Happy Fourth! Between barbecues and fireworks, we should think about what colonial Americans wanted when they declared independence: Among their demands, the right to conduct business freely and to consent to the taxes they paid.
Two of the “facts submitted to a candid world” in the Declaration of Independence (a list proving the King’s tyranny) reflect those hopes. England had “[cut] off our trade with all parts of the world,” and “[imposed] taxes on us without our consent.” Those actions sound familiar today, but not because of British rule. It’s because of tariffs, or taxes imposed on imports.
For months, President Trump has been moving toward a trade war. His shot heard ‘round the world: Tariffs on a wide range of goods focused on imported steel and aluminum. Canada, China, Europe and Mexico retaliated, and the Trump administration has threatened retaliation against the retaliations.
By putting “America First” with metals tariffs, Trump says we will “bring jobs and industry back onto American shores.” Would we? Not according to most economists. Nor to Senate Finance Committee Chair Orrin Hatch (R-UT), who blasted the policy at a hearing with Commerce Secretary Wilbur Ross:
“Know that you are taxing American families, you are putting American jobs at risk, and you are destroying markets — both foreign and domestic — for American businesses of all types, sorts and sizes.”
It is almost as if Hatch borrowed from one of those “facts submitted to a candid world.” He could have been talking to King George III.
Are tariffs “taxes imposed without consent?”
Not exactly. Voters knew candidate Trump wanted to impose tariffs, and he won the election. The US Constitution gives Congress the authority to modify tariffs and Congress has not done so. President Trump moved on his own, using a provision of existing law that allows him to impose tariffs on imports by claiming tariffs are necessary to protect national security.
During the campaign, did voters understand what tariffs would mean for the cost of the goods they buy and, perhaps, for their jobs? While tariffs are imposed on importers, those businesses will try to pass their increased cost on to consumers. If they can find a lower-cost US version of an imported product, consumers might buy it (Trump’s preference). Or, they might simply pay more for the import, since the tariff or import tax is built into the price and, if small enough, not be salient to consumers. (When you don’t see or know about something, can you really consent to it?) Or they might simply not purchase the product at all.
Two years later, how are voters feeling about tariffs? Polls show that more than 50 percent of respondents oppose the steel and aluminum tariffs Trump announced in March. Why? Well, the Center for American Political Studies at Harvard and The Harris Poll found that 43 percent of voters felt the tariffs would cost American jobs while 38 percent felt they’d protect them. Other polling by POLITICO/The Morning Consult found that 45 percent of voters think tariffs on aluminum and steel will hurt the economy, while 35 percent think they will help.
Do tariffs “cut off trade with the rest of the world?”
Tariffs don’t cut off all trade, but they make commerce more expensive and difficult. US consumers could end up paying more for products. That’s because US manufacturers often rely on a global “supply chain” in which they must purchase raw materials, parts, and other goods from other countries to make the products. If US producers can boost prices by an amount up to a tariff level and maintain market share, they will.
Undeniably, there are some winners from Trump’s trade policy. For example, in Granite City, Illinois, US Steel has reopened a mill and is rehiring 500 people at one blast furnace, and 300 at another.
But research by The Trade Partnership finds that for every job gained from metals tariffs, five are lost. In part, that’s because of higher US manufacturing costs for products containing the metals subject to tariffs. And with this summer’s tariffs, many firms already are starting to feel the bite.
Take Mid Continent Nail Corporation of Poplar Bluff, Missouri. It’s the largest remaining major nail producer in the country. It pays workers an average of $12.50 an hour and is one of the largest employers in its county. Since the 25 percent US tariff on imported steel went into effect and the prices of its raw materials went up, the company has lost about half of its business. While it employed 500 people at the beginning of June, the firm has begun layoffs. It may have to close up shop by September.
Then there are retaliatory tariffs. The Petersen Institute for International Economics (PIIE) explains: The Trump administration… will likely be imposing tariffs on $50 billion in Chinese goods. China will retaliate on a similar amount of US exports to China—but China will target American agricultural products. That means, as PIIE concludes, “American workers, ranchers, and farmers will largely bear the costs of China’s tariffs associated with lost agricultural sales.” And other countries have announced retaliatory tariffs, as well.
To remain competitive in world markets, US manufacturers can move production overseas—exactly the opposite of what Trump wants. For example, after the European Union announced 25 percent tariffs on large motorcycles in response to Trump’s metals tariffs, Harley-Davidson decided to move production of bikes for sale in Europe to its overseas plants. Otherwise it would have had to raise its average bike’s retail price by $2,200 to cover the EU tariff.
So what can our candid world expect in America’s 235th year of independence?
Senator Hatch painted a bleak picture. And PIEE’s Mary Lovely told The Financial Times (paywall), companies will pass on price increases with unprecedented speed. Lost sales will follow these higher prices, posing a real risk of job losses across the country. The Washington Post maps out communities whose jobs are at risk here. One can hope that the current cycle of tariffs and retaliation ends before an all-out trade war leads to a recession.
In the meantime, happy birthday, America.
The Tax Hound, publishing the first Wednesday of every month (or the day before a Wednesday holiday), helps make sense of tax policy for those outside the tax world and connects tax issues to everyday concerns. Need help or have an idea? Post a comment, or send Renu an email.
