A strategic U.S. president would likely conclude that the risks and costs associated with tariffs-as-a-tactic would be remarkably high, if not unacceptable.
An American president who thinks strategically would likely conclude that the risks and costs associated with tariffs-as-a-tactic would be remarkably high, if not unacceptable.
‘I t’s all part of the plan.” That seems to be the message coming from those considered close to Donald Trump seeking to allay concerns about his stated intention to move America further in protectionist directions should he become its 47th president.
The precise form to be taken by any such tariffs isn’t clear. Some wild numbers have been thrown around. The most concrete proposal thus far from the former president is the imposition of a universal baseline tariff of 10 percent or 20 percent on all imports into America and a 60 percent tariff on all Chinese imports.
But whatever the form or level that tariffs might take, some defenders of Trump’s tariff statements maintain that they are a negotiating tactic to secure better trade deals for America — much as business executives take “maximalist” positions to obtain concessions from those with whom they are negotiating.
In a recent Financial Times interview, one prominent business supporter of Trump, hedge funder Scott Bessent, argued that Trump essentially views tariffs as a bargaining chip. “My general view is that at the end of the day, he’s a free trader,” Bessent was quoted as saying. “It’s escalate to de-escalate.”
While I don’t think Trump is a closet free trader, he clearly does pride himself on his negotiation skills. The problem is that threatening to raise tariffs (or actually doing so) as part of a negotiation strategy is rarely wise. In fact, it risks inflicting significant harm on American consumers, businesses, and the wider U.S. economy.
Advocates of using tariffs as a bargaining chip occasionally point to the section in Adam Smith’s The Wealth of Nations in which he states that there might be cases for using tariffs to pressure other nations to reduce their tariffs and open their markets. Those invoking Smith along these lines, however, seldom acknowledge that he then immediately proceeds to express deep skepticism about the wisdom of such a strategy.
Not only, Smith maintained, were those inclined to use tariffs in this manner likely to be “politicians” whose outlook was dominated by “the momentary fluctuations of affairs” (i.e., short-term considerations). They will likely “do another injury” to ourselves. Indeed, entire sections of The Wealth of Nations are dedicated to explaining why protectionist measures are a seriously bad idea on account of the damage they inflict upon the economies of the countries which use them.
Even signaling a willingness to raise tariffs can hurt the economies of countries proposing to do so. As the American Enterprise Institute’s James Pethokoukis, Cato’s Scott Lincicome, and others have observed, one effect of Trump’s tariff rhetoric over the past year has been to spawn something that every CEO dreads: unnecessary economic uncertainty.
Businesses around the world are asking: Will America’s tariffs go up, or won’t they? If so, by how much? Will it be 10, 20, 100, or 2,000 percent? Would universal tariff hikes be accompanied by tariffs specifically targeted against particular countries? If so, which ones, and for how long? If Chinese imports get their own 60 percent rate, and China retaliates, will the world start descending into a global trade war?
Such uncertainty doesn’t only impact exporters of goods to America. It also unduly complicates the choices facing American businesses. They start wondering whether they should continue sourcing something from abroad or whether they need to find domestic suppliers. For all they know, imports might suddenly get much more expensive in the near future. Alternatively, nothing might happen at all. Who’s to say?
All this uncertainty makes it harder for the thousands of American businesses that use foreign imports to plan ahead. Facing such ambiguity, their appetite for risk and expansion will probably diminish.
Another problem with using tariff increases as a bargaining stance is that you must be prepared to follow through if your implied threat does not elicit the desired response. But once you take that step, even if only as a temporary measure, the odds are high that the other side will retaliate in ways designed to hurt your economy.
One recent example concerns the Trump administration’s 2018 imposition of tariffs on $250 billion worth of goods from China in three tranches following unsuccessful negotiations to persuade Beijing to stop engaging in practices like forced technology transfers. But as the March 2019 Economic Report of the President states, the desired effect was not achieved:
Rather than changing its practices, China announced retaliatory tariffs on U.S. goods. The first and second tranches were met with symmetric responses against $34 and $16 billion worth of 2017 U.S. exports, respectively. Notably, the first tranche of retaliation included a 25 percent tariff on $14 billion worth of U.S. soybean exports — the Chinese market represented over 57 percent of total U.S. soybean exports in 2017. Soybeans were the largest single product among dozens of agricultural exports targeted.
Chinese retaliation, the report adds, resulted in the Trump administration having to provide affected farmers with billions of dollars in subsidies to compensate for their losses.
No one would describe this as a good outcome for America. Moreover, six years later, China still hasn’t altered its technology transfers practices, despite the Biden administration’s also using tariffs to try and force a change.
Now consider what would happen if a Trump administration increased tariffs on all imports into America to try and advance renegotiation of multiple trade agreements.
Some American businesses would simply keep importing what they want from abroad but pass on the higher costs associated with the tariff increase to American consumers. Other companies would try to source the same inputs domestically. Yet that, too, would generate increased prices for American consumers. After all, the reason why companies import something in the first place is that doing so is less expensive than using domestic sources. Again, American consumers would absorb the extra costs.
A universal tariff increase on America’s part would also likely provoke retaliation against the U.S. from across the globe. This could involve countries raising their own tariffs on imports from America, imposing import quotas upon American goods, and/or applying additional health-, safety-, or environmental-compliance standards to American-made products. All such measures would hurt major export sectors of the U.S. economy such as transportation equipment, electronics, chemicals, energy-related products, agriculture, minerals and metals, and machinery, to name just a few.
The damage done to America by American tariff increases wouldn’t stop there. Numerous American companies would immediately start lobbying legislators and the White House for subsidies and other forms of assistance to offset the costs of retaliation.
If the history of tariffs in America tells us anything, the question of who would actually receive subsidies would be significantly determined by which companies have greater access to political power: i.e., cronyism. Furthermore, once those subsidies were in place, their recipients would fight tooth and nail to prevent them from being reduced in the future.
All these problems — excessive uncertainty, higher prices for American businesses and consumers, retaliation from abroad, more cronyism, the spread of hard-to-remove subsidies — would be a high price to pay for using tariffs “to escalate to de-escalate.” In fact, an American president who thinks strategically would likely conclude that the risks and costs associated with tariffs-as-a-tactic would be remarkably high, if not unacceptable.
We can only hope that any U.S. president’s advisers who prided themselves on truth-telling and advancing America’s general welfare would tell the president precisely that.