Benn Steil is director of international economics at the Council on Foreign Relations and the author, most recently, of “The Marshall Plan: Dawn of the Cold War.” Benjamin Della Rocca is an analyst at CFR.
“Trade wars are good, and easy to win” — or so tweeted President Trump in March 2018. But the president’s trade wars are, in fact, proving difficult and costly. China, India, Canada, Mexico, Turkey and the European Union have all chosen retaliation over capitulation. So whereas the president has agreed to restart trade talks with Beijing, he is no longer pledging easy victories. Instead, he is doubling down on the idea that trade wars are good in and of themselves.
“Tariffs will bring in FAR MORE wealth to our Country than even a phenomenal deal of the traditional kind,” he tweeted in May. China, he said, was paying “hundreds of billions of dollars in tariffs.” He even claims that tariffs somehow boosted first-quarter U.S. output growth.
So in trade wars, it’s “heads we win, tails they lose.” Foreigners give us phenomenal deals (of the Trumpian kind), or America feasts on ever-soaring tariffs.
The problem with this logic is that all of the president’s claims are, even if we grant him maximum artistic license, demonstrably false. Here is why.
First, foreign countries don’t pay a dime of his tariffs. Tariffs are taxes on imports — paid by the importers, not by the exporters. The president’s advisers know this, and therefore try to explain away his “China pays the tariffs” claim the way he explains away his “Mexico pays for the wall” claim. Mexico does not “write a check” for the wall, he admitted, but (somehow) pays through changes in trade flows that will (someday) emerge from his NAFTA revisions. Likewise, China does not actually pay the president’s tariffs, trade adviser Peter Navarro explained, but “bears most of the burden of the tariffs” by lowering its export prices to offset them.
Fortunately, we can test this claim. Each month, the Bureau of Labor Statistics publishes an aggregate index of the pre-tariff prices of imported Chinese goods. Any Chinese price cuts would cause this index to fall.
Given that tariffs last year raised the import costs of Chinese goods roughly 6 percent on average, if Chinese firms had cut prices to offset Trump’s tariffs the index would have fallen 6 percent since last June — when the trade war started. Yet the index has fallen barely 1 percent, and at least some of that tiny decline can be explained by Chinese currency depreciation — which makes Chinese goods cheaper for U.S. importers. There is, therefore, no evidence supporting Navarro’s claim. Americans are, in fact, bearing the burden of Trump’s China tariffs.
Trump’s second claim is that tariffs are “filling U.S. coffers.” China tariffs, recall, were allegedly bringing in “hundreds of billions of dollars.” Yet this, too, is false. Government data show that they netted just over $8 billion in 2018. Extrapolating forward through the end of May, total revenue from Trump’s China tariffs has therefore been about $20 billion — a small fraction of what the president asserts.
More important, as of May, Trump has authorized nearly $26 billion in compensation to U.S. farmers for the losses they have suffered to date from Chinese retaliatory actions. This compensation is $6 billion more than the total estimated China tariff revenue. Far from “filling U.S. coffers,” then, Trump’s tariffs have been draining them at an accelerating pace.
Nothing in our analysis has even touched on the harm to U.S. businesses and consumers from the higher prices the president has imposed on intermediate and final goods, nor to American non-farm sectors that have been slammed by foreign retaliatory tariffs. It is noteworthy that even the industries Trump promised to revive are reeling. Since the announcement of steel tariffs in March 2018, for example, U.S. Steel has lost 70 percent of its market value.
In short, then, Trump’s trade wars have thus far been an unmitigated economic and diplomatic own-goal for the United States. It is time for Congress not merely to challenge the president’s false narrative but also to end the executive branch’s abuse of its tariff authority under the outlandish guise of “national security.” The threat of veto-proof Senate opposition helped force Trump to back down from his recent threat to impose escalating tariffs on Mexico as leverage in immigration negotiations. Such opposition must be widened before the damage becomes permanent.