Talk of Tariffs from Team Trump Makes Economists Very Nervous
Policy + Politics

Talk of Tariffs from Team Trump Makes Economists Very Nervous

REUTERS/Lucy Nicholson

A report from CNN that Donald Trump and his economic team are considering the imposition of a 5 percent tariff on imports is adding fuel to the fear that his administration would be willing to engage in the sort of aggressive protectionism that leads to trade wars.

CNN reported on Wednesday that senior figures on Trump’s economic team, like venture capitalist Wilbur Ross, the nominee for Commerce Secretary, are serious about imposing a blanket tariff on imports as they cross the border. Throughout his presidential campaign, Trump took a “get tough” stance on trade issues, insisting that the U.S. is effectively being cheated out of jobs and revenue by bad trade deals.

Related: It Looks Like Trump Is Serious About Starting a Trade War With China

The suggestion that he would pursue the 5 percent tariff -- enacted by executive action, according to CNN -- came as Trump announced the creation of a National Trade Council in the White House, apparently operating at the same level and the National Security Council and Domestic Policy Council. The man he picked to run the NTC, University of California-Irvine economist Peter Navarro, is a trade hawk who has repeatedly warned that China is attempting to destroy the United States through unfair trade practices.

But while Trump has talked about tariffs before, they were typically presented as specific and punitive -- like a 45 percent tax on all Chinese goods as a punishment for what Trump claims are Beijing’s illegal trade practices, or a 35 percent tariff on goods manufactured by U.S. companies that move production overseas.

An across the board 5 percent tariff would be so unprecedented and counter to most economic theories about trade, that some economists weren’t ready to take the idea completely seriously, reacting instead with cautious disbelief.

Alan Cole, an economist with the Center for Federal Tax Policy at the Tax Foundation, said he was considering the idea a “trial balloon” that may not actually reflect the incoming administration’s real plans. “Maybe they want to see how people will react.”

Related: Experts Warn of a Coming Fiscal Crisis as Trump Prepares to Take Charge

However, he said, “If they keep going forward with this, I would expect more attention is going to be paid to it by economists and think tanks, and that attention is going to be negative.”

In general, economists dislike tariffs because they are an inefficient form of taxation, and they cause particular problems when the nation levying the tariff is, itself, a major exporter.

If the sole purpose of a tariff was to raise money for the government, there’s at least an argument that they are a good idea. The hope, basically, is that part of the additional 5 percent cost of goods coming into the country would be borne by foreign merchants, meaning that the Treasury would gain more in tax revenue than the U.S. population would pay. However, tariffs don’t operate in a vacuum. For one, they tend to cause the currency of the country imposing them to rise in value relative to other countries’ currencies, which hurts domestic industries whose exports are now more expensive to foreign buyers.

Tariffs also frequently trigger retaliation by other countries, doing still more damage to domestic companies that export their goods. They also raise prices on goods that consumers in the country imposing the tariff saw as a good value.

Related: Want to Pay Less than Half for Your Meds? Join the Throngs and Try Canada

Cole said that if the Trump administration is seen to be serious about pushing the tariff, it will see “fairly united opposition among experts and academia.” However, he pointed out, the defiance of experts and academics hasn’t exactly deterred Trump in the past.

“All of that opposition isn’t to say that he won’t end up getting tariffs,” Cole said.

Nevertheless, he said, “It’s not a good idea.”