On May 30th, President Trump announced that he will place a five percent tariff on all imported goods from Mexico, retroactive to June 10th. The President’s reasoning was the lack of effort by the Mexican government to stem the tide of illegal immigrants flooding the southern US border.
These new import taxes are a continuation of Trump’s policy of using tariffs as a negotiation and revenue increasing tool. Beginning with large scale tariffs on the importation of Chinese goods, Trump has expanded his use of tariffs to include punishing the Mexican government for their supposedly insufficient response to the overwhelming crisis at the US border.
Despite President Trump’s constant bloviation that “tariffs make Americans richer,” tariffs are not a viable tool to create wealth or negotiate with foreign powers.
According to tariff supporters, tariffs create wealth by taxing imported goods from foreign countries to create revenue for the government while protecting American jobs. However, tariff backers discount the problem of economic adaptation. When foreign and domestic companies face decreased profits due to rising costs caused by tariffs, they combat it by passing those costs onto the consumer. As various business costs increase, either in the form of inventory, raw materials, manufacturing, or shipping costs, businesses accordingly increase consumer prices in order to protect profits that enable innovation and growth. These increased costs hurt those on the lowest levels of the economic scale the most, as wages stagnate and price increases reduce the quantity of goods and services that can be purchased.
The idea that tariffs protect American jobs sounds great in theory and is paraded as patriotic and economically productive by its supporters, but the opposite is true. When American jobs are outsourced or technologically replaced, economic efficiency is increased in the form of lower costs for business and consumers alike. US workers adapt to job outsourcing by creating new products and jobs that couldn’t have been foreseen even just a few years ago. Tariffs employ a protectionist strategy that eliminates efficiency by defending domestic sectors from foreign competition, thereby creating higher prices and less competition. In a global economy, workers and businesses are forced to adapt and innovate, and tariffs hinder this adaptation while simultaneously raising overall costs.
Tariffs are only useful for negotiations in rare cases and with multiple stipulations, including reluctance to employ them, short term outlooks, and low rates. However, President Trump seems to hold the opposite view, embodied in his tweets and engagements with the press. The President seems to believe that tariffs the universal key to unlocking increased wealth for the United States, as well as protecting domestic jobs. Without the requisite intent to use tariffs as a short term tactic, the economic response will continue to be overwhelmingly negative, as evidenced repeatedly in the stock market.
The virtually unanimous consensus among economists and corporate executives is that tariffs are destructive and inefficient. Large corporations such as Walmart, Apple, and others have warned that tariffs will only increase domestic costs for consumers. Agriculture and farming has been especially battered by President Trump’s China tariffs, due to increased costs in farming equipment and technology. Trump apparently realizes this as he continues to push farming subsidy packages in an attempt to protect votes in vital 2020 states.
In recent months, as President Trump has ramped up tariffs on China, the US stock market has been hammered with volatility, retreating from its record highs to correction territory for many blue chip domestic equities. Without confirmation from the President that these tariffs are not short term, corporations are faced with receding revenues and shrinking margins, forcing firms and individual investors to sell due to market concerns. Trump’s tweets saying there is “no rush” to remove tariffs and make a deal with China has caused the market to reverse large gains and fluctuate at a rate not seen since Trump took office. This latest round of tariffs on Mexico will create similar results.
Historical examples are abundant, but none more infamous that the Smoot-Hawley tariffs passed in 1930. These tariffs encompassed over 20,000 imported goods, signed into law by Herbert Hoover. The deliberations and negotiations of the tariffs in the House and Senate were intensely monitored by Wall Street and as more tariffs were added to the bill, the stock market crashed, culminating in Black Thursday “market massacre.” Upon its passage, foreign governments retaliated with increased tariffs and trade barriers, decimating the market and leading to the widespread expansion of the most destructive economic event in US history, the Great Depression.
These tariffs exposed protectionist policies as economically illiterate and counterintuitive. Without global free trade, prices are increased exponentially and inefficiency is expanded in the global marketplace. President Trump refuses to look at historical and current examples that explain the fallibility of tariffs as a long term economic solution.
On top of all of this is the fact that tariffs increase costs on all sides. Further weakening the Mexican economy will only enhance the incentives to illegally cross the border in search of work. A weaker Mexican economy will increasingly motivate Mexican job seekers to find work north of their border, and, in turn, exacerbating the border crisis.
Despite the constant claims that tariffs create wealth and save jobs, this recent round of import taxes that Trump has announced on Mexico will only increase domestic costs and threaten the economic durability of this bull market that is so vital to President Trump’s re-election bid.
The views expressed in this article are the opinion of the author and do not necessarily reflect those of Lone Conservative staff.