Trump, the Self-Described 'Tariff Man,' Does Not Understand How Tariffs Work

Since the president-elect refuses to admit that levies on imports are taxes paid by Americans, he sees no downside to raising them.

"I'm a big believer in tariffs," President-elect Donald Trump said this week, not for the first time. "I think they're beautiful."

Trump claims the heavy tariffs he plans to impose during his second term are "going to make us rich," at no cost to American businesses or consumers. That is a dangerous fantasy.

Trump's position on tariffs begins with his longstanding misconceptions about international trade, which he erroneously views as a zero-sum game with rules that are rigged against the United States. "We're subsidizing Canada to the tune [of] over $100 billion a year," he told Kristen Welker on Meet the Press. "We're subsidizing Mexico for almost $300 billion."

Trump was referring to U.S. trade deficits with those countries, which are about half as big as he claimed. Those gaps between exports and imports are not subsidies; they reflect goods that Americans voluntarily purchase, which means they get something of value in exchange for their money.

As Trump sees it, however, trade deficits are inherently bad, and he aims to eliminate them by imposing tariffs. Although that is feasible only if tariffs raise the cost of imports, making them less competitive with domestically produced alternatives, Trump contradicts that logic by insisting that tariffs do not raise prices.

"Americans are not paying for the Tariffs" on Chinese goods, Trump averred in 2019. "They are being paid for compliments of China."

Trump, the self-described "Tariff Man," clearly does not understand how tariffs work. They are taxes collected from importers, not from the exporting country.

In theory, exporters could respond by cutting prices, or importers could swallow the additional cost. But study after study has found that the cost of tariffs is paid mainly by American buyers of intermediate goods and finished products.

"U.S. tariffs continue to be almost entirely borne by U.S. firms and consumers," Mary Amiti, an economist at the Federal Reserve Bank of New York, and two co-authors reported in 2020. That finding is consistent with the results of prior and subsequent studies.

The Tax Foundation estimates that the tariffs Trump imposed during his first term, which the Biden administration generally kept in place, cost Americans nearly $80 billion a year—"one of the largest tax increases in decades." And that's without considering the impact of retaliatory tariffs, "lost output, lower incomes, and loss in consumer choice."

When Welker noted that "your previous tariffs…cost Americans some $80 billion," Trump was unfazed. "They cost Americans nothing," he insisted. "It didn't cost this country anything. It made this country money."

Since Trump refuses to admit that tariffs are taxes paid by Americans, it is not surprising that he sees no downside to the additional tariffs he has promised to impose in his second term. They include a "universal baseline tariff" of 10 percent or possibly 20 percent; a tariff of 60 percent or maybe more on Chinese goods, plus "an additional 10% Tariff"; and a 25 percent tariff on imports from Canada and Mexico, which Trump promises to impose on his first day in office.

Trump says the 25 percent tariff, which would wreak havoc with cross-border supply chains for American manufacturers and raise prices for goods such as food, clothing, and cars, "will remain in effect until such time as Drugs, in particular Fentanyl, and all Illegal Aliens" stop entering the United States. Forever, in other words, which makes sense if you believe that such taxes "are going to make us rich."

Those tariffs, together with the 10 percent levy on Chinese goods that Trump improbably claims will suppress the illicit fentanyl supply by encouraging China's government to execute drug traffickers, would amount to a $1.2 trillion tax increase over a decade, the Tax Foundation projects. "In the long run," it adds, "we estimate the tariffs would reduce GDP by 0.4 percent and employment by 344,900 jobs."

As is often the case with Trump, we have to hope he does not mean what he says.

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