The True Cost of Trump's Tariffs

Plus, two ways Medicare could save billions

The True Cost of Trump's Tariffs

Stocks suffered their worst drop in months Tuesday as investors contemplated President Trump’s latest threats in his burgeoning trade war with China. Amid news that trade talks weren’t going well, the president threatened on Sunday to raise tariffs to 25% on $200 billion of Chinese goods, up from the current 10%. He also said he might impose an extra 25% tariff on another $325 billion of Chinese goods “shortly.”

Trump has repeatedly cited the tariffs as a contributing factor to the relatively strong economic growth seen in recent months, but most economists agree that tariffs function as taxes on American consumers and manufacturers. An importer pays a tariff on goods coming from overseas and has several options for what to do about that increased cost. According a Reuters analysis Monday, a U.S. importer can:

1. Pay the full cost of the tariff, and see profits shrink.

2. Reduce other costs to make up for the higher import cost.

3. Seek a discount from the supplier.

4. Change suppliers to avoid the tariff.

5. Raise prices to make up for the higher cost.

While importers may use some combination of those options, much of the cost ends up being passed on onto companies and consumers. A recent study by the Peterson Institute for International Economics found that Trump’s steel and aluminum tariffs added 9% to the price of steel products sold in the U.S. last year, for a total of $5.6 billion in extra costs.

Overall, the tariffs have added about $11.5 billion in costs to the U.S. economy on annual basis – and Trump is threatening to raise that number.

“[Trump’s] assertion generally that the Chinese are paying these tariffs is just simply nonsense. It’s a complete misunderstanding of how tariffs work, because tariffs are paid by the importing company and those companies are overwhelmingly American,” said Jacob Kirkegaard of the Peterson Institute. “Ultimately, that means this is a tax paid by the American consumers. The idea that it’s somehow something the Chinese pay is wrong.”

As far as government revenues are concerned, Trump’s tariffs aren’t moving the needle. “In theory, the government should be earning $32.5 billion a year on top of what they were already earning. That hasn’t happened,” Kirkegaard said. “If you look at tariff revenue in 2018, it was only about $50 billion, whereas in 2017, it was about $35 billion. It hasn’t gone up by as much as you’d think.” And even if tariff revenues were to increase further, they would be a drop in the bucket relative to the more than $3 trillion the Treasury takes in annually.

Although the tariffs aren’t doing what Trump claims they are, they nevertheless are having a real effect, as Tuesday’s market performance indicates. In a note to clients, Deutsche Bank's Torsten Slok pointed out just how unusual Trump’s approach to tariffs is: "If the US follows through on the latest trade war threats it will raise the overall US tariff level to 7.5%, which is higher than in many emerging markets" and well above the levels seen in other industrialized nations, the economist said.

How Medicare Could Save $80 Billion a Year on Prescription Drugs

Medicare could have saved almost $80 billion last year alone if it had paid what the U.K. does for prescription drugs that don’t have any competitors, according to a new study in Health Affairs.

The study looked at Medicare costs for 79 brand-name drugs that are only available from a single source and have been on the market for three years or more. The researchers compared Medicare Part D spending on those drugs to prices in the U.K., Japan and Ontario. They found that the U.S. price, after rebates, was 3.6 times higher than in the U.K., 3.2 times higher than in Japan and 4.1 times higher than in Ontario — and the longer a drug has been on the market, the greater the price difference.

If Medicare used what’s known as external reference pricing — basing its payments on international comparisons — it could have saved billions, the researchers conclude.

Buying all single-source drugs at the pre-rebate price in the U.K. would have saved $78.8 billion. The savings for the 79 drugs included in the study would have been $41 billion, or 72% of the $56.6 billion Medicare Part D spent on those medications. Even paying three times the pre-rebate UK prices would have saved Medicare $19.8 billion (35%) for the 79 drugs in the study, or $38.1 billion for all single-source drugs. And if Medicare had used the average price from the three reference sources in the study, it would have saved an estimated $72.9 billion on all single-source drugs.

