The word “tariff” appears repeatedly in Donald Trump’s economic plan. Calling it “the most beautiful word in the dictionary,” he declared his intent to impose a 60 percent tariff on Chinese goods and a 10 percent tariff on goods from other countries around the world.
In his first term, Trump actively used tariffs as a bargaining chip to obtain better market access and achieve other diplomatic and security goals. His tariffs appear to be transactional. However, his concept originates from U.S. tariff policies in the 19th century. He has a strong belief in their power and he thinks he excels in the art of creating a “level playing field” to generate jobs at home. That means his tariffs could be permanent.
Trump’s rationale
Tariffs are complement to the U.S. tax system. Trump argues that other countries mainly rely on indirect taxes, such as consumption taxes and value-added taxes, while the United States relies on direct taxes such as income taxes. The value-added taxes of other countries can be adjusted at the border to encourage exports, restrain imports and protect domestic industries through export tax rebates and other methods. In contrast, U.S. federal and state income taxes are not refundable on export. In the U.S. market, foreign companies have established an advantage, thanks to export tax rebates at home, when competing with fully taxed U.S. producers.
Similarly, U.S. companies in foreign markets face what they say is “unfair competition” by paying taxes domestically and then paying additional value-added taxes in those markets. Therefore, Trump has come to believe that the United States should use tariffs for border regulation.
Second, tariffs can offset the reduction in federal revenues caused by domestic tax cuts. During the September presidential debate, Trump described increasing tariffs as a way to extract money from competitors. Republicans are eager to extend the 2017 tax cuts, many of which are set to expire at the end of 2025. On the other hand, tariffs could offset some of the $4 trillion the tax cuts would cost the country.
In other words, Trump believes with near-religious fervor that sweeping tariffs could kill two birds with one stone: They not only change the “unfair competition” faced by U.S. companies but also generate new sources of revenue for the government to make up for the losses caused by reducing or canceling certain income taxes.
Third, high tariffs have contributed to the success of U.S. manufacturing. Trump has promoted a popular domestic narrative that American industry initially became “great” with high tariffs but has since been systematically undermined by free trade. In 1870, the average tariff on imported goods in the United States was as high as 45 percent and by 1900 was still 30 percent.
The period from 1870 to the beginning of the 20th century was the golden age of American manufacturing. For example, the emerging auto industry lagged far behind its European counterparts in terms of efficiency and technology, but protected from competition by a 45 percent import tariff the industry began to take off. By the 20th century, not only the automobile industry but many protected American industries were outpacing their European competitors. So Trump believes that tariffs will increase the overall output of the U.S. manufacturing sector in the same way. In this view, tariffs not only protect future U.S. industries until they mature but also protect the profit margins of already strong industries.
Fourth, tariffs can reshape trade patterns. One of Trump’s goals in imposing tariffs on China is to diversify U.S. supply sources and reduce dependence on the Eastern manufacturing giant. In fact, the Biden administration shares this goal. Trump’s advisers during the recent campaign floated a potential tariff scenario in which the United States imposes one set of tariffs on China and a different, much smaller, set on U.S. allies. The goal is to turn the United States into the center of a trading system made up of market-oriented democratic nations, as it was from the 1940s until the end of the Cold War.
President has the power
U.S. law has long given the president broad authority to impose tariffs to protect national security and industries harmed by foreign trade practices, and to take action in response to “international emergencies,” which can be defined as almost anything. The only exception is that Trump’s idea of imposing sweeping tariffs on all foreign products may be subject to legal challenges. But now it appears he has favorable conditions to unilaterally implement his tariffs.
For one thing, his tariff plan has gained Republican support. During Trump’s first term, Congress — and Republicans in particular — often opposed his protectionist approach. Four years later, the party has abandoned free trade, and this year’s campaign platform supports Trump’s sweeping tariff plan. The GOP believes that “tariffs can play a constructive role, and the use of tariffs is an art.” Republicans in control of the House and Senate could give Trump significant leeway.
Trump could also invoke the International Emergency Economic Powers Act. He once said, “I don’t need Congress … I’ll have the right to impose them myself.” During his first term, Trump took advantage of existing regulations designed to punish unfair trade practices and protect national security — namely Section 301 of the Trade Act of 1974 and Section 232 of the Trade Expansion Act of 1962. When he once again enters the White House and implements sweeping tariffs, he may turn to the International Emergency Economic Powers Act, which took effect in 1977. He believes is “faster and can be fully implemented.”
Tariffs may be permanent
Robert Lighthizer, who served as U.S. trade representative and was responsible for developing Trump’s trade strategy during his first term, remains an influential adviser to the president-elect. Lighthizer says the goal of imposing tariffs should be to eliminate the U.S. trade deficit. This suggests that tariffs will be increased gradually until the trade deficit is eliminated and then be maintained at corresponding levels.
It also means that Washington will impose high tariffs indefinitely, even if other countries make concessions. Trump has said that higher tariffs will increase government revenue, thereby lowering other taxes. This also suggests a belief that tariffs should be permanent.
Under Trump’s tariff plan, the average U.S. tariff will rise from 1.5 percent in 2016 and 2.3 percent in 2023 to 17 percent based on import value weighting. This will be the highest tariff level since the Great Depression in the United States.
