President Trump just raised your taxes. But he wants you to think it’s a gift.
As threatened, Trump has now raised the tariff on $200 billion worth of Chinese imports from 10% to 25%. This is meant to punish China for refusing the accept the terms of a trade deal Trump’s team proposed. The prior tariff level amounted to a tax of about $20 billion per year on U.S. importers. That’s now up to $50 billion per year.
Trump keeps saying China is paying these tariffs to the U.S. Treasury. That’s a lie. American importers, producers and consumers pay the tariffs. The price of the purchased products goes up, and each purchaser tries to pass as much of the added cost onto the next purchaser. Since most of the targeted imports are components rather than finished consumer goods, wholesalers and manufacturers have to deal with them more than consumers. For now.
Trump justified the higher tariffs with a string of bogus economic logic, proclaiming on Twitter that the tariffs will make the U.S. economy stronger and bring more wealth to the United States. These are also lies. Oxford Economics predicts the tariffs will cost the US economy $62 billion in lost output by 2020, and lower GDP growth by three-tenths of a percentage point. Most economic forecasters are similarly downbeat about the tariffs.
Tariffs are self-inflicted economic harm that raise prices for everybody, with no offsetting gains. That’s why this week’s Trump-o-meter reads SAD!, the lowest rating.
There’s an escape hatch in Trump’s latest tariff hike: They don’t apply to products from China already on their way to the United States. That means they won’t result in actual price hikes for two or three weeks. That represents a grace period during which U.S. and Chinese negotiators could still reach a deal. It also reveals that Trump squeezed the trigger, but fired a rubber bullet.
Markets wavered, all the same. The S&P 500 fell more than 3% for the week, until Trump changed his bellicose tone and tweeted that “constructive conversations” with China continue. Rally! A losing day turned into a winning one, limiting S&P losses for the week to 2.5%.
Markets are still pricing in the chance a deal during the next couple of weeks will negate the tariff hikes. But if there’s no deal by the time the grace period ends, expect another downturn in markets. Bank of America Merrill Lynch predicts a 5% pullback in stocks if the tariffs remain at the new levels, and a 10% pullback or worse if Trump adds additional tariffs—which he has also threatened.
Trump is fully aware that his trade wars are bad for stocks and generally unpopular. So he has ginned up this gem of an idea: Use the tax revenue Americans pay in new tariffs to buy food from U.S. farmers that the Chinese would have purchased, but no longer do. Then take that food and—you know what, never mind. This idea is so absurd it shouldn’t be reproduced.
Maybe there will be a trade deal with China, and Trump’s kooky economics won’t matter. But the door is now open to escalation, with tariffs on even more products from China. A SAD! situation might get SADDER!
Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman