AI generated cartoon representing tariffs |
The article is by Jason Koslowski, and it appears in Left Voice under the title Notes from a Wall Street Sewer: Tariff Edition. Mr. Koslowski identifies himself as "a contingent college teacher and union organizer who lives in Philadelphia." In other words, he works for peanuts, having to share his salary with the zillion other PhDs out there seeking a career in academia.
I assume he teaches English given the quality of writing, which is good.
He gets the most important fact correct: Tariffs are "a tax on imported things." The reason for tariffs is supposedly to make foreign goods more expensive for American consumers, and thereby encouraging us to buy domestically. Or, alternatively, to incentivize the producer to manufacture their products in the US. In principle, tariffs should lower the trade deficit.
He remarks, correctly, that this usually doesn't work, writing "...this plan did not work in 2016. Also, pretty much every expert everywhere says it’s not going to work this time."
I don't blame Mr. Koslowski for taking Trump's justification for tariffs at face value. But in this case I think he's mistaken. I think Trump understands that tariffs won't likely reduce the trade deficit. What he really wants to do is raise taxes. And tariffs, especially disguised as repatriating factories to the US, is a politically acceptable way to raise taxes.
In other words, tariffs are--first and foremost--a tax increase. That's entirely the point. The uncertainty arises when one asks Who is gonna pay the taxes? This turns out not to be an easy question to answer.
The obvious answer, which both our contingent college teacher and "experts" suggest isn't likely, is that American consumers will pay the taxes. But here's the rub: when confronted with a tax increase, people adjust their behavior to avoid paying the taxes. American consumers are no exception: they can substitute the foreign products with American products, or they can decide they don't need as much of the tariffed goods after all. Eg, if Mexican avocados are tariffed, then perhaps our affection for guacamole will be lessened. This option, if it happens, would reduce the trade deficit.
Or it could happen that the foreign producers desperately need the revenue, and so they reduce their prices sufficiently to maintain market share. I think Chinese manufacturers may fall into this category--the Chinese need the US dollar reserve currency in order to buy food and oil from abroad, regardless of whether they end up taking a loss in Yuan terms. This is called mercantilism. In this case it is Chinese producers (both workers & capitalists) who pay the tax. There will be no net decrease in the trade deficit.
A third option is that--because, eg, Americans by fewer Canadian products--that Canadians just simply don't have enough money to buy American products. The result is that the Canadian dollar will decline in value compared to the US dollar. This is good for the Canadian manufacturer because of the favorable exchange rate their products sold in the US are no more expensive than they were before the tariffs were imposed. But Canadian consumers are still worse off--they still won't be able to afford that vacation in Florida. In this case there might be an increase in the trade deficit (Canadians sell just as much, but buy less), and it is the Canadian consumer who ends up paying the tax.
Finally, it's possible that Walmart generates sufficiently high margin on, eg, Mexican avocados that they can just pay the tariff as extra overhead. In this case the Walmart shareholder (and eventually, employees) are paying the tariff tax. This will also have no effect on the trade deficit.
None of these options are mutually exclusive, and it's likely that they will all apply to some degree. Of this we can be certain: every option reduces trade and therefore reduces wealth. As such tariffs are bad for the economy. But that's true for any tax increase--all taxes are bad for the economy. The only advantage of tariffs is that they're politically more palatable.
Of course it gets even more complicated. Mr. Koslowski mentions that other countries will levy retaliatory tariffs, ie, raising taxes even more! And it spirals down from there. But I think this problem is somewhat limited because: 1) the US runs a large trade deficit with the rest of the world, so other countries need to sell to the US a lot more than the US needs to buy from them. So the US will win this kind of war. And 2) the US depends less on foreign trade than almost any country on earth, so it's relatively immune from retaliatory tariffs.
In short, apart from being a tax increase, the effects of tariffs are near impossible to forecast. There are just too many options, followed by options in response to prior options, to know how this is gonna proceed. Anybody who predicts a supply shortage/inflation/higher price for Americans/a recession, or any other disaster may be right, but they're most likely wrong. I predict that Trump's tariffs won't have a huge effect on the American economy. People will respond by minimizing their tax bill, and eventually not much tax will actually be collected.
Mr. Koslowski damages his credibility with his cartoon-like description of the US economy. He writes
I think we should see the tariffs as part of a magic trick Trump is trying to pull off. That trick is to hold together an unstable — that’s the key word — class alliance. To get elected, he had to win over very different sections of the different classes in society.
First sector of this support: large chunks of the ruling class, the “big bourgeoisie,” the very rich, majority shareholders and big CEOs of big companies. ...
He won a lot of them over. Trump’s selling his party as the most pro-business of the two parties. (Elections are lovers’ quarrels between segments of our masters.) He’s offering massive tax breaks for the rich, again. He’s deregulating the economy, he’s slashing protections on the environment — all this is great for profits.
One part of his appeal to the ruling rich: break the backs of the workers.
His premise is that there is a fight-to-the-death between bosses and workers. I've discussed this in many previous blog posts, and it's not true. While they have some things to fight over, for the most part bosses and workers have a common purpose: sell as much to consumers as possible.
He asserts that the "big bourgeoisie" have a common interest--namely they're for tariffs. Many of them (in industries like agriculture, auto manufacturing, retailers, etc.) are very much against tariffs. Others (such as tech firms) don't care because they don't export material goods. I don't think there are many big businesses who actually think tariffs work in their favor.
The biggest supporters of tariffs are in fact the unions. Many union members were present at Trump's "Liberation Day" announcement. UAW head Shawn Fain is a strong supporter. And no wonder--tariffs allow unionized workers to collect a rent on top of the market wage--eg, a salary increase roughly equal to the tariff.
Mr. Koslowski's only evidence that Trump is anti-worker is "...he's attacking the National Labor Relations Board." This is small potatoes--the NLRB plays a bit role in the American economy. Indeed, the whole idea of collective bargaining is so last century--supply chains and consumer choices are too diffuse for a strike against any one company to have much significance. Much more impactful are unions as lobbying and political organizations, and it is in precisely that role that Trump is trying to reach out to them. A new tariff will strengthen the union far more than any collective bargaining agreement.
Personally, I'm on the side of Mr. Koslowski's cartoonish bourgeoisie: I think tariffs are on net a bad thing for the economy. They're a tax increase. But politically they make a lot of sense, and for Donald Trump they look to be a winning issue.
Further Reading:
- The General Strike Fizzles
- Left Voice Demands 5 Things of UAW's Shawn Fain
- Tradable vs. Non-Tradable Goods