Donald Trump recently proposed a 45 percent tax on American shoppers buying imported goods from China.
Trump told the New York Times, “I would tax China coming in — products coming in. I would do a tariff. And they do it to us. We have to be smart. I’m a free trader. I’m a free trader. And some of the people would say, ‘Oh, it’s terrible.’ I’m a free trader. I love free trade. But it’s got to be reasonably fair. I would do a tax, and the tax — let me tell you what the tax should be. The tax should be 45 percent.”
Higher tariffs on American buyers have always been a big mistake.
In 1930 the Republican controlled Congress passed the infamous Smoot-Hawley Tariff Act that raised taxes on American imports. This unwise policy raised the cost of living for all Americans. These new taxes made it harder for people to shop for their families.
GOP Congressman Willis Hawley claimed that his tariff would cause “a renewed era of prosperity.” Instead his legislation made an already bad depression worse.
The historical record agrees with Ben Stein’s assessment of Smoot-Hawley tariff in the movie “Ferris Bueller’s Day Off”: “It did not work and the United States sank deeper into the Depression.”
Our higher tariffs led to retaliatory taxes on American exports to other countries. The resulting trade barriers reduced sales and employment in exporting industries in the United States. Farmers and auto workers suffered as trade barriers reduced American exports of their products. World trade fell 63 percent from 1930 to 1933. International trade promotes cooperation and peace between nations. This tariff war fueled bitterness in international relations.
Our standard of living fell because of the Smoot-Hawley Tariff and a boatload of other bad policies in the 1930s.
Donald Trump’s claim that his new 45 percent tariff is smart is as wrong as Rep. Hawley’s boast that his tariff bill would lead to prosperity. Don’t trust promises that we can tax ourselves into prosperity.
Our economy prospered as trade barriers were lowered after World War II.
The value of U.S. manufacturing set a new record of over $2.1 trillion in output last year. Economist Mark Perry notes that U.S. manufacturing is about the same size as the combined manufacturing output of Germany, the United Kingdom, France, South Korea, Brazil, and Russia.
We have become more prosperous because of both increased international trade and technological progress. In 1947 Americans paid 42 percent of their after-tax disposable income for food, cars, clothing, and household furnishings including appliances. Now we only pay 15 percent of our after-tax disposable income for these purchases. Lower prices for clothing and household furnishings have freed up money in the family budget. Trump’s tariff proposal would work against this positive economic trend for American families by raising prices.
Trump’s 45 percent tax will raise the prices of many goods designed in the United States and assembled in China. Trump’s proposal would make Apple products unaffordable for many Americans. This tax will steer consumers toward buying Samsung products from South Korea instead of Apple. This government interference in the private sector economy is not good for workers at Apple and other companies that are part of global supply chains.
American exporters would justly fear retaliatory trade barriers from China on their exports. Trump’s proposal is likely to trigger a trade war that would be especially harmful to Minnesota grain and hog farmers wanting to sell to China. Trump doesn’t talk about the economic damage that would result from his policy proposals.
Trump is hoping that voters believe that his tariff will not hurt them. But Trump supporter Rep. Chris Collins (R-NY) told MSNBC that Trump’s tariff would raise inflation and that this higher inflation would be good for the American economy. Congressman Collins supports squeezing family budgets by raising the prices of consumer goods through this new tax.
Trump’s 45 percent tariff proposal is a loser. If we don’t want people to suffer its harm we have to speak out against it now.
As Santayana wrote, “Those who cannot remember the past are condemned to repeat it.”
John A. Spry is an associate professor in the Department of Finance at the University of St. Thomas. Find him online at @JohnASpry.