Trump Should Go Big on Tariffs

It’s now clear that President Trump will hold off for a time on his campaign promises to impose stiff, strictly trade-related tariffs of varying levels on all of America’s economic competitors, though import duties relating to border security or other non-economic issues were announced Saturday for implementation Tuesday. But if Mr. Trump is hesitating on the economic side because some of his advisors disagree on how completely to fulfill these pledges, and how quickly, he should side with the trade hawks—and his own long-time instincts. Because going big on such tariffs, and quickly, is amply capable of helping revive the economy without reigniting significant (if any) inflation, without provoking meaningful (if any) retaliation, and without driving American allies into rivals’ arms.

First, Mr. Trump should go right ahead with his proposal for a universal tariff of up to 20 percent. A duty this sweeping can of course raise major revenue and help control the federal budget deficit. But it’s also needed to prevent China from evading tariffs on its own products by shipping them through third countries through various subterfuges.

Meanwhile, their impact on consumers can be eased greatly by exempting products that the United States simply doesn’t turn out. Among the most notable: tropical fruit, coffee, and cocoa (although in Iceland they’re already cultivating bananas in greenhouses). Even though the president announced a 10 percent duty on oil and gas from Canada, all such energy products should get carve-outs, too. Full restoration of Canadian supplies of the former in particular is critical because so many American refineries, especially in the Midwest and the Rocky Mountain states, are set up to process the heavy crude that’s so abundant north of the border.

Implementing this universal tariff as a form of value-added tax (VAT) would bring many other advantages as well. If it’s refunded for exports (which is common around the world), domestic production would be encouraged and the trade deficit narrowed considerably. It can be rebated for low-income Americans. It could be easily justified world-opinion-wise, since as suggested above, most other countries use exactly the same system. And it could help offset not only foreign tariffs, but the wide variety of other, often hard-to-identify ploys used by other countries’ opaque bureaucracies to block U.S. exports. These non-tariff barriers are often judged to be considerably more important than tariffs.

Second, because its own tariff and non-tariff barriers are in classes by themselves, China should be hit with an extra 60 percent blanket levy.

Third, Mr. Trump should forego blanket economic tariffs on Mexico and Canada, which are partners with the United States in the North America-wide USMCA trade deal he himself negotiated to replace NAFTA. But when it’s renewed in 2026, the free trade agreement should definitely include much higher duties for exports to the United States that are made largely outside this free trade zone. The current treaty sets out tough-sounding standards for these regional content requirements, but the tariff penalties for ignoring them are far too low to bite. Yet he should still feel free to continue to tariff both USMCA partners further if they fail to improve their efforts to stem flows of illegal opioids and aliens across their borders into the United States.

It’s vital to implement and administer all of these tariffs with street smarts and agility. For example, if China-based producers still see some advantage in reaching U.S. customers via third countries, any country that’s caught colluding should be hit with punitive tariffs in the 60 percent neighborhood. Further, these tariffs should stick until that third-country government can prove to Washington’s satisfaction that it has stopped these practices.

And if trade competitors respond to a U.S. VAT-style tariff by hiking their own value-added taxes or by devaluing their currencies to make their products more competitive with U.S. counterparts globally, American tariffs should be raised in kind.

Tariff critics seemingly have a point when they argue that these new Trump tariffs will boost prices for both U.S. businesses and consumers much more than their predecessors because they’ll be much higher and broader. But nearly all these critics assume that companies can pass through increased tariff costs (and in fact any increased costs) almost completely to their customers—whether they’re other businesses or individuals—regardless of other economic circumstances.

The critics apparently forget that levels of demand matter most in setting prices: if they’re inadequate, then ipso facto customers are rejecting higher prices. They also seem to believe that American consumers will blithely accept more expensive goods even after they’ve been hit with cumulative inflation of more than twenty percent during the Biden years. The greatly slowing pace of inflation since its mid-2022 peak despite solid economic growth and even a modest improvement in inflation-adjusted earnings rebuts that claim. If consumers were still so spending-happy, prices would still be rising much faster.

