Read: The U.S.-China trade talks have already changed the world
In Trump’s mind, tariffs are a potent, unilateral weapon, and protectionism is a potent, necessary economic philosophy. He argues that his tariffs are a direct tax on Beijing—a way of sapping Chinese manufacturers, raising American revenue, aiding domestic businesses, and giving Washington leverage in trade negotiations. “Tariffs are NOW being paid to the United States by China of 25% on 250 Billion Dollars worth of goods & products,” he said on Twitter. “These massive payments go directly to the Treasury of the U.S.”
This is not at all how it works; the Chinese government is no more apt to fork over billions of yuan for Trump’s tariffs than Mexico’s government is to pay for a border wall. Rather, tariffs fall on the American importers of Chinese goods, who often pass those cost increases onto American consumers. That means every time Trump raises tariffs, he risks raising costs on families and businesses.
Earlier this month, Trump argued that this dynamic did not exist. “The Tariffs paid to the USA have had little impact on product cost, mostly borne by China,” he wrote, intimating that Chinese companies have lowered their prices to remain competitive. That has not, in fact, happened. In a new paper, economists based at Princeton, Columbia, and the Federal Reserve Bank of New York write: “Although in principle the effect of higher tariffs on domestic prices could be offset by foreign exporters lowering the pre-tariff prices that they charge for these goods, we find little evidence of such an improvement in the terms of trade up to now.” The authors estimate that Trump’s tariffs were costing consumers about $1.4 billion in real income a month by the end of 2018.
Peter Beinart: China isn’t cheating on trade
Trump has promised to use the revenue that the government raises from China (remember, the government is not actually raising money from China) to help businesses harmed by the trade war. Washington will demand payments from Beijing, use the money to buy food, and pass the food on “to starving people in nations around the world!” he said. It is true that the government is planning more aid for agricultural firms hit by the trade war, and that Trump wants the U.S. Department of Agriculture to figure out some work-around. But at best, such a plan would involve taking American taxpayer dollars and using them to buy American agricultural goods to ship abroad or to bail out American farms.
Trump’s misconceptions on trade are not limited to tariffs. He continues to argue that the United States’ trade deficit with China is a sign it is getting ripped off, and that it is bleeding itself dry by engaging in commerce with the Chinese: “The United States has been losing, for many years, 600 to 800 Billion Dollars a year on Trade. With China we lose 500 Billion Dollars. Sorry, we’re not going to be doing that anymore!” There are many issues with the two countries’ economic relationship, and many ways that China does not play fair. But trade imbalances are not in and of themselves a bad thing. The United States has a trade deficit with China in large part because goods are cheaper to produce there, and Americans choose to consume huge amounts of them; the deficit is not a way of measuring capital losses in the United States.