Trump China Trade War Proposal: Details & Analysis
The Trump campaign is mulling a massive taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
increase on American purchases from China. During his first term, the Trump trade war quadrupled the tariffTariffs are taxes imposed by one country on goods or services imported from another country. Tariffs are trade barriers that raise prices and reduce available quantities of goods and services for U.S. businesses and consumers.
on imports of Chinese goods from 3 percent to 12 percent on average. If reelected, he might quintuple the tax, imposing tariffs of 60 percent on imports from China. The economic ramifications would be significant and unwelcome, upending businesses’ relationships with suppliers, diverting trade flows to get around the tariffs, imposing immense costs on people in both economies, and likely closing crucial export markets for key American products, including agriculture.
Trump’s first trade war was a failure. Though intended to boost U.S. manufacturing and reduce the trade imbalance, (unsurprisingly) neither occurred. Americans almost exclusively paid the tariffs that the U.S. imposed on nearly $380 billion worth of imports. Businesses faced higher costs, making it harder to compete internationally. Foreign governments retaliated with tariffs on U.S. exports, and China halted its purchases of agricultural products altogether. Lobbying, along with political favoritism, mushroomed.
One Federal Reserve paper concluded, “the impact from the traditional import protection channel is completely offset in the short-run by reduced competitiveness from retaliation and higher costs in downstream industries.” In other words, the tariffs didn’t create a net benefit because protection for some was outweighed by costs for others.
Escalating a failed trade war defies any semblance of sound policy and is motivated by faulty understanding. As Scott Lincicome explains, China does not pose a significant economic threat to the United States. To be sure, China has and continues to display bad behavior: from increasing authoritarianism, market interventions, and its own industrial policy to human rights abuses and intellectual property theft. But a prohibitive tariff does nothing to directly address China’s problematic behaviors. Instead, it risks upending a global economic system that has delivered massive gains (and yes, concentrated pains) to the U.S. economy.
To its chagrin, the United States has experimented with restrictively high trade barriers in the past.
In 1807, caught in the middle of a conflict between France and Great Britain, President Thomas Jefferson imposed an outright embargo on all trade. The embargo was intended to be a “commercial weapon” according to Jefferson, the idea being to use economic forces to coerce both nations to treat the U.S. neutrally. As trade came to a grinding halt under the embargo, prices of would-be exports plummeted, and prices of would-be imports spiked. Estimates suggest the economy shrank by 5 percent as a result of the embargo. It was not long before political support for the policy began to fall and merchants began to violate the embargo. Congress ultimately repealed the embargo after 15 months.
Just a couple of decades later, Congress enacted the Tariff Act of 1828, largely a result of political brinkmanship and trickery. The law imposed significant tariff hikes on raw materials, and that lopsided nature of levying significant tax increases on manufacturing inputs led one Congressman to call it a “bill of abominations.” The nickname stuck, and under the Tariff of Abominations, the average tariff rate on imports climbed to “reach 62 percent in 1830, the highest level in U.S. history,” according to economist Douglas Irwin. As Irwin recounts in a lesson for policymakers today:
[Vice President John] Calhoun later described the 1828 tariff as “a combined measure, originating with the politicians and manufacturers, and intended as much to bear upon the presidential election as to protect manufacturers.” In retrospect, Calhoun said that he “was amazed at the folly and infatuation of that period. So completely absorbed was Congress in the game of ambition and avarice, from the double impulse of the manufacturers and politicians, that none but a few appeared to anticipate the present crisis, at which all are now alarmed, but which is the inevitable result of what was then done.”
The Tariff of Abominations reduced the price of exports, thus redistributing income from southern agriculture (the source of most exports at that time) to northern industries, and it created significant political instability. Congress walked back the tariff hikes and the average tariff rate gradually fell from its 62 percent peak to below 20 percent over the next decades.
Today, the U.S. economy is significantly more interconnected with economies around the globe. In 2022, the United States imported $537 billion worth of goods from China. More than half were business inputs—industrial supplies and materials and capital goods (excluding vehicles and auto parts)—that American businesses go on to use in their own production processes.
On its face, assuming the Federal Reserve holds the price level constant, a 60 percent tariff on all imports from China would hike taxes by more than $200 billion. That said, a 60 percent tariff is not designed to raise tax revenue, it is designed to prohibit trade. Thus the potential tax costs illustrate just the tip of the iceberg of the total economic costs of a prohibitive tariff.
Imports from China would depress significantly. Supply chains would fragment, investment plans would be disrupted, and trade would be diverted to third countries. A prohibitive tariff would create a void in trading opportunities with China that other countries would fill, leaving the U.S. excluded.
In sum, it is not a thoughtful approach to the U.S.-China economic relationship. The economic costs of prohibiting trade with China would undercut the benefits of the tax reforms put into place under the Trump administration, harming business investment and innovation and placing U.S. businesses at a competitive disadvantage.
In the event the U.S. government would again permit a case-by-case exclusion process, some companies could be shielded from the prohibitive tariff. But granting the government the ability to pick winners and losers creates significant opportunities for influence peddling and favoritism, placing large, established firms at an advantage over smaller or newer firms that lack the resources and connections to successfully lobby for exclusions.
Trump’s proposal to return to the Tariff of Abominations is foolish. It would harm U.S. farmers, manufacturers, and consumers (especially those with low incomes); upend supply chains and impose significant costs as businesses deal with resulting fragmentation; and create a world in which the United States is increasingly left behind on the global stage. It would be an abomination.
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