Why Economists Hate Trump's Tariff Plan | WSJ
Understanding the Chicken War and Tariffs in Trump’s Economic Plan
What’s the Chicken War? Before diving into Donald Trump's economic strategies, it’s vital to understand the Chicken War — a tale of tariffs and trade that set the stage for modern economic debates.
Post World War II, West Germany saw a surge in chicken consumption, specifically American chicken. By mid-1962, U.S. farmers anticipated selling over $50 million worth of chicken (equivalent to half a billion today). This inflow incensed European farmers, prompting the organization that later evolved into the European Union to impose tariffs on chicken imports. A five-pound chicken increased from $1.60 to $2.25, leading to a swift decline in imports.
The U.S. retaliated with a 25% tariff on German trucks such as Volkswagen, effectively halving their U.S. truck sales — a situation that never fully recovered. Americans faced higher chicken prices, while fewer truck options were available. This serves as a classic example of how tariffs can hurt consumers while aiming to protect specific industries or alter foreign government policies.
Trump's Economic Nationalism
While tariffs have been largely absent from trade policy for decades, former President Donald Trump changed the narrative. He revived the idea of tariffs, branding it as "America First." His approach resonated with many who began considering tariffs as useful tools in the U.S. economic arsenal.
Tariffs in Action: The 2018 Washing Machine Tariffs
Let’s break down tariffs as they occurred in 2018. Trump announced tariffs on washing machines, claiming it would benefit consumers and create jobs.
When a washing machine is imported into the U.S., the importing company pays a tariff to the government. Margins are low, forcing companies to pass the price increase onto consumers. Thus, while the goal was to decrease demand for foreign goods, it inadvertently raised prices on domestically produced products too. After the tariffs, not only did imported washing machines become pricier, but U.S.-made washing machines and associated products like dryers followed suit, even without direct tariff action on dryers. This indirect effect occurred due to shifting consumer demand — when purchasing a washer, consumers often buy a dryer as well.
One silver lining? The tariffs generated jobs, about 1,800, mostly in foreign companies like Samsung and LG opening U.S. plants. The U.S. collected $82 million annually in tariffs, but these price hikes cost consumers an additional $1.5 billion. This translates to approximately $815,000 per job created.
The Impact of Steel and Aluminum Tariffs
In 2018, Trump also introduced significant tariffs on steel and aluminum aimed to penalize China for international trade rule violations, along with national security concerns. Industries relying on steel faced inflated costs, squeezing profit margins and creating a disadvantage against foreign competitors who didn't incur these costs.
Multiple studies revealed both pros and cons of these tariffs. While manufacturing jobs plateaued, the overall economy lost jobs, particularly in downstream industries affected by increased prices. Companies faced rising costs, which were passed on to consumers — an economic conundrum.
Despite these downsides, the Biden administration suggested maintaining Trump’s tariffs and even proposed adding or increasing them. Two factors contributed to this: domestic interest groups benefiting from tariffs wished to keep them, and tariffs served as bargaining chips in future negotiations. This dynamic illustrates why tariffs can remain long after their initial purpose fades, as seen with a lingering 25% tariff on trucks, despite a cooldown in the Chicken War impacts.
Trump's Future Tariff Plans
Trump's second-term proposals included reinstating and significantly increasing tariffs — a radical shift from previous policies. He suggested imposing a 60% tariff on all goods from China and 10-20% on imports from other nations, claiming that countries would "pay us back for all that we’ve done for the world." Yet, multiple independent studies warned these measures could cost American households an additional $1,700 due to amplified prices and potentially result in over 684,000 job losses.
Potential Blowback and Future Outcomes
Retaliatory tariffs from other countries also pose substantial risks, as nations would unlikely modify their behaviors to appease the U.S. The economic landscape would then see a decline in both U.S. exports and imports due to these tensions. According to Trump, these tariffs could serve as a revenue stream to offset tax cuts for American workers — presenting itself as a tempting solution on paper.
The Changing Landscape
China’s investment in manufacturing over the past two decades, alongside trade rule violations, has overshadowed the tariff discussion. Trump's emphasis on using tariffs as punishment to leverage trade changes signaled a structural shift in U.S. economic policy, continuing under the Biden administration.
In conclusion, while tariffs can generate immediate outcomes, the long-term ramifications remain uncertain. The upcoming years could either ignite significant global trade conflicts or propel shifts in international economic dynamics. Tariffs have emerged not just as economic tools but also as instruments in broader geopolitical strategies, turning the mundane into a high-stakes game of chicken.
