The Corner

Economy & Business

Get Ready for the President to Ask for 25,800 Tax-Rate Increases During the SOTU

President Donald Trump delivers his State of the Union address to a joint session of Congress, January 30, 2018. (Win McNamee/Pool/Reuters)

Tonight during the State of the Union address we can expect president Trump to highlight the economy, which by most accounts is doing very well. We can also expect the president to talk about a potential deal with China, infrastructure spending, and the use of government to control the price of drugs. We can be sure that there will be no reference to run-away spending and the size of the debt which has reached $22 trillion and has grown more in the last eleven years than in all of American history.

It will be depressing for those of us who still believe that  free markets are the best way to serve the American people and that large governments that overreach and invade most of our lives is a big threat to our wellbeing and happiness.

It will be even more depressing since after almost a year of protectionist policies that have led to higher tariffs on millions of consumers, including many manufacturers, and has led to business closures and sour relationships with our trading partners, we can expect the president to make yet another misguided push toward more bad trade policies. Tonight, the president is expected to ask Congress to expand his ability to impose duties with a complete disregard for the global-trading system that has served us so well in the last 60 years.

When the president tells Congress tonight that he would like to see legislation enacted that would allow him to adjust individual tariffs upward to match those imposed by other countries, he will likely make his case by repeating his favorite examples: United States has lower duties than do most other countries in the world. We will hear once again that the European Union imposes a 10 percent duty on U.S cars exported to Europe while the U.S.’s duty on foreign cars entering America is 2.5 percent. I doubt he will mention that the U.S imposes a 25 percent tariff on light trucks that it has insisted to protect in its negotiations with South Korea, and Canada, and Mexico. We won’t hear about the thousands of tariffs that the U.S imposes on foreign goods.

Now, protectionists obviously refuse to acknowledge what economists all agree on (Peter Navarro being a notable exception): This state of affairs is mostly to the benefit of us Americans since it means that we pay a smaller penalty than do Europeans when we purchase automobiles of our choice. In addition, just as U.S. tariffs are paid in a large part by American consumers, foreign tariffs on U.S. exports are paid in a large part by foreign consumers. As such it defies logic for an American president to punish American consumers in order to prompt the EU to be kinder to EU consumers.

More importantly to tonight’s announcement is the actual reality of what the implementation of a truly reciprocal system of duties will look like. My colleague Dan Griswold has written an entire paper on the issue. It is appropriately called “Mirror, Mirror, on the Wall”. The trigger for this research was draft legislation, called The “U.S. Fair and Reciprocal Tariff Act,” (the FART Act) circulating within the White House.

Matching higher foreign tariffs line-for-line is a very daunting task in our post-war global-trading system. That system rests on a simple principle: While World Trade Organization countries can set duties as they please, they must apply the same rates on the same item no matter where it comes from. This requirement means that no member can unilaterally raise a duty on given items coming from one country alone. If they do, retaliations and litigations will jeopardize a system that has done so much to free trade over decades.

The administration’s proposal would jeopardize our entire trading system by raising tariffs unilaterally on some goods and services, and also by targeting specific countries, hence violating the non-discrimatory principle.

Griswold also has data to illustrate the scale of the tax increase that American consumers will shoulder if this reciprocity principle is really implemented to mirror every higher tariff imposed by our trading partners. Leaving aside countries with which the U.S. has a free-trade agreement (meaning that duties are likely close to zero), Griswold looks at our ten largest trading partners. He finds that under the administration’s reciprocity plan “the United States would need to implement more than 25,800 upward duty adjustments.” 25,800! He finds “The higher duties would apply to $583 billion in imports to the United States, raising the duties on 45 percent of imports from the affected trading partners.”

American consumers: are you ready to face these 25,800 tax-rate increases? Apparently, the president thinks that you are. Oh, and Congressman Sean Duffy thinks so too as he has a bill out doing the same thing.

And for what? They will tell you that the point of the whole exercise is to get other countries to lower their duties on us (read on their consumers). See, they will tell you that what they really want is a freer trade world. But that’s not what is going to happen. I don’t even need to point to history and ask you to read the work of wonderful scholars such as professors Doug Irwin or Don Boudreaux. I just have to remind you that this is the same argument we were served a year ago when the president announced that he would be unilaterally raising steel and aluminum duties, and later added many tariffs on China products. Not to worry; the administration claims that trade wars are easy to win, and that no countries will dare to retaliate (against those tariffs) because they can’t afford to cut themselves off from our huge market. Navarro and Wilbur Ross made this claim repeatedly on TV. 

Wrong. Pretty much everyone retaliated against Trump’s tariffs. So far, nobody has caved, the deal with China, like the new NAFTA, won’t be anything radical. And yet, here we are settled with tariffs on hundreds of foreign items, many of which are inputs used by manufacturers all over the country, and facing many retaliatory tariffs.

Here is Griswold’s paper. I really hope members of Congress will read it carefully before considering giving the president what he wants.

Jackie Varas, American Action Forum — The Cost of Reciprocal Trade:

This analysis finds that imposing a new reciprocal trade policy through equal tariffs on our current trade partners could increase nationwide prices by over $60 billion per year, not counting the cost of retaliation.

Bryan Riley, NTU Foundation —  Reciprocity for Disaster:

Since World War II, treating our trading partners as allies rather than adversaries has paid enormous dividends for Americans. Just since 1990, world tariffs fell by nearly two-thirds as U.S. exports more than doubled, even after adjusting for inflation.

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Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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