The U.S. Is Not "Winning the Trade War"
Unilaterally raising costs for Americans can harm people in the rest of the world, but not much more than any other policy that reduces the purchasing power of the U.S. private sector.
There was no escalatory spiral after all.
Since the start of this year, the U.S. has lifted the average tax rate on imports from its major trading partners by about 15 percentage points (as of July 28). With the exception of China—which used its leverage over the supply of critical minerals to extract valuable concessions on U.S. export controls—the aggregate response of the major economies has been to do more or less nothing. To be more precise, they refrained from retaliating, either with tariffs of their own, or asymmetrically via financial sanctions or regulatory measures. They also made vague and unenforceable pledges to buy more U.S. goods and invest more in the U.S.
If one believes that tariffs on imports are good for the people imposing them, and bad for everyone else, this must surely seem like a demonstration of this administration’s negotiating prowess. The normally sensible John Authers (a former colleague of mine) wrote a note with the risible headline “Trump Wins the Hulkmania Tariffs Brawl He Started”. My former colleagues at the Financial Times have a thorough report on how the European Union’s negotiators interacted with the administration titled “How the EU succumbed to Trump’s tariff steamroller”, implying that the Europeans had failed to resist a superior force. (Europeans really do believe that they lost out.)
That is not, however, an accurate description of what has occurred. Leave aside the likelihood that the tariffs imposed under the International Emergency Economic Powers Act (IEEPA) of 1977 will be ruled illegal in the courts, in which case no one will be paying the tariffs.1 The bigger problem is that the main losers of the new “deals” are Americans, with foreigners collateral damage only to the extent that American purchasing power falls. In fact, it is entirely possible, given difficulties substituting many specific foreign-made goods for U.S. alternatives, that the entire burden of paying the new taxes will fall on Americans via some combination of higher private indebtedness and a wider-than-expected budget deficit, with foreigners entirely unaffected.
The thing to remember is that tariffs are taxes, and that it is always better not to pay taxes, if possible. The question that matters is: who is the least able to avoid paying?
This is a well-known problem within the public finance literature, and it is why there is so much debate among professionals about the impact of taxes on corporate profits. The “obvious” answer is that shareholders pay the tax because there is less money available for dividends and buybacks. But the impact could be mitigated through higher debt issuance, in which case bondholders would pay some of the cost. And then there is the fact that higher profit taxes tends to raise hurdle rates for new investments (although that partly depends on the extent to which investments can be expensed for tax purposes), which should mean less investment and therefore less hiring, with the net result that workers pay part of the tax via lower wages. It is also possible that companies might try to raise their prices to offset the impact of higher tax rates on profits, in which case consumers would pay the tax.
There are similar questions when it comes to the impact of minimum wages. Do businesses respond by firing their least-productive workers? (And potentially offsetting the loss in output with a mix of automation and process improvements?) Do they eat the cost of higher wages via lower margins? Or do they pass on the costs to consumers in the form of higher prices?
In general, the answers to these questions tend to be “all of the above”, but the specific distribution of costs depends on a wide range of factors. The same logic applies to tariffs.