The Folly of Trump’s Tariffs

Over and over in American history we have tried tariffs to solve economic problems. Over and over tariffs have failed to solve those problems, while creating new ones. Sometimes it takes the passage of years for us to forget how badly tariffs hurt us the last time we tried them. Other times we have a leader who just doesn’t know or care about history and recklessly promotes tariffs to fix an imaginary problem. We have that leader now.

Usually, the U.S. government adopts tariffs for rational reasons. For example, we used tariffs early in our history to protect and encourage domestic manufacturing. But Trump’s proposed tariffs can’t be justified on that ground. He proposes blanket tariffs on all goods from a particular country, not targeted tariffs on goods in industries that need protection.

Some argue that tariffs will reverse the “hollowing out” of American manufacturing. Phil Gramm and Larry Summers, former Senate and Treasury officials who know what they’re talking about, debunk that idea in a January 23, 2025 letter in The Wall Street Journal. They point out that American manufacturing is at an all-time high. We are producing with higher productivity, meaning fewer employees but with higher wages. This is a great strength of the American economy, not a weakness.

Before 1913 when the Sixteenth Amendment established income taxation, tariffs were the main revenue source that funded the government. Our economy then was primitive by today’s standards. Today only 1.9% of our revenues come from tariffs. The U.S. government can tax and borrow with such ease that tariffs are no longer needed. Trump says that tariffs will make us rich, but have you heard any serious figures from the Treasury on the amount tariffs would raise or what spending gaps this revenue would close? Of course not.

Trump’s bizarre threats to use tariffs, and the tariffs he has so far imposed, have no connection to the traditional way tariffs are used. Instead, they are an effort to strongarm the target countries into adopting policies favorable to the U.S. that Trump cannot obtain through normal diplomacy.

So far this has been to force Canada and Mexico to supplement their efforts at the U.S. border to stop immigration and fentanyl. This bullying has not been well received in these two countries. The U.S. national anthem was recently booed by Canadian fans at an NBA game in Toronto. Only time will tell whether roughing up our closest neighbors and two largest trading partners will have lasting negative effects.

In the 1930s the Smoot-Hawley Tariff Act turned a recession into a full-blown depression. That legislation placed tariffs averaging 20% on about 20,000 imported goods, including agricultural products.  The goal was to protect American farmers. However, it raised the prices of food and other items. Other countries retaliated with tariff hikes, forcing global trade to decline by 65%.

We have already seen China retaliate for Trump’s imposition of 10% tariffs on goods they export to us. Their tariffs on our goods entering China will mean we will sell less in the huge Chinese market, so our own business income and American jobs will suffer.

American tariffs cause prices to rise here because foreign goods become more expensive. We’re not talking just luxury goods like BMW cars that we can easily avoid buying. Tariffs on Canada, Mexico and China will mean avocados, cherry tomatoes, children’s clothing, toys, electronics and all the other things we consider part of middle-class life will rise in price. Mexican President Claudia Sheinbaum warned that “one tariff will be followed by another.” Attention Wal-Mart shoppers! Stuff you like to buy will start getting more expensive.

It will not only be goods from foreign countries that will become more expensive. Experience has shown when a tariff is placed on a foreign item making it more expensive, the price of competing American items also increase because American sellers are able to raise prices and still be less expensive than the tariffed foreign item. You can count on Trump having no plan to stop that sort of thing.

Then there are longer term problems. The Economist magazine explains that tariffs on foreign goods induce American companies to “innovate less and misbehave more.” Sheltered from better run foreign rivals, American firms would have less incentive to produce superior and less expensive products. In a word, they would get lazy.

As he did in his first term, Trump is governing by impulse and chaos. I understand that many folks voted for him because of inflation. But it is unlikely they will see the payoff of lower prices. Instead, Trump’s tariff folly will add to their burden.