Trump’s tariffs
Donald Trump has just thrown many of his supporters under the bus. Trump says he is going to impose 25% tariffs on Canada and Mexico plus an additional 10% on China. In so doing, he has just betrayed those who voted for him because of the price inflation during the Biden years. First off, I thought all trade agreements had to come through the Congress. If a president can do this unilaterally without the consent of Congress, then Congress should take away this power. Second, tariffs raise the price of imported goods and are paid by the importer and not by the country of origin. The importer then forwards the amount collected to the Federal government.
What happens next depends on the elasticity of demand for the good imported. If it is a final good, then the importer (say Walmart) may decide to pass anywhere between 0 to 100% on to the customer. Any amount absorbed by Walmart will then be a drag on its earnings and lower its profits adversely affecting both the company and its shareholders. If the good is an intermediate good such as aluminum, steel, or lumber the importer will incorporate that price into its final product increasing final prices.
Currently about 3 million cars are imported from Mexico a year and another million from Canada. More than $90 billion in auto parts are imported. There are some estimates that the price of cars in the United States will rise between $3,000-$5,000. Not surprisingly, Trump’s announcement was met with a fall in the stock price of the auto makers. What about all of the agricultural goods imported? They will be adversely affected as well.
Estimates vary as to the overall effect of the tariff on households between $1,000 to $3,900 in lost purchasing power. The hardest hit will be low to moderate income households who spend relatively more on consumer goods and who shop at stores that stock Chinese products, stores like Walmart and Target. Moreoever, Trump has threatened to increase Chinese tariffs by an additional 60% which will have an even greater negative impact on household real income.
The Chinese, Mexicans and Canadians won’t sit idly by. The Chinese retaliated on American goods during the first Trump administration and will do so again. So did Canada and Mexico. The new Mexican president has also said that Mexico will retaliate this time as well. Recall during the first Trump administration when he imposed stiff tariffs on Canadian lumber building costs in the United States skyrocketed causing a building slump. The housing market also suffered. The same will happen again. Most economic forecasters predict that the overall impact of the tariffs will be to raise consumer prices, lower economic growth and increase unemployment with a loss of about 400,000 jobs. All bad things.
I reported before that I had a conversation with a prominent economist who said that Trump was using tariffs as a bargaining tool to get fairer trade deals. I don’t believe him. Trump hated NAFTA and on his watch renegotiated the deal which resulted in the US-Mexico-Canada Trade Agreement. Well Trump has just violated his own agreement with the tariff threat.
Trump has said that he wants to return manufacturing jobs back to the US. He must think that magically companies can instantaneously build plants and re-employ factory workers. Trump forgets that the myriad of US regulations mean that it takes up to three times longer to bring a plant on line in the US than in Mexico. Even then the labor costs in the US may make the plant not feasible.
This time Trump says that the tariffs are being used to make Mexico and Canada stop the flow of fentanyl and illegals into the country. In his last term, he used the threat of tariffs to get the Mexicans to agree to his remain in Mexico policy. It remains to be seen what will be the reaction of the Mexicans and the Canadians. The Mexican president has vowed retaliation amid the threat that the tariffs will plunge Mexico into a recession, Although my memory is a bit fuzzy, I recall that during the first Trump administration Mexico imposed $2 billion in retaliatory tariffs targeting exports from Texas and the swing states of Arizona, Michigan and Illinois. The new Mexican president is a hardcore leftist and has sworn not to back down to Trump. Although fentanyl is manufactured by the cartels in Mexico from chemicals from China, Mexican president Claudia Sheinbaum says that drugs are an American problem. It will be interesting to see who blinks first.
Regardless, Trump has thrown his rank and file supporters under the bus.
haroldblackphd.com 