Former president and current Republican presidential candidate Donald Trump wants to extend the tax cuts passed when he was in the White House, which are due to expire next year. That would not just be welcomed by the many Americans who would benefit, it could boost economic activity. But there's a big problem: The protectionist tariffs favored by Trump would undo the good done by his tax cuts, reducing rather than increasing prosperity.
Tariffs Not Seen Since the Great Depression
"Former President Donald Trump's proposals to impose a universal tariff of 20 percent and an additional tariff on Chinese imports of at least 60 percent would spike the average tariff rate on all imports to highs not seen since the Great Depression," warns Erica York of the Tax Foundation.
Trump has actually been a little vague on the size of his universal tariff, first floating it at 10 percent while allowing "it may be more than that," and then upping the ante to 20 percent. Either way, it's a cost that ends up being largely paid by Americans in terms of higher retail prices and more expensive imported parts and materials for domestic manufacturing.
The Trump administration's 2018 "tariffs resulted in higher prices for a wide variety of goods that U.S. consumers and businesses purchase," the Tax Foundation's Alex Durante and Alex Muresianu concluded.
Even when tariffs don't directly affect the cost of imported goods purchased by consumers, they still drive up the prices of many things made in the U.S. The Cato Institute's Pierre Lemieux points out that "a tariff on an input (say, steel) is paid by the American importer who will typically pass it down the supply chain to his customers and eventually to the consumers of the final good (say, a car)." Instead of boosting domestic production, that can do harm, instead.
"For manufacturing employment, a small boost from the import protection effect of tariffs is more than offset by larger drags from the effects of rising input costs and retaliatory tariffs," Federal Reserve Board economists found when they researched the 2018 tariffs.
That's not to say Trump is alone in his protectionism. Last month, Bob Davis noted for Foreign Policy that "the Biden administration is the first since at least President John F. Kennedy's time to fail to negotiate a major free trade deal, instead embracing tariffs" while Trump pursued both tariffs and trade deals.
In 2022, Cato economist Lemieux called Biden administration protectionist trade policies "Trumpism with a human face," indicating more continuity than verbal sparring suggests in some policies of the two administrations—and potentially a Kamala Harris administration, given her role as Biden's vice president. That said, while Biden and Harris embraced stiff tariffs against China, Harris's team rejected the idea of a universal tariff on all imports.
A Major Flaw in an Otherwise Decent Tax Plan
What makes the situation that much more unfortunate, though, is that aside from tariffs, Trump's tax policies offer significant relief to Americans and a potential boost to economic activity. A keystone of his tax proposals involves extending the 2017 Tax Cuts and Jobs Act (TCJA) that gave most Americans a little relief from the federal government's appetite. The tax cuts are set to expire in 2025 and continuing them could be a boon to the economy.
A September Tax Foundation analysis of Trump's tax proposals estimated "the major tax changes proposed by Trump would increase long-run GDP by about 1.5 percent (excluding the two new proposals to uncap SALT and exempt overtime)," with TCJA extension the most important component, followed by lowering the corporate tax rate and exempting Social Security and tips from taxes.
But, the analysis added, "Trump's proposed tariffs threaten to offset the economic benefits of his proposed tax policy changes….The proposed tariffs of 60 percent on China and an additional 10 percent on all imports would reduce long-run GDP by nearly 0.8 percent. Further lifting the 10 percent tariff to 20 percent would take the combined economic effect of the tariff proposals to a 1.3 percent drop in long-run output."
Foreign retaliation in terms of tariffs on American goods, York emphasized, would further reduce GDP.
Risking Another Collapse in Global Trade
That fear of foreign retaliation is behind the Tax Foundation's warning that Trump's plans would "spike the average tariff rate on all imports to highs not seen since the Great Depression." As York points out for the Tax Foundation, the 1930 Hawley-Smoot tariffs sent the average tariff rate to "highs of 59.1 percent on tariffed goods and 19.8 percent on all imported goods during the Great Depression" and resulted in a "collapse in global trade."
What do we mean by collapse?
A 2021 paper by Kris James Mitchener of Santa Clara University, Kirsten Wandschneider of the University of Vienna, and Kevin Hjortshøj O'Rourke of New York University-Abu Dhabi, found "the passage of Smoot-Hawley led to direct retaliation by important U.S. trade partners" who imposed their own tariffs on U.S. goods. While global commerce took a general hit during the Great Depression, retaliation put a much bigger dent in the U.S. economy, as "countries that responded to Smoot-Hawley with retaliatory tariffs reduced their imports from the U.S. by an average of 28-33 percent."
With Trump proposing 60 percent tariffs on Chinese goods and universal tariffs up to 20 percent, we're in Hawley-Smoot territory, and risk another trade war. That means higher prices for American consumers, stiffer costs for American businesses, and retaliation that could, again, torpedo international trade.
That's not how you build prosperity.
To be clear, neither the Trump nor Harris campaigns offer serious proposals for addressing rising deficits and the growing federal debt. Discussing that looming disaster is out of fashion with the current crop of American politicians. Chances are that it will remain so until ignoring the issue is no longer an option.
But in terms of growing the economy we have, letting private enterprise create jobs, and increasing wages and prosperity, Trump's tax plan is the better of the two on offer from the major presidential campaigns. That is, it's better if (a major caveat) we take his destructive tariff schemes off the table. Cutting taxes can build wealth. Raising protectionist barriers, on the other hand, will not just make Americans poorer, it could spark a new trade war that will impoverish people here at home and around the world.
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