How Trump Thinks Tariffs Work (And How They Actually Work)

To make the case for his trade war with China, the president is relying on blatant falsehoods and misconceptions.

Donald Trump speaks while meeting with Chinese Vice Premier Liu He in the Oval Office on April 4, 2019.
Trump meets with Chinese Vice Premier Liu He in the Oval Office on April 4, 2019. (Jonathan Ernst / Reuters)

Last week, President Donald Trump increased tariffs on $200 billion worth of goods imported from China, the latest salvo in the administration’s months-long trade war with Beijing. On Monday, China said it would retaliate with tariffs on $60 billion worth of American products, warning that it would “never succumb to foreign pressure.”

Trump argued that additional tariffs were necessary to force concessions from the Chinese and would redound to the benefit of American manufacturers and the American economy. “Tariffs will bring in FAR MORE wealth to our Country than even a phenomenal deal of the traditional kind. Also, much easier & quicker to do,” he said in one of his numerous tweets on the subject. He added: “Tariffs will make our Country MUCH STRONGER, not weaker. Just sit back and watch!”

Oh, really? To make the case for his trade war, and to measure his administration’s success in it, Trump is relying on blatant falsehoods and misconceptions. Taking those falsehoods as truths and those misconceptions as correct—accepting Trump’s theory of trade, that is—the United States might be stronger, the deals might be phenomenal, and the trade war might be good and easy to win. But the Chinese have not yet backed down, and show no signs of doing so. In the meantime, the businesses and consumers sitting back and watching the trade war are bearing modest, but measurable costs.

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.

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.

As for tariffs bringing “FAR MORE wealth to our Country”: The trade war thus far has not caused tremendous macroeconomic damage. But it has hit certain industries and businesses very hard—dairy farms in Wisconsin, for instance—while increasing consumer prices a smidge. Economists have estimated that Trump’s trade war cost the country a sliver of GDP last year, in part by forcing businesses to rejigger their supply chains. (The pain is worst in heavily Republican counties, one analysis found.) Given Trump’s new tariffs and China’s retaliatory measures, the cost might be yet greater this year.

Not that Trump himself would admit it. In his mercantilist, protectionist understanding of the world, trade wars are good, tariffs are a way of hitting the bad guy, and whatever the United States is doing on trade, it is winning. Alas, here in the real world, Trump’s trade war means that consumer goods are about to get more expensive and certain exporting businesses are about to face a much tougher climate, all thanks to the White House.