By Sarvesh. Kilariaar
London, UK
One may think that leaders aiming to gain votes from the whole nation would be relatively enthusiastic for free trade policies rather than more locally concentrated protectionism. Historically this has often been the case. Following 1934 when Roosevelt was granted rolling pre-approval for trade treaties, tariff rates in the United States fell from about 45% to 10% in less than 2 decades. As presidential responsibility for trade policy has increased, tariffs have been falling since.
However this anti-protectionist movement is likely to see a U-turn following the recent presidential election. Both leading candidates Kamala Harris and the self-proclaimed “Tariff Man” Donald Trump, were planning for a protectionist rather than a free market US economy.
And following former President Trump’s victory over the incumbent Democratic Vice President on the 5th of November, the question of tariffs is fairly dead set: Trump plans for a 10% tax on all goods imported to the United States as well as a colossal 60% levy on Chinese goods. This is unsurprising considering the Trump administration’s previous tariff policy in 2018, which taxed Chinese imports ranging from washing machines to flat-screen TVs. The ensuing trade war involved China responding with retaliatory tariffs and the US continuing to increase taxes on Chinese goods for the better part of 2 years. The trade war stopped in 2020 following a mutual agreement to stop raising tariffs, but by that point U.S. tariffs on China had increased from 5% to 20%. Trump’s return for a second term means taxes on imports such as electric vehicles will continue to skyrocket. He justifies this on the basis that the ‘unfairly’ low prices of imported Chinese goods are a threat to United States companies, workers and farmers. While this holds somewhat true many republicans still question the economic effects of these huge tariffs on the U.S. Economy.
Ask any economist whether tariffs are a good idea, their response will most likely be sceptical. The significance of trade and globalisation to the economy comes down to Ricardo’s idea of comparative advantage: that different countries have different cost structures and opportunity costs but by focusing on their relative strengths, they can both benefit from international trade. When local companies are forced to compete with international ones (with free market policies), prices remain low for consumers, monopolistic practices can be avoided and economic growth can be ensured. In his book The Undercover Economist Tim Harford explains that tariffs not only reduce imports but also reduce exports simultaneously. A no import policy is a no export policy because “who would want to spend time and money exporting goods in exchange for foreign currency, if nobody is allowed to spend the foreign currency on imports”. In other words, a tax on imports is a tax on exports; a policy meant to support one sector cripples another. And the effects of this were seen during Trump's previous term: in 2019 the CBO estimated that the negative effects of tariffs had outweighed the positive ones as they resulted in a 0.3% decrease in real GDP. This naturally came along with higher unemployment as well as higher consumer prices. Only in a few cases is the cost of the tariff absorbed by the exporting or importing company; consumers are most often subject to the increased economic burden.
Tariffs raise the prices of parts and materials, thus raising the cost of manufacturing goods and decreasing private sector output. This in turn lowers incomes for both owners of capital and workers. Higher consumer prices also decrease the real value of labour and capital income which decreases incentive to work, leading to lower output. All in all, tariffs lead to a smaller economy.
Trump plans to use the tariffs to help pay for his large tax cuts. At various points in his 2024 campaign, the former president talked about replacing income tax, eliminating the federal budget deficit, and beginning to pay off some of the $35 trillion in gross federal debt. While the Tax Policy Center estimates Trump's policies on tariffs would raise $2.8 trillion over the next 10 years, this is still nowhere near enough to meet his ambitious promises. Furthermore, the idea of replacing an income tax with universally higher consumer prices would sharply widen the income gap between the richest and poorest American families. By replacing a key redistributive policy such as income tax with a more regressive tax structure, higher burden is placed on poorer families whilst allowing wealthier corporations to contribute less. This would significantly increase inequality in a country whose gini coefficient is already very high at 4.7 - the highest in all G7 nations.
The impact of American protectionism on world trade is worrying to say the least. The US is the second largest trading nation, having trade relations with over 200 different countries and regional associations. A second term with Trump as president means a sharp decrease in exports and imports, a rise in consumer prices and a risky future for the American economy. It also risks dragging down its trading partners and increasing strain on other economies and global trade networks alike. After all, when America sneezes, the world catches a cold.
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