Freshman economics students learn about the law of unintended consequences, which is that government actions and policies have unintended effects.
President Trump’s import tariffs would make a good case study, because they’ve had enough unintended effects to qualify for the Guinness Book of World Records.’
Trump, AKA the tariff man, likes to point out that tariff revenue has been pouring into the government’s coffers. In fiscal 2018, it came to $41.3 billion, according to the Treasury Department. That is less than one percent of all federal revenue for that year, and about 5% percent of the federal budget deficit, which was $779 billion – a 17% increase from fiscal 2017.
Moreover, $41.3 billion is only slightly more tariff revenue than the government took in in each of the three previous fiscal years.
Trump, as is well-known, also likes to use tariffs for what he calls “leverage,” although you might consider that a euphemism for arm-twisting. Whatever you want to call it, it seems to work, and why wouldn’t it? If someone pointed a gun at you and said, “Gimme all your money,” you’d probably give it to him.
China, Canada, Mexico, the European Union and other targets of Trump’s tariff war don’t want to tangle with him or with the richest country on earth (for now). So, each of them has tossed him some bones to keep him from biting them.
These are trade policy effects that Trump is no doubt proud of.
But the following are not.
A recent study by economists from the New York Federal Reserve Bank and Columbia and Princeton Universities, entitled “The Impact of the 2018 Trade War on U.S. Prices and Welfare,” found that the principal victims of Trump’s tariff war were American consumers.
“[We] find that the full incidence of the tariff falls on domestic consumers, with a reduction in U.S. real income of $1.4 billion per month by the end of 2018,” it said.
This is an unintended, but certainly not an unanticipated, effect. Trade sanctions always victimize consumers.
When other countries react to what they consider unfair trade practices by the United States, they almost always hit back where it hurts – in farm country. Since China imposed a retaliatory tariff of 25% on American soybeans, farmers who had been exporting most of their beans to China are now storing them in grain bins, where they’re in danger of spoiling. China has made up for the loss by buying more soybeans from Brazil.
U.S. energy companies can’t ship liquified natural gas to China, because China has imposed a 10% retaliatory tariff on U.S. LNG. The world’s second-largest LNG importer, after Japan, China has turned to other suppliers, such as Australia and Qatar.
Some Chinese companies have gotten around Trump’s tariffs on $250 billion in Chinese exports by opening factories in other countries and shipping to the U.S. therefrom. For example, the Washington Post reported on March 27 that Fuling Global Inc., a Chinese company that makes paper cups and straws for the U.S. market, opened a factory in Monterrey, Mexico and will ship its products to the U.S. from there, duty-free under NAFTA.
U.S. importing companies have to post a customs bond to assure the Customs and Border Protection agency that they will pay the tariff on the goods they import. As a consequence of Trump’s tariff war, the cost of a customs bond has increased exponentially, 500-fold in some cases, Reuters reported on March 29. This poses a particular hardship on small companies. Those that don’t pay the full amount receive insufficiency notices. CBP issued about 3,600 of those in the first quarter of 2019, a spokeswoman said. She declined to say how that compared with previous years. The Roanoke Insurance Group of Schaumberg, Ill. provided data showing that CBP issued an average of 2,070 per year between 2006 and 2017.
This problem is bound to get worse this month, as Mexico is expected to publish a list of retaliatory tariffs to supplement those it imposed in June 2018 after the Trump administration imposed tariffs on steel and aluminum imports of 25% and 10% respectively. The Mexican government reasonably expected those tariffs to go away after it agreed to the NAFTA renegotiation that the U.S. forced on it. But they didn’t.
The steel tariffs have been great for the U.S. steel industry, but not for anyone else. U.S. Steel (NYSE:X) CEO David Burritt said in a March 25 letterto the Wall Street Journal that the tariffs had allowed his company to restart plants and create more than 1,000 jobs.
Industries that use steel – autos, construction, home appliances and many others – aren’t so thrilled about the tariffs. The Ford Motor Company (NYSE:F) reported in January that the tariffs had cost it $1.1 billion more in 2018 than 2017.
Life will get a lot worse for the auto industry if Trump imposes a 25% tariff on imports of autos and auto parts, as he is considering doing. That would increase the average price of a car – foreign or domestic – sold in the U.S. by as much as $2,750 and “threaten” more than 366,000 jobs, according to a study by the Center for Automotive Research.
Caterpillar (NYSE:CAT) said the steel tariffs had cost it more than $100 million in 2018 and that it expected to pay twice that much this year. Caterpillar said it planned to raise prices on most of its products by as much as 4%.
The U.S. and Chinese governments have been saying lately that they’re close to a deal to end the trade war. If Trump follows through on his threat to put a 25% tariff on auto imports, he’ll find himself in another, with the EU, the world’s largest market, all because the EU has a 10% car tariff.
John Brinkey was speechwriter for U.S. Trade Representative Michael Froman and for Korean Ambasador Han Duk-soo during the Korean government’s quest for ratification of the Korea-US Free Trade Agreement.