One theory about Donald Trump is that the more outrageous the statements he makes, the less effect they have – a verbal equivalent of what economists call diminishing returns.
Yet his pronouncements on tariffs still have shock value. We should be wary, too, of imagining his threats are too preposterous to be taken seriously.
In his presidential campaign he talked about 10-20 per cent tariffs on imported goods, going as high as 60 per cent on China, and 25 per cent from Mexico and Canada unless they fall in line with his desire to clamp down on illegal immigration and drugs.
The president-elect denied reports in the US media that he might be toning down his plans and has ramped up his rhetoric.
His chest-thumping included a threat to slap tariffs on Denmark ‘at a very high level’ if the nation resists his attempts to take over Greenland, an objective he has not ruled out using military force to achieve.
If Trump is as good as his word, it could have unintended consequences. Danish pharma giant Novo Nordisk makes weight loss jabs and up to 30 per cent of hearing aid imports to the US come from Denmark, so Americans may end up deafer and fatter if these products are caught in the net.
Diminishing returns: One theory about Donald Trump is that the more outrageous the statements he makes, the less effect they have
The aim of tariffs is straightforward: to penalise firms which import goods or components by forcing them to hand over a percentage of the price to the government.
The idea is to engineer a shift to domestic producers instead, thereby protecting US jobs, rebuilding the manufacturing industry and boosting the economy. Trump claims this will raise large revenues that could pay for tax cuts and social spending.
The word ‘tariff’, he says, is beautiful. Maybe, but there are ugly consequences.
If domestic producers cannot fill the gap left by imports, then consumers end up paying more because firms pass on some or all of their increased costs.
That drives up inflation, which in turn keeps interest rates high. Tariffs can also put a chill on exports, as companies pivot to producing for the domestic market.
They create inefficiency: one major benefit of free trade is that each country concentrates on what it is good at. Then there is retaliation.
One report in 2020 found that in his previous term, Trump spent more taxpayer cash on bailouts to farmers harmed by retaliatory Chinese tariffs than on building Navy ships or maintaining the nuclear arsenal.
Trump has weaponised tariffs and is behaving like a bully. What is less remarked on is that Biden kept most of those imposed in the first Trump administration and announced more on certain Chinese goods in May last year.
The Tax Foundation, a respected US think-tank, estimated in a report last summer that the Trump-Biden levies resulted in a reduction in US employment to the tune of 142,000 full-time equivalent jobs.
It estimates the new tariffs proposed – without taking account of retaliation – could result in the loss of 344,000 more.
Tariffs can have a certain blunt appeal. Some might think it tempting to emulate Trump’s threat to slap John Deere, the tractor maker, with a 200 per cent tariff over plans to move production to Mexico.
There might have been a cheer if the UK government had done the same when, say, James Dyson shifted manufacturing to Asia – but it would fizzle out when the cost of vacuums and hair-styling tools rose.
Tariffs are no more a magic wand to create a fairer and stronger economy in the US than Labour’s tax hikes are here in the UK.
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