Just as noteworthy: Importers themselves don’t seem confident about major pass-through, either. After all, reports have mushroomed over the last year that the prospect of new and higher Trump tariffs has had these companies fretting about these levies eroding their profits and/or scrambling to evade the duties by re-jiggering their overseas supply chains. If they genuinely believed that they could simply foist higher tariff costs onto consumers, why would they worry at all, or bother with all the time and expenses of moving often huge production complexes and shifting transportation arrangements?

In addition, overall business costs may not rise much at all during Trump 2.0 if the rest of his economic agenda succeeds. For example, greater overall energy availability (despite the 10 percent Canadian oil and gas tariff Trump announced on Saturday), and reduced regulations and taxes would significantly lower total business costs. And glaringly overlooked by tariff critics, the investment and expansion incentives expected by supply-side economists from major tax and regulatory cuts could prevent supply shortages from emerging or widening much, thereby containing price pressures.

Inflationary pressures can also be contained if, as is already happening, tariffs and tariff threats spur foreign companies to move their production to the United States to make sure they can continue selling into its huge domestic market. In fact, many foreign-owned automakers did just that to escape trade curbs imposed by Ronald Reagan. The same benefits could flow if new duties or threats thereof enhanced the attractiveness of foreign acquisitions of, and upgrades to, American facilities. That’s how Japanese producers responded to Reagan-era steel trade barriers, too, and it’s evidently prompting Nippon Steel’s attempted takeover of U.S. Steel.

Tariffs (including those endorsed by so many Democrats when they take the form of Buy American provisions for government procurement) have another crucial advantage over the subsidies and tax breaks used so prominently by the Biden administration to bolster manufacturing at home: They’d be paid for by foreign actors, not by American taxpayers or budget-straining tax breaks.

Although fits of pique may prompt some near-term foreign retaliation against U.S.-owned companies, full-blown trade wars are unlikely in the extreme. America’s very status as the world’s importer of last resort alone demonstrates how most major foreign economies depend much more on selling to the U.S. market for their own prosperity than vice versa.

Mexico and Canada, for example, send fully 30 and 25 percent of their entire economic output to the United States each year. The absolute numbers for China are much lower, but Bloomberg has just reported that “the US continues to be the largest single destination for Chinese manufacturing”—and China’s steadily weakening domestic economy has made exports the driver of China’s growth so far. Moreover, this figure doesn’t count all the products China sends state-side via those aforementioned third-country gimmicks.

Nor is foreign reliance on the American market likely to ebb much in the foreseeable future. As the United States’ post-pandemic economic performance continuing to lap the rest of the world’s, Japan has reed in slow-growth mode. Europe keeps flirting with recession with no signs of a major revival in sight. And the deepening economic woes besetting China’s domestic economy—boosting its own reliance on export-led growth—mock expectations that the People’s Republic could serve as a new global net import sponge (not that Beijing has ever even considered that goal). As many Wall Streeters like to say about investing in stocks, TINA—There is No Alternative to the United States.

Nor is there any alternative for U.S. allies or neutrals geopolitically. Even if Russia was remotely strong enough economically to attract countries into some form of trade bloc, would Moscow have any takers given its invasion of Ukraine? China obviously is a bigger magnet, but its massive Belt and Road loans to developing countries have often backfired on both Beijing and the borrowers. Meanwhile, China has no interest in serving as a net importer of anything other than raw materials, as opposed to the purchases of manufactures that third world countries need to advance economically.

Since they’re still more protectorates than useful military allies of the United States, and since they face belligerent neighbors in both North Korea and China, South Korea and Japan certainly aren’t about to antagonize their American defender by moving closer to the People’s Republic economically. In fact, Japan and Australia have just announced their determination to continue a stepped up defense cooperation with Washington that was spearheaded by the Biden administration.

The rapidly developing countries of Southeast Asia have worked out very rewarding positions in China-centric global supply chains (which largely work by sending the final products outside the region to wealthier countries like the United States). But even though they’d clearly prefer to hedge between the two superpowers and keep the trade proceeds flowing, several are worried that China’s expansionism in the South China Sea threatens their own territorial waters. So they know the importance of a strong American military presence in their neighborhood.

During the entire transition, President Trump has seen domestic and foreign leaders rush to accommodate his disruptive positions and bold pronouncements on a wide range of issues. If he uses the powerful tools that authorize him to act unilaterally and swiftly, he’ll find that going big on tariffs will ultimately produce similar results.