In a bold move last week, President-elect Donald Trump made a significant promise regarding tariffs. This declaration is just one in a series of grand commitments he has made to leverage tariffs for the benefit of the United States. Trump announced his intention to establish what he calls the "External Revenue Service" to collect tariffs and revenues from foreign entities. However, it is important to note that most tariffs are actually paid by American businesses importing goods, not external foreign sources. This announcement adds to the plethora of promises made by Trump on tariffs, which play a central role in his economic strategy and vision for the nation.
The goals for tariffs: revenues, jobs, and the war on drugs
Trump has articulated various goals for tariffs, including generating more revenue for the country. During his campaign, he pledged to accumulate hundreds of billions of dollars to benefit American citizens. In addition to the fiscal aspect, Trump believes that tariffs would bolster U.S. manufacturing. He has voiced intentions to impose tariffs on cars manufactured in Mexico, emphasizing the need for foreign companies to build plants in the United States to avoid these tariffs. Moreover, Trump has suggested that tariffs could help combat illegal immigration and prevent the influx of drugs into the country.
While these goals seem promising on the surface, there are inherent contradictions and challenges within Trump’s tariff policy. Erica York of the Tax Foundation, a right-leaning economic think tank, highlights a fundamental contradiction in Trump’s plan. She underscores the conflict between using tariffs for revenue generation and employing them as barriers to protect domestic industries. For instance, if Americans purchase fewer foreign goods due to higher tariffs, tariff revenue would subsequently decrease. Additionally, the effectiveness of tariffs in addressing issues like illegal immigration and drugs remains questionable.
Higher prices and uncertain revenues
Trump’s proposals for imposing tariffs on various countries and goods surpass what he initiated during his first term. He has floated the idea of imposing tariffs as high as 60% on Chinese goods, along with proposed tariffs on Canada and Mexico. Furthermore, he even suggested a blanket 10-20% tariff on all imports. Despite these ambitious plans, experts express skepticism about the revenue generation potential of such high tariffs. Trump’s admiration for an era before federal income tax, as well as his interest in replacing income tax with tariffs, may not align with economic realities.
Analyses from institutions like the Peterson Institute for International Economics estimate that the maximum revenue generated by Trump’s proposed tariffs would amount to $780 billion. This figure falls significantly short of the total revenue derived from income and corporate taxes and fails to consider the negative economic implications of higher tariffs. Kimberly Clausing, an expert who co-authored one of these analyses, warns that lower-income Americans would bear the brunt of tariff hikes through increased prices, while higher-income individuals would benefit from Trump’s proposed tax cuts.
As Trump navigates the complexities of his tariff policies, it remains essential to critically evaluate their potential impacts on various facets of the economy, from revenue generation to job creation. The contradictions and uncertainties surrounding these policies call for a nuanced and informed approach to ensure that tariffs serve the best interests of all Americans.
