Dr. John Gong, Professor at the University of International Business and Economics
Editor’s note: John Gong is a professor at the University of International Business and Economics (UIIBE).
The Trump administration certainly believes so. So, it is wasting no time initiating a Blitzkrieg tariff campaign, literally within days of Trump’s inauguration. The campaign started with 25% tariffs on imports from Canada and Mexico, which are now on hold for the moment, upon both countries’ strong responses and some commitments on tackling the issues of fentanyl and illegal immigration.
Then came the additional 10% tariff on imports from China. Beijing responded with a firm but restrained retaliation, including some tariffs on about $14 billion worth of American exports, among other retaliatory measures. President Trump has since promised that more tariffs are on their way targeting the European Union as well.
The fact that these tariffs will cause catastrophic damage to the global economy is well known to the public. But not so well known is how the tariffs are not in the national interests of the country, even though it is widely accepted among the economist community. CGTN’s latest report, “The Tariff Boomerang,” does a pretty good job of educating the public on this point. The choice of the word “boomerang” for the title says it all – pointedly alluding to the prediction that the Trump tariffs are going to backfire and end up hurting America.
There are several reasons why tariffs hurt America’s national interests. The first point is that they will hike up prices. If the supply side pays for the tariffs –the manufacturers and exporters in China – then inflation is unlikely to creep up in the United States. But if the demand side in the United States pays, then inflation is likely to happen. Why? Because the U.S. importers forced to pay the tariffs will pass on those additional costs to the consumers through price increases.
Economists have a fairly good analytical framework to understand this issue, which boils down to “demand elasticity,” meaning the degree by which demand changes as a result of price increases. If the demand is inelastic, most of the additional costs will be borne by the demand side – the consumers. There have been several studies in trade literature about Trump’s first trade war against China in 2018 that have shown that demand for Chinese imports are indeed inelastic, and American consumers have indeed been paying for the tariffs. I have seen expenditure numbers ranging from an additional $400 to $1,000 per household per year as a
result of the Trump tariffs. Some predict the impact this time around will be as high as $1,200 per household per year. To me, this is a no brainer. A lot of the goods the United States imports from China are everyday necessities sold at Wal-Mart and on Amazon, and they, of course, have low demand elasticity. The second reason why tariffs aren’t in the national interests concerns the protection argument. We know tariffs don’t protect consumers, but don’t they at least protect American companies?
The CGTN report does a good job of explaining the “no” answer, manifested in two aspects. First, many American companies are already globally-integrated; even though they operate principally in the United States, they still source many parts and components from overseas. Contrary to conventional wisdom, tariffs actually hurt them by raising their costs, even to the extent of incentivizing them to move overseas. The second reason why protectionism doesn’t help American companies is that it will dampen innovation, which will result in decreasing their competitiveness.
The American automobile industry is a good example. President Trump has a fixation on gas guzzlers. His “Drill, baby, drill” policy will eventually turn America into an ICE (internal combustion engine) island, whose vehicles will be at least one generation behind China’s. What tariffs protect is not just Detroit automakers, but also their outdated technologies. My last takeaway regarding the tariff national interest issue regards the national security argument.
The CGTN report uses the word “murky” to describe this argument, via the interview with a trade professor. This analysis resonates very much with me. National security ultimately boils down to great power competition in the hi-tech realm. If tariffs protect outdated technologies, how can they possibly help with national security thus national interests?