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The Trump tax hikes are coming

Rick Newman
Senior Columnist

President Trump’s biggest political win, so far, is the tax-cut legislation he signed into law late last year. But Trump is now taking action that is essentially a tax hike on American consumers, and will offset a portion of the tax cuts he has been crowing about for nine months. And in typical renegade fashion, Trump is dismissing political orthodoxy by daring to hit voters with new taxes just weeks before a crucial election.

Trump now plans to impose 10% tariffs on $200 billion worth of Chinese imports, beginning Sept. 24. The tariff will rise to 25% by the end of the year. That’s in addition to a 25% tariff on $50 billion worth of Chinese imports Trump imposed during the summer. So by Election Day in November, Trump will have placed new tariffs on $250 billion worth of stuff Americans buy every day.

A tariff is a tax collected when imported goods enter the country. It raises the cost of the good by the amount of the tariff. So a 10% tariff on a $100 product would raise its cost to $110. Producers typically try to pass the added cost onto consumers, and as the cost of certain imported goods rises, the cost of similar products not subject to tariffs can also rise, since there’s less competitive pressure pushing prices down.

The new tariffs will raise the cost of thousands of everyday items, including electronics, appliances, bicycles, tires, toys, clothing and footwear. Based on last year’s level of imports, the new China tariffs amount to a tax hike of $32.5 billion per year. If the latest set of tariffs rises to 25% and stays in place for 2019, the total additional tax would be $62.5 billion next year. The Trump tax cuts, by contrast, lowered tax payments by about $130 billion per year. So by this simple math, the China tariffs would offset about one-fourth of the Trump tax cuts this year, and nearly one-half next year.

Waiting for a deal

Trump says that won’t happen. Tariffs, in his strategy, are a way of gaining leverage in negotiations meant to cement trade deals more favorable to the United States. Trump has said he wants a lower U.S. trade deficit with China, and better opportunities for American firms operating in China. Once there’s a deal with China, he’ll rescind the tariffs.

Except no deal is falling into place, creating what increasingly looks like an open-ended trade war destabilizing to both sides. Larry Kudlow, Trump’s top economic adviser, said on Sept. 17, “we are ready to negotiate and talk with China any time that they are ready for serious and substantive negotiations.”  Chinese officials say basically the same thing. Yet talks have obviously gotten nowhere, and there’s no sign of a breakthrough any time soon.

Trump seems to think his trade fight is hurting China more than it’s hurting the United States, which will ultimately give him a victory. He’s partly right. The Shanghai stock index is down 21% this year, for instance, and it just hit the lowest level since 2014. The S&P 500, by contrast, is up nearly 7% and close to record highs.

But that doesn’t mean Trump will win. China shows no signs of capitulating, and is highly likely to retaliate against Trump’s latest move with punitive measures on US exports to China, or on American firms operating in the country. It might also devalue its currency, the yuan, which would make Chinese products cheaper to foreigners. More pain is coming for American farmers and others who export to China.

If China retaliates, Trump has threatened to slap tariffs on everything else China imports to the United States, which totaled about $500 billion worth of merchandise in 2017. But it’s not clear China would buckle, even then, and Trump hasn’t articulated an end game beyond that. “The President’s experience with negotiations is centered on real estate where if you don’t get the property, you move on with another property,” analyst Tom Block of Fundstrat wrote in a recent note to clients. “The trade war with China is more complex, and an exit strategy may not be as simple as looking for another location for a casino or golf course.”

Trump, in fact, has been the one to moderate his demands, suggesting his hand isn’t as strong as he thinks. Trump initially planned tariffs of 25% on the next $200 billion worth of Chinese imports, but scaled that back to 10%, at least for now—perhaps out of fear of rattling stock markets. Trump also faces rising resistance among voters in his own country. His trade policy is already unpopular, with 61% of Americans saying they disapprove, in one poll. Anecdotal reports of collateral damage, such as farmers losing access to foreign markets or U.S. companies hurting from higher costs related to tariffs, already seem to be hurting Republicans as they fight to keep control of Congress in the upcoming midterms. Trump doesn’t seem to care care, but there’s a reason politicians almost never raise taxes on voters with an election looming. Voters will now get to tell Trump directly how they feel about tariffs and taxes.

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Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman