President Donald Trump’s tariffs have created a firestorm of controversy that has confused most of the public as the media has poorly explained the economic alternatives. Before addressing this convoluted and complicated problem, the big question that must be answered is: Do you support production or consumption as an economic solution?
- Consumption: People who support the consumption alternative view tariffs as a bad strategy that will increase inflation and prices and possibly lead to a recession. They want to maintain the free market status quo where cheap imports are not tariffed and consumer prices remain the same. Critics believe that tariffs are a massive tax on American families and will do more harm than help.
- Production: On the other hand, support for production means supporting American manufacturing, protecting selected manufacturing industries and specific technologies, reshoring production, reducing the trade deficit and establishing a more level playing field.
Before choosing an alternative, it is helpful to evaluate what has been going on since 1994, when NAFTA and outsourcing began.
Trump is right about the unfairness of the existing tariff system, as shown in Table 2. Why should 25 countries have tariffs from 4.5% to 60% while the U.S. has average tariffs of 3.4%? Why did we think it would be good for America to allow all of our trading partners cheap access to all of our industries when they won’t give us the same access to their industries? A good example is the auto industry.
According to former U.S. Secretary of Commerce Wilbur Ross, “The EU charges a 10% tariff on imported American cars, while the U.S. imposes a 2.5% tariff on imported European cars. Europe exports four times as many vehicles to the U.S., or 1.14 million cars annually.
These unfair tariffs justify some kind of action that would level the playing field, and the idea of reciprocation with matching tariffs to get them to reduce their tariffs is valid. Over the last 40 years, we have proven that more trade agreements and negotiations do not work, but one thing that gets everybody’s attention is a monetary tool like tariffs.
It is also clear that implementing tariffs will have winners and losers. The losers will be consumers living paycheck to paycheck and cannot afford price increases. Also, businesses that depend on imported parts or materials from Asia will have to absorb increased import prices unless they can get a tariff exclusion, as happened for thousands of companies during the first Trump tariffs in 2017.
The big question is: What happens to the economy and manufacturing if we opt for the status quo to protect consumption and consumer prices? Until the threat of tariffs, the U.S. pursued a race to the bottom strategy, where outsourcing jobs and industries were rewarded, manufacturing declined, multinational corporations received most of the gains, and American towns and communities were devastated.
Accepting the consumption alternative means accepting deindustrialization as a permanent strategy, increasing trade deficits (which are currently $1.2 trillion per year), loss of critical industries, loss of technologies, loss of research and development, and our inability to compete in the future. The Coalition for a Prosperous America succinctly summarized the problem: “For too long, Washington sold out American workers in pursuit of a globalist fantasy—one where America consumed while others produced, and the middle class was left to fade.”
Our Difficult Decision
We must choose between two alternatives, and both have serious downsides. We can’t afford to give into the idea of continued deindustrialization or give up on manufacturing, and the only way to enact change under these circumstances is tariffs. However, the way the Trump Administration has introduced tariffs is haphazard and has led to more uncertainty than rational policy.
Instead of developing a comprehensive tariff plan, the Trump administration looks like they are making it up as they go along.
Implementing blanket tariffs on a country—like Trump did with Canada—isn’t going to work, because of the connection between our industries and suppliers. Blanket tariffs cause many problems that can only be worked out with negotiated exclusions.
We need an industry-by-industry tariff approach that sets tariffs and quotas on selected industries and products we need to protect. This will help us protect against unfair trade of specific imports like Mexican steel, which deliberately exceeded the agreed upon United States-Mexico-Canada Agreement (USCMA) limit by 492%.
Without some kind of tariff, America has no way to control countries that want to illegally dump products into the U.S. below cost like China and Mexico did with steel. Again, talking, trade agreements and negotiations haven’t worked.
Tariffs Will Reset Global Trade
Tariffs will reset global trade and will prioritize American manufacturing, protect key industries and working-class jobs, and provide security from countries that cheat, like China. Tariffs present complicated macroeconomic choices, but favoring production and forcing our trading partners to trade on a level playing field is a better long-term strategy than favoring consumption.
However, there will be winners and losers—prices will rise, and nobody knows how much. The predictions of price increases are not very accurate because consumers already face rising cost problems from child care, tuition, healthcare, mortgages, rent, gasoline, and insurance that will continue to increase regardless of tariffs on imported goods.
Accepting the status quo without tariffs might stabilize import prices, but it would do nothing to stop our competitor’s unfair trading practices that have landed us in the economic problems we face today.
Michael Collins is the author of “Dismantling the American Dream: How Multinational Corporations Undermine American Prosperity.” He can be reached at [email protected] or on mpcmgt.net.