Why it matters: The Trump administration has proposed using an international index of prices for Medicare Part B, which covers drugs administered in a doctor's office, not those you get at a pharmacy. This study suggests billions more dollars could be saved by expanding the idea to prescription drugs covered under Medicare Part D. The pharmaceutical industry opposes such price matching. "An international reference pricing system could result in American seniors losing access to their choice of medicine, and waiting years longer for new breakthrough treatments," the trade group PhRMA said in a statement to Axios.

Another Easy Way to Save Medicare Billions?

A new analysis by the Kaiser Family Foundation, a non-profit focused on health care, finds that Medicare beneficiaries who switched to Medicare Advantage plans offered by private insurers had lower prior health spending, on average, than those who did not switch.

Why it matters: Medicare’s payments to Medicare Advantage plans are based on the higher average spending among those enrolled in traditional Medicare. The study suggests Medicare could be overpaying by billions of dollars.

“The findings raise questions about whether Medicare Advantage plans tend to attract healthier and lower-cost beneficiaries and whether lower rates of service use among Medicare Advantage enrollees is attributable to care management or self-selection,” the Kaiser Family Foundation said in a press release. “Most notably, the study findings suggest that the current method of setting payments to Medicare Advantage plans based on spending for people in traditional Medicare may systematically overestimate expected costs of Medicare Advantage enrollees. Adjusting payments to reflect Medicare Advantage enrollees’ prior use of health services could potentially lower total Medicare spending by billions of dollars annually.”

House Democrats Release Their $1.3 Trillion Spending Plan for 2020

House Democrats on Tuesday released their proposed spending plan for fiscal 2020, detailing how they’d like to allocate $1.3 trillion in defense and non-defense funding.

The total discretionary spending level represents a $51 billion increase from 2019, according to The Hill, with about $27 billion of that increase going to the two largest of the 12 annual spending bills, Defense and Labor, Health, Human Services and Education, also known as Labor-H.

The Democrats proposed $622 billion in Defense funding (not including emergency spending or the off-book Overseas Contingency Operations account), up $15.5 billion.

The Labor-HHS-Education bill includes $189.9 billion in discretionary funding, up $11.8 billion from 2019 and $47.9 billion higher than President Trump requested in his 2020 budget.

The Hill’s Niv Ellis notes that Homeland Security is slated for one of the lowest increases, up just about $300 million compared to 2019, as Democrats continue to oppose Trump’s proposed wall on the southern border.

Among the other proposed spending levels and changes, based on information from the House Appropriations Committee and The Hill:

  • Military construction and Veterans Affairs: $105.2 billion, up $8.1 billion
  • Transportation and Housing and Urban Development: $75.8 billion, up $4.4 billion
  • State and foreign operations: $48.4 billion, up $2.1 billion
  • Interior and environment: $37.3 billion, up $1.6 billion
  • Agriculture: $24.3 billion, up $1.3 billion
  • Energy and water: $46.4 billion, up $1.8 billion
  • Financial services and general government: $24.6 billion, up $1.1 billion

The Republican-controlled Senate has yet to put forth its own 2020 spending plan as congressional leaders work to negotiate a potential deal to avoid automatic spending cuts set to take effect next year.

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Small Business Owners Mixed on the Effects of Trump Tax Cuts

Just over half of small business owners say that the 2017 Republican tax changes have not had much effect on their business, positive or negative, according to a Well Fargo/Gallup Small Business Survey conducted at the beginning of April. Another 25% say the new law has helped while 20% say it has hurt.

Nearly half of owners surveyed before the April tax-filing deadline said they expected that the tax law wouldn’t do much to change how much they paid in taxes for 2018. Another 23% said the new law would reduce their taxes, but a similar share, 21%, said they would pay significantly more. Gallup notes that these results mirror the broader public’s views of the tax law, based on other polling.

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