexity of global supply chains. He wants voters to think that John Deere tractors are made entirely in the USA, when in fact, the company imports a lot of parts, and also exports its products around the globe. A trade war (“Easy to win” — Trump) would shut down the supply chain and perhaps force John Deere into bankruptcy, with the loss of many jobs. In general, economists agree that a trade war would cause a huge recession.
Therefore, Trump’s tariffs would cause both inflation and a recession. Economies usually experience one but not the other, but our ‘stable genius’ would somehow manage to kill the American economy in both ways.