President Donald Trump carried out his promise to impose 25 per cent tariffs with no clear rationale on America’s two biggest trading partners, Canada and Mexico. They were first due to take effect last month but then both countries were offered a last-minute reprieve; China was also hit with an additional 10 per cent hike, bringing it up to 20 per cent on imports.

In The Wall Street Journal in an op-ed piece titled ‘Trump Takes the Dumbest Tariff Plunge’, the editorial board stated: 

‘Mr Trump is whacking friends, not adversaries. His taxes will hit every cross-border transaction, and the North American vehicle market is so interconnected that some cars cross a border as many as eight times as they’re assembled….Is this how the new Republican Party plans on helping working-class voters?’

US markets plunged for a second straight day as Trump’s new levies on Mexico, Canada, and China took effect. While some conservatives are defending the president’s decision to squeeze trading partners that take advantage of the US, the repercussions for the Republican Party can be detrimental. If a prolonged trade war spikes prices, the tax cut proposed by the GOP package may have far less impact.

‘Governments had to regulate trade to build their wealth and national power’

Indeed, high-ranking Republicans were swift in questioning President Trump’s decision to follow through on levying import taxes. For example, Senate Majority Leader John Thune said he hopes the tariffs are temporary because ‘nothing happens in a vacuum. There’s always a reaction to actions that are taken.’ Senator Ted Cruz had similar hopes that the tariffs would be ‘short-lived’.

The Essence of Tariffs

A tariff is a tax one country imposes on the goods and services imported from another country to influence it, raise revenues, or protect competitive advantages. The goal is to restrict imports by increasing the price of goods and services purchased from another country, making them less attractive to domestic consumers.

They emerged during the age of colonialism (16th to 18th centuries) from a system called mercantilism. It was based on the belief that the world’s wealth was static, and consequently, governments had to regulate trade to build their wealth and national power. The colonizing country, which saw itself as competing with other colonizers, would import raw materials from its colonies, which were generally barred from selling their raw materials elsewhere. The colonizing country would convert the materials into manufactured wares, which it would sell back to the colonies. High tariffs and other barriers were implemented to ensure that colonies only purchased manufactured goods from their home countries.

A key point to understand is that a tariff affects the exporting country because consumers in the country that imposed the tariff might shy away from imports due to the price increase. However, if the consumer still chooses the imported product, then the tariff has essentially raised the cost to the consumer in another country. And while they can produce revenue and coerce foreign countries into new trade agreements, tariffs can also have unintended side effects, such as:

• making domestic industries less efficient and innovative by reducing competition;
• hurting domestic consumers since a lack of competition tends to push up prices;
• generating tensions by favouring specific industries or geographic regions over others;
• coercing an unproductive cycle of retaliation, commonly known as a trade war, which is what Canada, Mexico, and China have done.

Tariffs for the Average Person

Tariffs have the added benefit in the sense that the executive branch of government is given more discretion than typical tax laws, which must be approved by Congress—Congress also controls the use of tariffs, but it has given the executive branch wide latitude to use them. Presidential discretion means that Trump can provide special treatment to certain exempt companies or industries and not others.

Economists argue that tariffs hurt more industries than they help since consumers ultimately pay the bulk of tariff costs as they are unable to meet the higher prices for goods. This is because individuals with limited financial means typically spend a higher percentage of their income on basic necessities and may bear a heavier burden. Ultimately, tariffs are taxes that importers usually try to pass on to their customers.

‘The American people are counting on President Trump to bring down costs and grow the US economy’

The poor, in particular, get few of the rewards from those tax cuts; they bear more of the burden from tariffs because they spend a larger share of their income than the rich do on things they want or need, including imported goods, rather than saving or investing it.

Experts hold that if President Trump does not reverse course soon, economic activity will likely weaken, putting pressure on the Federal Reserve to lower rates to provide relief to the economy even if tariffs push up prices faster and reignite inflation fears.

Perhaps Trump’s rationale is that the US is so economically strong and crucial to international commerce that he can deploy tariffs to resolve any problem. However, his mix of mercantilism and bullying tactics risks destabilizing a US economy battered by three years of inflation and now facing a slowdown in growth.

‘The American people are counting on President Trump to bring down costs and grow the US economy,’ said Senior Executive Vice President of Public Affairs Michael Hanson at the Retail Industry Leaders Association. ‘Tariffs on Canada and Mexico put those goals in serious jeopardy and risk destabilizing the North American economy.’

The views expressed by our guest authors are theirs and do not necessarily represent the views of Hungarian Conservative.

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