Trump’s tariffs are an opportunity for Harris

PRINCETON — Although trade policy is being debated everywhere, rarely is it addressed honestly. Instead of focusing on costs and benefits, the issue is crudely framed as a matter of “foreign” versus “domestic” production. This lack of serious debate about economic openness will have catastrophic consequences. The new consensus that has emerged can only end in tears.

Recall the first (and probably the only) debate between the two US presidential candidates. The only substantive, policy-relevant moment occurred in the opening minutes, when Kamala Harris described Donald Trump’s proposed 20 per cent tariff on all imports (with a 60 per cent levy on imports from China) as a sales tax. Trump replied, incorrectly, that the cost would fall on foreign producers, not on American citizens. But when he pointed out, correctly, that President Joe Biden has (largely) continued the tariff policy that he had started, Harris had no response. At some point, however, the Democrats will have to examine the question, because getting trade policy right is critical to the health of both the polity and the economy.

Fortunately, researchers have produced plenty of empirical evidence on the effects of trade, and there is surprisingly little controversy over the results. The most extensive study of the Trump tariffs comes from David Autor, Anne Beck, David Dorn and Gordon Hanson, who show that the policy had no positive effect on manufacturing employment, which was supposed to be protected. Worse, owing to retaliatory tariffs from other countries, the Trump policy produced job losses in many other sectors. But the tariffs increase the Republican vote in areas where workers had been “protected”. The policy thus offered political gains at an economic cost.

A political effect that benefited Republicans should not have been a reason for Biden to continue the tariffs. But by the time he took office, the rhetoric of promoting American production and getting tough with China had taken hold. Offering any “concession” to China, which would, in reality, have been a concession to American consumers, was seen as counterproductive.

Trump’s new tariff proposals are even more radical than the tariffs he implemented during his first presidential term, and they would bring much greater dangers. For starters, the price effects would be much larger, implying greater welfare losses. Estimates of the annual costs of a 10 per cent tariff (half of what he wants) to the average consumer range from the progressive Centre for American Progress’s $1,500 to $2,600 from the National Taxpayers Union.

Tariffs also pose conceptual and practical problems. Most products are the result of complex supply chains, and one stage may be in China even if final production or assembly occurs somewhere else. Hence, there has been much attention on the surge in American imports from Mexico and Vietnam at a time when those countries are also buying more from China.

Similarly, a large share of US generic pharmaceuticals come from India, but Indian producers use chemicals supplied by China. Should these products be taxed, too? Surely, Americans are not eager to pay more for their medications. If some drugs become unaffordable, higher morbidity and mortality will be the predictable outcome.

When it comes to trade, tariffs are a source of friction. A good analogy is the build-up of ice on the wing of an airplane: A little may not matter, but there is a tipping point at which the plane will no longer fly. Are we willing to crash the US economy, and the global economy with it, with a policy that would make the reaction to the 1930 Smoot-Hawley Act look modest by comparison? Given that policy’s role in causing a catastrophic global depression, the answer should be obvious.

Unfortunately, the new conventional wisdom regards free trade as a dangerous part of the discredited “neoliberal” ideology that the United States and its Western allies imposed on others after the Cold War. Attacks on free trade have come from both the right and the left. Russian President Vladimir Putin and Hungarian Prime Minister Viktor Orbán have made attacks on neoliberalism the core of their ideology, arguing that economic openness leads to the disintegration of traditional social values. Likewise, the left has long attributed corrosive effects to neoliberalism, and centrists like Biden have concluded that they can benefit from taking up themes that the right and left share.

There are two ways to return to common sense. One is to conduct the protectionist experiment and then consider the results, which would include massive job losses and the spread of discontent and instability around the world. It would be a reenactment of the 1930s, a miserable period that led to the recognition that trade generates widespread prosperity. Opinion polls give even odds to the American people choosing this path on November 5.

The other possibility is a serious, evidence-based discussion of the effects of trade. In theory, explaining the politics should be easy. The trade-off is between funding government expenditures through the equivalent of a sales tax on one hand, and relying on income taxes on the other. Voters should know that protectionism is highly regressive. Low- and middle-income earners are disproportionately hit by tariffs, whereas high earners don’t notice them at all.

Can this discussion be brought out of the corridors of academe? While the US has no tradition of federal referenda, just imagine how voters would respond if directly asked whether they prefer a much higher consumption tax. The best answer to “populism” is to have the courage to ask the people about specific issues, and the tariff is the most urgent. A serious debate about trade would be infinitely preferable to a tariff war that produces a global crash. The choice is obvious, and Harris needs to make it.

Harold James is professor of History and International Affairs at Princeton University. A specialist on German economic history and on globalisation, he is a co-author of The Euro and The Battle of Ideas, and the author of “The Creation and Destruction of Value: The Globalization Cycle,” “Krupp: A History of the Legendary German Firm”, “Making the European Monetary Union”, “The War of Words”, and, most recently, “Seven Crashes: The Economic Crises That Shaped Globalisation” (Yale University Press, 2023). Copyright: Project Syndicate, 2024. 

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