How Trump's Tariffs Will Likely Affect Your Wallet
In a world where technology and capital are highly transferable, there is a real risk that comparative advantage comes to be defined as whose labor force will work for the lowest wage.
At the height of last year’s Presidential Campaign, then-Senate Majority Leader Chuck Schumer wrote to the Congressional Budget Office (CBO) asking them to estimate the effects of the Trump Tariffs. At the time, Candidate Trump promised to impose tariffs on many of our nation’s most significant trading partners, especially China.
Specifically, Schumer asked the CBO what the effects would be if Trump imposed a 60% tariff on Chinese goods and a 10% tariff on all the other countries.
Recognizing that anything the CBO were to say would likely become an important issue for the campaign, Phillip L. Swagel, the Director of the CBO, and his staff produced a reasonable, fair, and balanced response to Schumer’s question. Here is a summary of the CBO’s projections:
The Congressional Budget Office (CBO) assessed the effects of increasing tariffs on US imports. The CBO evaluated three scenarios:
A 10% increase in tariffs on all imports.
A 60% increase in tariffs on imports from China.
A combination of both (10% on all imports + 50% additional on Chinese imports).
Key Findings:
Budget Impact: All three scenarios would reduce the federal deficit by increasing customs revenue, though retaliatory tariffs from trading partners would offset some gains.
10% tariffs on all imports: $2.2 trillion deficit reduction.
60% tariffs on China: $0.8 trillion reduction.
Combined policy: $2.9 trillion reduction.
Economic Impact:
Tariffs would raise costs for businesses and consumers, reducing investment, productivity, and GDP.
10% tariff: GDP down by 0.3%.
60% on China: GDP down by 0.3%.
Combined policy: GDP down by 0.6%.
Inflation & Prices:
Tariffs would increase consumer prices.
10% tariff: The PCE price index is up by 0.6%.
60% on China: PCE price index up by 0.4%.
Combined policy: PCE price index up by 1%.
Distributional Effects:
Lower-income households would be hit hardest as they spend more on goods, while export-driven industries and businesses reliant on imports would see disruptions.
Uncertainty:
The CBO notes high uncertainty due to the unprecedented scale of these tariff increases and potential foreign retaliation.
https://www.cbo.gov/system/files/2024-12/61112-Tariffs.pdf
It indicates just how fair this assessment was that neither campaign, Biden or Trump, used this report in the closing days of the 2020 Election.
Candidate Trump could have pointed to the $2.9 Trillion, 10-year reduction in the Government Deficit as a real benefit to his proposed tariffs.
On the other hand, President Biden could have pointed to the 1.0% increase in inflation or the 0.6% decrease in GDP over the coming decade as the inherent cost of the proposed Trump Tariffs.
Regrettably, the CBO did not have sufficient data to assess the most important objective of the Trump Tariffs: bringing foreign jobs back to America.
There has been a steady exodus of US jobs to low-cost countries for over half a century. The losses are often to countries with lower living standards, thus lower wages, lower worker’s benefits (such as insurance and retirement benefits), and usually lower environmental standards. These lower production costs have given offshore manufacturers an insurmountable advantage over American homeland businesses.
Trump campaigned on implementing a series of tariffs designed to “level the playing field” between American producers and foreign producers. However, as the CBO recognized, any data on the effect of American tariffs is at least 50 years old, which is too old to make any reasonable estimate for today’s tariff impact.
For the past five decades, the United States has been on an anti-tariff binge, breaking down tariffs and trade barriers as much as possible. NAFTA, the North American Free Trade Agreement, is a perfect example of how far this country has gone in pushing production offshore.
For the Nation’s Founding Fathers, this move to “free and unrestricted trade” would have seemed anathema — the polar opposite of how men like Washington and Madison wanted the country to go.
On that hot, sweltry summer in 1789, the delegates began to craft the Tariff Act of 1789 just after they signed the US Constitution. For years, they had suffered under the British's oppressive economic policies, in which the British extracted tariffs from the Americans without consultation or consideration. “No taxation without representation” was the rallying cry of the American Revolution.
Inherently, those early American leaders knew they would lose their industries to overseas predators like the British unless they protected the factories, shops, and merchants who made up the core of their burgeoning economy. Tariffs became the popular and effective method of preserving the “Made in America” brands. Tariffs also provided most of the revenue for the Federal Government.
Whether he knew it or not, President Trump is harking back to a movement as old as our nation: implementing Tariffs to bring back American jobs and protect American businesses.
Americans must realize that these new Tariffs won’t be without cost. The CBO’s projections are undoubtedly reasonable. Tariffs will likely result in an up-tick in inflation and a down-tick in GDP Growth. But in the end, we will all be in a much better place: less dependent upon foreign countries, more secure in our supply chain, and with more and better-paying jobs at home.
Tariffs are one American tradition that we ought to renew.